Difference Between Large Cap, Mid-cap, and Small-cap Stocks

Difference Between Large Cap, Mid-cap, and Small-cap Stocks

The stocks that are active in the stock market are generally categorized based on the company’s market capitalization and are known as large-cap, mid-cap, and small-cap stocks.

The categorization of these stocks helps the investors to make effective decisions while investing their funds in the stock market.

This article will help you to understand the difference between large-cap, mid-cap, and small-cap stocks.

Before diving into the details, let us understand what does market capitalization mean?

Market capitalization, also called a market cap, is the company's total market value based on its outstanding shares.
In simpler words, a company's shareholders held all the shares of a company at the market value is known as market capitalization.
Let us understand with the help of an example given below:
There's an ABC company whose shares are listed on a stock exchange with around 30 thousand shares, where the current price of each share is RS 30 in the stock market. So what would be the market capitalization?
To determine the market capitalization of an ABC company we need to multiply the price of 1 share with the total number of a company's share available in the stock market.
Thus, the formula for the market capitalization is given below:
Market capitalization = the total number of a company's share x the market price of each share.
In that case, the market capitalization of an ABC company would be
Market capitalization = 30 thousand shares x RS 30 each = 9,00,000
Therefore, the market capitalization of an ABC company will be 9,00,000.

Large-cap stocks are known as first-class stocks in market capitalization. It is typically defined as well-established companies that have a vast market share in the stock market.
These companies are known as market leaders because they are mostly stable and dominate their industry. The market capitalization of these well-established companies is RS 20,000 crore and above.
Besides functioning over decades, they have a massive reputation in their industry because they can handle any adverse events or in times of recession.
The top 100 companies in the stock market are known as large companies because of their high-performance and profitable track record.
These stocks are less risky than mid-cap and low-cap stocks because of their strong market presence.
Reliance Industries, Larsen & Toubro, Tata are some examples of large-cap companies listed on India's stock market.

Mid-cap companies are those companies that have a market capitalization between RS 5 - 20,000 crores.
Investing in mid-cap companies is risky than investing in large-cap companies because they tend to be volatile. The companies ranking from 101st to 200th are called mid-cap companies in terms of market capitalization.
Simultaneously, mid-cap companies can outrun large-cap companies in the long run as these companies deliver higher growth than large-cap stocks.
Hence, investors are more attracted and favorable towards mid-cap companies.
Ashok Leyland, Bajaj Electricals, Castrol India are examples of mid-cap companies listed on India's stock market.

An Indian company whose market capitalization is less than Rs 5,000 crores are known as small-cap companies. The stocks issued by these small companies are called small-cap stocks.
The rule of SEBI states that companies ranked from 251st position onwards in terms of market capitalization are called small-cap companies.
These companies are smaller in size, yet they can generate high returns for investors.
What makes them very risky is their low chances of being successful over time, making the stocks of such small companies volatile in nature.
NESCO Ltd, Delta Corp, Indian Energy Exchange are examples of small-cap companies listed on India's stock market.

  • Involvement of Risk
  • 1) Large-cap companies have a more substantial reputation and financials in the stock market. They have a significant market share and consistent performance, which makes them less risky than mid and small-cap stocks

    2) The involvement of risk in mid-cap companies is relatively higher because several investors invest in growing companies, leading to higher volatility in returns.

    3) Small-cap companies have increased risk because there are higher fluctuations in prices, which increases the risk for investors.

  • Growth Potential
  • 1) Large-cap companies have lower growth potential than mid and small-cap companies. This is because investors think of large-cap companies as a stable investment. After all, their high market capitalization has low chances of growth.

    2) Mid-cap companies are best suitable for investors because they deliver high potential growth. If an investor is looking for slightly higher growth, mid-cap companies are an excellent option for investing.

    3) Small-cap companies have the highest growth potential than mid and large-cap companies. They have lower share prices, and smaller size leaves space for these companies to become bigger in the future.

  • Liquidity
  • 1) The large-cap companies have high liquidity because the large-cap stocks are traded actively on the stock exchanges of India. As large-cap stocks are known as leaders of the market, they are familiar to the investors, increasing their liquidity in the stock market.

    2) The liquidity of mid-cap companies is generally lower because they have lower demand in the market due to risk.

    3) Small-cap companies have the lowest liquidity than mid and large-cap companies. They have low trading volumes generally very low in low cap stocks.

  • What is Market Capitalization?
  • Market capitalization, also called a market cap, is the company's total market value based on its outstanding shares.

  • Does large cap companies have lower growth potential?
  • Yes, Large-cap companies have lower growth potential than mid and small-cap companies. This is because investors think of large-cap companies as a stable investment. After all, their high market capitalization has low chances of growth.

  • What Are Small-cap Stocks?
  • An Indian company whose market capitalization is less than Rs 5,000 crores are known as small-cap companies. The stocks issued by these small companies are called small-cap stocks.

  • What is the formula to calculate the market capitalization of a specific company?
  • The formula to calculate the market capitalization of a specific company is: Market capitalization = the total number of a company's share x the market price of each share.

  • What Are Large-Cap Stocks?
  • Large-cap stocks are known as first-class stocks in market capitalization. It is typically defined as well-established companies that have a vast market share in the stock market.

Final Thoughts

Investors should know the difference between large-cap, mid-cap, and small-cap stocks before investing in any specific company. Understanding the differences between these stocks will helps the investor to make an informed decision.