- Date : 22/09/2021
- Read: 5 mins
Market capitalisation is one of the key criteria for stock selection. There are three categories of market capitalisation: large-cap, mid-cap, and small-cap. The risk profile of stocks differ based on their market capitalisation, so choose only those stocks that suit your risk-return appetite.
Market capitalisation is a good indicator of the size of a company. This is one of the main criteria to consider while choosing a stock. Market capitalisation is calculated by multiplying the number of outstanding shares by the current market price per share. This indicates the aggregate value of the company based on the prevalent market price.
Based on the number of shares afloat in the market (being traded), companies can be categorised as:
- Large-cap companies – Market capitalisation of Rs 28,500 crore or more
- Mid-cap companies – Market capitalisation of more than Rs 8500 crore but lower than Rs 28,500 crore
- Small-cap companies – Market capitalisation of less than Rs 8500 crore
Risk profile of stocks based on market capitalisation
The risk associated with a company is generally based on its market capitalisation (large, mid, or small). A large-cap company is considered to be relatively safe when compared to mid-cap and small-cap companies.
Large-cap companies are also called growth companies, as they would have established historical evidence of creating wealth for their shareholders.
Mid-cap companies are also called value stocks, they have the potential to become large-cap over the next decade. However, they carry a downside risk greater than that of large-cap stocks.
Small-cap companies may not have an established cash flow and the books may not exhibit enough strength to gain investor confidence. Small-caps are also often used for speculation, thereby the volatility is quite high.
Top 5 stocks based on market capitalisation
Here is a list of stocks with high market capitalisation. It is not possible to cover all the stocks that fall in this category, so we are listing the top 5 stocks.
1. Reliance Industries
RIL (Reliance Industries Limited) is part of the Nifty 50 and Sensex. It’s engaged in energy, natural resources, petrochemicals, etc. and has a market capitalisation of about Rs 14,79,123 crore. (This figure fluctuates daily based on the change in the close price of the particular trading day). The price per share is over Rs 2200. RIL has exhibited strength during tough times and remains one of the most profitable companies in the country. It offers a moderately stable return on equity (ROE) of around 8% p.a. The price/earnings for the company (indicative of the number of times the stock trades to its earnings per share) is at 31x. The dividend yield for the stock is 0.31%. The stock price CAGR (Compounded Annual Growth Rate) for 10 years stands at 19% per annum, so if you had invested in RIL 10 years ago, you would have received 19% returns every year.
2. Tata Consultancy Services (TCS)
TCS, with a market capitalisation of Rs 11,71,674 crore, ranks second after RIL. It operates in the IT services space. It is a subsidiary of the Tata Group of companies that has a long legacy in India. TCS alone employs over 5 lakh staff. It has made a pioneering effort to enhance the convenience and job satisfaction of employees. The company also provides a regular dividend to its shareholders. The dividend yield of this stock is at 1.02%. The ROE is at 39%, which indicates that the company has been growing at a very impressive pace. The stock trades at a price to earnings of 39x, which means that the price of the stock is 39 times the earnings per share. The stock price CAGR for 10 years is 22% p.a.
3. HDFC Bank
This company operates in the banking and financial services space and has a market cap of Rs 8,57,269 crore. The dividend yield on this stock is 0.42% and the ROE stands at 16.5%. The stock price CAGR for 10 years has been 21% p.a. HDFC Bank is a market leader in its space and strives to innovate to expand its outreach and enhance customer experience.
Like TCS, this is another Tier-1 IT services company that finds a place in Nifty 50 and the Sensex. It has a market cap of Rs 7,27,793 crore. The stock pays an impressive dividend; the yield is at 1.58% and the ROE stands at 27%. The 10-year stock price CAGR is at 19% p.a. Infosys proposes to leverage on the cloud platform to expand its business and continue to grow its top line (revenue) at a steady pace.
5. Hindustan Unilever (HUL)
One of the oldest British-Dutch companies in India, HUL was established in 1933 and spread its wings in the fast-moving consumer goods space (FMCG). The company has a market cap of Rs 6,29,208 crore. The dividend yield is 1.16% and the ROE is at 29%. The 10-year stock price CAGR is at 24% p.a. The company operates in a sector that is considered a safe haven during turbulent times.
We hope this article has helped you understand the concept of market capitalisation. For a beginner, it is always good to start off investing in large-cap companies.