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This article talks about the categorization of stocks into large cap, mid cap and small caps. It also describes the characteristics of each class, and guides readers about investing in each.
In the financial press and on business TV channels, we often hear terms like market capitalization (market cap), and also references to companies as large cap, mid cap or small cap.
Let’s understand what these terms mean, and what each class of stocks has to offer you.
Market Capitalization or Market Cap
It is the value of a company as determined by the stock markets.
Each company issues shares, and the total number of issued shares represents 100% ownership interest in the company. Thus, if we know the number of issued shares for a company, and the price for each share, we can derive the value of the entire company.
The value of a company determined in this manner is called its Market Cap.
Market Capitalization of a company = Market price of its shares * Number of shares issued
The price of a stock determined in a free market, where it is determined by market forces of demand and supply, is the most accurate price which is democratically arrived at. Since market cap calculation uses this price, the market cap of a company is the best measure to gauge the size of a company.
Companies traded in the stock market are classified based on their market cap, as each class demonstrates distinct shared traits. Let’s look at the classification of companies based on their market cap.
Large Cap
There is no standard definition of Large Cap, and it varies from institution to institution. But as a general rule, if a company has a market capitalization of more than Rs. 5000 Crores, it is considered as a Large Cap.
A Large Cap company is normally a dominating player in its industry, and has a stable growth rate.
It should be noted that almost all the Large Cap companies from India would be considered as Mid Cap or Small Cap companies in a global scenario, as globally, companies are usually classified as Large Cap if their market cap is more than $10 Billion (roughly Rs. 39,000 Crores).
Mid Cap
The definition of Mid Cap is hazy, and it varies from institution to institution. But as a general rule, if a company has a market capitalization of between Rs. 1000 Crores and Rs. 5000 Crores, it is considered as a Mid Cap.
A Mid Cap company is normally an emerging player in its industry. Such a company has a potential to grow fast and become a leader (a Large Cap) in the future.
Mid cap companies can show very high growth rates (in percentage terms), because they have a small base – since their size is small, even a small incremental increase in revenue / profits can be a big figure when expressed in terms of percentage.
Small Cap
Like Large Cap and Mid Cap companies, the definition of Small Cap is also not concrete, and varies from institution to institution. But as a general rule, if a company has a market capitalization of less than Rs. 1000 Crores, it is considered as a Small Cap.
A Small Cap company is normally a company that is just starting out in its industry, and has moderate to very high growth rate. Such a company has a potential to grow fast and become a Mid Cap in the future.
Points to Consider While Investing
Large Cap
People having less tolerance for risk should invest in large cap companies, as they are established companies with a known and more-or-less predictable track record. People investing in stocks for not a very long term should also invest in these companies, as their stock prices
are not very volatile.
Mid Cap
People having a reasonable tolerance for risk should invest in mid cap companies, as these are emerging companies and carry a risk of not becoming leaders. If chosen correctly, mid cap companies can give phenomenal returns when they grow and become industry leaders. (A prime example is Infosys Technologies)
But picking up the right mid cap company requires a lot research and expertise. Therefore, it is advisable to invest in mid caps through mutual funds (MFs).
Also, a mid cap company can take years to really bloom and grow into a large company. So, only people investing for a considerably long term should invest in mid cap stocks.
Small Cap
Only people having a high risk appetite should consider investment in these companies – these companies are in the very initial stages in their life cycle, and there is usually a very high degree of unpredictability concerning their growth.
Small cap companies can take even more time to grow compared to mid caps, but can give exceptional returns if chosen well.
Investment in small cap companies is advisable through mutual funds (MFs) only – direct investment would be only a shade better than speculation!
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it is unfortunate that ULIP participant neednot comply with submission of PANCARD etc.,MF participant has to provide the same.Although the both the products derive their earnings mostly from the Financial market(debt& equity).As a matter of fact MF should be given more soaps over ULIP as as little as Rs 5000 is enough for a small man also to get the benefit of growth of Economy.This will help in Inclusive growth which our PM and FM are looking for. I am not against PAN card for MF,but I recommend for all the insurance /investment products.
Similarly the benefit of no entry load for MF(online) has tobe extended for Insurance also.This will benefit the poor class people.
Dear Mr. Sharma,
At this stage, I do not recommend individual companies or products. So, I would not be able to provide much help there.
But you have a wide choice, as both private and public general (non-life) insurance companies provide health insurance.
hi raag,
thaks for the reply,
i think you are right , i do get post retirement medical benefit, but that is to maximum of rs.2lakhs on hospitalisation..as u know that now a days hospitalisation costs are very high.
thats the very reason i wanted to go for a health plan.
so iwould better go for a floater policy which would cover both of us.
can u suggest a couple of policies/companies in this regard.
regards
Sekhar sharma
Hi raag,
iam 57years old and working for a state govt orgnisation.
as iwas covered for health for all these years , iwould now like have a health cover for myself and spouse(53yrs) as iam due for retirement next year..
i did come accross tat-aig health plus scheme ,with a new plan for reimbursing of regular medical bills up to 15000 annualy kindly advise in this.
my monthly income is 25000 and post retirement after one year i would be eligible for a pension of 10000 per month. and both of us do not suffer from any major ailments or have undergone any surgery in the past.
apart from the above plan of tat aig, pls do suggest a gud health insurance plan.
Dear Mr. Sharma,
Unfortunately, at this stage, I do not recommend specific policies.
However, here are a few points that you should bear in mind:
- It is better to go in for a family floater cover (that covers you and your wife) instead of individual policies for each of you. This would reduce your premium.
- The cost of health insurance goes up with age. So, the premium would be in line with your and your wife’s age.
- As the age increases, insurers usually provide cover for smaller amounts to reduce their risk. Thus, for example, if you are looking for a health insurance cover of Rs. 5 Lakhs, an insurer might be willing to provide a cover for only Rs. 2 Lakhs.
You can do research about various health insurance plans on various personal finance sites, or sites like http://www.apnainsurance.com
However, one thing puzzles me – since you are a state governement employee, would you not get medical care benefit even after you retire? Just wondering…
Hi Varun,
I would write an article about it soon – thanks for suggesting a good topic!
Hi Raag,
can you give me more details of Money Back policy. which plan is good and how it works out.
regards,
varun