Difference Between Small Cap, Mid Cap, and Large Cap

Small-cap, mid-cap, and large-cap stocks are categories based on a company's market capitalization. Small cap stocks have a market value below ₹5,000 crores, representing newer or emerging companies with high growth potential but higher risk. Mid-cap stocks fall between ₹5,000 crores and ₹20,000 crores, offering a mix of growth and stability. Large-cap stocks, valued above ₹20,000 crores, are well-established companies providing stability and consistent returns with lower risk. Understanding these categories helps investors diversify their portfolios effectively.

What Is Market Capitalization

Market capitalization, also known as "market cap," is calculated by multiplying the total number of outstanding shares issued by a company by the price of one share in the market. It is one of the critical measures of a company's size and its stability in the market. 

For example, if there are outstanding 1 million shares and the price of every share is ₹100, the company's market capitalization will be:

Market capitalization = Outstanding Shares×Price per Share 

= 1,000,000×100 =₹100,000,000

Based on market capitalization, companies are broadly classified into three types, small mid, and large-cap in India.

Table of Content

1. What Is Market Capitalization
2. Large Cap vs Mid Cap vs Small Cap: Comparison
3. What are Large, Mid, and Small Cap Stocks
4. Diversify Your Portfolio With Large Cap, Mid Cap, And Small Cap Stocks
5. Returns on Investments

Large Cap vs Mid Cap vs Small Cap: Comparison

The below table summarises the difference between the small-cap, mid-cap, and large-cap.

What are Large, Mid, and Small Cap Stocks

Stocks generally fall into three broad categories based on market capitalization, which is the total value of outstanding shares of a company. They are small mid and large cap cap stocks. Let's look at what is large cap mid cap and small cap.

Large Cap Stocks

Large Cap stocks are large capitalization companies, with market capitalization above ₹20,000 crores. These are strong established companies, even sometimes a household name; they have been in the market for decades and built themselves as a household name. They are market leaders in their sectors, big banks, multinational corporations, or well-recognized high-technology companies. 

• Market Capitalization: More than ₹20,000 crores.
• Examples: Established companies like major banks and multinational corporations.
• Characteristics: They are stable, providing reliable returns and constant dividends. They are less risky than mid and small-cap stocks and, therefore considered for conservative investors.

Mid-Cap Stocks

Mid-cap stocks are those whose market capitalization ranges between ₹5,000 crores to ₹20,000 crores. This also includes companies that are still in the growing stages with huge growth potential. These represent a middle ground between the stability of large caps and the huge growth prospects of small caps.

• Market capitalization: ₹5,000 crores to ₹20,000 crores.
• Examples: Companies in the healthcare, technology, and manufacturing sectors with huge growth potential.
• Characteristics: They give a mix of risk and return. They can be the next biggest large caps; however, they are more risky as compared to large caps.

Small Cap Stocks

Small-cap stocks are those whose market capitalization is less than ₹5,000 crores. These are relatively new companies or startups that are still getting established in the market. They offer great scope for growth, but with high growth, it is equally very risky.

• Market Capitalization:  Less than ₹5,000 crores.
• Examples: Generally new companies or startups.
• Characteristics: They have high growth potential but offer big risks. They can give large returns, but they are highly fluctuating in their prices.

Diversify Your Portfolio With Large Cap, Mid Cap, And Small Cap Stocks

Investing in all three categories of funds with large mid and small-cap allocations will allow you to create a very diverse portfolio. Here are key reasons why you should diversify across small mid and large-cap stocks.

• Risk management: Diversifying among all three types enables you to balance your portfolio's overall risk. Large caps give stability in poor market situations. Small caps can yield big returns during other booming phases.
• Growth opportunities: Small caps can generate high returns if they are successful. At the same time, they carry higher risks. That might attract investors who might be interested in that kind of risk for potential high growth.
• Stable income: Large caps generally pay dividends, which means stable income flows. That becomes advantageous when one wants a steady flow of income out of investments.
• Market exposure: Midcaps can fill the gap between stability and growth. They often have the potential for sizeable appreciation while being less volatile than small caps.

Returns on Investments

When investing in large-cap, mid-cap, and small-cap equities, it is important to note their returns: 

• Large-cap stocks: These principally provide stable but lower returns compared to smaller companies. Investors tend to go to large caps for stability and consistent performances in the long term.
• Mid-cap stocks: Expected returns are higher than large caps due to growth in them but carry moderate risk. Mid-cap stocks are considered suitable for those seeking growth, not with the extreme volatility of small-cap stocks.
• Small cap stocks: They will give the highest possible returns in case of success. However, they are the most volatile. One would have to be ready for the severe fluctuation of price and, therefore, do thorough research before investing.

Conclusion
Distinguishing between small, mid, and large-cap stocks is essential for making informed investment decisions. Each category offers unique risk and return profiles: large caps provide stability, mid caps offer a balance of growth and risk, and small caps present high growth potential but with greater volatility. Investors should align their portfolios with their risk tolerance and investment goals. By diversifying across these categories, they can achieve a well-balanced portfolio. To enhance your investment journey, consider exploring a share market investment app for better portfolio management.