Types of Stocks: Large Cap, Mid Cap, Small Cap Explained

What Is Market Capitalisation?

Before delving into the categories, it is important to understand what market capitalisation (or market cap) is. Market cap is the total value of a company's outstanding shares. Market cap is calculated by multiplying the current share price by the total number of shares.

How to Calculate MARKET Capitalisation

Market Cap = Share Price × Total Number of Shares

Say, if a company has 10 crore shares and as on today they are trading at ₹500 each, its market cap is ₹5,000 crore. Market cap tells what size the size of the company is.

Based on market cap, companies are categorised into large, medium and small cap.

Let's now look at the criteria for this categorisation.

Large Cap Stocks

According to the Securities and Exchange Board of India (SEBI), the top 100 companies in India ranked by full market capitalisation are large-cap companies. Large-cap companies are generally those with a market capitalisation above ₹20,000 crore. Either way, these are India's biggest and most established businesses with proven track records.

Examples of large-cap stocks in India

• Reliance Industries
• Tata Consultancy Services (TCS)
• HDFC Bank
• Infosys
• ITC Limited

Characteristics of large-cap stocks

Large-cap companies are usually market leaders in their sectors and have strong brand reputation. Their revenue streams are stable, management teams are experienced and are mostly multinational.

Advantages of large-cap stocks

As these companies have a substantial market cap, they are less susceptible to any uncertainty. They are less likely to experience dramatic price swings. Due to this, they are suitable for investors who do not want to risk. Many large caps pay regular dividends, providing steady income. They also have better liquidity, meaning you can easily buy or sell shares without significantly affecting the price.

Disadvantages of Large Cap stocks

Since these companies are already massive, their percentage growth rates are not as steep as some smaller companies.

Investor Profile

These stocks often attract conservative investors, beginners or those seeking stable, long-term investments with lower risk.

Mid Cap Stocks

Mid-cap companies have a market capitalisation between ₹5,000 crore and ₹20,000 crore. These are established companies and have been around for some time. These companies have moved beyond the startup phase but have yet to reach giant status.

Examples

• Coromandel International
• Voltas
• Trent Limited
• Lupin Pharmaceuticals
• Page Industries

Characteristics

Mid-cap companies are usually well-managed businesses with good fundamentals. Many are regional leaders working towards becoming national or international players.

Advantages

Mid-cap companies have the potential to become tomorrow's large caps. In this process, their growth story can be impressive and can offer substantial returns. They are more nimble than large companies, able to adapt quickly to market changes and capitalise on opportunities.

Disadvantages

During market downturns, mid-caps often fall more steeply than large-cap stocks. They may also have less analyst coverage, making research more challenging.

Investor Profile

These stocks tend to attract investors with moderate risk appetite, who seek a balance between growth and stability.

Small Cap Stocks

Small-cap companies have a market capitalisation below ₹5,000 crore. These are smaller, emerging companies, with chances of growth but also substantial risk.

Examples include

• Computer Age Management Services (CAMS)
• Kfin Technologies
• Rainbow Children's Medicare
• Various regional businesses and emerging sector players

Characteristics

Small caps are often niche players or companies in emerging industries. They may operate in single regions or specific market segments. Many are relatively unknown to mainstream investors.

Advantages

If you identify the right small-cap early, returns can be exceptional. These stocks often fly under the radar, creating opportunities for informed investors.

Disadvantages

Small-cap stocks are highly volatile and risky. They are highly impacted by market downturns, economic changes, sectoral uncertainties and company-specific issues.

Many small caps have limited financial resources, making them vulnerable during tough times. Liquidity can be poor, meaning it might be difficult to sell shares quickly. Information is often scarce, requiring more thorough research.

Investor Profile

These stocks generally attract experienced investors with high risk tolerance.