Market capitalisation

In simple terms

Market capitalisation, usually shortened to market cap, is the total value the stock market places on a company's shares. It is calculated by multiplying the current share price by the total number of shares the company has issued.

If you could buy every single share of a company at today's price, market cap is roughly what it would cost. It is the quickest way to answer "how big is this company, according to the market?"

A note on Indian numbers

Indian figures use lakhs and crores. Getting comfortable with them makes market caps much easier to read.

So a company with a market cap of ₹2 lakh crore is worth about ₹2 trillion.

Working it out

Why share price alone is misleading

Beginners often think a ₹20 share is "cheap" and a ₹4,000 share is "expensive". But the price of one share only tells you what one slice costs. It says nothing about how big each slice is or whether the whole company is fairly valued.

Companies can change their share price without changing anything about the business. A stock split might turn one ₹1,000 share into ten ₹100 shares. The company and your ownership are exactly the same; there are just more, smaller slices. Market cap is unaffected.

Large, mid and small cap

Investors and fund managers group companies by market cap.

• Large caps are the biggest listed companies. They usually have long track records, are widely followed by analysts and are highly liquid.
• Mid caps are medium-sized companies, often still growing quickly, with more risk than large caps.
• Small caps are the rest. They include promising young businesses and also many fragile ones, and their shares can be thinly traded and very volatile.

In India, the rules for mutual funds define these groups by ranking listed companies by market cap, and a regularly updated list is used across the industry. The exact cut-offs are set by SEBI and can change, so check the current definitions if you need them precisely.

Why it matters

Market cap puts every company on the same scale. It lets you compare businesses fairly, understand why a few large companies dominate indices such as the Nifty 50, and judge whether a story you hear makes sense. If someone claims a small company's shares will "go up ten times", ask what market cap that would imply, and whether the business could plausibly be worth that much.

It is also the starting point for valuation. Comparing market cap with what a company earns, owns and owes is how you begin to ask whether its shares are expensive or cheap, a question taken up in the fundamental analysis path.

Limitations

Market cap is an opinion, updated every second. It reflects what investors are willing to pay today, which can be driven by excitement or fear as much as by the business. It also measures only the value of the shares. It ignores the company's debt, so two companies with the same market cap can be very different: one might owe nothing and the other might owe more than its market cap. A measure called enterprise value adds debt back in, and is covered later.

Market cap also says nothing about profitability. A loss-making company can have a huge market cap if investors expect great things, and a very profitable one can have a small market cap if they are pessimistic.

Common mistakes

• Judging cheapness by share price. A low price per share is not a bargain on its own.
• Treating market cap as the true value of a business. It is the market's current price for the shares, which can be too high or too low.
• Forgetting debt. Market cap shows the value of equity only.
• Confusing market cap with revenue or profit. Market cap is a price; revenue and profit come from the company's accounts.

Try it yourself

A made-up company, Vindhya Cables Ltd, has 8 crore shares trading at ₹375.

1. What is its market cap?
2. The company does a 5-for-1 stock split: each existing share becomes five. What are the new share count and share price, assuming the market's valuation is unchanged?
3. What is the market cap after the split?

Answers: 8 crore × ₹375 = ₹3,000 crore; 40 crore shares at ₹75; still ₹3,000 crore.