Difference Between Large Cap, Mid Cap and Small Cap

Market capitalization generally refers to the total worth of a company in the stock market. It is also known as the market cap in short. If you are looking to analyze a company and determine whether it is good enough to invest in market capitalization, it can surely help. To obtain a company’s market capitalization, one needs to calculate the market value of the outstanding shares. 

Figuring out Market Capitalisation

Market capitalization is the total number of shares that can be traded on the market multiplied by the current market price or the price it’s being currently traded at. This calculation provides an approximate valuation of the company.

Let’s understand market capitalization with the help of an example. Suppose a company named XYZ has 15 lakh shares listed on the stock exchange, and the shares are trading at Rs.40 each. Then by multiplying 1500000 to 40, we get 6 crores. Hence the market capitalization of the company is Rs. 6 crores. 

Using this method, we can find out the market capitalization of any company and know its current market value. To know the large-cap vs. mid-cap, large-cap vs. small-cap, and midcap vs. small-cap, you must know each category individually in detail. 

Categories of Market Capitalization

Market capitalization is a critical parameter to consider. It gives a detailed picture of how much value the company holds in the market. 

There are three different categories of companies based on market capitalization. The three categories are large-cap, small-cap, and mid-cap. The large-cap category includes the companies with very high valuations and ranks among the top 100 companies in the country. The “small-cap category” consists of small companies with low valuations. The mid-cap companies lie between the large-cap and small-cap ones.

To large-cap vs. mid-cap vs. small-cap, you must understand each market capitalization in detail.

What are Large Cap-stocks?

The large-cap stocks include companies that rank up to the hundred mark in market capitalization. They usually have a market capitalization of more than 20000 crores. India’s essential indices, Sensex and Nifty, consist of large-cap stocks. These stocks are very stable with fewer price fluctuations, making them a preferred choice for investors unwilling to take much risk. These companies offer good quality products and services with wide distribution networks. It makes them immune to sudden and unexpected changes in the market environment. Even in adverse situations, they remain profitable. They are very financially sound and have very negligible or no debt liabilities. Investing in large-cap stocks with a significant investment horizon in view can yield good returns. 

What are Mid Cap-stocks?

The mid-cap stocks live anywhere between the small-cap and mid-cap stocks. Their market capitalization is below 20000 crores but above 5000 crores. Thirty companies rank from 101 to around 200th place based on market cap. These are moderate-risk stocks with a high potential to grow because of their excellent business models. Considering the financial health quality of management, competitive advantage in the particular segment can choose to invest in these stocks.

What are Small Cap-stocks?

Small-cap stocks are stocks of companies with a market valuation below 5000 crores. The companies below the 250th rank in market capitalization come under small-cap stocks. The NSE and BSE consist of small-cap benchmark indices, respectively known as the nifty smallcap 100 and BSE small-cap index. Investors can track the performance of these small-cap stocks through these indices. The risk quotient in these stocks is high, and the shares’ price is volatile. Although, some of the good companies with good revenue-generating models can give investors profits on their returns. Before investing, one should carry out a full-scale fundamental analysis of the stock.

Difference Between Large-cap and Mid-cap and Small-cap

There are various factors that can help you understand the large-cap vs. mid-cap vs. small-cap. The factors are

1. Company Stature

Large-cap companies are established in the stock market. They are among the best in their sector and have strong management with large amounts of revenue. A mid-cap company is rising and striving to be among the best. Under good management, it could soon be a large-cap company. A small-cap company has a low valuation and is very small in size as well. It has good potential and with the right leadership, it can go a long way.

2. Market Capitalization

Market cap is a calculator of a company’s total value. It is calculated by multiplying outstanding company shares with the current market price of a single share. Apart from being its field leader, a large-cap company has a valuation of about Rs 20,000 crore or more. On the other hand, the valuation of a mid-cap company ranges from Rs 5,000 crore up to Rs 20,000 crore. For small-cap companies, the valuation will be under Rs 5,000 crore. Since the stock price of each company fluctuates, hence the listed company’s market cap also changes along with the market conditions.

3. Potential

In terms of growth potential, large-cap companies have less potential compared to
rnmid-cap vs. small-cap. In spite of having less potential, it will grow but at a slow pace and can be considered a reliable investment option. Mid-cap companies have a higher potential compared to large-cap companies. They have the potential to be a large-cap company if they are able to grow to a valuation of Rs 20,000 crore and above. Small-cap companies have the highest potential for growth due to their small size and valuation. They can turn out to be a multibagger stock if they grow to become a large-cap company. 

4. Volatility

Low volatility simply means that the share price is stable. This implies that investing in a less volatile stock helps investors. Large-cap companies are less volatile and their market price is pretty stable. In the long run, large-cap companies always have had a stable price. Mid-cap companies have comparatively more volatile prices and have a tendency to move from one extreme to another. This can happen due to various reasons. Small-cap companies have the most volatile share prices among the three. Due to their low valuation, their prices are comparatively low and have a tendency to swing to extremes.

In a bullish market, small-cap stocks have the most potential to grow at a quicker pace while a large-cap stock price will steadily keep increasing. When the table turns into a bearish market, small-cap stocks are the first to fall drastically. Large-cap stocks might even increase in such a time or will slowly lose value with time. 

5. Liquidity

Higher liquidity means it is easier to square off positions and sell the shares you already own. A large-cap stock has high liquidity. The reason is the high number of shares and demand for it because of enough buyers in the market. You can sell off your shares without much change in the share price due to this reason. For a mid-cap stock, the demand is comparatively less. Based on the price the number of shares might be less as well. This can make it a bit difficult to sell off your shares, and might affect the price especially if you hold a significant number of shares.

The liquidity of the shares of a small-cap company is the most difficult due to the lack of demand. This can make it pretty difficult to square off your position if your portfolio has a high number of the small-cap company’s shares. 

6. Risk

Risk is a very important factor and is directly proportional to potential growth. If the company has a high potential, then it is also a risky investment as potential needs to be acted on and be fulfilled to yield the expected returns. Large-cap companies are the least risky compared to small-cap and mid-cap. Mid-cap is comparatively riskier than a large-cap stock. Small-cap companies have the most risk associated with it. They can provide great yield but there is no guarantee of the expected return.

Relation Between Market Capitalisation and Mutual Funds

In recent times mutual funds have proved to be a reliable form of investment option in India. The number of investors has been increasing regularly as awareness about mutual funds spread. Based on capitalization mutual funds are divided into 3 categories

• Large-cap funds
• Mid-cap funds
• Small-Cap funds

Each fund is carefully crafted with a particular set of stocks grouped based on capitalization. Each category has different growth potential, risks, and benefits depending on the capitalization of the stocks it holds.

Differences Between Large-Cap, Mid-Cap, Small-Cap Funds Based on Risk

Risk plays an important factor in choosing which funds to invest in. Based on risk alone one can decide if they can or won’t invest in it. Each person’s risk appetite is different and being aware of it is crucial.

Large-Cap Funds

Large-cap funds generally invest in blue-chip companies which are large in scale and comparatively stable. Due to this investing in large-cap funds has its advantages. The risk is low as it’s less volatile and highly liquid. The growth potential, even though low, provides consistent returns in the long run. Some of them also payout in dividends ensuring returns

Mid-Cap Funds

Fund managers generally choose stocks that are mid-cap and have good growth aspects. This can lead to good returns in the future but also come with a fair share of risk. Even though the value of mid-cap funds can drop during times of market volatility, it can be a good investment option if the fund managers are good. Mid-cap funds tend to offer more growth and the volatility of these fund groups is also moderate. It seeks to capitalize on the capital appreciation in a potential way to create funds that are fairly diversified with the mid-cap stocks.

Small-Cap Funds

Small-cap funds focus on the limitless growth potential small-cap companies possess. In a bearish market, the value of small-cap funds is bound to fall, but they will still be a good investment option. Once the market turns to a bullish trend, it is bound to grow to reach new heights. Even though the risks are huge as it is volatile and has low liquidity, small-cap funds can be very profitable in the long run if managers are able to invest in the right stocks.

There are different expense ratios that can harm your returns. Different AMC (Asset Management company) charges funds fees in order to let you provide a mutual fund scheme with better returns. 

An expense ratio is a fee that is charged annually by an AMC. So before making an investment you need to check the expanse ratio, exit load fees, and other charges of mutual fund schemes. There are funds that are called balance or hybrid funds. These funds are a mixture of stocks, bonds, and other financial instruments available in the stock market. This fund’s goal is to further minimize the loss risk and give a stable return.

The portfolio manager gets complete access to change the ratio of mutual funds investments. In order to maintain the integrity and profit ratio of the funds. Investors with different goals whether short-term or long term can choose mutual funds accordingly. Mutual funds are flexible and provide a quick way to make your savings into earnings.

The taxation in the mutual fund schemes is for the short-term capital gains and long-term capital gains. The long-term capital gain tax on mutual funds is calculated along with the inflation and the capital gain charge at a rate of 20% in your mutual fund’s investments.

Conclusion

Having an understanding of the market cap is essential for any investor. You need to know about the market cap of stocks as well as the market of mutual funds too. Market caps provide a crystal clear picture of where they are investing their hard income money in the stock exchange. While large-cap stocks have a massive market valuation, small-cap stocks have a low market valuation.

Small-cap stocks generally have a market capitalization of fewer than 5000 crores. On the other hand, the mid-cap stocks have a market cap of more than 5000 crores. Large-cap stocks are enormous companies with very high market capitalizations. Mid-cap stocks are in the growing stage and have immense possibilities ahead. On the other hand, Small-cap stocks belong to those companies which do not have a considerable amount of market capitalization and are very small in size.

Since you’re now aware of the difference between large-cap and mid-cap, the difference between large-cap and small-cap, and the difference between mid-cap and small-cap, you can invest as per your needs considering your risk-taking capacity.

Usually, these companies have fewer number traders, and investors tend to follow a smart investment approach by just evaluating the company’s business growth. Although the small and mid-cap possesses a riskier factor. But there is a chance that this risky stock can gain a higher stock price in a shorter time. You can hope that you will get companies which are aided by different sectors. To choose the correct or better stocks you need to be patient and plan your investment accordingly.

Frequently Asked Questions (FAQs)