If you are new to trading, you will come across the market capitalisation concept. Market capitalisation or market cap is frequently used in the securities markets because it gives you an idea of the total value of a company. Let’s do a detailed exploration of the term ‘Market Cap’ so that you as an online trading account holder can gain more from your online trading account.
What is Market Cap?
In simple terms, Market Cap is the value obtained when you multiply a company’s outstanding shares with the current price of one share. This value is the total value of all of the company’s stocks at that particular time when the calculation is done. This means that you can purchase the entire available stocks of a listed company with the market cap value at that particular time. Market Cap allocation is generally divided as Small Cap, Mid Cap and Large Cap.
Nano Caps, Micro Caps and Mega Caps are other terms used by some financial analysts to determine the market cap value of the stocks. Large Caps and Mega Caps are blue chip stocks.
Here’s an example of Market Cap calculation:
Current share price of Company ‘Z’ = Rs. 100 per share
Outstanding shares of Company ‘Z’ = 1000
Current Market Cap of Company ‘Z’ = Current share price of Company ‘Z’ x Outstanding shares of Company ‘Z’ = 100 x 1000 = Rs. 100000
Interested online trading account holders can gain a better understanding of market cap by watching this video by Khan Academy: https://www.youtube.com/watch?v=5lmHzAHbtzg
Significance of Market Cap
Online trading account holders have to understand market cap primarily for comparison between the stocks of two listed companies. Also, this comparison helps in planning and executing strategies for better investments as per the targeted trading returns.
Comparing companies based on their unit share price is less valuable than comparing their market cap. This is due to the fact that the share price fluctuates in a volatile market and may not give the real value of the company. Instead the market cap value gives a better picture to determine the worth of two companies.
Classification of Market Capitalisation stocks
Market cap classification is important because it helps online trading account holders to gauge the company size along with risk and potential of stocks before investing.
- Micro Cap has less market cap value than small cap but greater market cap value than nano caps. Also, nano caps are stocks with maximum risk. Online trading account holders should invest in these stocks only after sufficient research due to the risk involved.
- The listed companies with a market cap of Rs. 500 crores or less are part of small cap companies. These are generally, startups or new companies who may have the potential to grow tremendously in the future. But the risk is high if the company fails to grow in the future.
- Mid cap companies have a market cap between Rs. 500 crores to Rs. 7000 crores. They are growth stage companies with a greater possibility of yielding good returns. These companies are preparing to enter the next level of business. As an online trading account holder, you can buy their stocks, hold it and gain in the long-term.
- Companies with market cap between Rs. 7000 crores and Rs. 20000 crores come under the large cap category. When you buy stocks of these companies using your online trading account, you are taking a comparatively low risk than small and mid cap companies. The risk is low because the large cap companies are generally established in their capabilities to sustain their business.
Companies with more than Rs. 20000 crores in turnover come under the mega cap category. These companies are reputed with local and global brand recognition. Their stocks are sought-after by investors.
Now, that you know more about Market Cap, you can plan your investment better with the right stocks in your portfolio. If you still haven’t got an online trading account, visit https://www.tradebulls.in/online-trading to open an online trading account with Tradebulls, one of the leading stock marker brokerage companies in India.
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