INTRODUCTION TO MARKET CAPITALISATION

1. MARKET CAPITALISATION
Dr H N Shivaprasad

2. Market Capitalisation
• Market capitalisation, often referred to as market cap, is a
key metric that quantifies the total value of a company’s
outstanding shares of stock.
• It is calculated by multiplying the current market price per
share by the total number of outstanding shares.
• Market capitalisation provides investors with insights into a
company’s size, indicating its relative standing in the
financial markets.
• Companies are generally categorised as large-cap, mid-cap,
or small-cap based on their market capitalisation.
• This metric is fundamental for investors assessing the scale
and potential risks and rewards associated with investing in
a particular stock or company.

3. Free Float Market Capitalisation
• While calculating the total market capitalisation of a company, all the shares,
including the ones publicly traded as well as ones held by promoters, government,
or other private parties, are multiplied by the stock price.
• But in the free float market capitalisation, shares held by private parties like
promoters, trusts (only when they are aligned with promoters, like family
endowment trusts or employee welfare trusts), or the government (in the case of
PSU) are excluded.
• Only those shares that are held and traded by the public are considered, which is
multiplied by the share price to arrive at a free float market capitalisation of a
company.
• Example
• Consider company XYZ with 60,000 publicly traded shares, while 40,000 are held
by promoters and family members.
– With a market price of ₹50 per stock, the total market capitalisation amounts to ₹50 lakh.
– However, the free float market capitalisation, accounting only for publicly traded shares, is ₹30
lakh.
– This distinction becomes more evident in companies with substantial promoter holdings

4. Impact of Free Float Market
Capitalisation on Investments
• Free float market capitalisation plays a crucial role in
shaping investment strategies by offering a more
accurate representation of a company’s market value
compared to total market capitalisation.
• It serves as a key indicator of true liquidity, considering
only publicly traded shares and providing valuable
insights into the stock’s actual tradability.
• This distinction becomes pivotal when a significant
portion of shares is privately held, impacting the
perceived liquidity and investment attractiveness.

5. Relation Between Free Float Market
and Volatility
• The volatility in the stock prices is inversely related to the
size of the free float.
– Higher float implies that there is an abundant supply of stocks
and traders are less likely to manipulate the prices.
– However, a lower float size implies that the controlling
shareholders have a greater influence on the stock prices.
– This is why investors have begun to take note of the free float of
the company before making an investment decision.
• Note: Every listed company shall maintain a public
shareholding of at least 25%. If the public shareholding in a
listed company falls below 25% at any time, such company
shall bring the public shareholding to 25% within a
maximum period of 12 months from the date of such fall.

6. Advantages of Free Float Market
Capitalisation
• More Practical
– The free float system only considers the number of
shares that are currently available in the market for
trading. Thus, this process is a more useful metric
when it comes to judging the true picture of a
company.
• No Distortion of Valuation
– With the free float market cap methodology, broad-
based indexing is possible, thus minimising the
concentration of such companies with large market
cap values and low free floats.

7. Conclusion
• Free float market capitalisation is a fundamental
concept in the financial landscape, offering a precise
measure of a company’s market value by considering
only publicly traded shares. This metric plays a crucial
role in investment decision-making, providing a more
accurate representation of liquidity and influencing
strategies. As investors navigate the complexities of
financial markets, understanding the nuances of free
float market capitalisation becomes paramount for
informed and strategic decision-making, shaping the
dynamics of portfolios and investment outcomes.

8. Large-cap Companies
• The SEBI has developed criteria for classifying companies.
The top 100 companies listed in the stock market based on
market capitalization are classified as large-cap companies.
– The mutual funds that hold the companies from the large-cap
are called ‘Large-cap funds’.
• Large-cap companies usually have good track records. The
market value (market cap) of these companies is
significantly high.
– These are also called ‘blue-chip stocks’.
• The market cap for these companies is around Rs.20000
crores and more, and they have a strong market presence.

9. Mid-cap Companies
• SEBI established a rule in the year 2017, according to which
companies that are ranked from 101 to 250 in terms of
market capitalization are known as mid-cap companies.
• The market cap for these companies will be around
Rs.5000 to Rs.20000 crores.
– Mutual funds that hold stocks from the mid-cap are called ‘Mid-
cap funds’.
• Mid-cap companies also have a good track record, but the
difference is noticeable compared to large-cap companies.
– Mid-cap funds are involved with more risk than large-cap funds.
– Mid-cap companies may or may not be included in broad
market indexes due to their limited market presence.

10. Small-cap Companies
• The companies ranked from the 251st position
onwards in terms of market capitalization are known as
small-cap companies.
• The market cap for these companies is below Rs.5000
crores.
– The mutual funds that hold stocks from the small-cap are
called ‘Small-cap funds’.
• Small-cap companies don’t have a long track record.
– For example, a start-up company or a company that is
under development can fall under the small-cap sector.
– These companies are mostly not included in the broad
market indices because of their negligible market
presence.

11. Differences Between Large, Mid and
Small-Cap Funds
• Here is the difference between small cap mid cap
and large cap based on various factors-
• RISK PROFILELarge-cap fundsLarge-cap funds
have a lesser risk profile compared to the others.
In large-cap funds, they invest in stocks that are in
the top 100 companies. For example, Nifty 50
stocks.Mid-cap fundsMid-caps are slightly riskier
than large-cap stocks and less risky than small-
cap stocks.Small-cap fundsSmall-cap stocks are
riskier than the other two. Despite the risk, these
stocks have great growth potential.

12. Aspect Large Cap
companies
Large Cap
companies
Large Cap
companies
Company Type
and Stature
Well-established
and stable
Compact,
growth potential
Smaller,
significant
growth
Market
Capitalization
₹ 20,000 crore
or more
₹ 5,000 crore to
₹ 20,000 crore
rupees
Less than
₹ 5,000 crore
Volatility Low volatility
Moderate
volatility
High volatility
Growth Potential
Lower growth
potential
Moderate growth
potential
Higher growth
potential
Liquidity High liquidity Lower liquidity Least liquidity