Table of Contents
Introduction
In the world of investing, things can seem complicated if you are not familiar with mutual fund terminology. Here, we’ll explore the term “market capitalisation.”
What is Market Capitalisation?
Market capitalisation, commonly known as market cap, is a financial metric used to measure the total value of a publicly traded company. Understanding it is essential for investors and analysts as it provides insights into the relative size and significance of a company. Investors often use market capitalisation to assess a company’s liquidity, risk profile, and growth potential.
How Market Capitalisation gets Calculated?
Calculating market capitalisation involves multiplying a company’s outstanding shares by its current share price. This provides insights into the company’s size, valuation, and market significance.
Formula: Market Cap = Outstanding Shares * Share Price
Example: For a company with 1 billion shares priced at ₹100 each: Market Cap = 1,000,000,000 shares * ₹100 = ₹100,000,000,000 (₹100 billion)
Importance of Market Capitalisation for Investors
Risk Assessment: Evaluates a company’s risk profile, with larger-cap companies generally offering more stability.
Investment Strategy: Helps investors tailor strategies, choosing between large-cap for stability, mid-cap for growth, or small-cap for higher-risk opportunities.
Portfolio Diversification: Spreads risk, ensuring a balanced portfolio with exposure to different market segments.
Benchmarking: Serves as a benchmark for performance evaluation, allowing investors to gauge portfolio performance relative to market indices.
Investor Sentiment: Reflects investor sentiment, aiding in understanding market dynamics and making informed decisions.
Types of Companies based on Market Capitalisation in India?
In India, companies are categorised into different market capitalisation segments, offering various investment opportunities:
Large-Cap: Companies with substantial market cap (typically exceeding Rs. 20,000 crore to Rs. 25,000 crore). They are industry leaders with stable revenue streams and are favoured by conservative investors for their stability and income.
Mid-Cap: Companies with market cap ranging from Rs. 5,000 crore to Rs. 20,000 crore. These companies are in a growth phase, offering potential for expansion and higher earnings growth, but also higher risk and volatility.
Small-Cap: Companies with market cap below Rs. 5,000 crore. Often younger and less established, they operate in niche markets with high growth potential but are more volatile and riskier compared to large-cap and mid-cap stocks.
These categorisations may change based on market conditions, company performance, and investor sentiment. Thorough research and due diligence are essential before making investment decisions.
The Factor that can impact the Market Capitalisation
Revenue and Profitability: Strong growth and profitability drive up market cap, while poor performance leads to declines.
Market Dominance: Leading companies with market dominance have higher market caps.
Investor Sentiment: Positive sentiment boosts market caps, while negative sentiment causes declines.
Economic Indicators: GDP growth, inflation, and interest rates impact market caps.
Corporate Actions: Mergers, acquisitions, and dividends affect market caps.
Geopolitical Factors: Trade tensions and political instability can affect market caps.
Alternatives to Market Cap
Besides market capitalisation, other metrics like Equity Value and Enterprise Value are used to evaluate a company’s growth and value:
Equity Value: Assesses the worth of a company from the perspective of common shareholders, indicating their ownership stake and potential returns. It’s calculated by subtracting total liabilities from total assets.
Enterprise Value: This comprehensive metric considers all stakeholders (equity holders, debt holders, etc.) and reflects the total value of a company’s operational assets. It’s calculated by adding market capitalisation, total debt, and other factors, and subtracting cash equivalents.
Conclusion
In conclusion, market capitalisation is crucial because it provides valuable information about a company’s size, value, and importance in the market. Knowing it helps investors manage risk, create tailored investment plans, diversify investments, and gauge investor sentiment. It’s a key factor in making informed investment decisions.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.