Learn about small, mid, and large-cap stocks and understand their differences and how to invest wisely in the stock market!
If you are new to investing, you might have heard the terms ‘small-cap,’ ‘mid-cap,’ and ‘large-cap’ stocks thrown around. People might have also advised you to stick with large-cap stocks when you are just starting out. But have you ever wondered why? Are small-cap and mid-cap stocks really not beginner-friendly?
In this article, we will unravel the mystery behind these stock market terms and explore the myths and truths behind these terms.
So, let’s get started!
What are Small Cap, Mid Cap And Large Cap Stocks?
Did you know that not too long ago, the terms ‘small-cap,’ ‘mid-cap,’ and ‘large cap’ stocks were a puzzle for investors? Back in the day, there wasn’t a clear, universally accepted definition for these categories.
Some investors thought that the stocks with the biggest market values should be called large caps, while those with the smallest market values were considered small caps.
But then, in 2017, the Securities and Exchange Board of India (SEBI) stepped in to bring some order to the chaos. They decided it was time to set some rules and give these categories some proper definitions.
So, what did SEBI come up with?
Based on their total market capitalisation, SEBI’s basic idea was this: The top 100 companies would be classified as large-cap companies. As of the six months ending on June 30, 2023, these large-cap companies include heavyweights like Reliance Industries Ltd at the top, followed by Tata Consultancy Services Ltd, HDFC Bank Ltd, ICICI Bank Ltd, Hindustan Unilever Ltd, all the way down to Trent Ltd (which used to be Lakme Ltd) at number 100.
Now, the mid-cap stocks consist of companies ranked from 101 to 250 in terms of market capitalisation. As of the same period in 2023, you will find names like Zydus Lifesciences Limited, Union Bank of India, and Whirlpool of India Ltd in this group.
And finally, small-cap companies are those ranked 251 or below. The list includes companies ranging from Emami Ltd to the tiniest one in terms of market cap, Sagar Soya Products Ltd.
But here is the thing: companies come in and go out of the list every day. So, what is in the large, mid, or small cap list can change over time. You can always check the latest list on the Association of Mutual Funds in India (AMFI) website.
What is Market Capitalisation?
Market capitalisation, often called ‘market cap,’ is a way to figure out how much a company is worth in the stock market. To calculate it, you multiply the number of shares of a company’s stock that are available for trading (we call this the ‘float’) by the current price of each share in the stock market. This calculation doesn’t include shares held by the company’s owners or the government.
Simply put, it is like measuring how big or small a company is in the investing world. Companies with a high market cap are usually seen as bigger and more established, while those with a low market cap are often seen as smaller companies with less extensive operations.
Are Large Cap Companies Safer than Mid and Small Cap Companies?
Yes, the question is tricky, but let’s figure it out using these points.
Volatility and Risk
Large-cap companies are generally considered to be less volatile compared to mid and small-cap companies. This is because large caps are typically well-established, with a long history of stable operations and revenue.
On the other hand, mid and small-cap companies can be more vulnerable to market fluctuations and economic downturns. They may lack the financial cushion and resources that larger companies have to weather tough times.
However, it is important to note that large-cap companies are not immune to risk. Economic crises or industry-specific challenges can still impact them significantly.
Large-cap companies often attract a higher level of participation from various types of investors, including mutual funds, Foreign Institutional Investors (FIIs), and the general public.
The increased attention from these investors can provide a level of stability to large-cap stocks. When institutional investors are heavily involved, it can help mitigate extreme price swings.
Large-cap companies tend to exhibit more shareholder discipline. This means that the company’s promoters or founders typically hold significant stakes and are deeply involved in the company’s management.
Shareholder discipline can lead to a more conservative approach to business operations. Promoters are less likely to sell their stakes impulsively, which can contribute to a stable stock price.
In contrast, small and mid-cap companies may have a more fragmented ownership structure, making them vulnerable to sudden changes in ownership and management decisions.
What Should Investors Look at?
While large-cap companies are often seen as less volatile and attract more institutional attention, they are not entirely risk-free. Investors should consider their own risk tolerance, investment goals, and the specific characteristics of individual companies when deciding where to invest. Secondly, a company with the largest market cap does not mean it will be the most profitable company in the market. Remember, the market cap is just a classification of stocks, but while you invest, you must look at several things like profitability, growth, margins, cash flows and a lot more.
In conclusion, adopting a well-rounded investment approach that takes into account various factors beyond market capitalisation is essential for investors seeking to build a profitable and resilient investment portfolio.
*The companies mentioned are for information purposes only. This is not an investment advice.