Identifying the category of any particular stock in terms of largecap, midcap, and smallcap is tough task for both beginners and as well as experienced investors. Is there any trick to categorize the stock? Let's decode this in this article.

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According to Utkarsh Sinha, Managing Director, Bexley Advisors, the definition of large-cap, mid-cap and small-cap are not hard-coded: it's akin to describing people as tall, average-height or short.

It is mostly relative, and a function of the market-cap of all players in an economy with the largest, most stable companies (where you expect stable to moderate growth) being categorized as large-cap, while the expectation from the smallest market-cap companies is to demonstrate the highest growth.

Sinha described that in the Indian stock market, if any listed company has a market capitalization of more than 20,000 crores, those are known as or come under the large category. While, if any company has m-cap below 5,000 crores they considered as smallcap. Rest of the companies (between 5k to 20k) are come under midcap category.

Why do fund/portfolio managers track m-cap?

The category or m-cap of the any listed company plays pivotal role is investment as well as trading. They (fund managers) use the value to identify both risks and returns of any stock. "⁠Portfolio managers use the market-cap distinction mostly to signify a risk-vs-return categorization," Sinha told Zeebiz.com.

Which category has more returns/risk?

The small-cap carries higher risk, along with higher return potential. On the other hand, Conversely, largecap category is more stable in terms of risk but represents a lower return in terms of growth in comparison to midcap and smallcap.

Which category should you add to your portfolio?

Utkarsh advised that a well-diversified portfolio would typically contain several stocks from across these categories to construct an un-correlated basket of stocks that have a combined risk and return profile that suits a particular investor.

"With this strategy, the large-mid-small-cap categorization serves as an effective shorthand to convey the risk-return profiles that stocks in each category enjoy," he said.

What role do indices play in the categorization?

Indices are like baskets that hold a selection of stocks from a specific group or category. They help measure how well that group is performing. Think of it like a report card for a particular type of stock, just like how a report card shows a student's grades, an index shows how well a group of stocks is doing.

There are different types of indices, like ones based on market size (large, mid, small) or industry; technoligy, healthcare, infrastructure, FMCG, etc. The way these indices are created is similar, but there might be some subjective decisions made when defining what makes a stock "large" or "small".

"⁠Indices are weighted baskets of stocks of a particular category that serve as an indicator of the health of a particular category of stocks. Fundamentally, there is no difference in how an index based on market cap is constructed to how one is constructed for say, an industry - except, there might be a level of subjectivity to how a particular index defines large-vs-mid-vs-small cap." Sinha said.

"Similarly, both the composition of⁠ such indices and the values that define the cut-off are revised periodically as the conditions of the individual stocks or the overall economy change." he added.