Large cap Vs Mid Cap Vs Small Cap

Have you heard of the terms large-cap, mid-cap, and small-cap? In this article, we will understand how they are different from each other.

· 3 min read
Large cap Vs Mid Cap Vs Small Cap

Large-cap vs Midcap Vs Small Cap

A lot of things have happened in the year 2020 which changes the course of life for people and our country as well. As per the latest data during the year 2020, the number of Demat accounts at the end of 2020 stood at 40.8 million up from 35.9 million.

This means that a lot of retail investors are taking exposure in the equity segment but many new investors would be perplexed with the diverse terms that they come across while investing in the market.

What is Market Capitalization?

Suppose that you want to invest and there are two shares, A whose price is 100 and B whose price is 500. Now one can say that price of A is low and hence is cheaper and has more scope to grow, but the information is incomplete as we do not how many shares are present in the market. Suppose that number of shares of A is 1 lakh and that of B is 10 lakhs.

Market Cap Formula= Price of per share x number of outstanding shares in the market

It is the total value of the company. In other words, if someone decides to buy the company, they have to pay the market value.

The market cap for A would be 100 x 1,00,000

= 10,000,000

The market cap of B would be 500 x 10,00,000

= 5,00,00,000

Companies are categorized on the basis of market capitalization as per SEBI and essentially there are three main segments, large-cap, Mid Cap and Small Cap. But there are significant differences between the companies not only in terms of capitalization but various aspects such as return, risk, volatility, and institutional investors. Let’s start by understanding what is large, mid, and small-cap companies.

Defining Large-cap Vs Mid-cap Vs Small Cap companies

Large Cap

Large-cap companies are those companies that rank from 1 to 100 in terms of market capitalization as per SEBI. Or we can also say that the top 100 companies in the market are large-cap. They are companies with a market capitalization of more than 20,000 crores. The companies are well established and have strong reputations and fundamentals.

Mid-cap

Mid-cap companies are those companies that rank from 101st to 250th as per the market capitalization given by SEBI. They fall between large-cap and small cap. A company with a market cap of more than 5,000 crores and less than 20,000 crores is viewed as a midcap company.

Small-Cap

Small-cap companies are those companies that rank from 251st onwards and relatively have a small market cap. A company whose market value is less than 5,000 crore is considered a small-cap company.

Difference between Large Cap, Mid Cap, and Small Cap

  Large Cap Mid-cap Small-Cap
Return Since the companies are grown and well established their growth is slow therefore the returns are lower as compared to mid and small-cap The companies are on the stage of growth and can generate higher returns as compared to large-cap. The companies are yet to grow and have a lot of scope for growth therefore they have the capacity to generate a high return as long as they are maintaining their growth.
Risk The risk involved in these companies is very less as they are well established and are quite large in market value, this makes them less risky as compared to mid and small-cap. They are riskier than large-cap companies and involves moderate risk As the companies are small, they have higher chances of failing and hence they have a higher risk.
Volatility (It is the change in stock price with respect to that of the market) The volatility of large-cap companies is low, they are more stable in nature The mid-cap companies are slightly volatile in nature The companies in small-cap are highly volatile. They have a very large swing movement.
Liquidity They are highly liquid as the companies involved are high in market cap and are mature There is liquidity present but to a moderate extent, lower than that of large-cap There is a low level of liquidity as the companies are not well known, there is an element of skepticism involved.
Institutional Investors (are those who invest heavily such as Mutual Funds, Pension Funds, Banks, etc) Large-cap stocks are highly tapped by institutional investors as they have low risk, and are established companies They are also used by institutional investors to invest Small-cap stocks are an area that is not exploited by institutional investors.
Examples  Reliance, TATA Steel, Nestle, HDFC Bank Biocon, Adani Thyrocare, Delta Corp 
         

Having understood the difference between large-cap, mid-cap, and small an investor should take note of some of the key aspects such as:

  • The return he is expecting to generate (Small-cap generate more high return as they have high growth potential as compared to Large and mid-cap stocks)
  • The risk he is willing to take (Small-cap carries more risk)
  • The time period for which he wants to stay invested
  • The life stage he is at (A young investor with fewer responsibilities can take more risk as compared to a middle-aged investor with responsibilities)

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