Market Capitalization helps determine the value of a company that is listed on the stock market. Market Capitalization is calculated by multiplying the total number of shares of the company by the current share price of the company.
Simply put, the formula for calculating the market capitalization of any company is as follows:
Market Capitalization = Current Share Price of the company * Number of Outstanding Shares
Where, the Number of outstanding shares = the Number of shares issued by the company to its investors.
For example, consider there’s a company namely PNQ Limited. The current share price of the company is Rs. 100 per share and the number of outstanding shares is 10,000 i.e. the number of shares issued by the company is 10,000. So we will now calculate the market capitalization of PNQ Limited. The formula for calculating the market capitalization is mentioned above. Therefore,
Market Capitalization of PNQ Limited = 100 * 10,000 = 10,00,000
In this way, the market capitalization is calculated for all the companies that are listed on the exchange.
Based on Market Capitalization, the companies are divided into three types namely Large-cap companies, Mid-cap companies, and Small-cap companies. So the companies that have a large market capitalization in the stock market are termed as large-cap, those with a medium-sized capitalization are termed as mid-cap and the ones with a small capitalization are termed as small-cap.
Whether the company belongs to a large-cap category or a medium-cap category or a small-cap category keeps on changing from time to time based on certain regulations set by the SEBI (Securities Exchange Board of India).
So the top 100 companies listed on the stock exchange based on market capitalization are classified as large-cap companies. The market cap of such companies is about 20,000 crores and more. The large-cap funds are less risky as compared to the other two.
The companies ranked from 101 to 250 based on market capitalization are termed as mid-cap companies based upon the rule established by SEBI in 2017. The market cap of such companies lies between 5,000 and 20,000 crores. These funds are a bit riskier than large-cap funds and less risky when compared to small-cap companies.
The companies ranked 251st position onwards based upon market capitalization are typically classified as small-cap companies. The market cap of such companies lies below 5,000 crores. These small-cap funds are riskier as compared to the rest of the two.
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