What is Market Capitalization?
5paisa Research Team
Last Updated: 01 Oct, 2024 01:07 PM IST
Want to start your Investment Journey?
Content
- What is Market Capitalization?
- How to calculate Market Cap?
- Importance of Market Capitalization
- Types of Market Capitalization
- Types of Companies Based on Market Cap
- Market Cap Vs. Share Holder's Equity
- Market Capitalization investment strategy
- What are the factors which impact Market Caps?
- Other Ways of Evaluating a Company’s Value
- Misconceptions About Market Caps
- Conclusion
The total market capitalization of a listed company allows investors to compare the relative size of one company to another, irrespective of geography. Market capitalization measures a company's value and prospects on the open market, reflecting how much investors are willing to pay for its shares.
This article discusses what market capitalization is in detail.
What is Market Capitalization?
Understanding a company's value is significant, and often difficult to identify accurately. Market capitalization 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 capitalization becomes a real-time estimate of a company's value.
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 INR 75 per share, now the company’s total market cap would be calculated as
MC = N x P
= 50,000 x INR 75
= INR 27,50,000
Therefore, the total value of the company is INR 27,50,000.
Importance of Market Capitalization
The market cap plays a crucial role In understanding a stock’s potential. The importance of market cap includes
1. Global metrics: Market cap is widely used to evaluate a stock. Since it is a globally accepted method, it is easier for investors to compare the stocks irrespective of their geographic or economic differences.
2. Precise suggestions: Any suggestions on market conditions may be risky due to various factors involved in making the said suggestion. However, the market cap method is very precise in its evaluation. It fairly suggests the risks associated with a company.
3. Affects the index: This method is also used to weigh the stocks of various companies for stock market indices. Under this method, stocks with higher market capitalization are weighted more heavily in the index.
4. Useful for comparison: It is a convenient way for investors to compare different companies as it is a universal method used to assess the market value of any company. This comparison not only helps you understand the size of the company but also the risks involved in investing in the company.
5. Balanced Portfolio: Investors should keep a balanced portfolio to avoid risks of greater losses. A balanced portfolio generally includes investing in some of the top companies through market capitalization and risky investments in developing companies.
While this valuation process is convenient and widely accepted, investors should also be aware that it excludes company and other financial liabilities. Consider different types of returns such as stock splits, dividends, etc.
Types of Market Capitalization
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.
Stock Type | Market Cap |
Small-Cap Stocks | Up to Rs.500 crore |
Mid-Cap Stocks | From Rs.500 crore up to Rs.7,000 crore |
Large-Cap Stocks | From Rs.7,000 crore up to Rs.20,000 crore |
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 capitalization, 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 capitalization. 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 capitalization & 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 Capitalization investment strategy
Given the simplicity and effectiveness of risk assessment, market capitalization can be a useful metric to decide which stocks to invest in and how to diversify a portfolio with companies of various sizes.
Large-cap companies (also known as big-cap companies) typically have a market capitalization of $10 billion or more. These companies have been around for a long time and are major players in established industries. Investing in large-cap stocks doesn't necessarily yield big returns in the short term. Regardless, these companies typically reward investors with consistent stock appreciation and dividend payments over the long run. Examples of large-cap stocks include Reliance Industries, Tata Group, etc.
Mid-cap companies typically have market caps between $2 billion and $10 billion. Medium-sized companies are established in their operating industries and are expected to grow rapidly. They are inherently more risky than large-cap companies because they are comparatively less established than the big companies, but they are attractive because of their growth potential. An example of a medium-sized company is Relaxo Footwear.
Companies with market caps between $300 million and $2 billion are typically classified as small caps. These small businesses may be young companies or serve niche markets or new industries. These companies are considered riskier investments because of their age, the markets they serve, and their size.
Smaller businesses with fewer resources are more sensitive to economic downturns. As a result, small-cap stock prices tend to be more volatile and less liquid than larger, more mature companies. Similarly, small businesses often offer greater growth opportunities than large companies. Even smaller companies are known as microcaps, which range in value from about $50 million to $300 million.
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 capitalization. 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 capitalization 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 capitalization. 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 capitalization 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 capitalization 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 capitalization. An improved way to figure out how much it would cost to buy a company entirely is to use its enterprise value.
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.
More About Stock / Share Market
- What is Dabba Trading?
- Learn about Sovereign Wealth Fund(SWF)
- Convertible Debentures: A Comprehensive Guide
- CCPS-Compulsory Convertible Preference Shares : Overview
- Order Book and Trade Book: Meaning & Difference
- Tracking Stock: Overview
- Variable Cost
- Fixed Cost
- Green Portfolio
- Spot Market
- QIP(Qualified Institutional Placement)
- Social Stock Exchange(SSE)
- Financial Statements: A Guide for Investors
- Good Till Cancelled
- Emerging Markets Economy
- Difference Between Stock and Share
- Stock Appreciation Rights(SAR)
- Fundamental Analysis in Stocks
- Growth Stocks
- Difference Between ROCE and ROE
- Markеt Mood Index
- Introduction to Fiduciary
- Guerrilla Trading
- E mini Futures
- Contrarian Investing
- What is PEG Ratio
- How to Buy Unlisted Shares?
- Stock Trading
- Clientele Effect
- Fractional Shares
- Cash Dividends
- Liquidating Dividend
- Stock Dividend
- Scrip Dividend
- Property Dividend
- What is a Brokerage Account?
- What is Sub broker?
- How To Become A Sub Broker?
- What is Broking Firm
- What is Support and Resistance in the Stock Market?
- What is DMA in Stock Market?
- Angel Investors
- Sideways Market
- Committee on Uniform Securities Identification Procedures (CUSIP)
- Bottom Line vs Top Line Growth
- Price-to-Book (PB) Ratio
- What is Stock Margin?
- What is NIFTY?
- What is GTT Order (Good Till Triggered)?
- Mandate Amount
- Bond Market
- Market Order vs Limit Order
- Common Stock vs Preferred Stock
- Difference Between Stocks and Bonds
- Difference Between Bonus Share and Stock Split
- What is Nasdaq?
- What is EV EBITDA?
- What is Dow Jones?
- Foreign Exchange Market
- Advance Decline Ratio (ADR)
- F&O Ban
- What are Upper Circuit and Lower Circuit in Share Market
- Over the Counter Market (OTC)
- Cyclical Stock
- Forfeited Shares
- Sweat Equity
- Pivot Points
- SEBI-Registered Investment Advisor
- Pledging of Shares
- Value Investing
- Diluted EPS
- Max Pain
- Outstanding Shares
- What are Long and Short Positions?
- Joint-Stock Company
- What are Common Stocks?
- What is Venture Capital?
- Golden Rules of Accounting
- Primary Market and Secondary Market
- What Is ADR in Stock Market?
- What Is Hedging?
- What are Asset Classes?
- Value Stocks
- Cash Conversion Cycle
- What Is Operating Profit?
- Global Depository Receipts (GDR)
- Block Deal
- What Is Bear Market?
- How to Transfer PF Online?
- Floating Interest Rate
- Debt Market
- Risk Management in stock Market
- PMS Minimum Investment
- Discounted Cash Flow
- Liquidity Trap
- Blue Chip Stocks: Meaning & Features
- Types of Dividend
- What is Stock Market Index?
- What is Retirement Planning?
- Stock Broker
- What is the Equity Market?
- What is CPR in Trading?
- Technical Analysis of Financial Markets
- Discount Broker
- CE and PE in the Stock Market
- After Market Order
- How to earn 1000 rs per day from the stock market
- Preference Shares
- Share Capital
- Earnings Per Share
- Qualified Institutional Buyers (QIBs)
- What Is the Delisting of Share?
- What Is The ABCD Pattern?
- What is a Contract Note?
- What Are the Types of Investment Banking?
- What are Illiquid stocks?
- What are Perpetual Bonds?
- What is a Deemed Prospectus?
- What is a Freak Trade?
- What is Margin Money?
- What is the Cost of Carry?
- What Are T2T Stocks?
- How to Calculate the Intrinsic Value of a Stock?
- How to Invest in the US Stock Market From India?
- What are NIFTY BeES in India?
- What is Cash Reserve Ratio (CRR)?
- What is Ratio Analysis?
- Preference Shares
- Dividend Yield
- What is Stop Loss in the share market?
- What is an Ex-Dividend Date?
- What is Shorting?
- What is an interim dividend?
- What is Earnings Per Share (EPS)?
- Portfolio Management
- What Is Short Straddle?
- The Intrinsic Value of Shares
- What is Market Capitalization?
- Employee Stock Ownership Plan (ESOP)
- What is Debt to Equity Ratio?
- What is a stock exchange?
- Capital Markets
- What is EBITDA?
- What is Share Market?
- What is an investment?
- What are bonds?
- What Is a Budget?
- Portfolio
- Learn How To Calculate The Exponential Moving Average (EMA)
- Everything about the Indian VIX
- The Fundamentals of the Volume in Stock Market
- Offer for Sale (OFS)
- Short Covering Explained
- What Is The Efficient Market Hypothesis
- What Is Sunk Cost: Meaning, Definition, and Examples
- What Is Revenue Expenditure? All You Need To Know
- What are operating expenses?
- Return On Equity (ROE)
- What is FII and DII?
- What is Consumer Price Index (CPI)?
- Blue Chip Companies
- Bad Banks And How They Function.
- The Essence Of Financial Instruments
- How to Calculate Dividend per Share?
- Double Top Pattern
- Double Bottom Pattern
- What is the Buyback of Shares?
- Trend Analysis
- Stock Split
- Right Issue of Shares
- How To Calculate the Valuation of a Company
- Difference between NSE and BSE
- Learn How to Invest in Share Market Online
- How to Select Stocks for Investing
- Do’s and Don’ts of Stock Market Investing for Beginners
- What is Secondary Market?
- What is Disinvestment?
- How to Become Rich in Stock Market
- 6 Tips to Increase your CIBIL Score and Become Loan-worthy
- 7 Top Credit Rating Agencies in India
- Stock Market Crashes In India
- 5 Best Trading Books
- What Is the Taper Tantrum?
- Tax Basics: Section 24 Of The Income Tax Act
- 9 Read-worthy Share Market Books for Novice Investors
- What is Book Value Per Share
- Stop Loss Trigger Price
- Wealth Builder Guide: Difference Between Savings And Investment
- What is Book Value Per Share
- Top Stock Market Investors In India
- Best Low Price Shares to Buy Today
- How Can I Invest in ETF in India?
- What is ETFs in Stocks?
- Best Investment Strategies in Stock Market for Beginners
- How To Analyse Stocks
- Stock Market Basics: How Share Market Works In India
- Bull Market Vs Bear Market
- Treasury Shares: The Secrets Behind The Big Buybacks
- Minimum Investment In Share Market
- What is Delisting of Shares
- Ace Day Trading With Candlestick Charts - Simple Strategy, High Returns
- How Share Price Increase or Decrease
- How to Pick Stocks in Stock Market?
- Ace Intraday Trading With Seven Backtested Tips
- Are You A Growth Investor? Check These Tips to Increase Your Profits
- What Can You Learn From The Warren Buffet Style of Trading
- Value or Growth - Which Investment Style Can be the Best For You?
- Find Why Momentum Investing is Trending Nowadays
- Use Investment Quotes to Improve Your Investment Strategy
- What is Dollar Cost Averaging
- Fundamental Analysis vs Technical Analysis
- Sovereign Gold Bonds
- A Comprehensive Guide To Learn How to Invest In Nifty In India
- What is IOC in Share Market
- Know All About Stop Limit Orders And Use Them To Your Benefit
- What is Scalp Trading?
- What is Paper Trading?
- Difference Between Shares and Debentures
- What is LTP in the Share Market?
- What is Face Value of Share?
- What is PE Ratio?
- What is Primary Market?
- Understanding the Difference between Equity and Preference Shares
- Share Market Basics
- How to Choose Stocks for Intraday Trading?
- What is Intraday Trading?
- How Share Market Works In India?
- What is Scalp Trading?
- What are Multibagger Stocks?
- What are Equities?
- What is a Bracket Order?
- What Are Large Cap Stocks?
- A Kickstarter Course: How To Invest In Share Market
- What are Penny Stocks?
- What are Shares?
- What Are Midcap Stocks?
- Beginner's Guide: How to Invest in the Share Market Successfully Read More
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.
Frequently Asked Questions
Reliance Industries stand at the top with a market cap of INR 1,690,971.27 Crore.
Market capitalization does not affect stock prices. Instead, the market cap is affected by the stock price. Market capitalization is calculated by multiplying the stock price by the number of shares outstanding. Therefore, when stock prices rise, so does market capitalization.
No, the market capitalization, which is determined by examining the price of the stock and the quantity of shares issued, has no bearing on the stock price. A blue-chip firm's higher market capitalization has no direct effect on stock prices, even though it could perform better due to its increased market presence and organizational efficiency.
A firm with a high market capitalization is one that is more well-known in the industry. Bigger businesses might not have as much room for expansion as start-ups, but established businesses might be better able to obtain funding at a lower cost, have a steady flow of income, and benefit from name recognition.
Because it enables prospective investors to understand the underlying worth of businesses and the relative sizes of different companies, market capitalization is important. Since it shows what the market is willing to pay for the shares, it helps investors estimate how the company's stock will do in the future.