Market capitalisation

A beginner sees one stock priced at fifty rupees and another at five thousand, and concludes that the first is cheap and the second is expensive. It is one of the most common mistakes in the market, and it is completely wrong. A single share's price tells you almost nothing about how big or valuable a company is, because it depends entirely on how many slices the company has been cut into. The number that measures the whole company is its market capitalisation.

The price of the whole company

Market capitalisation, or market cap, is the price the market puts on an entire company. The calculation is simple:

market cap = share price times the total number of shares.

Recall that a share is one slice of the business. Multiply the price of one slice by the number of slices and you have the market's valuation of the whole. A company with ten crore shares trading at five hundred rupees each has a market cap of five thousand crore rupees.

This is why a share price on its own misleads. A fifty-rupee share can belong to a far larger company than a five-thousand-rupee share, depending on the share count. The per-share price is almost arbitrary. The market cap is what tells you the size.

Large, mid, and small cap

By market cap, stocks are sorted into three groups you will hear about constantly. In India the split is by ranking rather than by fixed rupee lines, which keeps it steady as prices change. The hundred largest companies by market cap are the large caps. The next hundred and fifty, ranks one hundred and one to two hundred and fifty, are the mid caps. Everything from there down is small cap.

In plain terms, large caps are the biggest, most established, and most widely followed companies. Mid caps are medium-sized and often still growing. Small caps are the smallest, whether young, niche, or simply little known.

Size and risk go together

The group a stock sits in tells you a lot about its character.

Large caps tend to be stable, heavily traded, and closely watched, so they are more liquid and usually less volatile, at the cost of slower growth. They are the steadier end of the market.

Mid caps have more room to grow than the giants, but they swing more and are less proven.

Small caps carry the highest growth potential and the highest risk. They are often thinly traded, with the wide spreads the quote chapter warned about, they are more volatile, and they are more prone both to business failure and to manipulation. A small cap can multiply, and it can also fall close to nothing and stay there.

The pattern is the risk-and-return idea in another form: as you move from large down to small, the potential reward rises, and so do the risk and the volatility.

What to carry forward

Market capitalisation is the market's price for the entire company, found by multiplying the share price by the number of shares, and it, not the price of a single share, is the true measure of size. That size sorts companies into large, mid, and small cap, and the group a stock belongs to signals its character: larger companies steadier and more liquid, smaller ones more volatile and riskier but with more room to grow. A high share price never means a big or safe company.

There is one more thing a company can do that changes your holding directly, sometimes overnight and without any trade on your part. The next chapter covers these corporate actions: dividends, splits, bonus issues, and buybacks.