Common Financial Terms & Concepts

What is Market Capitalization or Market Cap? Meaning, Formula & Importance

Buying stocks/shares of a company doesn't depend on one particular factor. But several causes would determine your investment ideology. One prominent figure that could help in this investment strategy would be \Market Cap.\

What is Market Cap? Meaning

Market Cap or Market Capitalization is the evaluation of a company based on the cost of a single share with the number of outstanding shares of the company. It's an excellent manner of evaluating the value of a company. But only publicly traded companies have this valuation method.

It's a vital terminology that helps investors devise their next potential investment in a company. For those looking in short-term or long-term investment in a company, the market cap is a vital pointer to consider. Of course, this is not the only one, but one of the several parameters.

Market Cap Formula

Here's a simple formula for calculating the market cap:

Market Capitalization = (Cost per share) x (Number of shares)

A simple one indeed!

Market Capitalization: Types of Stocks

Before investors consider their next company for investment, its a safer option to look into the three different types of stocks that come under the market cap. These can be classified as:

1. Large-cap Stocks

(20,000 crore rupees and above)

These companies are often stable and are the least risky option to invest in. However, the returns are relatively low as they are stable. In other terms, they have reached their final stage of growth, and there are significantly lesser chances of them stumbling. A long term investment in such companies can prove beneficial. Also, go through a list of Top 10 Companies in India Ranked by Market Cap

2. Mid-cap Stocks

(5000-20000 crore rupees)

Companies that are stable but portray a considerable amount of growth come under this category. These stocks dictate their dominance by showcasing the potential and impact of their development in the right direction. At the same time, they are quite risky since they are still growing, and any false move could stumble their overall valuation.

3. Small-cap Stocks

(less than 5000 crore rupees)

Companies that have a lesser market cap prove to be the riskiest of them all. These are emerging companies making their way towards the top. But the profits/loss margins are very high. Investing in such companies would prove to be a gamble.

Important: The criteria for large cap, mid-cap and small cap companies gets revised owing to different metrics. There are no pre-defined parameters that decide the company is a large or mid capped. It's all based on the inflation and deflation of the market that determines the valuation of a company.

Market Cap Importance

Let's see why market cap plays an important role for companies as well as investors.

1. Specific Suggestions:

Market cap helps investors understand the precise valuation of companies in pressing times. No matter how inflated/deflated the market might get, the market cap helps in understanding the company from an investor's point of view, though it may/may not be full-proofed due to the obvious.

2. Universal Method:

It's the most effective manner of evaluating a company around the world. Accepted universally, it makes it easier for investors to understand companies' geographical impact and assess their economic losses as well.

3. Effective Comparison:

Accepted universally in evaluating a company's valuation, the market cap helps investors and others understand the size of the company and also the risk associated with them while making their investments.

4. Affects the Index:

The method helps in the weighing of shares of different companies in the stock market. Through this method, stocks/shares with a more significant market cap result in a better weight in the index.

5. Balancing out the portfolio.

Market cap helps in understanding stable companies with high-risk ones. Investing at both ends of the spectrum becomes a feasible option and could help yield considerable returns.

What could Impact the Market Cap of a Company?

  1. The company's effort in fulfilling the demand and supply of a commodity or service. It's regarded as one of the most significant factors affecting its market cap.

  2. The reputation and reliability prove to be an equal asset in its market cap.

  3. Economic turmoil, bundled with an impact on the company, affects the market cap of a company significantly.

  4. The competition of a company against others in a particular segment of the market.

  5. Another significant impact on the market cap of a company would be the company's exercising warrant on the stocks.

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