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What is Market Capitalization
What is Market Capitalization
Market capitalization sounds like a big term but it's really a simple concept, and it's important for you to know if you are planning to invest
What is Market Capitalization?
Market capitalization, often called “market cap,” refers to a simple calculation. To calculate this number, you multiply the total number of shares a company has outstanding (the numbers of shares issued and owned by investors) by the current share price.
So the conclusion is, the market capitalization of company changes every single day as the stock price also changes every day. That's why sometimes news flashes that a company lost millions of rupees in market cap after a big down day.
Why Does Market Cap Matter?
Ok, so figuring out a company's market cap is easy enough, but why would an investor care what that is?
It's the simplest calculation to figure out how big a company is, which is rarely evident from looking just at the price of the stock.
Market cap is a short-cut that helps you determine how big or small a company is without doing all the calculations related to sales, revenues, liabilities, debt and all that.
A company can adjust its share price through splits, but the market capitalization remains the same because they increase the number of shares outstanding in relation to the stock split they do.
Splits, affect the stock price while it does not affect the market cap of a company.
How to Calculate Market Cap
So let's work through an example.
Let's say a company has 1,000,000 (10 lakh ) shares outstanding and the price of the stock trading right now is Rs 120 per share.
We multiply 1,000,000 by 120 Rupees to get a market cap value of it 120,000,000 Rupees.
What is the Difference Between Large Cap, Mid Cap, and Small Cap Stocks?
Companies are divided into three categories according to market cap: large-cap, mid-cap, and small-cap.
Large Cap means companies having market capitalization over Rs.1000 crore
Mid Cap means companies having market capitalization between Rs.100 crore and Rs.1000 crore
Small Cap means companies having market capitalization less then Rs.100 crore
Conclusion for Market Capitalization
Knowing where your stock fits in the market cap it becomes vital for diversification. You don't want your whole portfolio to be in any one group, investment in diversified companies is always a good portfolio providing best returns.
Now that you know what market cap is, take a moment to look over the stocks in your portfolio and see how many you have in each of these three categories. Do you have too many stocks in one category? If so, then you might want to add a little diversification and balance in the future so that your portfolio is not too conservative or too risky.