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Market capitalization is the aggregate valuation of the company based on its current share price and the total number of outstanding stocks.

Market Capitalisation = Current Share Price * Total Number of Outstanding Stocks

For Example:

If the Current Share Price is Rs.100 and the total Number of Outstanding Stocks is 100000, then the Market Capitalisation of the Company would be 10000000.

Stocks are divided broadly into three types in the Indian context.

  • Large-Cap Stocks – Capitalisation of more than Rs.20000 Crores
  • Mid -Cap Stocks – Capitalisation more than Rs.5000 Crores but less than  Rs.20000 Crores
  • Small-Cap Stocks – Capitalisation less than Rs.5000 Crores

The potential for growth, profitability and the ability to withstand the market parameters are also based upon Market Capitalisation. For instance, Large-cap stocks have better growth potential than small-cap stocks. The Large-cap stocks are more stable and have lower risk profiles whereas the small-cap stocks are more volatile and tend to have more risk. TheMarket Capitalisation based investment strategy propounds to diversify the investment aligning it with the risk profile of the investors. Thus based upon Market Capitalisation, the Investor can take decisions on diversification and risk. An investor with a lesser risk appetite can go with more Large Caps on his portfolio whereas an aggressive investor with more risk appetite can go with more small caps in his portfolio.

However one has to bear in mind that, the Market Capitalisation is not as such the value of the Company. It is only the value of the equity. The Value of the Company including its Capital and debts is known as Enterprise Value.

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