Dear readers, today we are starting a new series on our blog. In this series, we will have discussions on the various terms associated with the stock market. To Invest in Stock Market or for Trading, if you do not have a clear idea about these terms (Stock Market Terms) you cannot be a successful trader or investor. Our first topic in this series is Market Capitalization. Let us see the details about this.
What is Market Capitalization?
Before we start to discuss market capitalization, it is necessary to understand what is Outstanding Share. Then it will be very easy to understand what is market capitalization.
Outstanding shares are the number of shares held by all the shareholders of a company at a specific time. The number of outstanding shares of a company can be seen in the balance sheet of the company. The number of outstanding shares does not remain the same always. The number of outstanding shares increases when the company sells shares or splits the stock to raise capital from the market, whereas the number of outstanding shares decreases if the company performs corporate action like buyback or reverse split.
Now that you have understood what is outstanding share, let’s move on to market capitalization. Market Capitalization refers to the current market value of a company. That means, if you want to buy a company entirely, the amount of money you have to pay is the market capitalization of that company.
It is very easy to get the market capitalization of a company. For this, you need to multiply the outstanding shares of the company with the current market price of the shares of that company. The result is the market capitalization of the company. Let us take the example of the ITC company. The company currently has an outstanding share of 1,232 crores. Today, (on January 19), the market price of a share of ITC is 219 rupees. Now, (1232 crore X 219) = 2,70,238 crore rupees (approximately) is the market capitalization of ITC.
Therefore,
Market Capitalization = (Number of Outstanding Shares of Company X Current Market Price of one Share of Company)
Market capitalization determines the size of a company. On the basis of market capitalization, in India, the companies are divided into three categories namely Large Cap, Mid Cap, and Small Cap.
Large-cap company
In India, a company with a market capitalization of Rs 20,000 crore or more is called a large-cap company. For example, Nestle India, Page Industries, Reliance, HDFC Bank, etc. are large-cap companies.
Mid-cap company
In India, a company with a market capitalization of more than Rs 5,000 crore but less than Rs. 20,000 crore is called a mid-cap company. For example, Ajanta Pharma, CDSL, Gillette India, Exide Industries, etc. are mid-cap companies.
Small-Cap Company
In India, a company with a market capitalization of less than Rs 5,000 crore is called a small-cap company. For example, Minda Corporation, Arti Drugs, CEAT, etc. are small-cap companies.
In general, the larger the company, the safer is the investment.
Last Words
Market Capitalization is a very important concept related to Stock Market. This is also an important valuation factor. I hope, that, I have been successful to give you a clear idea about Market Capitalization.
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