Before entering into stock markets one must know the term market cap or market capitalization, it refers to the total market value of the company. It can be calculated as current market price of the share of the company multiplied by number of outstanding shares of the company. A company can be classified according to market cap or capitalization in three ways –
1. Large cap companies – These companies are considered to be relatively stable and secure, they are the market leaders in their industry. They are often referred to as blue chips, and many investors who are first time investors begin with these stocks as they relatively safe to invest in, however they cannot give those abnormal returns like mid cap and small cap companies can give. These stock are bought by those people who do not want to take too much risk, in other words conservative investors tend to buy these stocks.
2 Mid cap companies – Stock price of these companies are more volatile than the large-cap companies. These companies include those which are rapidly growing and on their way to become the industry leaders, in simple words they are regarded as the future large cap or blue chips companies. Mid cap stocks are bought by those people who can take moderate risk in the hope of abnormal profit or return from these investments
3 Small cap companies – These companies have the highest risk associated with them and therefore these are bought by those investors who are aggressive and do not worry about the risk associated with such investments. Return is highest in these stocks when compared to large or mid cap stocks.