Market Capitalization: What is Market Cap (Market Capitalization), Formula

Market Capitalization

To determine the size of a company, see "market capitalization" (market cap).

Market Cap = The value of the entire company determined by the number of outstanding shares minus the share price.

Market cap sizes range from small, mid, and large.

What is Market Capitalization?

Market Capitalization Also called market cap for short, the market cap is actually the total value of a company. From the market cap, we can understand how big or how small the company is in terms of share capital.

Many times new investors start linking the share price with the price and get caught in the trap. In fact, both are completely independent of each other. The share price is really of little consequence. As we will see later with stock splits, the price of a company is dependent on how many shares are in the market at any given time.

Generally, by looking at the share price of a company listed in the stock market, newcomers understand that the company whose share price is high is a big company. And the specific company whose share price is low is a small company.

For example, if one stock is priced at Rs 1000 and another stock is priced at Rs 100, then generally newcomers consider a share price of Rs 1000 as a big company, which is not true and completely false.

The truth is that by comparing the market cap of a company, one can get an idea of how big or how small the company is. On the other hand, it is also very important to understand the fact that a change in the price of stock directly affects the market cap of that company, hence understanding the market capitalization becomes very important.

Check our free Stock Average Calculator.

Market capitalization Formula

Market capitalization or market cap is actually the total value obtained by multiplying the current share price of that company by the total outstanding share capital of any company. The market cap is calculated like this-

Market Capitalization = (Total Number of Shares Outstanding) X (Current Share Price)

For example, suppose the total outstanding share of a company is Rs 100 crore and the current market value of the share of that company is Rs 150.

So this would be the market cap of that company.

Market Cap = Rs.100 Crore X Rs.150 = Rs.15000 Crore.

And as we know, the share price is always changing.

In such a situation, if the price of this share becomes Rs 140 someday, then now the market cap will be there.

Market cap = Rs 100 crore X Rs 140 crore = Rs 14000 crore.

Now you see carefully that there is a difference of 1000 crores in the total market cap of that company due to a decrease of Rs 10 in the share price.

In this way, it is very important to understand the market cap, from which we can get accurate information about the total capital of the company, and also understand how big or small the company is.

Outstanding share

Outstanding Shares mean all those shares which are issued by the company. And which is available for trading on the stock exchange as well as promoters, investors, restricted shares, all these shares are called outstanding shares that the company has not repurchased. Outstanding shares i.e. shares that have been issued by the company but not repurchased.

Free float market capitalization

Free float market capitalization means when only the number of shares available for trading in the market is taken into account for calculating the market capitalization.

Free float market capitalization = number of tradable shares X current price of the share

The number of tradable shares is available on the website of BSE and NSE, tradable shares do not include the shares of the shareholders and promoters of the company. The NSE index Nifty and BSE Index Sensex are calculated using the free-float market capitalization of the company.

Chipotle currently has about 31 million shares in the market, valuing the company at $18.5 billion. McDonald's, on the other hand, has about a billion shares, which gives them a value (or market cap) of over $100 billion.

So what does this mean for investors? Should an investor not invest in valuable companies?

It all depends on what your goal as an investor is. More valuable companies are safer investments. Reliance, SBI, and TCS may not be going anywhere anytime soon. You are pretty much guaranteed that you will not waste all your money on these people.

The flip side is that these companies are not going to grow as fast as smaller companies like Petronet, Jubilant, and NCC. These companies have more room to expand and hence can see huge growth in the next few years. Of course, this also makes them risky investments.

So you are making a tradeoff between risk and rewards. The more volatile a company or organization is, the greater its potential for growth. The more secure a company is, the less likely it is to quadruple your funds.

There are three levels of market cap.

➤ Large Cap: Above Rs 10000 crore

➤ Mid Cap: Rs 1000 - 10000 crores

➤ Small-Cap: Less than Rs 1000 crore

Let us now talk about them in detail-

Small-Cap or Small Cap Companies

Generally, the company whose market capitalization or market cap is up to 1000 crores. All those companies come under the category of small-cap companies and they are called small-cap shares or small-cap companies.

Like – Aadhaar Ventures India Ltd, and A2Z Infra Engineering Ltd.

Mid Cap or Mid Cap Companies

Generally, the company whose market capitalization or market cap ranges from 1000 crores to 10000 crores. All those companies come under the category of mid-cap companies and they are called mid-cap shares or mid-cap companies.

Eg – ABBOT India, Adani Power Ltd., Aditya Birla Fashion and Retail Ltd.

Large Cap or Large Cap Companies

Generally, the company whose market capitalization or market cap is more than 10000 crores. All those companies come under the category of large-cap companies and they are called large-cap shares or large-cap companies.

Like – Tata motors, HDFC Bank, Infosys, and TCS.

Capital investment in large caps is very safe and the risk is low. On the other hand, Return on Investment is very less in large cap, because the large-cap company is at the peak of its growth.

Whereas investment in a small-cap company carries the risk of loss of the capital invested. But this is where the return on investment in some Small Cap companies is very high because these companies have a lot of opportunities for growth.

SUMMARY

You can understand well with the help of the above description, and understand the difference between large-cap and mid-cap and small-cap as well as what kind of company is beneficial for you to invest in

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Market Capitalization: What is Market Cap (Market Capitalization), Formula