Large Cap vs Mid Cap vs Small Cap

Hi Friends

If you are thinking to start your investing journey or are just a new bee who is interested to invest in the mutual funds or stock market, many times you hear jargon like large-cap mutual funds, mid-cap mutual funds, large-cap stocks, small-cap stocks, etc. To understand this jargon, you need to understand the basics of the stock market.

Jargons like large-cap, mid-cap, or small-cap are derived from market capitalizations. Before understanding different caps, you need to first understand what marker capitalization stands for in the stock market.

What is market capitalization?

Market capitalization is defined as the market value of the outstanding shares of a company. In simple words, it is the market value of total shares held by all the investors in the company such as promoters, FII, DII, retail investors, etc.

Market capitalization is calculated with a simple formula

                Market Capitalization = Number of outstanding shares * Current Price of a share

Let's consider a simple example of Reliance Ltd. It has a total outstanding number of shares are 677Cr approximately and the current market price of a share is 2492/- Rs per share on 22nd June 2022.

                Market Capitalization =  677 * 2492

                                                    = 1687084 Cr

Refer below snippet from the screener (Read more: Best Websites For Fundamental Analysis)

Market capitalization in the above snippet has a small difference due to price, but it will be approximately the same.

Depending upon market capitalization, companies are categorized into three types

1. Large cap
   
   
2. Mid cap
   
   
3. Small cap

SEBI (Securities and Exchange Board of India) has circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 to define what is large cap, small cap, and mid cap companies to make sure uniformity in all investment instruments.

Large cap vs Mid cap vs Small cap

Large cap

As per the SEBI circular, a large cap is defined as the top 100 companies in terms of full marketizations as per market capitalization. These top 100 companies are considered blue-chip companies and these companies have proven records. There are no clear market cap criteria defined for large cap companies. Generally, the market capitalization of large cap companies is above 35000Cr. Again it depends if the company falls in the top 100 companies or not.

Large cap companies are included in the nifty and Sensex index as there have strong fundamentals and proven track records. Mutual funds which only invest in large cap companies are called large cap mutual funds.

Mid cap

As per the SEBI circular, companies that are ranked between 101 to 250 in terms of full marketization ions are called mid cap. Generally, the market capitalization of mid cap companies is between 10000Cr to 35000Cr. These companies are called growth companies. Mid cap companies will be part mid cap indices but won't be part of major indices such as nifty 50 or SENSEX. Mid cap companies have more potential for growth compared to the large cap but they are riskier compared to large cap.

Mutual funds which invest in only mid cap companies are called mid cap mutual funds.

Small cap

As per the SEBI circular, companies that are ranked 251 onwards in terms of full marketization ions are called mid cap. Generally, the market capitalization of small cap companies is below 10000Cr. These companies are considered riskier companies as they don't have a proven track record. There is every chance of a company to go bank corrupt due to market conditions or due to the company is not able to make a profit. 

Before investing in small cap companies, a lot of research is needed. These types of companies are meant for risk-taking personalities. They should be ready for a complete loss of capital. Mutual funds which invest in small cap companies are called small cap mutual funds.

Difference between Large cap vs Mid cap vs Small cap

How investor will know the cap of the company?

SEBI has appointed AMFI (Association of Mutual Funds in India) to prepare a stock list, based on the data provided by BSE (Bombay Stock Exchange), NSE (National Stock Exchange), and MSEI (Metropolitan Stock Exchange of India). AMFI release a list two time a year, one in January and another in July. All the rules and regulations related to this can be available in circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114.

You can see stock lists on the AMFI official website.

Website Link: AMFI Categorization of Stocks

Conclusion

• Companies are categorized into Lage cap, Mid Cap, and Small Cap depending upon market capitalization.
• Large cap companies are blue-chip companies that are safe investment options compared to Mid Cap and Small Cap.
• NIfty 50 and SENSEX index consist of Large Cap stocks.
• Small Cap companies are riskier than mid cap and large cap.
• AMFI prepares a stock list according to the market capitalizations of the company and releases the list two times a year. Mutual funds need to rebalance the portfolio in line with the updated list within a month's time.

Read more: Bonus Issue, Stock Split, List of Large Cap Stocks

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