What is Market Capitalization?
Market Capitalization is one of the best ways of assessing the market value of the company. Market Capitalization is also known as 'market cap', it is the market price of all the outstanding shares of the company.
Market value of the company is calculated by multiplying market price of one share by total number of outstanding shares.
Market Capitalization tells the size of the company and helps to analyze the company. It helps to rank of the companies on the size basis.
Market Capitalization Formula
The Formula is given below,
Market Capitalization = Market price of one share × Total number of shares outstanding
Market Capitalization Example
Suppose, it is ABC company. If the market price of one share of ABC company is Rs 100 and total number of outstanding shares 500,000
So, Market Capitalization = Rs100 × 500,000 = Rs 5,00,00,000
Types of Market Capitalization
Market Cap classifies the stock market into different categories:
(a)Large Cap:
Compaines with a market cap above Rs 1,25,000 crore are considered large cap companies. These large companies are very stable & Large companies have been around for a long time in market.
Large companies cannot bring good returns in a short period of time but Companies make a lot of money in the long run. These companies have lower risk. Example- Reliance, TCS, Hindustan Unilever etc.
(b)Mid Cap:
Compaines with a market cap between of Rs 15,000 crore to 1,25,000 crore are considered mid cap companies. The mid cap companies that work in an industry expected of rapid development experience.
These companies have immense potential of growth. Mid-cap companies are in progress in the process of expansion. They carry higher risk of institution than the large cap companies because they are not as established, but they are attractive for their growth possibilities. Example- Jk cement, Union bank of India etc.
(c)Small Cap: Compaines with a market cap between of Rs 15,000 crore to 20,000 crore are considered small cap companies. These companies have fewer market capitalization & the companies are considered riskiest of all stocks and possibility of higher return.
Small cap companies are facing problem in any recession due to least resources, that is why these companies are considered risk investment. Small cap share prices are more volatile and less liquidity than large cap shares.
Even small cap companies give rise to more than large companies. Small cap companies are also known as 'micro cap'. Example- BSE limited, Tata Investment Corporation Limited etc.
Changes in market value of the company
The important thing to note here is that the market capitalization of a company keeps changing with fluctuation in the share price. This means that the market cap of company increases and decreases with the rise and fall of the stock price.
Misconceptions of Market Cap
Many investors have a general misconception that market price per share is a good indicator of the size of the company.
Example:
(a) ITC, whose current price is Rs 184.05 and market cap is Rs 2,29,373 crore.
(b) HDFC Bank which is currently trading at Rs 1033.35 and market cap is Rs 5,59,577 crore.
The difference was due to the number of outstanding shares. Thus, market price of the share does not tell anything about the size of the company.
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