Market capitalisation

You can determine a company’s value (and also, the value of its stock) in many ways. The most basic way is to look at the company’s market value, also known as market capitalisation (or market cap).

Market capitalisation, commonly known as market cap, is simply the value you get when you multiply all the outstanding shares of a stock by the price of a single share.

A company’s stock price by itself does not tell you much about the total value or size of a company; a company whose stock price is Rs 60 is not necessarily worth more than a company, whose stock price is Rs 25. For example, a company with a stock price of Rs 60 and 100 million shares outstanding (a market cap of Rs 6 billion) is actually smaller in size than a company with a stock price of Rs 25 and 500 million shares outstanding (a market cap of Rs 12.5 billion).

Companies with a market capitalisation of up to Rs 5,000 crore are called small-cap stocks while stocks of companies with a market capitalisation of Rs 5,000-Rs 20,000 crores are known as mid-cap stocks. Meanwhile, large-cap stocks have a market capitalisation of Rs 20,000 crore or more.

A conservative investor has a very low-risk appetite. So, he wants to be safe and invests only in large-cap stocks.

A more practical investor understands that if he wants high returns, he must take high risk. So, he invests a part of his funds in mid-cap stocks, which increases his chance of getting a high return on his total investment. At the same time, he keeps a large part of his investment exposed to low risk by investing in large-cap stocks.

The most adventurous kind of investors, on the other hand, is willing to risk losing a large part of his investment, for the possibility of getting very high returns on his investments. So, he invests most of his funds in risky mid-cap and highly risky small-cap stocks and a very small for large-cap stocks. Thus, market capitalisation plays an important role in deciding which companies you should invest in, considering your expected returns and your risk appetite.

Besides, from a safety point of view, a company’s size and market value does matter. All things being equal, large-cap stocks are considered safer than small-cap stocks.