Beginners entering the stock market must know the importance of market capitalisation. Market capitalisation or market cap represents the total value of the company on the basis of its current share price and the total number of outstanding shares. Most of the large investors like mutual funds make their portfolio according to the market cap of the companies. The classification of the companies on the basis of market cap is done into three categories; large-cap, mid-cap, and small-cap. In this article, you will learn about the difference between large, medium and small cap in the share market.
Difference Between Large, Medium And Small Cap in Share Market
Large Cap Stocks
The large cap stocks are those companies that have a market cap of more than Rs. 20,000 crore. These companies have been for a long time in the market and well known among the public. They have a strong presence in the market and investing in them is safe or less risky. The large cap companies disclose all the material information to the public through media, stock exchange, newspapers, etc. The information about the large cap companies is readily available for everyone. Some of the examples of large cap companies of India are Infosys, TCS, HUL, Reliance Industries, etc.
Mid Cap Stocks
Mid cap companies have a market cap between the large cap and small cap companies. The market cap of mid cap companies is between Rs. 5,000 cr – Rs. 20,000 cr. The profitably, revenue, client base, etc. of the mid cap companies is lower than the large cap companies.
What makes mid cap stocks more attractive is the fact that they have the potential to generate huge returns in the long run. The scope of growth is much higher in mid cap companies and they have the potential to become an overnight success. Investing period of 3-5 is ideal in mid cap stocks. Some of the examples of mid cap stocks are Granules India, Hexaware Tech, Escorts, etc.
However, mid cap companies are not such a safe investment in comparison to large cap companies. Also, much information about the mid cap companies is not available publically. This is the reason why investors fear investing in mid cap companies and these stocks are not the first choice of conservative investors.
Small Cap Stocks
Small cap stocks are those companies that have lower revenues and a small number of employees. Small cap companies have a market cap of up to Rs. 5,000 crore. Most of the small cap companies are either start-up enterprises or companies in the initial stage.
Small cap stocks are ideal for moderate to high risk appetite investors. This is because small cap stocks can be purchased when the business is in the initial stage and they have the potential to become big winners for the investors in long-term horizon. Investing small cap stocks can be highly risky. Some of the examples of small cap stocks are Magma Fincorp Ltd, Redington India Ltd, etc.
Before investing in the small cap stocks one must carefully search about the company. Basic things that one should analyse while investing in small cap stocks is the short term and long term plans of the company. Some of the parameters to consider include revenue model, profitability, goodwill of the promoters, financial strength etc.
Diversification is Key
Most of the financial advisors follow the golden rule of investing i.e. diversifying. By diversifying the portfolio on the basis of the market cap of companies, one can manage the risk well. If you have fear and lack of knowledge about the stock market, parking money in large cap stocks is advisable. However, if you are alright with investing in risky stocks than you may invest in mid cap and small cap stocks. Therefore, before investing in the stock market you must analyse your risk profile and investment horizon. For beginners in the stock market, diversification of the portfolio is advisable.
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