What Is Market Capitalization?
What Is Market Capitalization?
If you are new to the stock market, you must have heard the term Market Capitalization many times - commonly known as market cap. This is important data that is seen before investing or trading in any company, which affects the decision of every investor. So today in this post we will know what is the market cap, how is it calculated and why is it so important?
What is a market cap?
Market cap is directly defined as Total Market Value. This is then multiplied by the total Outstanding Share issued by that company by the currently running Actual Share Price. This shows the size of the company, with the help of which the investor can get an idea of the future Potential and invest keeping in mind the Risk & Reward.
For Example: If at present the price of 1 share of Reliance is issued by ₹ 200 and a total of 10,000 shares issued by Reliance, then the total market cap of Reliance will be = ₹ 20 lakhs (₹ 200 × 10,000).
How is the market cap calculated?
It has a simple formula - [Market Capitalization = Current Share Price x Total Outstanding Shares]
[Market capitalization = Current share price x Total shares issued by the company]
Current Share Price - The running price of any company during the open market (9:15 am to 3:30 pm) is called the current share price. It varies continuously depending on demand-supply, company growth, financial data, and many other factors.
Outstanding Shares - Outstanding shares refer to the total authorized shares issued by the company which is available with all types of investors, promoters, officers, employees. It does not include Treasury Shares that have been buyback by the company.
Top 10 High Market Cap Companies in India
(Last Updated: 4 April 2021)
| Reliance Industries Ltd | ₹13,28,134 |
| Tata Consultancy Services Ltd | ₹11,70,750 |
| HDFC Bank Ltd | ₹8,19,612 |
| Infosys Ltd | ₹5,90,187 |
| Hindustan Unilever | ₹5,63,685 |
| ICICI Bank Ltd | ₹4,11,087 |
| Kotak Mahindra Bank Ltd | ₹3,57,632 |
| State Bank of India | ₹3,30,791 |
| Bharti Airtel Ltd | ₹2,86,025 |
| ITC Ltd | ₹2,70,856 |
What are the market caps?
To compare any company, Market Capitalization is divided into a total of 3 parts -
| Large Cap | More than ₹ 20,000 crores |
| Mid Cap | ₹ 5,000 crores to ₹ 20,000 crores |
| Small-Cap | Less than ₹ 5,000 crores |
1. Large Cap Stock
Large-cap companies include companies whose total market capitalization is more than ₹ 20,000 crores. Where do they usually go to Blue Chip Stocks which have been performing very well in the stock market for the last one or two decades and provide constant returns to the investors?
Such companies remain stable even during a recession and maintain themselves in profit. Currently, more than 180 companies have been listed as Large Market Cap Company in the Indian stock market. As an example, in Nifty 50 Companies, all companies come in large caps.
2. Mid Cap Stock
The market cap of these companies ranges between ₹ 5000 crores to ₹ 20000 crores.
Investing in these companies is a bit Risky due to their high volatility as compared to large-cap.
But when talking about the other side of the coin, these companies are considered Near Leader, and on seeing the Future Potential, there are more chances of creating high growth and a large-cap company in the long run.
Companies like LIC Housing Finance and Castrol India are an example of this.
3 Small-Cap Stock
Total listed companies in the stock market are 80% to 90% Small Cap Companies, whose market cap is less than Rs 5000 crores. Due to being small in size, their growth probability is also high, due to which most retail investors invest in it.
But the truth is that due to the small market cap, it has very high volatility and risk, due to which it is unable to keep itself stable in the negative market and goes down.
Why is market capitalization important?
The market cap shows the actual size of any company by which investors can compare the two companies to find the risk-taking Ability and take the right investment decision. Along with this, the market cap has a direct connection to the growth, future prospects, and returns of the company i.e. the higher the market cap = the better the chances of growth.
It is seen in most cases that large-cap companies give a stable return with low risk. While small-cap companies have high risk, but no estimate of returns can be made.
Frequently Asked Questions (FAQ)
Q.1 What is Free Float Market Capitalization?
Ans: In the free-float market cap, the company calculates only those shares which are available to trade on the stock exchange. It does not include those shares which are held by an executive of the company or by a government institution and any private company.
Q.2 Which of the high and low market cap is good?
Ans: It depends on different investors.
If you want a good return with low risk, then you should invest in large-cap companies.
On the other hand, if you want to earn high returns with high risk, then you can invest in Small Cap.
[Note - We do not recommend anyone to invest in Small Cap, as it is very Risky]
Q.3 What is the difference between market cap and enterprise value?
Ans: Market Cap gives the total value of the company which comes to multiply the total shares issued and the share price.
Its formula is [Market Capitalization = Total Outstanding Share x Share Price]
Enterprise value represents the real value of the company, which can be calculated by adding debits to the market cap and reducing the cash.
Its formula is [Enterprise Value = Equity Value + Debt. + Chosen Stock + Interest - Cash]
Q.4 Does the market cap change daily?
Multiplying total shares and share price brings market capitalization.
In such a situation, every day there are small changes in the share price of every company, due to which the market cap also changes.
For example: Suppose HDFC Bank has total shares of ₹ 10 lakh and its share price on April 1 is ₹ 10, so its market cap will be ₹ 1 crore. But if his share price increases to ₹ 11 on April 2, his total market cap will also increase to ₹ 1.1 crores.
Q.5 Does everything have a market cap other than the company?
You can find out the market cap of every Valuable thing. For example, NSE & BSE, which is a stock exchange, also has a market cap.
Q.6 Are Small Cap Stocks and Penny Stocks the same?
No | Companies whose total market value is less than ₹ 5,000 crore are called small caps. While those companies with a stock price of around ₹ 10 to ₹ 50 are called Penny Stocks.
At times, a company can fall into both these categories, but its calculus is different.
Q.7 What is Market Cap to GDP Ratio?
Ans: The use of this ratio is used to compare the market at a level like undervaluing or over-value.
75% to 100% is an Average Ratio while being more than 100 is considered Overvalued.
Talking about Indian Share Market, in March 2021 this Ratio was 189.5%.
Conclusion
In this post, we have learned what the market cap is and how important it is.
Along with this, we have also talked about many other important factories.
You can tell us how helpful you found this post in the Comment Box below.
Also, how is the market cap influencing your investment decisions?
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