What is Market Capitalization?

The following article gives you detailed information about the concept of market capitalization and related terms like mid cap, small cap and Big Caps. 

Every company will have an upward or downward trend in its business activities. Such changes will have an impact on its share value. The term market capitalization refers to the value of a company. In simple terms it can be calculated for any company using the formula share price multiplied by the outstanding number of shares for a particular company. The market capitalization is a kind of public opinion about the company and its performance. As the number of shares that is outstanding is considered for finding out the market value you may find that the company whose share value is low will have better market capitalization and vice versa. If the market has a good opinion about a company then the there will be higher market cap and those with negative opinions tend to have lower market cap. 

The market cap is denoted based on some criteria and these are classified into the following:

Big-Cap or Large-Cap

Blue chip companies come under the Big-Cap segment as they are well established and will be the market leaders in all aspects. Such companies are highly reliable and their share price will not be that very volatile. They provide lesser risk investment and the company performance over the last years would be stable giving a better public opinion about the company as a whole. The financial position of the company stands to gain the confidence of the investors. These companies pay their dividend regularly to their shareholders which mean their profitability is steady. Some of the companies that come under this segment will include Reliance Industries Limited, BHEL and also L&T. Such companies will help the investors give a fixed flow of income and is most suited for people who are not ready to take up higher risk. But during the bull market period you may not able to fetch much returns from the big caps companies as they still grow in the same steady pattern. 

Small-Cap

Small companies will bring about lot of efficiency in their performance and reinvest their profit back into their business. By dong such activities they try to grow up the ladder and such companies may ultimately become big one day. Many of the big companies today were once upon a time coming under the segment of small cap. But their sustained growth and profitability has enabled them to reach such a position. This is the main advantage of small company. It gives the investors’ confidence and benefit of earning early profit during their growth stage. The best return provider during the bullish market is the small-cap companies. If proper research and technical analysis is done then the investors could very well invest in potential small companies. 

Mid–Cap

Companies that are higher than the smaller companies but lower than the big blue chip companies come under this segment of Mid-Cap. Their financial position though not as stable as the blue chip but still they manage to get positive reviews from the investors and the market. They work on standard and established business models and therefore they have a sustained growth ladder. The main advantage of the companies under this segment is that you will be benefited by the large cap company’s stability and also get the benefits of the growth that pertains to the small cap companies. These companies will also be able to give you better returns when compared to the big-cap companies. In fact these are the large companies who have not been able to go beyond a certain point and so their performance gets retarded. Similarly the small cap companies are those who are not able to take a big leap though they give the investors the advantages of the growth period. 

Having explained all the various market capitalization terminologies it should also be understood that this is not the only criteria that your investment decision should be based upon. Though this forms major part of the decision there are other factors like the company performance, news items that could have an impact on the share price and so on. A cumulative approach and study of all the factors goes a long way in taking the right investment decision.