So how do we measure the size of the company? For this, we have to look into what is called “Market capitalization”.

Market capitalization is got by multiplying the present stock price with the number of outstanding shares. This gives us the value of the company at present or in other words, how much it would cost to buy the company.

The stock of ABC company which is trading at say, Rs 50 with 100,000 outstanding shares has a market cap of Rs 50 lakhs. (Rs.50 X 1,00,000 = Rs. 50,00,000) whereas in another company XYZ having 1 crore outstanding shares, trading at Rs. 10, the market capitalization will be Rs.10 X 1,00,00,000 = Rs.10,00,00,000.

As the price of the share keeps on changing and since the outstanding shares of every company are different, the market capitalization of every company is also different and keeps changing.

When we evaluate these two companies, Their individual share prices do not say anything about the companies. To give an example, although the share price of Reliance industries is Rs.1200 a share, it is a much bigger company than MRF Ltd having the price of its share at around Rs.60,000.

This said we will now look into how companies are classified according to their market capitalization.

LARGE CAP

The definition of Large Cap varies but in India as a rule, if the market capitalization exceeds Rs. 5000 Crores, then it is considered as Large Cap. Large Cap companies are usually dominant players who maintain a stable rate of growth in the industry.

It should however be noted that, when taken globally, most of the Large Cap companies in India would be considered as Mid Cap or Small Cap companies. Globally, companies are classified as Large Cap if their market cap is above $10 Billion.

MIDCAP

A company having a market cap of between Rs. 1000 Crores and Rs. 5000 Crores is considered to be Mid Cap.

Mid Cap companies are normally emerging players in its industry. Such companies have the potential to grow fast and turn into a Large Cap in the future.

They can also show very high growth rates, in terms of percentage, as their base is small. As they are small, even a small increase in revenue or profits can be very impressive when expressed as a percentage.

SMALL CAP

Small-Cap companies having a market cap of Rs. 1000 Crores or less is considered to be Small Cap

Small-Cap companies are normally companies that are new in their industry having moderate or very high growth rates. These companies have the potential to grow really fast and turn into a Mid Cap in the future.

It should be noted that focusing on the market cap will give a picture of the value of a company in the market. Share prices do not tell us about the size of the company.

Where to invest?

This is a difficult question and the answer would depend on the attitude of individual investors, age, financial capacity, goals, and risk appetite. Here are a few pointers as to what one can expect by choosing to invest in these three different caps.

What to expect from Large Cap stocks.

1. Steady growth: Large-cap stocks area usually well-known companies with operations on a huge scale and has the potential for steady growth.

2. Less volatility: Large-cap companies do not grow at a high speed and have very fewer surprises in their quarterly or yearly earnings reports

3. Favourites of FII’s: Foreign institutional investors planning to invest in the Indian markets start by investing in large-cap stocks first. A conservative investor who buys and holds the shares for the long term would probably pick their investments from among large-cap stocks.

4. Market leaders: Large-caps are usually the ones to lead during a market recovery, while mid-cap and small-cap stocks usually catch up later.

5. Better performance in a bull market: Large-cap stocks usually perform better than mid and small caps during a bull market.

6. Dividends: Companies with large capitalization usually have a history of regular dividend pay-out. As Small and mid-cap companies continue to invest their surplus for expansion or other projects, they may not pay regular dividends.

WHAT TO EXPECT FROM MID CAPS AND SMALL CAPS.

1. High growth: Stocks of Mid- and small-cap companies represent those companies that are still in the initial phase of their business or smaller in size within a sector, in terms of market share or revenue.

2. High volatility: Mid and small-cap companies have the potential to grow beyond expectations and may surprise the market every quarter or year on year, which could result in a high variation of their stock prices.

3. Potential to become Multi-baggers: Anyone who is trying to locate multi-bagger stocks must invest in stocks of mid- and small-cap companies.

4. With high returns comes high risk: While midcaps have the potential to give higher returns because of their earnings growth at a faster rate, one should be aware that they also carry a higher risk when compared to large caps. Because they are vulnerable to downturn their earnings may take a huge blow.

5. Less liquidity: As most of the stocks of small and mid-cap companies are not actively traded as in the case of large caps, a decreasing volume can adversely cause a decline in prices of these stocks when there is a meltdown in the market. It is therefore important to investigate the stock for liquidity by looking into the historical trading volumes for the previous years before investing.

6. First to face the impact of a market crash: Those planning to book profits in anticipation of a big market correction must liquidate their stocks of mid- and small-cap companies first, as they are the most vulnerable in the event of a crash.

7. Poor performance during a period of uncertainty: During uncertain periods, Mid- and small-cap stocks will underperform compared to large caps stocks.

TIPS FOR BALANCED APPROACH

It will be prudent to maintain a balance in the portfolio between large-, mid- and small-cap stocks to spread one's investments across various sectors and businesses. Ideally one should invest 60 % of the money in large caps stocks, 30% in mid-cap stocks, and the remaining 10% in small-cap.

Investing only in small or mid-cap stocks could result in high volatility whereas choosing only large-caps could deliver only modest results.

Irrespective of market conditions, fund allocations must be based on one's risk appetite.

Switching allocations between large-, mid- and small-cap stocks must be based on market conditions to give maximum results. However, this kind of strategy will not be suitable for beginners.