What is the significance of market capitalisation and how is it calculated?

Market cap refers to the total worth of a company's outstanding shares of stock, simply put how much will it cost to buy the entire company at the current share price.

For investors who are monitoring stocks and thinking about potential investments, market capitalisation can be a helpful tool. In acquisitions, the market cap is used to determine whether a takeover candidate offers a good value to the acquirer. Companies with lesser market capitalisation values are risky but they can payout generously.

Larger market capitalisation companies are more likely to retain your money, but they might not offer high returns.

Fundamentally, market capitalisation represents the public's assessment of a company's value. It might be a reliable indicator of a company's growth, but it's definitely not the best way to assess a company's value.

How is it calculated?

It is calculated by multiplying the current market value of each share of the company by the number of outstanding shares. Here, the outstanding shares refer to the shares held by the stockholders, company officials, and public investors.

So heres the formula, 'Current market share price X Outstanding shares'. Also, the current share price is the last traded price of the company on the stock exchange.

Of course, the public decides what it is based on a variety of factors, including the company's performance, the demand for its shares, its profitability, previous trends, projections of its future performance, and so on.

Why is market capitalisation important?

Since all other financial metrics must be viewed through this prism, market capitalisation is used as the starting point for analysis. By having a better understanding of the market capitalisations of the various companies, investors can choose the kinds of stocks they want to include in their portfolios based on their investing objectives.

Market capitalisation is important because it represents what the market is willing to pay for the shares, which enables investors to predict how the company's stock will perform going forward. The size of a company is also indicated by its market capitalisation.

How it fluctuates?

Market capitalisation fluctuates on a daily basis because as its directly linked to a company's stock price. When a stock price rises, so does its market capitalisation and vice versa. Stock prices can fluctuate for several reasons including the company's reliability and reputation, past performance and forecasts, demand for the company's products and so on.

Changes on the number of shares also have an impact on the market capitalisation. Companies may issue new shares to raise capital or to buy back shares assuming a fixed share price issuing shares increases market capitalisation while purchasing them decreases it. A stock split or dividend, however, typically has no impact on the market capitalisation.

Categories of Market cap

Companies are classified as large-cap, mid-cap, and small-cap based on their market capitalisation. This classification can assist investors, in selecting the best stocks for their investment objectives and risk tolerance.

Large cap - Companies with a market value of Rs 7,000 to 20,000 crores. These businesses have been in existence for a long time, and are key participants in well-established industries. These companies often reward investors with a sustained increase in share value and dividend payments over time.

Mid cap - Companies typically have a market valuation of Rs 500 to 7,000 crores. Mid cap firms are well established businesses that engage in an industry that is predicated to grow exponentially.

Mid cap firms are in a process of growing. They are riskier than large-cap companies but are appealing because of their potential for growth.

Small Cap - Companies with a market capitalisation of less than Rs 500 crores. These small businesses may be younger or they may serve niche markets on new industries because of the age the markets they serve and their size these companies are considered higher risk investments. Smaller organisations frequently offer more prospectus for growth than larger corporations.

By balancing the portfolio with a decent mix of all of these, risks can be decreased. A cautious investor might favour large cap stocks. If you want to take a chance, a small cap might be a better option. However, if you want to have a balanced portfolio with both appreciation and revenue, mid caps might be the way to go.