There are approximately 5461 companies listed on the Bombay Stock Exchange (BSE) of varying sizes, spread across sectors and industries. Usually, when we refer to the size of a company we allude to its market capitalisation. Market capitalisation is simply the total value of all the outstanding shares of a company. It is calculated by multiplying the prevailing market price of each share with the total no of outstanding shares of the company. Size or market capitalisation can be indicative of the company’s current and future growth potential, as well as, the investment risk associated with it. In terms of market capitalisation, companies are classified as large-cap, mid-cap, and small-cap.
According to recent changes in SEBI guidelines, the top 100 companies as per market capitalisation are classified as large cap companies. The 101st - 250th companies in terms of market capitalisation are categorised as mid cap companies and all the companies except these top 250 companies are categorised as small cap companies. Each market cap categorisation has its own benefits and shortcomings. It is important to be cognizant of this because investing in a company of a certain size brings with it unique opportunities and risks. The advantages and drawbacks of large-cap investments are different from those of small and mid-cap investments. Consequently, the value that each of these investments’ contribute to a portfolio is differentiated and unique.
Large caps are basically well established companies that have a strong market presence and are considered as leaders in their fields. They are considered to be stable companies with reliable earnings and growth patterns. Consequently, they are better positioned to weather downturns. However, as these businesses are large in size and have reached a maturity stage, they generally do not have a very high growth rate. Along the risk/return spectrum, large cap companies lie in the low risk and low return quadrant. Investors looking for moderate and stable returns can consider investing in large cap companies either directly or through large cap funds.
Mid-cap companies, on the other hand, are generally those that are up and coming, and hold great future potential. The key is that this potential is yet to be realised. Such companies are expected to witness high grow and an increase in profits, market share and productivity. They are usually in the middle of their growth stage, which lends them a higher risk but also increases their profit potential. If you wish to invest in companies with lower risk than small cap stocks but need higher returns than large cap stocks, you can consider investing in mid cap stocks. However, in order to truly reap the benefits of their growth, investors should choose to invest in these stocks or funds for at least 5 years.
At the farthest end of the risk or return spectrum lie small cap companies. These are usually emerging businesses that have a high growth potential. However, unlike the mid-caps they are yet to prove their potential. These companies are extremely volatile and usually have a beta greater than one. This means that they have the potential to generate very high returns in bull markets but are also susceptible to steep declines in bear markets. Investment in these companies is usually characterised with higher risk appetite and longer investment time horizon.
When looking at investment options, you must select investments that suit your risk appetite, return requirement and investment horizon. A financial advisor can help you align these judiciously.