Difference Between Large Cap and Medium Cap in Stock Market
Choosing the right stocks for trading and investment purposes can be a little difficult and tricky, especially when you are only starting your journey in the stock market. But is it all that difficult? Not if you know what parameters you need to select your stocks.
Most traders and investors, old or new, choose stocks of various companies based on market capitalisation, which is a company’s total outstanding shares in the market multiplied by the current price of each share. Market capitalisation is a measure of a company’s projected valuation.
According to the Securities and Exchange Board of India (SEBI), the first 100 companies in terms of full market capitalisation are large-cap companies, while the firms ranked between 101 and 250 are mid-cap companies and those ranked above 250 by full market capitalisation are called small-cap companies.
What are Large-Cap Stocks?
Large-cap stocks are stocks of large-cap firms or companies that have a considerable market share of around ₹20,000 crores or more. These companies tend to be quite stable even in times of a recession or any economic instability. As a result, the stocks of these companies are less volatile than that of mid-cap companies and small-cap companies.
What are Mid-Cap Stocks?
Companies with a market capitalisation of more than ₹5,000 crores but less than ₹20,000 crores are called mid-cap companies. While the risk the stocks of these companies carry is more than large-cap stocks, they are less risky than small-cap stocks. Therefore, investors choose mid-cap stocks as the growth potential of these companies is higher than large-cap companies.
What are Small-Cap Stocks?
Small-cap firms are those which have a market cap of less than ₹5000 crores and have substantial growth potential despite being smaller in size. However, these companies are considered to be risky investments because of the low chances of their long-term success. This is also the reason why the stocks of these firms are volatile as compared to large-cap and mid-cap stocks.
One can select stocks to trade and invest in based on market capitalisation. However, now let’s look at the difference between large-cap and medium cap stocks.
What is the Difference Between Large-Cap and Medium Cap?
Though the difference between large-cap and medium cap may appear to be trivial in theory, it makes a lot of difference for investors who choose to invest in such stocks based on their risk appetite.
- Price volatility:
Stocks of large-cap companies tend to be safe and less volatile mainly because the prices of these stocks remain stable even when the market is not, making them a good low-risk option. On the other hand, mid-cap stocks carry a higher risk than large caps but are still safer than small-cap stocks, which are highly volatile.
- Growth potential:
While large-cap stocks tend to have low growth potential, they function as stable investment options for long-term investors. Those with a moderate risk appetite may consider mid-cap stocks, the growth potential of which is slightly higher. Investors may consider mid-cap stocks for the fact that they’re less volatile than small caps.
Most of the time, there is always a great demand for large-cap stocks in the stock market which makes it easier for an investor to sell these shares without an impact on the share price. When compared to large-cap stocks, mid-cap stocks have a lower demand which makes the sale of such stocks slightly difficult.
To Sum it Up
When considering the difference between large-cap and medium cap stocks, investors often tend to create a balance between the two in their portfolios, depending on the risk they can handle. Therefore, it is important to research and invest according to your own risk appetite.
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Frequently Asked Questions
Investing only in large-cap stocks can be a good option for an investor with a low-risk appetite. Those with a higher risk appetite may opt for mid-cap stocks and also small-cap stocks or a combination of all three known as multi-cap funds.
Beginners generally start with investing in large-cap stocks, which are considered to be a safe and stable investment option and as they understand the market, and their risk appetite better with time, they can opt for mid-cap stocks as well.
Yes, when certain stock is in high demand, it is easier to sell that stock which makes it highly liquid. If a stock has low demand, it takes time for the trader/investor to sell that stock and square off their positions, which can lead to the loss of a trade opportunity.
Depending on one’s investment goals and investment horizon, the investor can choose to make a long-term investment with large-cap and mid-cap stocks. However, low-risk investors may choose to stay just with large caps due to the stability even during tough phases in the market.