What Is the Difference Between Large Cap, Mid Cap & Small Cap?
It is essential for stock market newbies to understand what is large cap, mid cap and small cap in stocks. They differ from each other in terms of growth potential and risk. Small-caps have growth potential, mid-caps balance stability and expansion, and large-caps are dependable, well-established businesses. Let’s dig deeper into the article to better understand these stocks and help with informed investing.
When beginners enter the stock market, they often have questions about which stocks to invest in. Such questions can overwhelm even a seasoned investor. Stock market investors must have sufficient knowledge to determine which stocks are the right choice for their investment strategy. If you have no clue about which stocks you should put money in, you could face losses. The share market has inherent risk, and this risk varies from one stock to another.
Stocks in the stock market are often classified based on their market capitalisation or market cap as large-cap, mid-cap and small-cap. This article will help you understand the difference between them and assist you in making better-informed investment choices. Let us first learn about the meaning of market capitalisation and its categories in detail.
Market Capitalisation: Meaning and categories
Market capitalisation refers to the total number of outstanding shares of a company in the market multiplied by the current price of each share. It is a measure of the estimated valuation of a company.
To help you understand this better, let us look at the meaning of market capitalisation with the help of an example. Suppose ‘ABC’ Company has 20,000 outstanding shares in the market and each share is priced at ₹20. Then, the market capitalisation of ‘ABC’ Company will be calculated as follows:
Outstanding shares x price per share
20,000 x 20 = ₹4,00,000
Therefore, the market capitalisation of ‘ABC’ Company is ₹4,00,000.
The stock of companies traded on the stock exchanges can be categorised into three broad categories: large-cap, mid-cap and small-cap. Let us learn about each of them in detail.
What Are Large-Cap Stocks?
Large-cap companies are well-established businesses with a significant market share, like market caps of ₹20,000 crore or more. These companies dominate the industry and are very stable. They hold themselves well in times of recession or during any other adverse event. Besides, they usually have been functioning for decades and have a good reputation. Large-cap stocks are a good option if you want to invest in a company’s stocks by taking less risk. These stocks are less volatile than mid-cap and small-cap stocks, and lower volatility makes them less risky. However, since they come with low risk, the returns here can be relatively lower than mid and small-cap stocks.
Examples of Large Cap Stocks
Reliance Industries and Infosys are examples of some large-cap market companies listed on India's stock exchanges. Their strong foothold in the market and consistent good performance make them good choices for long-term investors.
Advantages and Risks of Investing in Large -Cap
Investing in large-cap stocks is generally considered safer due to their established market presence and financial stability. These companies often have a history of steady growth and dividend payments, providing a reliable income stream for investors. Large -caps are typically less volatile, making them appealing for risk-averse investors who prioritise capital preservation. However, the primary risk with large -caps is their limited growth potential compared to smaller firms, as their massive size can make rapid expansion challenging. Additionally, large-cap stocks can be affected by broader economic downturns and regulatory changes that impact their industry. Despite these challenges, large-cap investments remain a cornerstone for many portfolios seeking long-term stability and modest returns.
What Are Mid-Cap Stocks?
Mid-cap companies have market caps above ₹5,000 crore but less than ₹20,000 crore. Investing in these companies can be riskier than investing in large-cap market companies, because mid-caps tend to be more volatile. On the other hand, mid-cap companies also can turn into large-cap companies in the long run. These companies can offer a higher growth potential than large-cap stocks; hence, more investors are attracted to investing here.
Examples of Mid-Cap Stocks
Metropolis Healthcare, Castrol India, and LIC Housing Finance are examples of mid-cap companies listed on India's stock exchanges.
Advantages and Risks of Investing in Mid -Cap
Mid-cap stocks offer a unique balance between growth and stability, making them attractive to a wide range of investors. These companies are typically past their initial growth phase but have not yet reached the maturity of large -caps. As such, they tend to offer greater growth potential than large -caps while being less volatile than small -caps. The advantage of mid -caps lies in their ability to adapt and grow within their industries, providing investors with opportunities for significant capital appreciation. However, mid-caps can still face significant risks, such as market fluctuations and economic downturns, which can impact their performance. As an Investor, you should be cautious of the potential for increased volatility and should conduct thorough research to mitigate risks.
What Are Small-Cap Stocks?
Small-cap companies have a market capitalisation of less than ₹5,000 crores. These companies are relatively smaller in size and have a significant growth potential. What makes them risky is the low probability that they will be successful over time. This makes the stocks of such companies volatile in nature. Small-cap companies have a long history of underperformance but when an economy emerges from a recession, small-cap stocks often prove to be outperformers.
Examples of Small-Cap Stocks
Bajaj Consumer Care, Shobha Ltd, and VST Industries are some examples of small-cap market companies listed on India's stock exchanges.
Advantages and Risks of Investing in Small -Cap
Small-cap stocks are often attractive to adventurous investors due to their high growth potential. These companies can rapidly expand and capture market share, leading to substantial returns for those willing to take the risk. The small-cap sector is ripe with innovation and emerging market leaders, offering investors like you the chance to invest in the next big success story. However, small -caps are also more susceptible to market volatility and economic changes, making them a riskier investment. Their smaller size can mean less financial stability and fewer resources to weather adverse conditions. Additionally, small-cap stocks may have lower liquidity, which can complicate buying and selling. As an Investor, you should approach small-caps with a careful strategy and a willingness to accept potential losses.
Difference Between Large-Cap, Medium-Cap and Small-Cap Companies
Here’s a table outlining a quick comparison between the small-cap, mid-cap, and large-cap companies based on various important factors.
| Aspect | Large-Cap Companies | Mid-Cap Companies | Small-Cap Companies |
|---|---|---|---|
Company Type and Stature | Well-established and stable | Compact, growth potential | Smaller, significant growth |
Market Capitalization | Rs 20,000 crore or more | 5,000 crore to 20,000 crore rupees | Less than Rs 5,000 crore |
Volatility | Low volatility | Moderate volatility | High volatility |
Growth Potential | Lower growth potential | Moderate growth potential | Higher growth potential |
Liquidity | High liquidity | Lower liquidity | Least liquidity |
Keep in mind that different stock exchanges and market situations may alter how companies are classified. When evaluating investment opportunities, it is critical to consider a range of factors and market trends.
In Which Cap Should You Invest?
When deciding between small cap vs mid cap vs large cap investments, diversification is key to balancing risk and return. A diversified portfolio that includes a mix of these categories can help you navigate market volatility and capitalise on growth opportunities. Large-cap stocks can provide stability and consistent income, while mid-cap and small-cap stocks offer the potential for higher growth and returns. By spreading investments across different capitalisations, you can mitigate risks associated with individual sectors or economic conditions. This balanced approach allows you to achieve your financial goals while minimiszing the impact of market fluctuations.
Popular Indices for Each Cap
Large -cap: The Nifty 50 Index is a well-known benchmark, representing the largest and most liquid companies.
Mid -cap: The Nifty Midcap 100 Index captures the performance of mid-sized companies, offering insights into this dynamic segment and its potential for growth.
Small -cap: The Nifty Smallcap 100 Index focuses on smaller companies, highlighting potential high-growth opportunities and emerging market leaders.
Mutual funds and market capitalisation
Mutual funds are an integral part of the Indian financial system. Mutual fund schemes are categorised into large-cap, mid-cap or small-cap funds based on their investment allocation. For example, a large-cap mutual fund scheme will mainly invest in large-cap stocks, while mid-cap and small-cap schemes will invest in mid-cap and small-cap stocks.
The bottom line
It is crucial to factor in your financial goals, appetite for risk and investment horizon before investing. Also, remember that investing in the share market or in mutual funds requires research and analysis. If you are starting your investing journey or need support, it may help to open an account with a large broker like Kotak Securities. This will give you access to market research and analysis and a wide range of educational resources.
FAQs on Difference Between Large Cap, Mid Cap and Small Cap Funds
Which is better large-cap vs mid-cap vs small-cap?
Large-cap funds offer higher stability but lower returns. Whereas, mid-cap and small-cap funds may offer slightly higher returns. Returns from small-cap funds may exceed mid-cap funds too. However, both these categories of funds are more risky as they invest in small companies which are still growing. They are not established companies like the ones in large-cap funds. So, you should invest according to you investment objective and risk appetite.
Which is risky large-cap or mid-cap?
Mid-cap companies are more risky as they invest in growing companies. However, large-cap companies invest in big companies that are well established.
How do you know if a stock is large-cap or mid-cap?
Calculate the market capitalisation to find out if a stock is a large cap or mid-cap. For this multiply the number of total shares of a company to the existing market price of each share. If the market capitalisation is above $10 billion it will be a large-cap company.
