For many new investors, confusion persists as to what exactly counts as a small-cap, mid-cap, or large-cap stock. Way back on October 6, 2017, the Securities and Exchange Board of India (Sebi) had cleared the air on this through a circular defining how stocks would be filtered into these categories based on their market capitalisation.
Before that, there was no fixed rule, and companies were broadly classified, but without a standard yardstick.
Market capitalisation, in simple words, is the total market value of a company’s shares. It is calculated by multiplying its outstanding shares with the current share price. For instance, a firm with 100 million shares trading at Rs 150 each has a market capitalisation of Rs 1,500 crore.
Large-, Mid-, Small-cap Definition
Sebi has laid down clear rules on what counts as a large-cap, mid-cap, or small-cap stock to bring uniformity across equity schemes.
Large-caps are companies ranked 1 to 100 by full market capitalisation, mid-caps are ranked 101 to 250, and small-caps are ranked 251 onwards. There are also micro-caps and nano-caps, terms often used by market participants, but not formally defined by any regulatory authority.
How Stocks Are Ranked
Sebi has entrusted the Association of Mutual Funds in India (Amfi) for preparing the ranked list of companies based on their market capitalisations. Amfi releases this list bi-annually.
If a stock is listed on more than one recognised stock exchange, Amfi will take the average of its full market capitalisation across those exchanges. If a stock is listed on only one recognised exchange, its market capitalisation on that exchange will be used.
The list is updated twice a year, in June and December, and published on Amfi’s website within five days. From the date the list is published, mutual funds get one month to rebalance their portfolios.
Why Knowing Market Cap Helps In Portfolio Diversification
Often, investors are advised to diversify their portfolio across large-cap, mid-cap, and small-cap stocks to manage risk better.
Large-cap stocks are relatively stable, as their stock prices do not fluctuate much, in comparison to mid-cap and small-cap stocks. Mid-cap stocks usually offer better returns than large-caps, but are also more volatile, though not as volatile as small-cap stocks. Small-cap stocks, on the other hand, can offer higher returns than both large-cap and mid-cap stocks, but also come with higher risk.
A good mix of all three is necessary for building a well-diversified portfolio.
