Where the labels come from
For Indian mutual funds the categories are defined by a SEBI circular, so that every fund means the same thing by the same word. The definition is a position in a list, not an amount of money.
Large cap is the 1st to 100th company by full market capitalisation. Mid cap is the 101st to 250th. Small cap is the 251st onwards.
The list itself is prepared by AMFI, in consultation with SEBI and the exchanges, using the average full market capitalisation of every listed company over the previous six months. It is published twice a year, and the categories a company belongs to can change when it is republished.
The circular defines three categories and stops. Micro cap is a term the market uses for the smallest companies far down the small-cap tail, and different people draw the line in different places. Treat it as a description, not a category with a rule behind it.
The same four words, by rank
Tap each. Notice that only the first three have a rule underneath them.
Bharat Foods is worth ₹500 crore — one crore shares at ₹500, from 01.01.05. On a ranked list of every listed Indian company that sits a very long way below the 250th position, so our illustrative company is a small cap.
Why a rank behaves differently from a size
Because the categories are positions, the rupee value of the boundary floats. In a rising market the hundredth company is worth far more than it was in a falling one, so the price of admission to 'large cap' changes without anyone rewriting the rule.
It also means a company can change category while doing nothing at all. If Bharat Foods stands still and thirty companies below it grow past it, Bharat Foods has been demoted by other people's results.
And the label is backward-looking by construction: it is built from a six-month average and published on a schedule. On the day you read it, it describes a period that has already finished.
A company's market capitalisation doubles over six months. Is it now a larger category than before?
What the label is, and is not, evidence of
It is evidence of relative size, measured over a defined past window, on a list anyone can check.
It is not evidence of safety, quality, or how much a share can move. A large cap can fall a long way and a small cap can be quietly steady. The category counts companies; it does not grade them.
It is also not a claim about how easily you could sell. That question is about how much trading happens in the share, which is the subject of a later chapter, and it does not follow automatically from the rank.
So the market has a way of sorting companies by size. The next question is how it sorts them by what they actually do — which turns out to have a rule behind it too.