What is market capitalization

Did you ever wondered by looking at a company that how to know if it is large company or small company? 

Then this article is going to solve your query.

WHAT IS MARKET CAPITALIZATION ?

Market capitalization or market cap determines the total market value of the company.It is calculated by multiplying the number of shares outstanding with the market price of the share.

                                     

      market capitalization = number of shares outstanding * price of 1 share

For example Let assume a company has 20,000 number of shares outstanding and the share price is RS 100 so the market capitalization is equal to 20,000*100 = RS 20,00,000.

By now you must be wondering what's the use of market capitalization.Market capitalization is used by investors to determine the size of the company and thus determine which cap does the company comes in whether it is large cap company or small cap company or other.This further helps investors to diversify their investment by investing in different cap companies. 

CLASSIFICATION USING MARKET CAPITALIZATION :

There is no fixed criteria for classification of the company based on market capitalization.Different people use different range for the classification.Generally the classification is :

1 Large cap companies : These are the companies whose market capitalization is larger then 28,000 crores.These companies are well established companies.Investing in large cap companies are considered to be safe option as they are less risky.The liquidity of these companies are very high.Example of large cap companies is TCS.

2 Mid cap companies :  These are the companies whose market capitalization is between 8500 crores and 28000 crores.These companies are riskier then large cap companies but are less risky then small cap companies.It is expected that they generate more return then large cap companies.The liquidity of these companies are high.Example of mid cap companies is TVS motor.

3 Small cap companies :  These are the companies whose market capitalization is less then 8500 crores.These are most risky companies and  can also generate more return then large cap and mid cap  companies.The companies in these category are considered to be growing companies that's why these companies can generate high return but many companies fail to achieve goal so these are also risky.The liquidity of these companies are low.Example of small cap companies is D-link India.

FACTORS EFFECTING MARKET CAPITALIZATION :

Market capitalization depends on price and number of shares outstanding which further depends upon

1. Issue of new shares
2. Buyback of shares
3. Demand and supply
4. Strength of the company
5. Competitor performance

The number of share outstanding can be changed when the company decides to issue new shares or buyback of shares.When company decides to issue new shares then the number of share outstanding increases.Buyback refers to company buying it's share from market.This decreases the number of shares outstanding further changing market cap.

The price of a particular company stock depends upon various factors such as demand and supply(when demand is high stock price increases and when supply is high stock price decreases),strength of company(is it fundamentally strong or not),performance of competitor etc. thus further affecting the market capitalization.

Final Thoughts : 

Market capitalization is one of the important tools to take into account while investing but there are few things which it does not consider like the debt load of company,the dividend given by the companies etc.It's better to take market capitalization into account by using other tools also so that you can generate more information before investing

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