Market Capitalization: What It Means for Investors

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Market Capitalization, or market cap, is the total value of a company’s outstanding shares owned by the stockholders. It is calculated by multiplying the current market price of stock by the total shares outstanding. Outstanding shares is the number of shares available for purchase by investors participating in the stock market. Market cap measures company’s size. 

Capitalization weight of a stock is the market cap of that stock divided by the total value of shares. It gives more weight to companies with larger caps i.e. larger companies have more significant influence on index’s performance. 

One of the most crucial factors in helping an investor to determine the share’s risk and return is its market capitalization. Additionally, it helps investors in purchasing stocks that satisfy their requirements for risk and diversity.

Market Capitalization Formula

How to Calculate Market Cap?

Name of companyShares outstanding(in million)Face Value(Rs./Share)Relative share in market (shares outstanding/total shares)Price(Rs./Share)MarketCap(Rs.Crores)Capitalization Weight
Apple101(10/33.2)=30.12%3356.63356.6038.52%
Tesla9.5128.61%2786.52647.1730.38%
Infosys8124.09%1654.81323.8415.19%
TCS5.7117.16%2432.31386.4115.91%
Total33.2100%8714.02

If all other investors are assumed to follow the Mean-Variance optimization, an investor will only observe the capitalization weight of each stock and decide on a Market portfolio using these capitalization weights. Investor does not need to embark on a detailed calculation of Mean Variance Optimization to arrive at his decision. Mean Variance Optimization is the method to minimize risks and increase returns.

How does this happen?  

Based on the results of mean variance optimization, investors are placing orders in the market to acquire their portfolios. The pricing needs to adjust if these orders don’t correspond with what is available. The prices will increase and decrease when the demand is high and low respectively. Price changes will affect asset returns and stimulate recalculation by other investors. The process will continue until the equilibrium is arrived at and the optimal portfolio is obtained. 

Types of Market Cap

1. Large Cap

Large Cap companies are those companies whose market cap is between $10 Billion to $200 Billion. These companies are considered to be most stable in the market. As a result, investing in these companies involves less risk as they are less volatile and therefore have lower return. Typically, these companies have attained the height of their growth, thus there is less probability of a major change in stock prices. 

Examples of Large-cap market companies listed on Indian stock exchanges include Reliance Industries, Infosys. Their solid market position and consistent achievements make them excellent long-term investors.

2. Mid Cap

Mid Cap companies have market caps of more than $2 Billion up to $10 Billion. All the companies in this category have potential growth and are somewhat stable. There is a certain risk associated with investing in these companies and they are more volatile than large cap. Thus, the return on them may be greater than that of large-cap companies. In the long run, mid cap companies can become large cap.

Examples of mid cap companies are Aditya Birla Capital Ltd, Bandhan Bank Ltd.

3. Small Cap

Small Cap companies have a market cap between $3 Million to $2 Billion. These companies have high risk and are highly volatile as they are getting established in the industry. These companies could either be new startups or in their development stage. While failure might result in a significant loss for its shareholders, success can cause their stock values to rise substantially.

Small cap companies are ICICI Securities Ltd., Easy Trip Planners Ltd., Eris Lifesciences Ltd.

Top 10 Indian Companies Based on Market Cap

Company NameMarket Cap (Rs.Cr)
Reliance1,987,143.52
TCS1,401,392.50
HDFC Bank1,146,677.70
ICICI Bank749,743.34
Bharti Airtel700,969.62
SBI671,577.05
LIC India617,541.15
Infosys586,994.92
ITC531,786.71
HUL524,193.81

How to include market capitalization in a portfolio

The longer your investing horizon, the riskier your allocation may be when it comes to allocating money among companies with different market capitalization. This is because a longer timetable gives your portfolio more time to recuperate from volatility. Long-term investors, such as those saving for retirement that may be decades away, may profit from small- and mid-cap companies’ prospective growth and still have time to withstand unforeseen downturns.

Less risk-averse investors may wish to allocate a smaller percentage of their portfolio to small- and mid-sized companies in favor of less volatile large and mega-cap stocks.

Mutual fund management is another common use for market-cap data. Investors can purchase numerous equities in a single transaction because of these funds’ ability to own stock in dozens or even hundreds of firms. Investors in mutual funds might purchase large-cap or small-cap funds because they frequently invest by category.

Market Cap and Its Role in Crypto

A cryptocurrency’s stability is determined by its market value. The more reliable a cryptocurrency is for investing, the larger its market capitalization. Conversely, less valuable cryptocurrencies are frequently impacted by market volatility.

Those who are interested in investing can calculate a cryptocurrency asset’s overall value by using its capitalization. They will also be able to comprehend the popularity and stability of a crypto asset thanks to its value. We can ascertain which cryptocurrency is less hazardous and has room to expand.

Market cap can be used to anticipate future crypto prices. Using various methods, investors attempt to forecast the price of cryptocurrency in the future. Using capitalization value is one of the simplest methods for making price predictions. To ascertain the price, it is imperative to take into account the prevailing purchasing and selling exchange rates. In addition, you can’t predict the cryptocurrency’s performance based on its market capitalization alone.

Market Capitalization: Conclusion

In conclusion, market capitalization is a key idea for investors since it offers important information about the size, valuation, and risk-return characteristics of businesses. An awareness of market capitalization and its ramifications can help investors create diverse portfolios that fit their risk tolerance and financial objectives.

FAQ

What is the role of market cap?

Since market cap must be interpreted in relation to all other financial metrics, it is common practice to utilize it as a baseline for study. For instance, a single company can have made twice as much money as any other company in this industry. Nonetheless, one may argue that the company is underperforming if its market capitalization is four times higher.

What is the difference between market cap and market value?

Market capitalization and equity market value are almost synonymous terms. Moreover, a company’s market capitalization is a single, clear-cut number that is calculated by multiplying the price by the total number of outstanding shares. Market values might vary depending on the analyst’s specific multiples and criteria.

Is high market value good?

A company with a high market capitalization is one that is more well-known in the industry. Bigger businesses might not have as much room for expansion as startups, but established businesses might be better able to obtain funding at a lower cost, have a steady flow of income, and benefit from name recognition.

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