Market Capitalization: What is it good for? Does the size of a company actually matter?

~Rishab Agrawal

Investors look at a number of aspects relating to a particular company before investing in that company. These aspects include past performance of the company, fundamentals and financials of the company, dividend history etc. But do investors consider the market capitalization of that company before investing?

Market Capitalization is the current value of a company calculated on the basis of its outstanding shares and current market price. The outstanding shares include ordinary shares held by individual investors, block shares held by various institutions and restricted shares held by the promoters and insiders of the company. The value of market capitalization depends on the number of outstanding shares and the current market price of the shares of a particular company. The value is bound to change in case the company issues shares through various way or if the price of shares fluctuate. The total market capitalization of NEPSE as of 11^th December 2018, stands at Rs.13.61 Kharba.

Considering market capitalization before investing will give an idea about the size of the company in the market. It shows how large the company is compared to its competitors and other players of the market. It would not be correct to say that the companies with largest market capitalization are the safest investment and will provide the most return, but it will give a picture about the risk absorbing ability of a company. Along with other indicators, this indicator holds equal importance while investing in a company.

Considering the importance of market capitalization, a list has been prepared containing the companies with largest market cap in each sector and top ten companies on the basis of market cap.

First we look at companies with highest market capitalization in each sector. The market capitalization of each of the following companies has been calculated on the basis of their LTP as on 11^th December 2018. The list is as follows:

The above mentioned companies are the market leaders in their respective sectors in terms of market capitalization. These companies have a total market capitalization of Rs.3.30 Kharba, making up 24.30% of the total market capitalization of NEPSE. High disparity can be seen between market leaders of different sectors indicating the inequitable development of different sectors.

Similarly, a list of top ten companies in terms of market capitalization, calculated on the basis of LTP of 11^th December 2018, is as follows:

As it is clear, commercial banks have dominated the list with 8 out of 10 companies being commercial banks. Nepal Doorsanchar Company (NTC) stands at top with a massive market capitalization of Rs.1.15 Kharba. NMB Bank (NMB) stands at the tenth position with market capitalization of Rs.31.73 Arba. The list features other commercial banks like Nepal Investment Bank (NIB), Nabil Bank (NABIL), Standard Chartered (SCB), Everest Bank Limited (EBL), Himalayan Bank (HBL), NIC Asia Bank (NICA) and Nepal SBI Bank (SBI) as top companies in terms of market capitalization. Only one life insurance company, namely, Nepal Life Insurance Company (NLIC) has made it to seventh position with market capitalization of Rs.40.53 Arba.

The top ten companies have total market capitalization worth Rs.5.23 Kharba, constituting a huge 38.46% of the total market capitalization of NEPSE.

The above mentioned companies hold a lot of significance in their respective sectors and it would be safe to say that the market will take a huge hit if any one of the above mentioned companies were to fall due to some reason.