To amplify returns from stocks, you need to develop an investment strategy. While shortlisting stocks, you may often pick stocks from the index universe, for instance, the Nifty 500. Among multiple factors to choose from, one can be market capitalisation. It helps with determining the size or the growth potential of the company.
This article covers the meaning of market capitalisation, how to calculate market capitalization, the importance of market capitalisation, market cap vs free-float market cap, the importance of market cap in an investment strategy, factors affecting market cap and the top 10 companies by market cap.
What Is Market Capitalization?
Market capitalisation, also known as market cap, refers to the market value of a public company’s outstanding shares.
How To Calculate Market Capitalization?
Market capitalisation can be calculated using the company’s outstanding shares and stock price. Here is the formula to calculate the market capitalisation of any company.
Market capitalisation = Total number of outstanding shares * Current stock price
Total outstanding shares mean the aggregate number of shares held by all company shareholders at a particular time.
Here is an example of the use of the market capitalisation formula.
Suppose XYZ Limited has 1,00,000 shares outstanding, and the current stock price is ₹200. Then, its market capitalisation can be calculated as below.
Market capitalisation = 1,00,000*₹200 = ₹2,00,00,000.
Importance Of Market Capitalization
Useful to evaluate a stock
Market capitalisation may help you correctly estimate the market value of stocks. Various financial ratios that may help you fundamentally evaluate a stock, such as price-to-earnings ratio, price-to-book value, price-to-free cash flow, etc., are calculated considering a company’s market capitalisation.
Helps to understand the company size
You may be unable to accurately predict the company’s size from the stock price, and here market capitalisation may help. Higher market capitalisation usually suggests big companies and vice versa.
As a potential investor, you may use market capitalisation to compare the company’s size and market value with other companies. You may also compare the risk associated with the stocks based on market capitalisation.
The base for stocks inclusion in benchmark indexes
If you ever wondered how the Nifty 50 or Sensex stocks are determined, they are included based on free-float market capitalisation. Their inclusion or exclusion and weight in the market indices also depend on market capitalisation.
Market Cap Vs Free-Float Market Cap
The free-float market cap method considers outstanding shares, excluding privately-owned shares such as shares held by government bodies, trusts, promoters, etc. While market capitalisation considers total outstanding shares, free-float market capitalisation only considers the shares available to the public for trading in the market.
For instance, ABC Limited has 5,00,000 shares outstanding, from which promoters privately hold 1,00,000 shares, and the current stock price is ₹100. Here,
Market capitalisation = 5,00,00*₹100 = ₹5,00,00,000.
Free-float market capitalisation = 4,00,000*₹100 = ₹4,00,00,000.
Top Indian Companies By Market Cap
Here is the list of the top 10 Indian companies by market cap as of September 08, 2022.
| Company Name |
Market capitalisation as of September 08, 2022 (₹ in crore) |
| Reliance Industries Limited | 17,46,484.49 |
| Tata Consultancy Services Limited | 11,58,108.05 |
| HDFC Bank Limited | 8,28,065.65 |
| ICICI Bank Limited | 6,25,316.59 |
| Infosys Limited | 6,17,419.50 |
| Hindustan Unilever Limited | 6,03,927.19 |
| State Bank of India | 4,80,411.85 |
| Housing Development Finance Corporation Limited | 4,41,665.89 |
| Adani Transmission Limited | 4,37,473.92 |
| Bajaj Finance Limited | 4,36,926.17 |
Top Indian Companies By Free-Float Market Cap
Here is the list of top 10 companies by free-float market cap.
| Company Name |
Free-float market cap as of September 07, 2022 (₹ in crore) |
| Reliance Industries Limited | 8,90,757.26 |
| HDFC Bank Limited | 6,50,248.13 |
| ICICI Bank Limited | 6,09,420.43 |
| Infosys | 5,33,569.36 |
| Housing Development Finance Corporation | 4,39,826.90 |
| Tata Consultancy Services Limited | 3,26,214.90 |
| ITC | 2,85,321.58 |
| Kotak Mahindra | 2,80,323.61 |
| Larsen & Toubro Limited | 2,36,621.68 |
| Hindustan Unilever Limited | 2,28,978.95 |
Market Cap And Investment Strategy
Market capitalisation is one of the metrics used by numerous investors to create their investment strategies. Based on market capitalisation, the stocks are categorised into various types, commonly, large-cap, mid-cap, and small-cap stocks. You may use these types to diversify your investments.
Large-cap stocks
Large-cap stocks are the stocks of the top 100 companies in terms of market capitalisation, and these are usually the stocks of well-established companies with long business histories. Investing in large-cap stocks may offer stability to your portfolio. However, they may be high-priced stocks with a lower potential for capital appreciation.
Mid-cap stocks
Mid-cap stocks are the stocks of companies with rankings of 101 to 250 in terms of market capitalisation and are considered to be in their growing stage. Investing in mid-cap stocks may be riskier than large-cap stocks, but they may have a better potential for capital appreciation.
Small-cap stocks
Small-cap stocks are the stocks of all companies which are ranked below 250 in terms of market capitalisation. These companies’ stocks may be low-priced and have a higher potential for capital appreciation. Though, investing in those stocks may be extremely risky, as these companies might not have proved their potential yet.
Factors Impacting Market Capitalisation
As mentioned above, the number of outstanding shares and stock prices determine market capitalisation. Therefore, factors affecting these two variables affect market capitalisation.
Factors affecting the number of outstanding shares
Multiple corporate actions such as buybacks, bonus issues, rights issues, etc., change the number of outstanding shares of a company.
Factors affecting the stock prices
The key determinants of stock prices are demand and supply. Numerous factors affect demand and supply and consequently the stock prices. Some of them are:
- Macroeconomic factors like inflation, interest rates, GDP, etc.
- Industry-specific factors such as industry growth rate, industry-related government initiatives, etc.
- Company-specific factors such as corporate actions, scams, reputation, competitive advantage, earnings growth rate, etc.
- Market perception about some stocks
Final Thoughts
Market capitalisation is an indicator of the market value of a stock, and some investors prefer diversifying their investments based on it. You may decide the portion of large-cap, mid-cap and small-cap stocks in your investment portfolio according to your risk and return preference.
With the help of WealthDesk, you can invest in WealthBaskets, which are combinations of equities and ETFs and reflect an idea, theme, or strategy. WealthBaskets are created by SEBI registered professionals.
FAQs
Whether a high or low market cap is better is subjective. You may find large-cap stocks better if you look for less volatile ones. On the other hand, if you look for stocks with higher potential for price growth and are ready to take more risks, you may find small-cap stocks better.
Reliance Industries Limited had the highest market cap, of ₹17,82,37,576 lakh, as of March 31, 2022. However, it keeps changing with the changes in the stock price.
The company’s market cap may be more critical than its stock price because it tells you about the value of the company’s outstanding shares, which stock price may be unable to define accurately. Additionally, it helps you compare the company’s size with other companies.
The rise in the market price of the stock and corporate actions like bonus issues or rights issues may lead the market cap to increase.
