Market capitalization represents the companies’ aggregate value, and it shows us the size of companies. The formula of market capitalization is
Market Capitalization (M Cap)= Market Price of 1 share x No. of outstanding shares
E.g., Let us take an example of a company X
Price of one share= Rs 1000
No. of outstanding shares= 100000
Therefore, market cap of company X= 1000 x 100000= Rs 1,00,000,000.
Further market capitalization is categorized into large-cap, mid-cap, and small-cap. Nowadays, we also heard about Mega-cap and Micro-cap companies.
Slabs for Market Capitalization
Large-cap– companies whose market cap is more than Rs 75000 crore. Generally, blue-chip companies come under the large-cap category.
Mid-cap– companies whose market cap is between Rs 13000 cr and Rs 75000 crore.
Small-cap– companies whose market cap is less than Rs 13000 crore.
There are no fixed criteria for small-cap, mid-cap, and large-cap. A few years ago, a company with a market capitalization of Rs 50000 crore was called a large-cap company. Today Rs 50000 crore companies come in mid-cap. Most small-cap companies are in the beginning phase of start-up or development. So they have more growth possibilities, and the risk is also high due to the failure rate.
Small-cap index such as S&P BSE Small cap reflects small-cap companies’ performance, and the Midcap index such as S&P BSE Midcap or Midcap Nifty 50 reflects the performance of midcap companies. Large-cap companies are large and well-established companies with strong market presence, e.g., TCS, Infosys, Reliance Industries, and L&T. Mostly the large-cap companies are included in Nifty and Sensex. Large-cap companies have excellent financial strength to survive in bad times; therefore, investing in large-cap companies is considered safe. Small-cap companies have the low financial strength to survive in bad times; these small-cap companies also have higher failure rates. Therefore investing in small-cap companies is considered risky. One thing to remember is that large-cap companies were sometimes small-cap companies, but not every small-cap or mid-cap company could become a large-cap company.
Free Float Market Capitalization
The difference between flee float market capitalization and the total market capitalization is that the former excludes the shares held by the promoters. For example, if a company issued 10 crore shares of face value Rs 10, 04 crore shares are held by the promoters, then the free-float market capitalization is Rs 60 crores.
Free float market cap is always lower than the total market cap as it excludes the shares held by the promoters and those that are locked in. For e.g., the total market cap of Indian Oil Corporation Limited (IOCL) is Rs 73807 crore, but the free-float market cap is Rs 19928 crore because of the high holding of the Government of India.
Both India’s stock exchanges, i.e., BSE and NSE, use the free float capitalization method to calculate their benchmark indices Sensex and Nifty, respectively.
Factors affecting Market Capitalization
The market cap keeps changing because of the last traded price change and the current market price change. The total number of outstanding shares not changed unless and until companies issue fresh shares and buyback certain shares.
Also read: Financial Markets: Definition and Types