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Market capitalisation is a company’s aggregate valuation based on its current stock price and the total number of outstanding shares. You can determine market capitalisation by multiplying a company’s current share price by the firm’s total number of outstanding shares.
Analysts and investors use market capitalisation to categorise and compare the size of companies. For example, companies are classified as large-cap, mid-cap and small-cap depending on market capitalisation.
According to SEBI, listed companies ranked from 1st to 100th depending on market capitalisation are called large-cap. Moreover, listed companies ranked from 101st to 250th are called mid-cap, and those ranked from 250th onwards are called small-cap.
You can calculate market capitalisation by multiplying the current share price with the total number of outstanding shares issued by the company.
Market Capitalisation = Current market price of each share * Total Number of outstanding shares of the firm.
For example, a company has three crore outstanding shares, and each share’s current market price is Rs 300. The company’s market capitalisation would be 3,00,00,000 * 300 = Rs 900 crore.
Let’s understand market capitalisation with another example. Suppose a company has two crore outstanding shares, and the current market price of each share is Rs 200. The company’s market capitalisation would be 2,00,00,000 * 200 = Rs 400 crore.
> 20,000 Crore
Rs 5,000 Crore to Rs 20,000 Crore
< Rs 5,000 Crore
Market capitalisation helps you predict the future price of a company’s share as it reflects what the market is willing to pay for the share. Moreover, market capitalisation indicates the size and performance of India’s stock market.
For instance, the market capitalisation ratio to India’s Gross Domestic Product (GDP) shows whether the stock markets are undervalued or overvalued.
Market Capitalisation to GDP Ratio = (Value of all listed stocks in a country) / (GDP of the country) * 100
According to this thumb rule, if the stock market capitalisation to GDP is between 50%-75%, stock markets are said to be modestly undervalued. If the ratio is between 75%-90%, stock markets are said to be fair valued. However, the stock markets are said to be modestly overvalued if the ratio is between 90% and 115%.
The stock market considers the value of all listed companies in India. However, Gross Domestic Product considers the value of all income, including unlisted private firms, MSMEs, small businesses, government companies etc. Hence, Buffett Indicator is unreliable as it only looks at listed companies when determining total stock capitalisation.
The total market capitalisation of a firm includes publicly traded shares and shares held by the government, promoters and private entities. However, free-float market capitalisation excludes shares held by the government, promoters, trusts and private entities.
For instance, to calculate free-float market capitalisation, you must multiply the current share price with the total outstanding shares traded with the public.