Stepping into the world of investing can be overwhelming whether you’re an absolute beginner or advanced. Most investors often contemplate about things such as which investment would be a good fit for their portfolio. However, to navigate through these challenges, investors need to have a solid understanding of how the markets work and which stocks they should choose for their portfolio. Without clear direction, you may risk financial losses. It’s important to remember that the stock market carries inherent risks, and these risks can differ significantly between individual stocks. Gaining knowledge and making informed decisions is crucial for minimizing losses and optimizing your investment potential. So, in today’s blog we will have a look at the types of market capitalizations and their differences.
What is Market Capitalization?
Simply put, market capitalization is the total value of a company’s outstanding shares of stock. It is calculated by multiplying the outstanding number of shares by the current market price of one share.
Let’s understand with a small example. Say there’s a company XYZ Limited. The company has 1 lakh outstanding shares in the market and the price for each share is ₹20. In that case, Company XYZ’s market cap would be:
= 1,00,000* ₹20 = ₹ 20,00,000
The market cap of a company changes throughout the entire trading day as its tied to the price of the stock. Companies are broadly classified into three categories based on their market capitalization that is large-cap, mid-cap and small-cap. The choice between a large-cap, mid-cap and small-cap depends highly on your risk appetite.
Introduction to Large-Cap Stocks
Large-cap companies are ideally those companies that are well-established and a significant market share and have a market cap of more than ₹20,000 crore. Since large-cap companies are known for their stability, reputation and their large market share, they are the ideal option for those investors who are conservative and risk averse. In comparison to mid-cap and small-cap, large-cap stocks are known to be less volatile. And, since they are associated with low risk, their returns are also relatively low.
An example of large-cap stocks is Reliance Industries and Infosys. Owing to their strong foothold in the stock market and consistent performance, these companies pose as an ideal choice for investors.
Pros and Cons of Investing in Large-Caps
Because of their well-established market presence and sound financials, large-cap companies are typically thought to be safer investments. These businesses usually have a consistent track record when it comes to their growth, dividend payments and providing investors with an additional source of income. And due to having low volatility, they are the best choice of investment for risk-averse investors who place a high value on capital preservation.
However, one main risk with large-cap companies is their limited growth potential. This is because of their massive size which can make rapid expansion challenging. Moreover, large-cap stocks can also be affected by economic downturns and regulatory changes.
But despite all of these challenges, large-cap investments continue to be an integral part in the portfolio of an investor who’s seeking long-term stability and decent returns.
Introduction to Mid-Cap Stocks
Mid-cap companies are those companies that have market caps above ₹5000 but less than ₹20,000 crore. Due to their tendency to be more volatile, mid-cap companies can be riskier to invest in than large-cap companies. However, mid-cap firms have the potential to grow into large-cap firms over time. More investors are drawn to invest in mid-cap companies since they have a higher growth potential.
A few examples include Metropolis Healthcare, Castrol India, and LIC Housing Finance.
Pros and Cons of Investing in Mid-Caps
Many investors find mid-cap stocks appealing because of their unique balance between growth and stability. These companies are past their initial growth phase but have not yet reached maturity like large-caps. Mid-caps are basically a middle ground for investors; they offer the growth potential of a large-cap while being less volatile than a small-cap. Another advantage of a mid-cap is its ability to adapt to changes and expand within their sectors, offering investors with opportunities to capitalize on.
However, like all investments, mid-caps too carry a certain amount of risk especially during times when the market is fluctuating or when there are downturns in the economy. Make sure you conduct extensive research before you invest in any financial security.
Introduction to Small-Cap Stocks
These companies have a market capitalization of less than ₹5,000 crores. Small-cap companies have substantial growth potential and are comparatively smaller in size. Their limited likelihood of long-term success is what makes them a risky investment. And, due to this, the stocks of such companies tend to be inherently volatile in nature. Although small-caps stocks have a lengthy history of underperforming, they frequently thrive when an economy recovers from a recession.
Companies such as Bajaj Consumer Care, Shobha Ltd, and VST Industries are a few examples of small-cap companies.
Pros and Cons of Investing in Small-Caps
Investors are often attracted towards small-caps because of their high growth potential. For investors who are ready to take the risk, these companies have the potential to grow rapidly and capture market share, which could result in substantial profits. This sector is ripe with companies that are innovative and emerging market leaders, offering investors the chance to invest in the next big success story.
However, small-cap stocks are risker investments since they are highly susceptible to market and economic fluctuations. Their small size could also indicate less financial stability and fewer resources to withstand unforeseen events.
Which Cap is the Right One for your Portfolio?
Diversification is essential for striking a balance between risk and return when choosing between a large-cap, mid-cap and small-cap investment. A well-diversified portfolio will help you navigate through market volatility and take advantage of potential growth opportunities. While mid-cap and small-cap companies provide greater possibilities of growth and returns, large-caps offer stability and consistent returns. However, before you settle on your decision make sure to thoroughly research the company and its stock to mitigate any risks.
Conclusion
Choosing between the three market caps solely depends on your financial goals, risk appetite and investment horizon. So, start your investment journey today with Jarvis AI – the best advisor in the stock market, that provides you with AI stocks in India and portfolio advisory services and personalized recommendations. Always remember to conduct through research before investing in any financial security.