What is the meaning of large cap, mid cap and small cap companies

Companies are categorized as large cap, mid cap and small cap, based on their relative market capitalizations. Market capitalization is simply the market value of the company, calculated by multiplying the share price of a company with the company’s total number of shares outstanding. Bombay Stock Exchange (BSE) categorizes companies into market cap segments based on the 80 – 15 – 5 rule. In the 80 – 15 – 5 rule, companies listed on BSE are arranged in descending order of market cap (highest to lowest) and starting from the top (company with highest market cap), the largest market companies which cover 80% of the total market cap of all the companies listed on the BSE are categorized as large cap companies. The next set of companies which cover 80 to 95% of the total market cap of all BSE listed companies are categorized as mid cap companies. The last set of companies, covering 95 to 100% of total market cap of all BSE listed companies, are small cap companies. You can understand that, if we go by the BSE market cap definitions, since share prices and market caps are dynamic, there are no fixed market cap segment limits.

If you think that, the BSE market segment definition is too complicated for the average investor, you can simply follow the US market cap limit definitions in dollar terms and translate them to our currency. If we translate US market cap definitions to Indian Rupees, companies with more than Rs 10,000 crores of market cap are large cap companies. Companies with market caps between Rs 500 to 10,000 crores are mid cap companies. Companies with market cap of less than Rs 500 crores are small cap companies.

You can find large cap companies in the BSE – Sensex or BSE – 100 are large cap companies, midcap companies in the BSE – Midcap Index and Small cap companies in the BSE – Small Cap index.

Large cap funds are mutual fund schemes that invest mostly in large cap companies. Midcap funds invest mostly in midcap companies, while small cap funds invest mostly in small cap companies. There are no standardized definitions of large cap, midcap and small cap funds. Different research and rating agencies, have their own definition. Usually mutual funds, which invest more than 75% of their corpus in large cap companies are categorized as large cap funds. Funds which invest more than 50% in midcap and small cap companies are midcap or small cap funds (in Advisorkhoj, we do not distinguish between midcap and small cap funds, because usually these funds invest in both midcap and small cap companies in varying proportions). Funds which invest 50 to 75% of their corpus in large cap companies and less than 25 to 50% of their corpus in small/midcap companies are usually categorized as diversified equity funds (also known as multicap or flexicap funds).

Bluechip companies are the largest of large cap companies. There is no standard definition of bluechip companies; usually they are the very well known leading companies in their industry sectors and have a strong track record of paying dividends regularly. Bluechip companies have a long history of strong financial performance and sought after by both domestic and foreign investors. Examples of some bluechip stocks are TCS, Reliance, ONGC, ITC, HDFC Bank etc. Mutual fund schemes that invest mostly in bluechip companies are named bluechip funds.

Hope this helps!