What are large-cap, mid-cap and small-cap stocks?

If you arrange all listed companies based on their market capitalization in descending order, the first largest 100 companies are called large-cap stocks, the next 150 largest companies are mid-cap and the next 250 are called small-cap stocks.

To understand what large-cap, mid-cap, and small-cap funds are, first understand what ''cap'' and ''market value'' are. Cap is a short form for market capitalization, which basically refers to the size of a company. In other words, the size of the company is also known as the market value of the company.

Now, what's the market value of a company? If you had all the money in the world and wanted to buy a company, the amount you would have to pay to buy all shares of this company is called the market value of the company. The market value of companies that are listed on the stock exchange keeps changing based on the price of shares and the number of shares that are available for the public to trade/invest. 

So market capitalization= Number of shares* market price per share. 

So now what are large-cap, mid-cap, and small-cap stocks?

SEBI has created a method to identify stocks that fall under these categories. Here's how you can classify them:

If you arrange all listed companies as per their market capitalization in descending order, then 

• Large-cap stocks are stocks of those 100 companies that have the largest market capitalization on the stock exchange. These are the companies that stand between ranks 1 to 100. The top 100 companies make up about 76.8% of the entire market capitalization.  

• Mid-cap stocks are the next 150 companies that have the next largest market capitalization and rank between 101st to 250th position. These 150 stocks make up about 13% of the entire market capitalization. 
• Small cap companies are those companies that stand from the 251st position onwards to the end of the list. These stocks make up about 6.4% of the entire market capitalization. 

How to find which stocks come under which category? The stock exchanges publish a list of multiple indexes (which are basically different kinds of baskets that have different kinds of stocks).

If you look at the Nifty 100 index, you will find a list of these Top 100 companies which are called large-cap companies. Some companies that are a part of large-cap stocks are Reliance Industries Ltd, HDFC Bank, ICICI Bank, Infosys, TCS etc. 

If you look at the Nifty Midcap 150 index, it will show you the 150 mid-cap stocks, which include companies like Adani Total Gas Ltd, Tata Power, Bharat Electronics, Page Industries, and Crompton Greaves.  

There is another separate index called Nifty Small Cap 250 index which includes the 250 companies that stand from 251st to 500th position. This list includes companies like PVR, IDFC Ltd, CDSL, BSE Ltd, and so on. 

So what's the difference? Large-cap stocks basically represent big and stable companies that have expanded in multiple sectors. Since their business is diversified, their risk potential is moderate and a drastic stock market shift doesn't necessarily affect these companies much. Having said that, the return potential is moderate too. Since these are stable companies, these companies experience heavy trading by retail and institutional investors and are easily liquid stocks.

Mid-cap stocks basically represent companies that are growing and will take some time to grow into large-cap stocks. Since they have immense growth potential, their return potential is high and more than large-cap stocks. But they are also riskier than large-cap stocks since they are more volatile than large-cap stocks.    

Small-cap stocks are the companies with the highest return potential of all stocks. But holding these shares is the riskiest in a crisis since these stocks are the first to take a larger hit when prices crash. Since these stocks can change directions by about 5-10% in even a day, institutional investors do not generally prefer them.