What Is Market Capitalisation and Why It Matters?

2 min read | Updated on November 27, 2025, 16:31 IST

Market Capitalisation and Why It Matters?

When you start exploring the stock market, you will frequently encounter the term ‘market capitalisation or ‘market cap’. Market capitalisation is the basis on which any company's size is decided and they get categorised as large cap, mid cap or small cap. Using market capitalisation, indices are calculated. Market capitalisation helps analysts and investors understand the overall risk associated in investing in a particular company.

Let's understand what market capitalisation means, how it is calculated and how you can use it to make investment decisions.

Understanding Market Capitalisation

Market capitalisation is the total value of a company's outstanding shares in the stock market.
Market capitalisation = Number of outstanding shares * value per share
For example, if a company has 10 crore shares outstanding and each share trades at ₹100,
Its market capitalisation = ₹100 * 10 crore = ₹1000
This figure represents the entire company’s worth at that particular moment when its share value was ₹100.
It's important to note that market cap changes constantly as share prices fluctuate throughout trading hours.

Categories of Market Capitalisation

In India, publicly listed companies are categorised as large, mid and small cap. This categorisation is done as per SEBI (Securities and Exchange Board of India) guidelines.

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Large-cap companies

As per SEBI, the top 100 companies based on the market capitalisation are classified as large-cap. Giants like Reliance Industries, TCS, HDFC Bank, Infosys, ITC etc. are large-cap stocks. These companies are mostly industry leaders with stable revenue streams, strong management and proven track records.

Mid-cap companie

As per SEBI these are companies ranking from 101st to 250th position as per market cap. Generally speaking, these are the businesses that had been start-ups for a few years, have now moved beyond that phase, have stabilised operations and are now growing. Examples include companies like Dixon Technologies, Prestige Estates or Godrej Properties. Mid-caps can deliver higher returns than large-caps but come with increased volatility.

Small-cap companies

As per SEBI, market cap, from rank 251st onwards, are small-cap companies. These are smaller businesses that can offer significant growth but carry inherent risk. Small-caps, with their low market cap, can be volatile and are more sensitive to market downturns.

Common Misconceptions

Many beginners assume that if a share is cheaper, the company is smaller. This is incorrect. A company whose share is trading at ₹10 might have a larger market cap than one with shares at ₹1,000.

Market cap provides the true picture of a company's size and value and not the share price. A ₹5 stock is not necessarily a better buy than a ₹500 stock. What matters is the total valuation relative to the company's fundamentals and growth prospects.

Why Market Cap Matters to Indian Investors

Since market capitalisation lets us know if a company is large, mid or small cap, it helps investors in several aspects.

Risk assessment

As per common observation, large-cap stocks are less risky than mid and small-cap stocks. During the 2020 pandemic crash, large-caps recovered faster than small-caps, demonstrating this principle. Small-cap stocks are considered the riskiest. Knowing the stock category helps investors know their risk beforehand and can plan accordingly.

Portfolio diversification

As one gets aware of stock categories, whether large, mid or small, one can easily diversify the portfolio as per risk tolerance and financial goals.

Mutual fund regulations

For mutual funds, SEBI mandates that large-cap funds must invest at least 80% in large-cap stocks, mid-cap funds in mid-cap stocks and so on. Understanding market cap helps you choose appropriate mutual funds.

Liquidity considerations

Large-cap stocks usually trade in high volumes on stock exchanges. Due to this, you can buy or sell shares quickly without significant risk as there are enough buyers and sellers. Small-caps may have a low number of buyers and sellers, lowering their liquidity.

Market cap helps you understand what you are buying in terms of risk and returns. When you check for investment opportunities, always consider market capitalisation and other factors like revenue growth, profit margins, debt levels and industry position of the particular company.

About Author

Pradnya Surana

Sub-Editor

is an engineering and management graduate with 12 years of experience in India’s leading banks. With a natural flair for writing and a passion for all things finance, she reinvented herself as a financial writer. Her work reflects her ability to view the industry from both sides of the table, the financial service provider and the consumer. Experience in fast paced consumer facing roles adds depth, clarity and relevance to her writing.