Ever wondered about what is Market Capitalization? Why is it used? What is its significance? No worries. We should be able to solve all your relevant queries by the end of this article. Before going further, here are the critical points on which we will discuss in this article related to Market Capitalization:
What is Market Capitalization?
Which Company is Bigger in Size: MRF or Infosys?
What are the categories of Market Cap?
The new 80-15-5 Rule
Is Market Cap equal to the actual value of the firm?
Which Market Caps are suitable for Investment?
So Let’s get started:
Going with the definition of the term, Market Capitalization is the valuation of the Company which calculated as the product of the Company share price and the total outstanding shares.
Outstanding shares of the Company denote the total number of equity shares that can be traded in the market.
Let’s take a quick example at this point. Suppose a Company XYZ has a share price of Rs 125 and the outstanding shares of the Company are 1 crore. Therefore, Market Cap. is the multiplication of both the given terms, i.e. Market Cap= Current market share price * Total Outstanding shares = 125*1 crore= Rs. 125 crore.
So, the Market Cap. of the Company XYZ, as per the data, has come up to around Rs. 125 crores.
A naïve would shout the answer as MRF as it has the current share price around Rs 54,152. This stock is supposedly the most expensive one in the NSE/BSE stocks list. But does that mean it is the largest Company in India? Let’s come back to the actual question of MRF and Infosys.
For such a comparison, let’s find the market cap. of both the Companies:
Current share price = Rs 54152
Total Outstanding shares = 4.247 million
Therefore, Market Cap. = Current share price * Total Outstanding shares
= 54152 * 4.247 million =230.03 billion
This gives us the Market Cap. for MRF as 230.03 billion
Current share price = Rs 724
Total Outstanding shares = 4.35 billion
Therefore, Market Cap. = Current share price * Total Outstanding shares = 724 * 4.35 billion = 3.15 trillion
This gives us the Market Cap. for MRF as 3.15 trillion!
You can see a clear winner here: Infosys!!
The takeaway is that to compare Companies and decide which is bigger or smaller, we can use “Market Cap.” of the Company.
Please note: The share price is just the market price of the Company and does not decide the size of the Company.
Companies are segregated into three main categories according to their Market Cap.:
The definition or the criteria for the type may vary with currency, time and industry. Still, we can have a general aspect to these terms.
From the Indian Stock market perspective, Large Cap Companies are the ones who have Market Cap. more than 10,000 crores. Mid Caps range from 2,000 crores to 10,000 crores and the Companies having Market Cap under 2,000 crore fall in the category of Small Cap firms.
BSE has come up with a new definition by which they segregate their exchange-listed stocks based on their Market Cap. This new rule is also known as the “80-15-5” rule.
Now, let’s learn more about this rule and how BSE does things.
The Exchange sorts the 5,000 listed Companies in the descending order of their Market Cap. Then the Companies that come up in the top 80% are tagged as “Large Cap.” Companies.
The next 15% is categorized as “Mid Cap.” Companies, while the rest 5% comes under the “Small Cap.” Companies.
This is one of the most common misconceptions revolving around Market Cap. Let’s try to analyze the formula to get the answer to this query.
The formula says that it is the product of the current market share price and the total outstanding shares of the Company. Out of which, the total outstanding shares seem to be a less volatile term, i.e. it remains almost the same over the years.
The term to be noted is the “Share price” which is valid only for the particular instant of time. As we know, it is decided by the market and is highly volatile.
And this term decides the market cap of a Company as a more substantial proportion. Hence this cannot be equal to the actual “Value” of the Company. This is rather the “Market value” of the Company.
Finding the value is altogether a different process known as “Valuation”.
Before untangling the query, let me tell you a critical thing concerning investments. Please make sure, you do a thorough study of the Company into which you wish to invest. If you are new to this, either take expert advice or DIY before the decision making for investment.
Let’s come back to the query. Majorly, this decision depends upon your ultimate goal of investing. If you are looking for a long-term holding in Companies, then Large Caps especially the Blue Chips should be a better option. These Large Cap Companies are considered relatively less risky than other Cap Companies.
Blue Chips are Financial Sounding Large Cap Companies. Most of the time, there are leaders in their respective sectors. TCS, Reliance Industries, ONGC, ITC are examples to name a few.
But if you wish to make some quick profits, then you should opt for Mid Cap and Small Cap firms. These Caps are considered relatively riskier than the former category firms.
Thanks for reading and we hope you found it helpful!
Here is the video explanation of Market Capitalization:
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