What is Market Capitalisation? An Overview
7 November, 2024
Synopsis
Market capitalisation is a financial metric that calculates the total market value of a company.
Market capitalisation categorises the companies into small-cap, mid-cap and large-cap.
In India, the free-float market cap method is used to construct major indices like Nifty 50 and BSE Sensex.
Market capitalisation is a metric that investors use to evaluate a company's size and performance in the market. As an investor, you ought to understand market capitalisation as it provides insight into a company's standing in the market. It can also help in making informed investment decisions. Let us explore what is market capitalization is to gain a better understanding.
What is Market Capitalisation in Stock Market?
Market capitalisation meaning states that it is a financial metric used to measure the total value of a company's outstanding shares of stock. It is determined by multiplying the current share price by the total outstanding shares. Market cap helps understand the company’s market position and assess its financial health relative to industry peers. Market cap categories companies into different sizes which includes small-cap, mid-cap and large-cap. These classifications allow investors to assess a company's relative size, stability and growth potential, which are crucial for preparing investment strategies.
How is Market Capitalisation Used
Now that you know what does market cap mean, it is crucial to know how it can be a necessary tool in various aspects of investment and financial analysis. Here’s how it is used:
Investment Strategy: It can help you to align your portfolios with risk tolerance and investment goals. By assessing companies as per their market cap, you can strategically diversify your portfolio and balance high-risk, high-reward opportunities against more stable investments.
Company Classification: Companies in India are categorised based on their market cap:
- Large-Cap: These are well-established companies with high market capitalisations, such as those listed on the Nifty 50 or BSE Sensex. Their market capitalisation can range from ₹7,000 crore to ₹20,000 crore. They may be considered more stable.
- Mid-Cap: These companies have moderate market capitalisations, ranging from ₹5,000 crore up to ₹7,000 crore They often offer a balance between risk and return, with potential for growth but also greater volatility.
- Small-Cap: These companies have the smallest market caps and are seen as high-risk, high-reward investments. Their market cap remains up to ₹500 crore. They may offer significant growth opportunities but can be more volatile.
Market Trends: Changes in market capitalisation can signal shifts in market trends or company performance. A rising market cap might indicate growing investor confidence or strong business performance. On the other hand, a declining market cap could suggest financial difficulties or reduced market interest.
Index Inclusion: Market cap plays a role in determining a company’s inclusion in major stock market indices like the Nifty 50 or BSE Sensex. Companies with significant market caps are more likely to be included in these indices, which influences their investment appeal.
Market Capitalisation Method Used in India
After learning what is market cap in stocks, it is time to learn how it is calculated. In India, major stock market indices like the Nifty 50 and the BSE Sensex use the free-float market capitalisation method. This method calculates a company's market value based only on the shares that are actively available for trading. It excludes shares held by governments, major stakeholders and long-term investors. Using free-float market capitalisation gives investors a clearer picture of market trends and movements. This allows them to make more informed investment decisions.
Here is the general formula used for Market Capitalisation calculation:
Market Capitalisation = Current Share Price × Total Number of Outstanding Shares
For free-float market capitalisation, the formula adjusts to:
Free-Float Market Capitalisation = Current Share Price × (Outstanding shares - Restricted Shares)
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Market capitalisation provides valuable insights into a company's financial health and helps investors make informed decisions. To effectively manage and track your investments based on market cap and other financial metrics, consider using an HDFC Bank Demat Account via HDFC Sky. With HDFC Bank, you gain access to a range of investment options and benefits, including seamless fund transfers and easy tracking of your securities. By leveraging these tools, you can efficiently manage your portfolio and make strategic investment choices to optimise your financial growth.
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*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
