What Is Market Capitalisation?

Take the current share price and multiply it by the total number of shares the company has issued. If a company has 10 crore shares and each trades at Rs 500, its market cap is Rs 5,000 crore. These are illustrative numbers.

Because the share price changes every day, market cap changes every day too.

Market cap is roughly what it would cost to buy the whole company at today market price. It reflects how investors value the business right now, based on its profits, growth prospects and mood.

SEBI rules use a simple ranking by full market cap:

• Large cap: the top 100 companies.
• Mid cap: companies ranked 101 to 250.
• Small cap: companies ranked 251 and beyond.

Our page on large, mid and small cap funds explains how this shapes mutual fund categories.

AMFI publishes the ranked list of companies twice a year, based on average market cap over the previous six months. Fund houses use it to decide which companies count as large, mid or small for their schemes.

Companies can move between categories as their values change.

Some shares are held by promoters or governments and rarely traded. Free float market cap counts only the shares available for public trading. Many indices, including the Nifty 50, are weighted by free float market cap.

Our page on Nifty and Sensex explains how indices are built.

Mutual fund categories are defined by market cap. A large cap fund must hold mostly top-100 companies, a mid cap fund mostly companies ranked 101 to 250, and so on. This tells you roughly how risky and how volatile a fund may be.

Our page on SEBI fund categories lists the rules.

Large companies are usually established leaders with strong finances. Their shares tend to be steadier and easier to trade, though they still fall in market crashes.

Mid-sized companies are often growing fast but with less established positions. They can rise more in good times and fall more in bad times.

Our page on mid cap versus flexi cap explains their role.

Small companies can grow very fast, but they are more fragile and their shares can swing sharply. Some do brilliantly; many struggle.

Our page on large cap versus small cap compares the two ends.

A huge market cap does not mean a company is a good buy at today price. A small market cap does not mean it is cheap. Market cap says nothing about debt levels, profit quality or management. It is a size measure, not a quality measure.

Market cap reflects investor expectations, not just current size. A company with modest sales but high expected growth can have a large market cap. A company with big sales but low profits may have a small one.

The combined market cap of all listed companies is sometimes compared with the size of the economy as a rough valuation signal. Like other valuation measures, it is not a reliable timing tool.

Our page on the Nifty PE ratio explains another valuation measure.

Many investors hold mostly large caps as a steady core, with smaller portions in mid and small caps for extra growth. Flexi cap and multi cap funds mix sizes for you.

Our pages on flexi cap versus multi cap and diversification explain how to combine them.

Index funds that track market-cap-weighted indices put more money in the largest companies. That means a few giants can drive much of the index movement.

Our page on how to invest in the Nifty 50 explains what this means for index investors.

Suppose two companies each earn similar profits. One is seen as having strong future growth, so investors pay a high price for its shares, and its market cap is large. The other is seen as slow-growing, so its share price is lower and its market cap smaller. Same profits, very different market caps, because market cap reflects expectations as well as present size.

This is why market cap alone cannot tell you whether a company is a good investment.

Because rankings are updated twice a year, a company can move from small cap to mid cap, or from mid cap to large cap, as it grows. Funds may then need to adjust their holdings to stay within their category rules. A company can also slip down a category if its value falls. These shifts are normal and are handled by the fund managers.

A fund mostly holding large companies usually carries less volatility than one holding small companies. That is reflected in the riskometer shown for each scheme, which considers market cap among other factors. Our page on the riskometer explains how to read it.

Stock exchange websites, financial portals and broker apps show each company market cap. AMFI publishes the official ranked list used for fund categories on its website.

• Market cap = price times shares.
• Top 100 large, 101 to 250 mid, the rest small.
• AMFI updates the list twice a year.
• Size is not quality; look deeper before investing.

We are distributors rather than investment advisers and we recommend no schemes. If you want help understanding which fund categories suit you, get in touch.