A complete guide on Market capitalization of Indian stocks (to understand large, mid, and small-cap companies): Hello investors. In this post, we are going to discuss the basics of Market Capitalization (A.k.a market cap) in the Indian Stock Market to understand large-cap, mid-cap, and small-cap companies in India. We’ll look into how companies are classified, their features, risk and return potential of all these types of companies.

However, before we start this post, let me ask you a very general question. The stock prices of two famous Indian companies are given below. What do you think? Which company is bigger?

1. MRF= Rs 69,780
2. HDFC Bank= Rs 1,650

If you think that MRF is a bigger company as its share price is too big compared to HDFC bank, then you need to read this post completely. This is because you’re completely wrong. You cannot judge the size of the company just by looking at its share price.

To understand the answer to the question about which company is bigger, you need to understand the concept of market capitalization. So, be with me for the next 8-10 minutes to learn everything about market capitalization in Indian stock market.

Market Capitalization in Indian Stock Market

Classification of companies in Indian stock market:

Any company in Indian stock market can be classified in one of the following categories:

1. Large Cap
2. Mid Cap
3. Small Cap

Here cap means capitalization. Although there are few other categories also like Mega-cap, Microcap etc, however, they aren’t used much in classifying the stocks.

These companies are classified based on their market capitalization, which we are going to discuss next.

What is Market Capitalization?

Basically, market capitalization shows the size of the company and its aggregate value. Let us define market capitalization now:

Market capitalization or Market Cap refers to the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s outstanding shares with the current market price of one share.

Market Capitalization = (Total no of outstanding share) * (Price of one share)

Note: Here, Outstanding Shares refers to all shares currently owned by stockholders, company officials, and investors in the public domain.

For example, let us assume for a company ABC,

1. Total number of outstanding shares= 1,00,000
2. Current price of 1 share= Rs 1,500
3. Market capitalization = 1,00,000* 1,500 = Rs 15,00,00,000

Therefore, the market capitalization of company ABC is Rs 15 Crores.

Now, let us move back to our original question. Which company is bigger? HDFC Bank or MRF?

We need to find the market capitalization of both these companies to figure out which one is bigger.

From the above table, we can notice that the market capitalization of HDFC bank is around 15 times that of MRF. Hence, HDFC bank is a much bigger company than MRF.

The skyrocketing share price of MRF is insignificant when we compare the total number of outstanding shares of MRF with HDFC bank.

In short, the share price cannot decide the size of a company. It’s the market capitalization that is used to classify the companies based on size.

How are companies classified using Market Capitalization in Indian stock market?

There is no hard and fast way rule (criteria) to define the classification of the companies based on the market capitalization. If you refer to different financial websites, the range of market cap will vary for different capitalization. However, in general, here is the commonly accepted classification of companies based on the market capitalization in Indian stock market.

Quick Note:  The above table is based on the latest circular by SEBI. Here’s the link to the list of Average Market Capitalization of listed companies during the six months ended 31 December 2019 available on AMFIIndia Website.

Why there is no fixed market capitalization range for classifying companies?

Bombay stock exchange (BSE) uses the 80-15-5 rule to classify the companies in large cap, mid cap or small cap. Now, let me explain this 80-15-5 rule. The rule classifies the different companies listed on the exchange based on the decreasing order of their market capitalization in Indian stock market.

1. The largest market capitalization which covers up to 80% of the total market cap of all the listed company on the BSE is categorized as large cap company.
2. The next set which covers the 80-95% of the total market capitalization of all the listed company on the BSE is categorized as mid cap company.
3. Lastly, the set which covers 95-100% of all the listed company on the BSE is categorized as small cap company.

Since the share price and market caps are dynamic; hence, there is no fixed market cap segment limit for classifying companies.

A few years ago, companies with a market capitalization around 10,000 crores- were considered to be large cap company. Now, they are mid cap company for this market cap. Most small cap companies are start-ups or in developing phase. They have a high growth opportunity. However, due to high failure rates of small caps, they also have a high risk.

Also read: S&P BSE Mid Cap and BSE Small Cap Index

What are large, mid and small cap companies?

“Every large cap company was a mid cap/ small cap once. However, every small cap company is not certain to become a mid/large cap.”

Large Cap companies

They are the big and well-established companies. Most of the large-cap companies are leaders in their sector and have a huge market presence. Many of the large-cap companies are listed in Sensex 30 and Nifty 50. These companies have a very large capitalization to survive in adverse economic conditions. Here is the example of a few large-cap companies:

Mid Cap companies

These represent mid-sized companies that are relatively riskier than large-cap as investment options, yet they are not considered as risky as small-cap companies. These companies have the potential to become a large cap in a few years and have enough finance to survive harsh economic conditions.

Here are a few examples of mid-cap companies:

You can find the list of more mid-cap companies here.

Small Cap companies

These companies have small market capitalization and usually includes the start-ups or companies in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector. However, the risk level is high while investing in small-cap companies.

Here are a few examples of small-cap companies:

You can find the list of small-cap companies here.

Here is a summary of the large-cap, mid-cap, and small-cap companies.

Also Read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

How to track different sectors’ performance?

You can track the performance of the companies of different classification of the various financial websites like Money control, BSE India, NSE website etc.

It would be best if you use the BSE India website for tracking. Here is a link, which you can use: http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=82&iname=BSE30#

• S&P BSE Sensex is used to show the performance of the large-cap companies.

• S&P BSE Midcap shows the performance of mid-cap companies. http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=82&iname=BSE30#

• S&P BSE Smallcap shows the performance of small-cap companies.
  http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=82&iname=BSE30#

What are Blue Chips stocks?

Blue chips are the nationally recognized, well established and financially sound companies.

These are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.

Blue chip companies have huge market capitalization and are generally leaders in their market.

For example- HDFC bank (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company) etc. A few other examples of blue-chip stocks are Reliance Industries, Sun Pharma, State bank of India etc.

These companies have stable performance and are very less volatile. That’s why blue-chip stocks are considered safe to invest compared to other companies.

Why are they called ‘Blue chip’ stocks? — The term ‘Blue chip’ has been derived from ‘Poker’ game. In the game of poker, blue chips are considered to be most valuable. Mr Oliver Gingold, who used to work in Dow Jones, is credited to bring this name in the stock market. He used this name first time in 1923 referring it with few most valuable companies of that time. Later, the term ‘blue chips’ became popular to cite the reputed companies of the stock market.

Blue-chip stocks are known to give good consistent dividends to their shareholders. These companies have a huge liquidity, which means that there are a large number of buyers and sellers in these stocks. So, they can be easily bought or sold anytime.

Besides all these pros of the Blue chip stocks, there are few cons too.

It’s not necessary that these companies will always perform. There are a number of examples of companies that were a blue chip in the past but are not anymore. Although most of them survive harsh economic conditions, nevertheless few blue chips stocks are financially hit hard by recessions and extreme adverse conditions.

In addition, as these companies have already achieved great success, therefore a large growth possibility is very less for such stocks. So, it will be very less likely to make quick returns or sharp profit in these stocks.

However, the chances of a sharp downfall are also very less in blue-chip stocks. Therefore, they are considered very less risky.

A few of the good properties of these stocks are- stability, consistent returns, good financial backup, less volatility and high liquidity.

Overall, Blue chip stocks are a good option for a safe long-term investment.

Top 10 Blue Chips stocks in Indian stock market.

Here is the list of top 10 blue chips stocks in Indian stock market.

Also read: Best Blue Chip Companies in India that You Should Know

Conclusion

The various companies can be classified based on the market capitalization in Indian stock market as large, mid and small-cap companies. A thumb rule for classifying them is shown below:

The selection of a company to invest depends totally on your preference. If you looking for a steady long-term investment, select large-cap companies to invest. On the other hand, if you are looking for high profits and quick returns, then you should invest in small or mid-cap companies.

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I hope this post ‘Basics of Market Capitalization in Indian Stock Market’ is useful to the readers. Do comment below if you have any doubts or suggestions.

Kritesh Abhishek

Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.