BSE Midcap - Opportunities beyond large-cap, risk less than small-cap

The stock market is divided into different segments based on market capitalisation. Among these, the BSE Midcap index plays a crucial role in identifying mid-sized companies that exhibit strong growth potential. This index is widely followed by investors looking for opportunities beyond large cap stocks but with relatively less risk than small cap stocks.
In this article, we will understand the concept of BSE Midcap, its significance, calculation methodology and stock selection criteria.

• Table of contents

1. Understanding BSE first
2. Concept of midcap
3. Introduction of BSE Midcap
4. BSE Midcap – History, meaning, and relevance
5. Selection of stocks for the BSE Midcap index
6. Calculation of float-adjusted market capitalisation
7. Criteria for selecting stocks
8. Difference between BSE and mid cap

Understanding BSE first

The Bombay Stock Exchange (BSE) is Asia’s oldest stock exchange, established in 1875. It is one of the largest stock exchanges in the world and provides a platform for trading in equities, derivatives, commodities, and other financial instruments. The BSE operates various indices to track market performance, including the BSE Midcap index, which represents mid-sized companies.

Concept of midcap

Midcap companies have a medium market capitalisation, sitting between large cap and small cap firms. With a market cap between Rs. 5,000 crore and Rs. 20,000 crore, mid cap companies are ranked from 101 to 250 on the SEBI list. The BSE Midcap index, managed by the Bombay Stock Exchange, tracks the performance of these mid-sized companies in India’s stock market.

Investing in mid cap stocks can be rewarding as these companies often have strong growth potential, offering investors good returns. However, they also come with higher risks compared to large-cap stocks.

To make smart investment decisions, investors should assess their risk tolerance and do proper research. Tracking the BSE Midcap index daily helps investors stay updated on market trends and make informed choices.

Introduction of BSE Midcap

The BSE Midcap index was launched by the Bombay Stock Exchange in 2001 to track mid-sized companies in the Indian stock market. Since then, it has helped investors monitor midcap stock performance.

The index has grown significantly, selecting companies based on market capitalisation and trading volume to ensure a mix of different sectors. Keeping an eye on the BSE Midcap index and share prices helps investors understand market trends.

BSE Midcap – History, meaning, and relevance

History

The BSE Midcap Index was launched to provide investors with a clear view of mid-sized companies’ performance in India. Over the years, it has become a key indicator of economic growth and investor sentiment towards midcap stocks.

Meaning

The index represents a collection of mid cap companies selected based on predefined criteria.
These companies typically have a market capitalisation that is lower than large-cap firms but higher than small-cap companies.

Relevance

The BSE Midcap Index helps investors identify high-growth companies. It offers diversification benefits, reducing dependence on large-cap stocks. Many mutual funds and institutional investors use this index as a benchmark for their midcap investments.

Selection of stocks for the BSE Midcap index

Identifying Eligible Stocks: Companies listed on the Bombay Stock Exchange (BSE) that meet specific liquidity criteria, such as average daily trading value and market capitalisation, are considered. Stocks that fail to meet these standards are excluded.

Ranking and Selection: Eligible stocks are ranked based on their full-market capitalisation, considering their free-float market cap. The top-ranked stocks are chosen for the index.

Regular Review: The index is reviewed periodically. Stocks that no longer qualify are removed, while new ones that meet the criteria are added, ensuring it stays relevant to market conditions.

Calculation of float-adjusted market capitalisation

Float-adjusted market capitalisation is a way to measure a company’s market value by considering only the shares available for public trading. It excludes shares held by company insiders, governments, or other restricted entities, making it a more accurate reflection of market value from an investor’s perspective.

Here’s how it is calculated:

Step 1: Calculate total market capitalisation
Multiply the company’s current stock price by the total number of outstanding shares. This gives the total market value of the company.

Step 2: Determine the float percentage
Identify the percentage of shares available for public trading, excluding those held by insiders or the government.

Step 3: Adjust the market capitalisation
Multiply the total market capitalisation by the float percentage to get the float-adjusted market capitalisation.

Formula: Float-adjusted market capitalisation = Total market capitalisation × Percentage of float

Criteria for selecting stocks

Company’s financial health: Check important financial details like revenue growth, profits and debt levels to ensure the company is stable.

Competitive advantage: Understand what makes the company stand out in its industry and how it competes with others for long-term success.

Management team: A strong and experienced leadership team plays a big role in a company’s growth and performance.

Stock valuation: Look at price-to-earnings (P/E) ratio, price-to-sales ratio and other factors to see if the stock is fairly priced.

Market conditions: Consider economic factors like interest rates, inflation and global events that may affect stock performance.

Difference between BSE and mid cap

• BSE (Bombay Stock Exchange): The broader stock exchange that lists all publicly traded companies.
• BSE Midcap index: A specific index within the BSE that tracks mid-sized companies.
• Scope: BSE includes large cap, mid cap, and small cap stocks, while BSE Midcap focuses only on midcap companies.
• Risk factor: Midcap stocks are more volatile than large-cap stocks but generally offer higher growth potential.

Conclusion

The BSE Midcap index is an essential part of the Indian stock market, offering investors an opportunity to invest in mid-sized companies with strong growth potential. Understanding how this index is structured, calculated and selected can help investors make informed decisions. Midcap stocks provide a balance between risk and reward, making them a crucial segment for portfolio diversification.

FAQs

What is the meaning of BSE Midcap and how is it defined?

BSE Midcap refers to an index comprising mid-sized companies listed on the Bombay Stock Exchange (BSE). It tracks companies that rank between 101st and 250th in market capitalisation.

What is the BSE Midcap Index and why is it important for investors?

The BSE Midcap Index is a benchmark that tracks the performance of midcap stocks. It is crucial for investors seeking exposure to companies with strong growth potential but lower risk than small-cap stocks.

How is the BSE Midcap Index calculated?

The BSE Midcap Index is calculated using the float-adjusted market capitalisation method, which considers only publicly traded shares, excluding those held by insiders or the government. This approach ensures a more accurate representation of a company’s market value. The index value is updated regularly to reflect market movements and stock performances.

What are the eligibility criteria for a stock to be included in the BSE Midcap Index?

A stock must be ranked between 101st and 250th in market capitalisation, have high liquidity, and demonstrate financial stability.

How does the BSE Midcap Index differ from the BSE Large-Cap and Small-Cap Indices?

• BSE Largecap Index: Tracks the top 100 largest companies.
• BSE Midcap Index: Covers mid-sized companies ranked 101st to 250th.
• BSE Smallcap Index: Includes smaller companies ranked 251st and beyond.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.