Mid cap and small cap are two of the most common categories of stocks, the other being large cap. The word ‘cap’ associated with stocks represent their market capitalisation and in this article, we will compare mid cap vis-à-vis small cap stocks on various parameters that will help you know their various aspects and make an informed choice.

  1. Market capitalisation
  2. To simply put, market capitalisation refers to the aggregate valuation of a firm based on its current share price multiplied with the number of outstanding shares. Outstanding shares refer to the shares that can be bought and sold in public markets.

    Market capitalisation = Share price x Number of outstanding shares

    So, for example, if a company has 500 outstanding shares with a share price of Rs. 100, it’s market capitalisation is Rs. 50,000. In India, mid cap stocks belong to firms whose market capitalisation is between Rs. 5,000 to Rs. 20,000 crores. On the other hand, small cap stocks belong to companies with a market capitalisation less than Rs. 5,000 crores.

  3. Risk and return
  4. As an investor, it’s essential for you to have a clear understanding of the risk and return equation while investing in stocks. As compared to small caps, mid cap stocks are less risky. At the same time, their returns are potentially lower than small caps.
    On the other hand, small caps are riskier than mid cap stocks since the latter has a more aggressive investment style. However, their chances of generating returns are greater compared to mid caps.

  5. Available information in public domain
  6. Information about mid cap firms is easily available in the public domain. This is because since these firms are on the growth trajectory, any development from their side is widely covered in the media. Thus, it becomes easy for you, the investor, to know about the company’s credentials, performance, leadership, etc.

    However, small caps are generally start-ups, which have just commenced business. Therefore, not much information is available about these firms. This is what contributes to their risk factor. Hence, it’s advisable to conduct in-depth research about the parent firm, as much as possible, prior to investing in a small cap stock.
To sum up

Investing in mid cap and small caps not only offers diversification, but also gives you a chance to earn higher returns on your investment. Having said that, it’s essential to adopt due diligence and research thoroughly about the parent company. At the same time, it’s important to analyse returns over the long term and choose a stock that has performed consistently across market cycles.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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