It is equal to the current stock price multiplied by the number of outstanding shares.
Market capitalization = Total outstanding equity shares x current stock price
Let’s assume ABC Ltd. has 1,00,000 shares outstanding and the current share price is Rs. 12/-. We can calculate the Market capitalization based on the above formula, that the ABC Ltd. market capitalization is 1,00,000 shares x Rs.12 = Rs. 12,00,000.
Market capitalization helps the investor to determine the returns and the risk in the stock. It also helps the investors choose the stock that can meet their risk and diversification. It also helps the investors to know the size of the company compared with other companies. Thus market capitalization is a better measure of size than worth.
The companies are classified into three groups by investors which are based on their market cap as Large Cap, Mid Cap, and Small Cap.
Large Cap: Large-cap refers to a company with a market capitalization value of more than Rs. 20,000 crore in India and $10 billion in the US. The large-cap companies are known for their stability and consistent returns.
People looking for a steady return on their investments, particularly opt for the long term can consider these stocks. Large-cap stocks are comparatively safer than mid & small-cap companies.
Mid Cap: A mid-cap company is a company with a market capitalization value between Rs.5000 crores and less than Rs.20000 crores in India and between $2 billion and $10 billion in the US.
Mid-cap companies are considerably smaller than large-cap companies in all fields of comparison – revenue, profitability, employees, client base, etc.
Many investors tend to get attracted to the mid-cap stocks because they have the potential of becoming tomorrow’s success stories and provide good returns to the investors if invested for the long-term. It has more growth potential compared to large-cap companies.
Small-Cap: Small-cap companies are generally those companies that have market capitalization is less than Rs. 5000 crores in India and less than $2 billion in the US. Small-cap is a term used to classify companies with a relatively small market capitalization.
Small-cap companies are those companies that are basically in the early stage of development and have low revenue and have a small client base and employees. An individual must carry out comprehensive research work before investing in these stocks.
The need for Market Capitalization
It helps to determine the size of the company. The large market cap of the company reflects well-known companies within an established industry.
It also defines a company’s stage in development. Large-cap stocks are considered more conservative than investment in small/mid-cap companies.
Limitation of Market Capitalization
Market cap can be helpful for decision making but it is the not only factor that can help the investor in an investment decision but also enterprise value is more useful in case of Investment decision.