Market Capitalization – Definition, Formula And Example

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Market Capitalization –

Market capitalization is also known as market cap. Market capitalization is a very important concept for investment and trading. The definition of market capitalization is the total value of all company’s shares of stock. It can be calculated by multiplying the total number of shares by the share price.

Market Capitalization

Take an example of company A, if company’s share price is 100rs and total outstanding shares are 1cr, then market cap of company A is

Market Cap = Total outstanding shares X Share price

Market Cap = 10000000 X 100

Market Cap = 100cr

Take an example of company B, if company’s share price is 200rs and total outstanding shares are 50lac, then market cap of company B is

Market Cap = Total outstanding shares X Share price

Market Cap = 5000000 X 200

Market Cap = 100cr

As we can see from above, Market cap is depend on both outstanding share and share price. Both company A and B have same market cap but different share price and different outstanding shares.

If share price of a company C is more than company D, it doesn’t mean that market cap of company C is higher than company D.

Market cap is very important for diversifying the portfolio, it helps us to distinguish between companies. There are four types of market cap,

  1. Small Cap = Companies with a market cap up to Rs 500cr include small-cap companies. These companies have very high growth potential but are also very risky for investments.
  2. Mid Cap = Companies with a market cap between Rs 500cr to 7000cr including mid-cap companies. These companies have high growth potential but are also highly risky for investments.
  3. Large Cap = Companies with a market cap between Rs 7000cr to 20000cr include large-cap companies. These companies have low growth potential also low risk for investment. These are stable companies.
  4. Mega Cap = Companies with a market cap above Rs 20000cr includes in Mega cap companies. These companies have similar growth and risk profile to large-cap companies.

From this classification, we can diversify our portfolio according to our risk profile, Also we can choose this classification for trading purposes, by using liquidity. Large-cap and Mega cap companies have high liquidity for trading as compared to mid and small-cap companies.

This term mostly used in fundamental analysis as compare to technical analysis.

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