Want to understand the concept of small cap, mid cap and large cap stocks / mutual funds? Today we will talk about the concept of market capitalization and the difference between small cap, large cap and mid cap stocks.

Want to understand the concept of small cap, mid cap and large cap stocks / mutual funds? Today we will talk about the concept of market capitalization and the difference between small cap, large cap and mid cap stocks. So let’s dive right in. So as we all know, stocks or funds can be broadly categorized in 3 categories with respect to market capitalization – small cap, mid cap and large cap. A lot of investors get confused as to which parameters to look at while deciding the ideal category for their investments.

Investors usually have to look at a lot of ratios and financials of a company before they decide to invest. An easy way to start analysing a company is by looking at the market capitalization. The market capitalization is defined as the total market value of a company’s free float outstanding shares. So what are free float shares? Free float shares are those share which are not held by the promoter or the government. So mathematically speaking, market capitalization = number of free float shares * Current market price The number that is obtained with this formula, which is the market capitalization, is used to calculate the size of the company as opposed to using revenue or total assets.

As it is very simple to calculate, market capitalization is a very useful tool for all investors to understand which stocks he has invested in and how portfolio can be diversified by investments in companies of different sizes. Now coming to our categories, in India, any company having a market capitalization of more than 20,000 crores is considered as a large cap company.

Similarly, a company having a market capitalization between 5,000 and 20,000 crores is considered as a mid cap company. And lastly, a small cap company is the one with market capitalization of less than 5,000 crore rupees. Recently, SEBI (Securities Exchange Board Of India) came up with a new definition for all these 3 categories. According to the new SEBI definition, the top 100 companies in terms of market capitalization will be termed as large cap companies. The 101st to 250th company in terms of market capitalization will be termed as mid cap companies.

And lastly, 251st company onwards will be termed as small cap companies. So what types of investors can invest in what type of stocks? To answer this simply, for a conservative investor, the large cap companies would be an ideal investment as they are rock solid and less risk is taken. But also they do not rise as much as small and mid caps. This makes them low risk low return instruments.

Similarly, an investor with a higher risk appetite can invest in small cap and mid cap companies as they rise and fall faster than large caps, making them high risk high return investment instruments.