Investment word of the day: Market capitalisation — what it means and formula to calculate it

Investment word of the day: One key measure to understand a company's value is market capitalisation—it reveals how the market values a business at any given moment. Whether an experienced investor or a newcomer, market cap is an essential guide to assessing a company’s growth potential.

What is market capitalisation?

Market capitalisation or market cap is the total value of a company's outstanding shares. It highlights the size, value, and financial health of a company in the stock market.

How market cap is calculated

Market cap is calculated by multiplying the current stock price by the total outstanding shares.

The formula to calculate market cap is — Market cap = Current stock price * total outstanding shares.

For instance, if a company has 50,000 shares, with a closing price of Rs100 per share, then its total market cap would be — 50,000 * 100 = ₹50,00,000. Therefore, the total value of the company stands at ₹50 lakh.

Significance of market cap

Market capitalisation is an important metric in the stock market as it gives a clear understanding of a company's size, value, and stability. Investors use market cap to analyse the relative risk of investing in a company. It acts as a guide for investment strategies, a metric to judge a company's financial performance and future outlook of the business. Additionally, it is a universal metric to compare companies and make informed investment decisions.

Factors affecting market cap

• Changes in the stock price.
• When a company issues more shares or buys back shares, it impacts the market cap.
• A company's earnings and net profit reflect investor decisions, which will further impact market cap.
• Any significant change in the stock market will reflect on the market cap as well.

Companies based on market cap

Large-cap companies

Companies with a market cap between ₹7,000 crore and ₹20,000 crore are classified as large-cap companies. They are typically considered to be stable and, hence, popular among conservative investors who avoid taking risks. However, the returns from such companies might be relatively lower. Mostly, these companies have crossed a certain growth metric, and hence, a drastic change in the stock prices is unlikely.

Mid-cap companies

Mid-cap companies have a market capitalisation between ₹500 crore and ₹7,000 crore. These companies have reached a particular level of growth but have further scope to progress. Investing in such companies may be relatively riskier than investing in large-cap companies, but the returns can be higher.

Small-cap companies

These companies have a market cap of up to ₹500 crore. Small-cap companies are in the process of registering growth; hence, the risks associated with them are relatively high.

The choice of investing in any large-cap, mid-cap or small-cap companies will depend on an investor's requirements and risk tolerance. Market cap is a metric for investors to analyse and compare various companies and invest accordingly.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a qualified financial advisor before making any financial decisions.