MumbaiTrader Blog

Market Cap Explained

1. What is market ‘cap’italization?

Market cap or market capitalization is the rupee value of all the shares of a company. It is commonly used to measure the size of a company. It is a criteria use by investment analysts to make investments in a company.

 
2. How is the market cap calculated?

Market cap is calculated by multiplying the company’s share price by the total outstading shares. The share price is the current market value of 1 share of the company. The total outstanding shares is the total number of shares of the company.

3. Are companies grouped based on their market cap?

Yes. Companies are grouped based on their size or market cap.

Small cap stocks are companies whose market cap is Rs. 250 crores or less. These are relatively new companies with arecent IPO and have growth potential. Since these companies are new, they also carry a high risk, they can either go bust or grow to become large companies.

Mid cap stocks are stocks of medium size companies. These companies have a market cap higher than Rs. 250 croresand lower than Rs. 4000 crores. These companies still have growth potential and are more stable than small cap stocks.

Large cap stocks are stocks of large size companies. These companies have a market cap higher than Rs. 4000 crores. These companies are typically leaders in their space and growth rates are not significant due to the large size.

4. How is market cap used by investors while making investment decisions?

Since market cap indicates the size of the company, it can be used as a guideline while making a decision to invest in a company.

For example, small cap stocks are recommended for investors who are looking for growth companies and are willing to risk price drops. Due to high risks of price drops, these are not recommended for short term investments. Large cap stocks are successful companies that offer a stable investment and potentiall pay dividends from time to time.

March 14, 2012 - Posted by mumbaitrader | Stock Investing