Difference Between Large Cap and Medium Cap in Stock Market

In the Indian stock market, companies are classified into three major categories based on their market capitalisation. Market capitalisation is the measure of a company’s value, which is determined by multiplying the current stock price by the total number of outstanding shares. 

The three market capitalisation categories across which stocks are classified are large-cap, mid-cap, and small-cap. Among these three, traders and investors often prefer to invest in large-cap and mid-cap stocks. 

Understanding what they are and the differences between these two categories is crucial for making effective investment decisions. Here’s everything you need to know about them. 

What are Large-Cap Stocks? 

The Securities and Exchange Board of India (SEBI) assigns ranks to listed companies based on their market capitalisation. The higher the market cap of a company, the higher its rank. Stocks with a ranking from 1 to 100 in terms of market capitalisation are categorised as large-cap stocks. 

Large-cap stocks are well-established, financially stable, operate on a global scale, and possess a substantial market presence. Most of these companies are leaders in their respective industries and have a long history of stability and consistent growth. 

What are Mid-Cap Stocks?  

According to the SEBI classification of stocks according to market capitalisation, listed companies that are ranked between 101 and 250 are categorised as mid-cap stocks. Mid-cap companies are generally in the growth phase. Since their businesses are not well-established yet, the companies tend to be more volatile than their large-cap counterparts. However, their growth potential is often much greater than that of large-cap stocks.  

Differences Between Large-Cap and Mid-Cap Stocks 

Now that you are aware of large-cap and mid-cap stocks, let us now look at the differences between the two. 

Factors to Consider When Investing in Large-Cap and Mid-Cap Stocks 

With the differences between large-cap stocks and mid-cap stocks out of the way, let us now focus on some of the key factors you need to consider before investing in these companies.

• Investment Goals 

When investing in mid-cap and large-cap stocks, you must ensure that your choice aligns with your investment goals. For example, if your goal is to build a stable portfolio that can offer regular income by way of dividends, investing in large-cap stocks may be ideal. On the other hand, if you are seeking high returns from your investment, you could consider opting for mid-cap stocks instead.  

• Risk Tolerance

Your risk tolerance level plays a crucial role when deciding between large-cap and mid-cap stocks. Large-cap companies may be ideal for conservative investors with a low tolerance for risk, whereas mid-cap companies are for those with a higher risk tolerance level.  

• Investment Horizon

The investment time horizon is another key factor you should consider. Large-cap stocks are typically better for long-term investments due to their stability and consistent returns. Mid-cap stocks, on the other hand, may be more suitable if you have a medium- to long-term horizon.

• Diversification 

Diversification is essential to managing risk effectively. As an investor, instead of investing in just one segment of stocks, it would be ideal to construct a balanced portfolio consisting of large-cap, mid-cap and small-cap stocks. This way, you can effectively leverage the benefits of all of these stocks and reduce overall investment risk considerably. 

• Sector Exposure

When investing in large-cap and mid-cap stocks, you must consider the sectors in which the companies operate. This is because some sectors tend to be more cyclical or volatile than others and may influence the risk and return profiles of the stocks within those sectors.

• Company Fundamentals 

Thorough research and analysis are crucial when selecting stocks. Regardless of the market capitalisation of stocks, you must thoroughly evaluate a company's financials, management team, competitive advantages, and growth prospects before making an investment decision. 

When assessing fundamentals, remember to focus on aspects that matter the most. For large-cap stocks, assessing historical performance and stability is key, while for mid-cap stocks, focusing on growth potential and market opportunities is critical.

• Market Conditions

Economic and market conditions can impact the performance of large-cap and mid-cap stocks differently. During economic downturns, large-cap stocks tend to be more resilient due to their established market presence and resources. Conversely, mid-cap stocks may outperform during periods of economic growth and market expansion. Therefore, consider investing in these stocks when the market conditions are favourable. 

Conclusion

The difference between small-cap, mid-cap, and large-cap stocks is not just restricted to their market capitalisation alone. In fact, there are several aspects in which they differ from one another. As an investor, you must carefully consider these factors and make investment decisions accordingly. 

Also, remember to account for your individual financial goals, risk tolerance, and market conditions when choosing between large-cap and mid-cap stocks. Diversifying your portfolio with a mix of stocks across market capitalisations can help balance the benefits of stability and growth, ultimately leading to a more robust investment outcome.

The Research 360 platform, powered by Motilal Oswal, can help you choose the right stock for your portfolio. The platform offers a host of useful information, ranging from stock-specific fundamental and technical information to news and announcements. You can also compare stocks with their peers across different metrics to determine which one aligns with your requirements.