Large Cap vs Mid Cap vs Small Cap Stocks: What’s the Difference?

If you are an investor or if you are beginning your investment journey, then you must have heard about market capitalization, haven’t you? When you try to find a stock, it often shows under either one of these three: large cap, mid cap small cap, isn’t it? So, what exactly are these largecap, midcap, and smallcap all about? Why are they important for your investment strategy? Why do you need to allocate funds strategically across all these market capitalization segments? There are many similar questions you might have had when trying to invest, haven’t you? So, let’s understand what these categories are all about, how they are different from each other, and why they are crucial for investors. 

What is Market Capitalization?

Market Capitalization can be defined as the total value of a company’s outstanding shares. So, for instance, suppose a company has 10000 outstanding shares, and the current market price of each share is ₹1000. So, the total value of the company, which is the market capitalization, will be – 

Market Capitalization = ₹ (10000*1000)

= ₹10000000

Market cap helps in understanding the scale of the business that a company has. It helps investors to diversify their portfolio across the market cap segments to mitigate risks and optimize returns. 

According to SEBI, all the listed stocks on the Indian Stock Exchanges are categorized as per Market capitalization. This is done by arranging the companies according to market capitalization in descending order.  

• Largecap: Companies having market capitalization within the top hundred.
• Midcap: Companies with a market cap ranking from 101^st position to 250^th position. 
• Smallcap: All companies with market capitalization ranked 251^st onward

Now, you have the basic understanding of what market capitalization is and how it is determined. Let’s explore each of these market capitalization-based categories and their features. 

Large Cap Stocks

Amongst the large-cap, mid-cap, and small cap stocks, Largecap stocks are the stocks of the bluechip companies that are the biggest by market capitalization, ranking within the top 100 as per market cap. These are the well-established companies with years of presence in the market and a major market share. Here are the common features of these stocks – 

Features 

• These are leading companies or businesses in their industry with years of experience 
• They hold massive market shares within the industry they operate in 
• These companies have significant brand value
• Usually, these companies have stable revenues and earnings
• They often pay dividends to the stakeholders
• Due to their large-scale operations, they often enjoy the economy of large-scale production 
• These stocks are less volatile compared to the midcap and smallcap stocks 
• Largecap stocks have limited room for growth as they are already too huge to make robust expansions possible
• Since there is less room for growth, the returns generated by these stocks are also usually lower than the other market cap categories’ stocks. 
• Often these stocks are dividend dependent, as there is not much return from price rise
• These stocks are often dominated by institutional investors

Mid Cap Stocks

The next is midcap stocks, which are established companies as well, and these are usually creating brand value for themselves. The 101^st to 250^th stocks, as per market capitalization, are considered to be the midcap stocks. Here are the salient features of this category of stocks – 

Features 

• These are well-established companies, but yet to be as big as a largecap company
• Room for strong growth and an increase in market share 
• These stocks offer a fair liquidity factor, however, not as high as the largecap stocks, but also not as low as the small-cap stocks
• These stocks have the potential to become largecap stocks, given they continue to perform well and grow their businesses
• With higher growth prospects comes higher potential for returns for the stakeholders as well
• Some of the midcap stocks offer dividends, while others don’t. Usually, these are not dividend-oriented stocks
• With higher return potentials comes higher risk factor, as well as these stocks are quite volatile, unlike the largecap stocks. 

Small Cap Stocks 

The small-cap stocks form the third category, and these stocks include all listed stocks on the stock exchanges that rank from 251^st onward as per market capitalization. These are highly volatile stocks, however, with massive gain potential. Let’s see its salient features.  

Features 

• These are mostly young companies that are in their initial growth stage
• These are more or less regional businesses that are yet to go national or international
• Smallcap stocks have massive room for growth and expansion
• There is a higher potential for massive returns
• The volatility is also very high for these stocks, as they are new, not much traded compared to largecap and midcap 
• The risk factor is super high for the smallcap stocks
• These are not very liquid compared to largecap and smallcaps
• They have higher price fluctuations
• Most of the smallcap companies are focused on a single business
• These stocks are often prone to buyouts and mergers
• These stocks are less covered by analysts and brokerage houses, and also less information is available about these stocks, making it difficult for investors to analyze them. 

Large Cap vs Mid Cap vs Small Cap

Here are key differences between small-cap, mid cap and large cap stocks – 

Basis	Large Cap Stocks	Mid Cap Stocks	Small Cap Stocks
Type of Company	Bluechip Companies, well-established	Established companies	Emerging companies
Market Capitalization	₹20,000 crore or more	₹5,000 crore to ₹20,000 crore	Less than ₹5,000 crore
Ranking As per Market Cap	1st – 100th	101st – 250th	201st onwards
Volatility	Usually, low	Moderate to high	High to very high
Risk	Lower risk	Moderately risky	Highly risky
Returns on Investments (ROI)	Lower but stable	Higher Return potential	Very high return potential
Investment Horizon	3-5 years	5-7 years	7 years and more
Suitability	Risk-averse investors	Investors with Moderate risk tolerance	With a higher risk appetite and risk tolerance
Liquidity	High	Moderate	Lowest

How to diversify your portfolio across large cap, mid cap, and small cap Stocks?

Diversification is the key of successful investments. As they say, don’t put all your eggs in one basket, so it is with investments. The simplest yet effective way of diversifying your investments is across large cap, mid cap, small cap stocks. 

Here are some of the general guidelines for doing so, according to the type of investor you are – 

• If you are a risk-averse or conservative investor, then for you it will be better to put 70%-80% of your funds into largecap stocks. The remaining you can divide between midcap and smallcap stocks, or can invest in only midcap, leaving behind smallcap if you are highly conservative. 
• Now, if you have a moderate appetite for risk, you can balance between these three large caps, mid cap, and small cap categories of stock. You can invest around 50% in the largecap to hold your grounds during rough market days, while another 50% you can segregate between midcap and smallcap, which may help you earn higher returns as well. 
• Finally, if you are an aggressive investor with higher risk appetite, you can keep 30%-40% of your funds for largecap, invest around 40%-50% in the midcap, and 20%-30% in smallcap. 

Having said that, these are all general strategies. When you are investing, you must align your investment strategy and the proportion of these stocks in your portfolio according to your investment goals and your investor profile. 

Wrapping UP 

So, by now, you must have gotten an idea of the differences between small cap mid cap, and large cap. You must have also understood what small cap, mid cap, and large cap in India is all about. Now, when you are investing, try to allocate your funds according to the market cap, aligning with your investment goals and profile.   

Large Cap Mid Cap Small Cap | FAQs

Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.