Market capitalisation is an important element of stock markets and anyone who wishes to trade needs to have a grasp of the concept. Market cap, which is the short form of capitalisation, sizes up a certain company’s overall market value. It is computed by multiplying the stock price of a firm by outstanding share numbers.
If Company X trades at Rs 100 per share and has 500 shares outstanding, it means its market cap is Rs 100 x 500 shares, which is Rs 50,000.
Based on the market capitalisation of companies listed on the stock exchange, they are classified as small or large cap stocks. Market capitalisation helps investors compare and assess a company’s worth in the market and also the risks inherent in investing in such companies. Understanding market cap also helps investors balance their portfolios with stocks of varying market capitalisation so that there is adequate diversification. This way, investors can balance risk and reward.
According to the Securities and Exchange Board of India (SEBI), the top 100 companies ranked 1 to 100 are classified as large cap firms. Companies that are ranked 101 to 250 are categorised as mid cap firms while firms ranked from 251 and below are small cap firms.
So, what’s the difference between large cap and small cap stocks?
The biggest difference between large cap and small cap stocks is in their market capitalisation, as already mentioned. Typically the market cap of small cap stocks is up to Rs 500 crore. Large cap stocks are those that belong to companies with a market cap of over 7,000 crore and running into Rs 20,000 crore or more. More than 95 per cent of companies listed in India are treated as small cap firms. When it comes to large cap stocks in the country, the Nifty 50 contains the top 50 such stocks, which are traded the most in the stock market. Some large cap stocks are also called blue chip stocks because they belong to companies that are blue chip, ie, market leaders in their sector.
Another small cap vs large cap stocks/companies difference lies in their position on the growth curve. Small cap stocks belong to companies that are still starting their growth journey. They could be start-ups or firms that are nascent. On the other hand, large cap stocks belong to companies that are well-established and have a proven track record of growth.
Another small cap vs large cap differentiator lies in the payment of dividends. Large cap companies tend to pay dividends to their investors from time to time. On the other hand, the chances of receiving dividends from small cap companies are not high. Small cap companies may need to channelise funds for reinvestment as they are on the growth track.
Pricing of stocks:
The difference between large cap and small cap stocks also lies in the pricing of the stock. Since small cap firms are yet to establish themselves, their stocks are priced lower than large cap companies. Large cap stocks are more expensive than small cap stocks.
On the liquidity front, investing in large cap stocks is a highly liquid option as there are buyers willing to buy them owing to their popularity and track record. Large cap stocks have been in the market for a long time and they are well-known. Small cap stocks are often less liquid because not many investors may have enough knowledge about such stocks and selling them can be a tad time-consuming.
Volatility and risk:
A key differentiator in the small caps stocks vs large cap stocks equation is in their risk or volatility element. Typically, large cap stocks are considered more stable than small caps but on the other hand, small cap stocks provide an opportunity for growth. Both large caps and small cap stocks have their own pros and cons and inclusion of both categories may lead to a balanced portfolio.
The small caps stocks vs large cap stocks question also needs to take into account the concept of presence in the market. Large cap stocks have a conspicuous presence and are easy to track. They offer regular financial information and any investor finds it easy to look them up without too much effort. Large cap companies are under obligation to release their statements and documents and make them available to the public. On the other hand, small cap stocks may not have much of a presence and tracking information pertaining to such companies may require greater research.
Assess your risk appetite before investing
In terms of investment, small cap stocks may be a fit for those with a high-risk tolerance while large cap stocks may suit those who are risk-averse or those with a low/moderate risk appetite and prefer stability. Depending on what kind of an investor you are, you could opt for small cap stocks or large cap stocks. An individual’s risk profile, investment horizon and goals should be factored into deciding on a certain market cap stock.
Stocks are categorised as small, mid and large caps based on their market capitalisation. Small cap stocks belong to companies that have a smaller market cap and are yet to establish themselves. They are nascent and are at the beginning of their growth curve.
On the other hand, large cap companies are well-established firms and sometimes market leaders in their sectors. They offer stability and are easy to research and monitor. Small caps are relatively less known and may need some research and tracking before an investor picks the appropriate small cap stock. Rather than take a small cap vs large cap approach, it helps to look at a balanced portfolio where there is enough diversification and risk-reward balance.