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Many people have questions when they first start investing in the stock market. Even seasoned investors can be overwhelmed by such questions. Stock market investors need to have enough knowledge to decide which stocks are best for their investment strategy. You could lose your money if you don't know which stocks to invest in. There is inherent risk in the share market, and each stock has a different risk.
Stocks on the stock market are classified according to their market capitalisation (or "market cap"), which can be either large-cap or mid-cap. Investors can make informed investments by knowing how their stocks are categorised. This article will explain the differences between small-cap, medium-cap and large-cap stocks.
Let's first discuss the meaning and categories of market capitalisation.
Market capitalization refers to the number of shares outstanding in a company's market multiplied with the current price for each share. It's a measure of a company's estimated value.
Let's simplify things by using an example to illustrate the concept of market capitalisation. Let's say ABC Company has 20,000 shares outstanding on the market. Each share is priced at Rs 20, This will calculate the market capitalization of ABC Company as follows:
Outstanding shares at x per share
20,000 x 20 = Rs 4,00,000.
ABC Company's market capitalization is Rs 4,00,000.
There are three main categories of companies that trade on stock exchanges: large-cap, small-cap and mid-cap. Let's learn more about each one.
Large-cap companies refer to businesses with a large market share and a long history. Market caps exceeding Rs 20,000 crore are considered large-cap companies. These companies are the leaders in their industry and they are extremely stable. These companies are resilient in times of recession and other adverse events. They will also have a good reputation and will have been in business for many decades. Large-cap stocks can be a great option if you are looking to take less risk and invest in the stocks of a company. These stocks are more volatile than small-cap or mid-cap stocks. They are less risky because they have lower volatility.
Infosys, Reliance Industries and Infosys all have large-cap market companies that are listed on Indian stock markets. They are a good choice for long-term investors because of their strong market presence and consistently good performance.
Companies with a market capital of more than Rs 5,000 crore, but less Rs 20,000 crore, are called mid-cap companies. These companies are more risky than large-cap companies. Mid-caps are more volatile. Mid-caps can also turn into large-cap businesses in the long-term. These companies have a greater growth potential than large-cap stocks and therefore attract more investors to invest in them.
Some mid-cap Indian companies are listed on stock exchanges like Castrol India and Metropolis Healthcare.
A small-cap company is one with a market capitalisation less than Rs 5,000 crore. These companies are smaller and have significant growth potential. They are also risky because they have a low chance of being successful over time. These stocks are volatile because of this. Although small-cap stocks have a history of poor performance, they are often outperformers when the economy is recovering from a recession.
A few examples of small-cap markets companies that are listed on Indian stock exchanges include DB Corp, DB Corp and KNR Constructions.
Indian mutual funds are an integral part the Indian financial system. Based on the amount of investment they make, mutual fund schemes can be divided into large-cap, small-cap or mid-cap funds. A large-cap mutual funds scheme will invest primarily in large-cap stock. Mid-cap and smaller-cap schemes will invest in small-cap stocks.
How can you select the best mutual fund scheme to fit your investment portfolio? Your tolerance for risk will play a part in your decision-making. Large-cap funds are generally less risky, while small-cap funds can have higher growth potential. Before you look into these mutual fund schemes, make sure to understand their risks.
Large-cap funds invest mostly in blue-chip businesses. These funds have certain advantages. They invest in large, stable companies that can weather volatility in the market. These stocks are highly liquid because there is high demand. Although they may have a low growth potential, there is still a risk. These funds typically provide consistent, modest returns over the long-term.
These mutual funds invest mainly on mid-cap stocks. This gives mutual funds a higher potential for growth and a higher chance of receiving higher mutual fund returns. Mid-cap companies are more prone to market volatility than large-caps, which means that there is a greater risk of loss. Fund managers aim to provide funds to mid-cap businesses that are likely to be successful in the future.
These mutual funds invest primarily in small-cap companies. These funds have a higher risk of losing money because small-cap businesses are less established. For example, they may find it difficult to keep their businesses afloat in times of recession. However, small-caps have a higher chance of growing than large-caps or mid-caps when they do well. This possibility is what small-cap funds seek to exploit. Despite the risk, there are still higher returns.
Your investment portfolio can be influenced by market capitalization. The performance of small-, medium- and large-cap stocks changes as the share market moves through various phases. Mid- and small-cap stocks could rise when large-caps don't do well. Your overall returns could be steady if you have large-caps that are either small- or mid-caps falling. Stock and mutual fund investors should diversify their portfolios by investing in different market caps. This will allow you to have a portfolio that can withstand changing market conditions.
Before you invest, make sure you consider your financial goals, risk appetite, and investment time horizon. You should also remember that mutual funds and the share market require research and analysis. Open an account with Kotak Securities if you are unsure or need assistance. This will give you access to market analysis and research, as well as a variety of educational resources.
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