Market capitalisation, commonly called market cap, is one of the most important measures used to classify companies in the stock market. It helps investors evaluate the size of a company, understand its stability, estimate its risk level, and compare it with peers. Whether you invest in stocks, mutual funds, or ETFs, market cap plays a crucial role in shaping your investment strategy.
If you’re still learning market basics, read our beginner’s guide to the Indian stock market.
What Is Market Capitalisation?
Market capitalisation is the total value of a listed company based on its current share price and total number of outstanding shares.
Market Cap = Share Price × Total Number of Shares
A high market cap generally indicates a large, stable company, while a low market cap may signal higher growth potential but greater volatility.
SEBI-Defined Market Cap Categories in India
SEBI classifies companies into the following groups based on their market cap rankings:
- Large Cap: Top 100 companies
- Mid Cap: Companies ranked 101–250
- Small Cap: Companies ranked 251 and beyond
Large Cap Stocks
- Stable, established companies
- Lower volatility and steady returns
- Examples include Reliance, TCS, Infosys
- Suitable for beginners and conservative investors
Mid Cap Stocks
- Growing companies with improving market presence
- Moderate volatility with higher return potential
- Suitable for medium-risk investors
Small Cap Stocks
- Fast-growing but volatile businesses
- High return potential with high risk
- Suitable for long-term, high-risk investors
Why Market Capitalisation Matters
1. Helps Understand Risk Levels
- Large caps are stable, small caps are risky, mid caps lie in between.
2. Guides Portfolio Allocation
- Balanced portfolios typically include all three categories.
3. Useful for Comparing Companies
- Better to compare companies within the same market cap group.
4. Influences Mutual Fund and ETF Selection
- Large cap, mid cap, small cap, multi-cap, and flexi-cap funds are structured based on market cap rules.
To understand how these categories affect fund selection, read our blog on mutual fund categories in India.
Market Cap vs Enterprise Value (EV)
Market cap only considers share price and shares outstanding. Enterprise Value includes debt and cash and offers a more complete valuation.
- Market Cap: Good for size classification
- EV: Better for company valuation
Common Mistakes Investors Make
1. Chasing Only Small Caps for High Returns
- Small caps can crash quickly during market downturns.
2. Ignoring Risk Based on Market Cap
- Each category requires different expectations and holding periods.
3. Not Diversifying Within Market Caps
- A balanced mix improves long-term stability.
For a detailed approach, explore our guide on building a diversified portfolio.
How Market Cap Affects Your Investment Strategy
- Short-term cautious investors → prefer large caps
- Medium-term balanced investors → choose mid caps
- Long-term aggressive investors → allocate to small caps
Final Thoughts
Market capitalisation is a simple yet powerful concept that shapes how investors analyse companies and build portfolios. Understanding large, mid, and small caps helps you measure risk better, choose appropriate investment products, and design a portfolio aligned with your goals. No matter your experience level, market cap should always be part of your investing framework.
SEBI Compliance and Legal Note
This article is for educational purposes only and not financial advice.
Information sourced from SEBI, NSE, and BSE.
For investor grievances, visit SEBI SCORES.
Consult a SEBI-registered advisor before investing.