Difference Between Large Cap vs Small Cap
Depending on their current market capitalization, stocks or companies are classified into three categories
- Large-cap company,
- Mid-cap company
- Small-cap company
A market capitalization of a company calculated by the current price per share multiplied by the total number of its outstanding shares in the market. It gives the investor with an estimated valuation of the company or it shows the size of the company. For example: Suppose a company has 20,000 outstanding shares in the market, and price per share is at Rs. 20.
Thus, its market capitalization can be calculated as outstanding shares * price per share.
20,000 * 20 = Rs. 4,00,000 (Market cap of the company)
What is large Cap stocks or company?
These stocks or companies are the first class in market capitalization. As the name itself suggests, these companies are having large market capital, these are stocks of reputed companies that have been around for decades. The market capitalization of such companies is very high – above Rs20,000cr.
Large-cap companies have a strong market presence and their stocks are generally considered to be very safe and less volatile (low risk). Most of these listed companies regularly disclose information through exchange filing or media, such as newspapers, television or company’s website. In other words, information on large-cap companies is very easily available for investors, clients or customers.
In India, examples of large-cap companies include Reliance, Tata Steel, and Hindalco, among others. Nifty 50, BSE 100, SENSEX 30 indices comprise of large-cap companies. Generally, market indices which are designed comprise of large-cap companies for example – Nifty 50, SENSEX etc.
For investors who want to invest in an index or a large number of companies into a large market cap, can choose mutual funds or large-cap funds. Depending on the size of the companies, some mutual funds schemes are categorized as a large-cap fund, mid-cap fund, small-cap funds. As their name suggests, large-cap funds comprise large-cap companies. Mid-cap funds & small cap funds comprise mid-cap companies and small-cap companies respectively.
What is small cap stocks or company?
Large cap stocks are having highest market capitalization whereas Small-cap stocks lie at the other end of the market capitalization spectrum with a low market cap. Most small-cap companies are either companies in the development stage or start-up enterprises. As the name suggests, small-cap companies have a small number of employees and low revenues and clients. Information on these companies isn’t easily available to investors, clients or customers.
As small cap companies are small in size, they have tremendous potential for growth. This gives an opportunity to investor multiply their money. But small cap companies are highly volatile and high risk. As growing business is not an easy task many hurdles are faced by small cap companies due to this, small cap stocks are considered to be a highly risky investment.
Generally, small cap stocks are having a market capitalization of fewer than 500 crores. Small cap companies have small cap index from where an investor can track the performance of the small-cap stocks.
For investors who want to invest in an index or a large number of companies into a small market cap, can choose mutual funds depending upon their growing appetite and risk profiling.
Four major risks small-cap companies have –
- Liquidity risk – It means, when an investor wants to buy share it may not be available or when an investor wants to sell his stocks buyer might not be there.
- Limited access to financial resources – Compared to large cap, small cap companies has limited options for capital raising and also these companies need to pay more premium for debt as a risk associated is high compared to large cap companies.
- Lack of operational history and the potential for its unproven business model. It might happen the business model may not be scalable or cannot sustain for a longer time.
- Limited availability of data for analysis.
Although small-cap stocks are considered riskier investments than large-cap stocks, there are enough small-cap stocks offering excellent growth potential and high potential returns on equity. Another major advantage offered by the small cap is growth potential if the business model gets successful. It is relatively easy to double sales from 10 million to 20 million, but it is tough to double the sale from 1 billion to 2 billion. So compared to large cap small cap companies has high growth potential.
Large Cap vs Small Cap Infographics
Below is the top 7 difference between Large Cap vs Small Cap:
Key Differences Large Cap Stocks vs Small Cap Stocks
Both Large Cap vs Small Cap are popular choices in the market; let us discuss some of the major Difference Between Large Cap vs Small Cap:
- Market size wise large cap companies are having more than 20,000 crores market capitalization whereas small-cap companies are having a market capitalization of fewer than 500 crores.
- Large-cap companies are the well-established player having present in the market from decades whereas small-cap companies are newly established players or start-ups.
- Large cap companies are considered to be safe and less volatile whereas small cap companies are considered to be risky and highly volatile.
- As analyst tracks large cap companies, getting information on such companies is relatively easy.
Head To Head Comparison Between Large Cap vs Small Cap
Below is the topmostComparison between Large Cap vs Small Cap:
|The basis of comparison between Large Cap vs Small Cap||Large Cap Stocks||Small Cap Stocks|
|Market Capital||More than 20,000 Crore||Less than 500 Crores|
|Risk associated||Considered to be Less risky||Considered to be highly risky|
|Returns||Less compared to small-cap stocks||High compared to small cap and mid cap.|
|Stability in business||Relatively high||Relatively low|
|Examples :||Tata Steel, Reliance Industries or Hindalco||8K Miles, Bhansali engineer Polymer, Rana Sugar|
Large Cap vs Small Cap – Final Thoughts
As we have discussed above, an investor has three options to choose for allocating money to stocks. And the allocation of money is entirely dependent on an investor’s risk appetite and return expectations. All these categories (large cap, mid cap, and small cap) consist of some really good long-term investment opportunities for high returns. It is always prudent to allocate fund proportionately into each of these segment as each segment offers a unique opportunity.
For high risky investors, small cap stock is his playground but for safe investors, large cap stock is his playground.
This has a been a guide to the top difference between Large Cap vs Small Cap. Here we also discuss the Large Cap vs Small Cap key differences with infographics and comparison table. You may also have a look at the following articles to learn more-