There are three main classifications when it
comes to stocks -
- Large
Cap stocks;
- Mid
Cap stocks
- Small
Cap stocks.
What
is market capitalisation?
It is the value of the stock that you arrive at by multiplying the stock price by the company's outstanding number of equity shares.
It is the value of the stock that you arrive at by multiplying the stock price by the company's outstanding number of equity shares.
Market Capitalisation = Current Stock Price
x Number of Shares outstanding
|
Let
us see an example:
Company ABC has 10,000,000 shares outstanding and its current share price is Rs 8.
Company ABC has 10,000,000 shares outstanding and its current share price is Rs 8.
Based on the above formula : Market Capitalisation =
Current Stock Price x Number of Shares outstanding
Company ABC's market capitalisation is Rs 80
million or Rs 8 per share X 10,000,000 shares.
Large
cap stocks
As we mentioned above, the first category based on market capitalisation is that of 'large cap stocks'.
One can look at the BSE-Sensex or BSE-100 Index as a reference point for large cap stocks. Market capitalisation for stocks in the BSE-100 Index, for instance, ranges from Rs 200 bn to Rs 3,500 bn.
Mid cap stocks
Mid caps lie between large cap stocks and small cap stocks. Mid cap stocks are those that generally have a market capitalisation within the range of Rs 50 bn and Rs 200 bn.
As we mentioned above, the first category based on market capitalisation is that of 'large cap stocks'.
One can look at the BSE-Sensex or BSE-100 Index as a reference point for large cap stocks. Market capitalisation for stocks in the BSE-100 Index, for instance, ranges from Rs 200 bn to Rs 3,500 bn.
Mid cap stocks
Mid caps lie between large cap stocks and small cap stocks. Mid cap stocks are those that generally have a market capitalisation within the range of Rs 50 bn and Rs 200 bn.
These
represent mid-sized companies that are relatively more risky than large cap as
investment options yet, they are not considered as risky as small cap
companies. They rank between the two extremes on all the important parameters
like size, revenues, employee and client base.
Small cap stocks
Lying at the lowest end of market capitalisation, Small cap stocks are generally viewed under the misconception of being hazardous or 'quick rich' stocks. However, both these labels are untrue.
Small cap companies have smaller revenue and client bases, and usually include the start-ups or companies in the early stage of development.
Small cap stocks
Lying at the lowest end of market capitalisation, Small cap stocks are generally viewed under the misconception of being hazardous or 'quick rich' stocks. However, both these labels are untrue.
Small cap companies have smaller revenue and client bases, and usually include the start-ups or companies in the early stage of development.
Have a look at the table below to get a better idea about the return potential of small cap stocks over a 10 year period. Small cap wonders Change in share prices over the past 10 years
Conclusion
All these categories consist of some really good
long term investment opportunities. As such, investors must decide the
allocation based on the opportunity's merit and not just whether it is a large
cap, mid cap, or small cap.
But purely as a matter of prudence and safety, investors looking to build a portfolio
from a 10 to 15 years perspective can have a 60-70% allocation to large caps
and 10-15% each to mid and small caps. Treat this allocation as just a
guideline and, we repeat, allocate your equity portion using your understanding
of different kinds of companies across different levels of market
capitalisation.