Beginners often ask: "Is a ₹5,000 stock more expensive than a ₹100 stock?" The answer is: **Not necessarily.** Looking at the stock price alone to determine a company's value is like looking at a person's height to determine how much money they have in the bank. Height and wealth are unrelated.

To measure the true "Size" and "Weight" of a company in the financial market, we use a metric called Market Capitalization (or Market Cap). It represents the total market value of a company’s outstanding shares of stock. It is the price the world is currently willing to pay to buy the entire company today.

SMALL
CAP
MID
CAP
LARGE
CAP
SCALING COMPANY VALUATION

1. The Formula: The Real Price Tag

Market capitalization is calculated by multiplying the current market price of one share by the total number of outstanding shares.

Market Cap = Current Share Price × Total Number of Shares

Example:
Company A: Share Price = ₹1,000 | Shares = 1 Crore. Market Cap = ₹1,000 Crores.
Company B: Share Price = ₹10 | Shares = 1,000 Crores. Market Cap = ₹10,000 Crores.
Even though Company A has a higher share price, Company B is **10 times larger** as a business.

2. Classification of Companies (By Size)

In the stock market, we categorize companies based on their market cap. Each category represents a different level of risk, stability, and growth potential.

Category Description Investor Expectation
Large Cap Top 100 companies (e.g., Reliance, TCS). Stability, safety, regular dividends.
Mid Cap Ranked 101 to 250 in size. Faster growth than large caps, moderate risk.
Small Cap Ranked 251 and below. High growth potential, very high risk.
Penny Stocks Very low market cap (Micro-caps). Extreme risk; prone to manipulation.

3. The Risk-Reward Hierarchy

There is a fundamental law in investing: **Size and Stability are friends; Size and explosive Growth are often enemies.** It is much easier for a small startup worth ₹100 Crores to grow 10x to ₹1,000 Crores. It is nearly impossible for a giant like Apple (worth $3 Trillion) to grow 10x in a short period.

LARGE CAP (Safety)
MID CAP (Balanced)
SMALL CAP (High Growth / High Risk)

The Market Capitalization Pyramid

A. Large-Cap Stocks (The Blue Chips)

These are the "Elephants" of the market. They are established leaders in their industries with proven track records.
Pros: They usually survive recessions, pay consistent dividends, and have low volatility.
Cons: They rarely provide "Multibagger" returns (500% or 1000% gains) because they are already so large.

B. Mid-Cap Stocks (The Sweet Spot)

These are the "Gazelles." They are successful companies that are still in their expansion phase. Many mid-caps are the "Large Caps of tomorrow."
Pros: They offer a balance of growth and stability.
Cons: They are more volatile than large caps and can fall sharply during market corrections.

C. Small-Cap Stocks (The Rabbits)

These are young companies or companies serving niche markets.
Pros: This is where the 100x gains are found. If you find a small cap that turns into a large cap, you become wealthy.
Cons: High failure rate. Many small caps go bankrupt or stay small forever. They are very sensitive to economic downturns.

4. Why Market Cap Matters to You

As an investor, market cap helps you build a Diversified Portfolio. You should never put all your money into one category.

  • Aggressive Investors: Might put 50% in Small/Mid caps and 50% in Large caps.
  • Conservative Investors: Might put 80% in Large caps and 20% in Mid caps.
The Liquidity Factor: Large-cap stocks have high liquidity—you can sell ₹10 Crores worth of Reliance shares in seconds. Small-cap stocks often have low liquidity—if you try to sell a large amount, the price might crash because there are no buyers. Always check the daily volume!

5. Market Cap vs. Enterprise Value

While Market Cap tells you the "Equity Value," it doesn't tell you the whole story. If a company has a Market Cap of ₹1,000 Crores but also has ₹500 Crores in Debt, the total "cost" to buy that business is actually ₹1,500 Crores. Professional analysts use **Enterprise Value (EV)** to include debt and cash in the valuation.

Summary of Module 07

  • Market Cap is the total value of a company (Price × Shares).
  • Large Caps provide safety; Small Caps provide growth potential.
  • SEBI reclassifies the ranks of companies every six months.
  • Stock price alone is not an indicator of a company's size or value.
  • A healthy portfolio contains a mix of different market cap categories.

Now that we know how to measure a company's size, we need to understand how these companies are grouped together based on what they actually do. How does a bank differ from a software company? We explore this in the next module: Sectors & Industries.