New investors are often advised to steer clear of small cap stocks or mutual funds due to the associated high risk. Despite an overall market uptrend, small and mid-cap shares have been taking a beating recently, prompting regulatory authority SEBI to urge investors to proceed with caution in this segment.
Before pouring your money into the stock market, it's crucial to scrutinize the category of the company you're investing in to avoid future regrets. Astute investors are now becoming wary as small caps, once racing ahead, are now experiencing a downward trend.
Continued Decline in Small Cap Stocks
Several small cap stocks have plummeted over 20%. SEBI's chief, Madhabi Puri Buch, has repeatedly expressed concerns over the hasty ascension of small and mid-cap shares. On March 11th, she reiterated at an AMFI event that this increase in prices does not always align with the companies' fundamentals.
Yet, how does a retail investor discern which category a certain stock fits into? Understanding the differences between small cap, mid-cap, and large cap can help you determine the nature of the company you're investing in.
Calculate a Company’s Market Cap Easily
The market value or capitalization of any company can be computed effortlessly. The market cap of a large, mid, or small cap is determined based on the company's capitalization. Multiply the number of shares by the market price, and you've got your market cap.
For instance, if ABC Company has 20,000 shares priced at 100 rupees each, then its market cap would be 20 lakh rupees (20,000 x 100 = 2,000,000).
It's important to note that every company issues shares, and the total number of shares represents 100% ownership in the company. Once you know the total number of shares and the current price per share, you can easily determine the company's value. Now, let's explore what large cap, mid-cap, and small cap actually mean.
Large Cap (Large Cap)
Companies with a market capitalization exceeding 20,000 crores are generally classified as large cap. They dominate their respective industries and are viewed as market leaders with steady growth. Large caps are less affected by market fluctuations compared to mid and small caps and are considered safer investments by most experts.
Mid Cap (Midcap)
Companies with a market value ranging from 5,000 to 20,000 crores fall into the mid-cap category. Mid-cap companies position themselves as rising stars within their sectors, with potential to become large cap entities in the future. Some mid caps experience rapid growth.
Small Cap (Small Cap)
All companies with a market value of less than 5,000 crores fall after large and mid caps, making them small caps. Many of these companies, especially newer ones, may witness exponential growth over a short period, but they also pose higher risks and higher potential returns. There's a chance for significant gains, but also a substantial risk of loss.
Ranking Based on Market Cap
Additionally, companies are ranked based on market capitalization. Those ranking from 1st to 100th are considered large cap; from 101st to 250th are mid-cap, and all coming after 251st are classified as small cap.
