What is market capitalization?

Classroom

oi-Sunil

By Sunil Fernandes

Published: Wednesday, February 20, 2013, 8:53 [IST]

It's a term so often heard while investing in stocks that it's imperative for an investor to know what market capitalization is. Market Capitalization is the outstanding shares of a company multiplied by the current share price of a company.

Say a company has an equity capital of Rs 300 crores, and assume this comprises of 3 crore shares of Rs 10 face value. Then we can say that the outstanding shares of the company are 3 crore shares. Let's assume that the current share price of the company is Rs 100. Then we can say that the market capitalization of the company is Rs 300 crores.

Formula

Market Capitalization is: Current market price x outstanding shares

In India companies like ITC, Reliance, ONGC, HDFC, HDFC Bank etc., are the companies whose market capitalization is very high. Companies whose market capitalization are high are called large cap companies. All of the companies mentioned above are large cap companies. These companies have a large equity base or the current market price is high or both. These large capitalization stocks are largely preferred by institutional investors when they decide on investing.

There are also set of stocks that are called mid capitalization or small capitalization stocks. These have lower capitalization and are generally more volatile then large cap stocks, because a slight increase in volumes could see these stocks generating superior returns or higher losses.

Market capitalization will undergo a change if either the market price changes or the company declares a bonus, rights issue or if there is a merger or acquisition with another company.

Of course, a price variation will also lead to change in the market cap. In the Indian context, ITC recently replaced Reliance as the company with the highest market cap. However, this can change quickly and by the second.

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