What is Market Capitalisation?

What is Market Capitalisation?

Understanding a company's value is significant, and often difficult to identify accurately. Market capitalisation means the total number of shares outstanding multiplied by the price per share. It is a quick and easy method of estimating the value of a publicly traded company. 

After a company is listed and traded on a stock exchange, its price is determined by the supply and demand of its shares in the market.  The price rise if the stock is in high demand due to favourable factors. If the company's future growth prospects are unfavourable, sellers may lower the stock price. Market capitalisation becomes a real-time estimate of a company's value.
 

Market Capitalisation Explained

Let’s break it down. Market capitalisation—often just called market cap—is a simple way to figure out how much a company is worth on the stock market. Here's the formula:

Market Cap = Share Price × Total Outstanding Shares

For example, if Company A has 50 million shares trading at ₹200 each:

Market Cap = ₹200 × 50,000,000 = ₹10,000,000,000 (or ₹1,000 crore)

That puts Company A in the mid-cap category. Here's a quick snapshot of how companies are usually grouped:

• Large-cap: ₹20,000 crore and above
• Mid-cap: ₹5,000 to ₹20,000 crore
• Small-cap: Less than ₹5,000 crore

These categories help investors understand a company's size and the level of risk that might come with it.
 

How to calculate Market Cap?

You can calculate Market Cap using the below formula.

MC = N x P

Where MC means market capital

N stands for the number of outstanding shares.

And P is the closing price of the concerned company’s shares.

For example, if a company has 50,000 outstanding equity shares, with a closing price of ₹75 per share, now the company’s total market cap would be calculated as

MC = N x P

= 50,000 x INR 75

= ₹27,50,000 

Therefore, the total value of the company is ₹27,50,000.

Importance of Market Capitalisation

Market cap isn’t just a number—it gives you real insight into how stable or risky an investment might be. Here's why it's important:

• Risk & Stability: Big companies (large-cap) like TCS or Infosys are generally more stable. Smaller firms (small-cap) can grow fast, but they’re riskier.
• Portfolio Diversification: By mixing large-, mid-, and small-cap stocks, investors can balance potential returns with risk.
• Benchmarks & Indices: Market cap decides how much weight a company holds in major indices like the BSE Sensex or NSE Nifty.
• Mergers & Acquisitions: Bigger companies usually have more resources to acquire smaller ones—and that can shift market dynamics.

In short, market cap gives you a snapshot of a company’s standing and its potential impact on your portfolio.

Types of Market Capitalisation

An investor can select from three different sorts of stocks based on this widely used approach of analyzing a firm. Risk may be reduced by distributing the portfolio among all of these in a sensible way.

Market Cap exceeding Rs. 20,000 crore designates a company as a Mega-Cap Stock. The three main stock categories that investors choose to pursue are covered in more detail below.

Types of Companies Based on Market Cap

1. Large-cap: These are among of the market's most reliable company groupings. Therefore, the least hazardous course of action is to invest in these businesses. But it's also crucial to remember that because they are solid businesses, the return on investment is generally modest.
These businesses have usually achieved the peak of their development, thus there is less likelihood of a significant shift in stock price. Nonetheless, buying these companies is a prudent choice due to the low risk and less aggressive growth.

2. Mid-cap: Based on market capitalisation, this category includes companies with significant growth potential that have had some stability and growth. These stocks show the potential for future growth together with a company's degree of industry establishment.
Since these businesses are still relatively new to the market, investing in their stocks carries a somewhat lower risk than that of the next set of firms, but it is still dangerous. They may thus yield a return that is larger than that of large-cap equities.

3. Small-cap: The riskiest equities are those that comprise firms with the smallest market capitalisation. These are emerging businesses that have not yet made a name for themselves in their sector. They are therefore quite dangerous. When a company succeeds, its stock price may soar, but when it fails, its stockholders may suffer a significant loss. The most daring investing choices are these.
 

Market Cap Vs. Share Holder's Equity

Market capitalisation & shareholder equity are important metrics for assessing not only company's value but also financial health, but they differ ways: 

1. Meaning: Market cap is total market value of company's outstanding shares, whereas shareholder equity is company's net worth from accounting perspective. 

2. Calculation: Market cap is calculated by multiplying total number of outstanding shares by market price of single share. Shareholder equity is calculated by subtracting company's liabilities from its assets. 

3. Fluctuation: Market cap fluctuates based on not only stock prices but also investor sentiment, while shareholder equity is more stable. 

4. Purpose: Market cap is quick way for investors to categorize companies by size, while equity provides insight into not only company's financial health but also value available to shareholders. 

5. Risk: Stocks with larger market cap are often considered less risky, but this isn't always case. For instance, large-cap stock with lot of debt or bad news may be riskier than expected, while small-cap stock with not only steady earnings but also little debt may be less risky.
 

Market Capitalisation investment strategy

Here’s how market cap can shape your game plan:

• Large-Cap Strategy: Invest in well-known giants like Reliance or HDFC. These are stable bets, great for long-term, low-risk growth.
• Mid-Cap Strategy: Look for companies on the rise. They’re less stable than large-caps, but often offer more room to grow.
• Small-Cap Strategy: These are your high-risk, high-reward picks. Think startups and emerging firms. Great for bold investors who can stomach the ups and downs.

The best move? A blend of all three, so you're not putting all your eggs in one basket.
 

What are the factors which impact Market Caps?

There are several factors affecting the market cap including:

●  Both the demand for an institution's products or services and its ability to meet that need.
●  Exercise of warrants against company stock may reduce its value.
●  Performance and ingenuity of competing brands or institutions.
●  Company credibility and reputation.

A company's outstanding shares vary depending on share buybacks and stock buybacks. A stock split to issue new shares does not change the company's market capitalisation. While various factors impact MC, it is prudent for investors to do the same.

Here is an example. Given that a company's shares are priced at Rs 100 if Ms Mehra invests Rs 10,000, he will get 100 shares of the company. The stock price will be positively affected if the company's market capitalisation increases. When the stock price rises to Rs. 120, Mehra’s total investment is Rs 12,000. As a result, Ms Mehra makes a profit of Rs.2,000 with an initial investment of Rs. 10,000.
 

Other Ways of Evaluating a Company’s Value

Investors should familiarize themselves with a few pertinent ratios that are useful while studying market capitalisation. MC is taken into account in these ratios.

1. Price to earnings ratios: These are used to calculate the projected return on investment for purchasing a company's shares. To get this ratio, divide the MC by the net income for the previous twelve months.
2. Price to Free Cash Flow Ratios: To compute this ratio, divide the 12-month free cash flow (MC) by 12. The projected anticipated returns are likewise projected using it.
3. Cost to Book Value Ratios: This is computed by dividing MC by the entire book value of the business. It is calculated by subtracting the entire amount of an institution's obligations from its total book value of assets.
4. EV to EBITDA: This gauges the short-term operational returns that may be anticipated. Earnings before Interest, Taxes, Depreciation, and Amortization is referred to as EBITDA. After subtracting total cash and adding the market capitalisation to the value of preference shares and debentures, enterprise value (EV) is determined. By dividing the EV by EBTIDA, the ratio is computed.

Misconceptions About Market Caps

Market capitalisation is a term used to describe a firm, although it is not a measure of a company's equity worth. That can only be accomplished by a careful examination of a business's foundations. The market price simply indicates how much the market is ready to pay for shares since shares are frequently overvalued or undervalued by the market.

The price at which a firm would be acquired in a merger does not depend on its market capitalisation. An improved way to figure out how much it would cost to buy a company entirely is to use its enterprise value.
 

What’s a Market Capitalisation-Weighted Index?

You’ve probably heard of indices like the Nifty 50. But did you know they’re usually market cap-weighted?

That means the bigger the company, the more influence it has on the index. So, if Reliance Industries has the highest market cap in the Nifty 50, its stock movements will move the entire index more than smaller companies do.

These indices are often used as performance benchmarks for mutual funds and ETFs.
 

How Market Cap Impacts Stock Prices

Here’s the twist: market cap doesn’t control stock price—it's the result of it. It’s calculated after the stock price is known.

Still, market cap can influence how investors feel about a company. If a firm moves from mid-cap to large-cap, it might catch the eye of big institutional investors. That extra demand? It can push the stock price up. Also, getting added to a major index can boost buying interest, raising the price further.

Bottom line: while market cap doesn’t drive stock price directly, it can definitely shape how the market responds.
 

Conclusion

When observing stocks and assessing possible investments, market capitalization may be a useful tool for investors. For publicly listed firms, market capitalization provides a quick and simple way to estimate a company's value by extrapolating what the market believes it is worth. The market capitalization of a takeover candidate aids in evaluating whether the acquirer will find the candidate to be a suitable fit.