Often stocks are classified according to their market capitalisation which equals to the share price multiplied by the number of outstanding shares. Based on market capitalisation, stocks are classified as:
- Large-cap: Large-cap stocks are the shares of a company whose market capitalisation is more than Rs. 20,000 crores.
- Mid-cap: Mid-cap stocks are shares of a company with a market capitalisation in the range of Rs. 5,000 to Rs. 20,000 crores.
- Small-cap: Small-cap stocks are shares of a firm with a market-capitalisation of less than Rs. 5,000 crores.
How these stocks differ from each other?Each of these categories of stock exhibits unique characteristics, which make them stand apart from each other in the following areas:
- Track record of operations Large-cap companies, which issue large-cap stocks, have a proven track record of profitable business operations. They enjoy a high brand value and consumer confidence. Mid-cap and small-cap companies, on the other hand, are relatively new entrants in the market. Mid-cap companies may be a familiar name on regional levels, but these companies are in the process of building a national level brand name. Small-cap firms are pretty new into operations.
- Growth potential Having reached almost saturation levels of growth, there isn’t much scope for large-cap stocks. The returns are relatively stable in the long run compared to mid and small-caps. On the other hand, mid and small-cap stocks have higher growth potential than large-caps since they have the scope for further growth in the future.
- Payment of dividend With large-caps, there are high chances of shareholders receiving attractive dividends on a regular basis as these stocks are relatively stable. On the other hand, mid and small-caps prefer to reinvest their profits and therefore the chances of receiving dividends regularly is a difficult proposition.
- Financial information available A lot of information is easily available about the large-cap stocks since the companies issuing them are relatively well-known in the public domain. This is not the case with mid and small-caps as the firms issuing them are still on the path of growth.
- Ability to withstand fluctuations Large-caps with their robust fundamentals are able to better weather fluctuations or volatility in the market compared to mid and small-caps. In other words, large-caps are more resilient during market upheavals.
Investing in each of these categories of stocks has its own pros and cons. Each one of them serves a specific purpose and as an investor, you must choose the one that best aligns with your financial goals and most importantly risk appetite. Irrespective of the stock you choose to invest, you must stay invested for the long haul for reaping maximum benefit.
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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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