The stocks in the share market are classified on the basis of the market capitalisation of individual companies, where market capitalization is the number of issued equity shares of the company multiplied by the current market price. On this basis, stocks can be broadly classified into three categories - large, mid and small cap. Besides this, the term micro-cap are also used for very small companies.
Large cap stocks are considered to be companies having a very high market capitalization and generally the companies having a market capitalization of Rs.30,000 crores or more are considered to be large-caps. Also these companies are considered to be blue chip stocks and are expected to grow at a steady rate for the rest of their life because of a strong base, fundamentals, corporate governance, industry dynamics and history of past existence. The risk involved is such stocks is generally lower and are considered safe bets in times of volatility in the market. Some examples of large caps are Reliance Industries, TCS, State Bank of India, Hindustan Unilever etc.
Mid cap stocks are companies having a market cap between Rs.10,000 crores and Rs.30,000 crores and are considerably smaller than large cap companies in comparison to the revenue, profitability, clientele, employee size. These companies are on the radar of many investors in order to generate higher returns in a 3-5 year time horizon as the scope of their growth is very high in the market. Mid cap stocks are sometime touted to become the next large cap or are designated as large caps of the future. Hence, many investors bet heavy on mid-caps – since they generally rule at valuation multiples lower than large caps and are considered to have higher growth than the market leaders. Some examples of mid caps are Amara Raja Batteries, L&T Technology Services, Kansai Nerolac Paints etc.
Small cap stocks are companies having market capitalization less than Rs.10,000 crores and are considered to be companies at the development stage or start up enterprises. These companies usually have a low revenue base and their clientele and number of employees are lower than midcap companies. Also the information on such companies is not very easily available and only with in depth research of such companies can one conclude its strength and weaknesses. The most important things to analyse while working with such companies is their revenue model, reliable corporate governance structure, external investment, competitive pressures on profitability among various other parameters. Some examples of small caps are Himadri Speciality Chemicals, Tinplate, Sanwaria Consumer, etc.
To bring uniformity in mutual fund scheme names and avoid confusion in investors’ minds, SEBI has, in October 2017, defined large cap, mid cap and small cap companies for the investment universe for equity mutual fund schemes. As per this categorisation, top 100 stocks by largest market capitalisation shall be considered as large cap, next 150 stocks as mid cap and balance stocks as small cap. As of 31-12-18, large cap stocks had market cap of Rs. 28,000 crore and above, mid caps had market cap of Rs. 8,550 and above, whereas balance 4,645 stocks listed on BSE are considered as small caps.
A diversification of Large, Mid and Small cap stocks is considered to be ideal for a portfolio as it helps to balance both risk and returns.