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This website is purely ACADEMIC in nature and NOT a stock market recommendation service or a tip provider. No live data or feeds are provided and all information is historic only. Information is provided for ease of understanding for the purpose of learning. Accuracy of definitions etc is not mantained. I am not a SEBI or IRDA registered.
Today, lets focus on a new topic Market capitalization or market caps.
Market cap is the term used to determine the size of a company that is listed in the stock exchange.
It is the market value of a company's outstanding shares.
Formula for calculating Market Cap is simple.
Market Capitalization = Outstanding shares x Share price
We have thousands of companies listed and traded in our stock markets.
They are all of different sizes and shapes.
Each of the stock is traded and will have a market cap.
How to know the market cap of a specific company?
Now, please visit this page and identify the market cap of State Bank of India.
Give a rough number. Need not be accurate
Some Rs. 173498.07 Cr
Yes. That is a huge number
Based on the market caps, all shares in the market are dividend into four types.
There are 4 market capitalizations in our market
- Large cap
- Mid cap
- Small cap
- Micro cap
Large Cap = Companies with a market cap above Rs. 7,000 Cr.
Large and well established companies with well known products fall into this category.
Such as TCS, Infosys, SBI, Bank of Baroda, L&T, Ashok Leyland etc.
Large cap stocks are considered to be relatively stable and secure investment options.
Because they are generally leaders of their business. They have size and scale.
But, at any given point of time, largecap stocks are expensive.
If they are expensive, how to invest in them?
The best time to enter into them is during a deep market correction.
But as you know, our approach is that we cannot time the market
We cannot predict when the market will go up and when it goes down.
So, we use cost averaging method to accumulate such good companies.
Can a midcap turning Largecap?
It's there a possibility that a large cap find become a mid cap?
Yes. Very much possible.
And if things do not work out, a largecap can even become a microcap too.
We know what happened to Satyam.
But situations like that are rare.
Because, large cap guys work really really hard.
One problem with largecaps is that they are already giants.
They take the beating when something wrong happens.
For instance, in the recent RBI decision to cut Non performing assets, SBI took a huge beating.
But being experienced guys, they will quickly be back.
And the good thing is that some times they dictate the norms of the industry.
These are generally the top 100 companies.
So, they are relatively secure and safer over other stocks.
Now visit this page http://www.moneycontrol.com/stocks/marketinfo/marketcap/bse/index.html
Find out the largest FMCG company from the list.
BTW, FMCG means Fast Moving Consumer Goods.
Mostly FMCG companies are into consumables we use in our household. soaps, aata, cigar etc.
Now, who is its nearest competitor ?
From the list, it will be ITC
There are several other listed and non-listed companies who are competitors.
For instance, Patanjali is a non-listed competitor !
Point to note: Even large caps will face severe competition.
Is it ITC ?
Yes. It is ITC.
ITC is such a huge company, it has very diversified categories of business.
What we just did is, from the list of stocks, we tried to map to the sector it belongs to
How to find fmcg in screener ?
Screener only provides from stocks perspective. U need to use moneycontrol.
Exercise for you for the weekend.
Take a print of the above webpage that contained the top 100 stocks.
And then try to identify the sector it belongs to.
The idea is that u shd get familiar with stock name and the sector to which it belongs to.
Go to bseindia.com
search for the stock name
and note the category as listed by bse
This is very important !
As i told earlier, our car has 5 seats,
i mean to say our core portfolio will be having 5 stocks.
And to get the maximum diversification and differentiation, we will select stocks from 5 different sectors.
So 1 stock from 1 sector max !
If you choose, say two IT companies, we will get biased!
IT sector performance will influence our portfolio.
If we diversify well enough, we will get stable returns in all market conditions.
PS: Mega-cap is a term used in the US.
They are the toppest guys and their business failure might cause unstability to the country / sector.
Such as GE !
Can we go to Midcaps?
Now, the next market cap is Mid cap.
Mid cap is a friend of Large cap.
He is a young adult !
Mid Cap = Companies with a market cap between Rs. 500 Cr. and Rs. 7,000 Cr.
Companies in this basket are in their developing or growth stage and their share price are more volatile than the large- and mega-cap companies.
Mid caps represent a significant portion of growth stocks.
Some of the companies might not be industry leaders, but they may well be on their way to becoming one.
List of Midcap stocks are available at http://www.moneycontrol.com/stocks/marketstats/indexcomp.php?optex=NSE&opttopic=indexcomp&index=27
You might be familiar with some of the names in the list.
Adani Power, Ajantha Pharma, Apollo Tyres etc.
Midcap stocks are those who strive to become leaders.
They are stable enough but not large enough in size.
So, they have growth potential !
Some times, it feels that largecaps are slow movers and midcaps are better.
So, it makes sense to invest in midcaps
Apollo Hospital for instance is a leader in health sector.
It is a midcap stock. May be it has huge growth potential in its sector.
Pls Note: We will limit all our exercises to Largecaps and middcaps only.
Those who are familiar with mutual funds will notice that:
Midcap mutual funds look attractive for this very reason
Yes. Midcap is a busy space. It attracts investors of all sizes. Both big FII and DIIs as well as retail investors like us.
I will explain about Small Cap and Micro cap. But that explanation is limited to theory and to be cautious.
Then, our next market cap is *Small Cap*.
Small Cap = Companies with a market cap upto Rs. 500 Cr.
Small caps are like college kids. They move here and there, with more enthusiasm. But they face accidents too !
Although their track records wont be as lengthy as those of the mid to mega caps, small caps do present the possibility of greater capital appreciation - but at the cost of a higher degree of risk.
So, notice that we moved from safe giants (largecaps) gradually to small risky guys (smallcaps).
This is top - down approach in stock picking
Any questions so far?
I need two votes to continue
Some questions related to market caps
-When does a company shifts it's status from small to mid or so on
-Is it that the market cap increases above the said value
-Its status gets automatically changed?
Obviously when a share gets traded more and more (volume increase) or price goes up faster (price increaes) that its market cap increases.
Remember Market cap = Number of common shares in the market x CMP of the share.
The status of a share from Smallcap to Midcap or viceversa gets updated on a quarterly basis when NSE and BSE revises its indices.
So the status gets automatically changed once it crosses thr limits
Okkk so it's on quarterly basis
When does it happen exactly ?
So if a small cap company does consistently better, NSE moves the company from NSE Smallcap Index to NSE Midcap Index
Introduction to Index
Now a little talk about what an *Index* is
- Index* is a term to refer to a benchmark reference of stocks created by exchange.
So, Nifty 50 contains top 50 marketcap stocks. Nifty Midcap 100 contains top 100 midcap companies etc.
You can get the names of indices and constituent stocks on NSE, BSE and of course on money control
Finally, the last guys are *Micro caps*.
Micro caps are really small guys. School kids.
Hardly heard names, bottom in the industry. Low volumes. May be new companies. Risky financials.
They are not small, smaller or smallest. They are tiny guys !
They are extremely risky
New investors should totally avoid them.
Apart from all these terms, we come across another risky shares.
These are called *penny stocks*.
Avoid these companies whose share price is below Rs 20.
Such stocks are called penny stocks and are extremely risky.
They mostly exit in Small cap and Micro cap.
But we have seen few penny stocks out performed in past
Yes. Good penny stocks would do well but there will be far and few between in this world of competition.
Mostly they are run market operators who influence the stock price with their money or share holding.
Penny stocks are easily manipulated.
Do not be surprised to see these stocks moving from a lower circuit to upper circuit and vice versa, even on the same trading day.
These are the most risky form of shares.
More than the stock fundamentals, the market operators influence such stocks.
A majority of traders and investors lose money in this type of shares.
Almost all investors begin their investment journey with these type of shares because the CMP looks cheap and affordable.
When it comes to stock valuations, the CMP is not the only factor one shd see.
For instance, we have seen financial ratios like PE and IPE, BV etc. that help us determine if the CMP of the stock is fair or not.
Totally avoid small and micro cap stocks. Avoid penny stocks as well !
You can start investing in penny, small and microcap stocks once your risk taking abilities improve.
For now, better to focus only on largecap and midcaps
In fact, you can blindly start investing in such shares because they have a leadership position in their business.
Even when expensive, they will easily smooth out and give decent returns in the long term.
Question: Marketcap vs Volumes (or both?)
Question to you all:
Which of the following are important to track as part of fundamental analysis?
a. Market Capitalization
b. Volume of shares traded every day
When exactly is a midcap treated as a largecap?
How does one know that a particular listed company is large, mid small or micro-cap? Is 1000 crore as benchmark? i.e If the market cap is above 1000 crores, one can consider as a large cap?
There are several ways of determining if a stock according to capitalizations. The most common method used is: Large Cap = Companies with a market cap above Rs. 7,000 Cr.; Mid Cap = Companies with a market cap between Rs. 500 Cr. and Rs. 7,000 Cr.; Small Cap = Companies with a market cap 100 Cr to Rs. 500 Cr. and the rest being microcaps
For detailed information on broad market indices, check https://www1.nseindia.com/content/indices/ind_meth_broad_indices.pdf
- Question: Despite range bound around 1000 for quite long time, why people are getting fascinated in investing in stocks like Reliance? As far as I noticed, Blue chip stocks are laggards, compared to most of the mid/ small cap stocks.*
Largecap stocks are relatively safe to invest because the companies are giants and know their business well. Reliance might have moved due to the RJio euphoria.
We cannot say largecaps are laggards because when the market starts correction, mid/small caps falls more compared to largecaps and vice versa. They are safe havens in a bearing / correcting markets.
1. Check your demat statement and from the list of stocks, classify them into various marketcaps
2. Take a print of Top 100 stocks and identify their sectors.
3. List our atleast 1 stock from each marketcap and from each of the leading sectors / industries.
- Initial Public Offer (IPO)
- Offer For Sale (FPO)
- Introduction to Financial Ratios used in Stock Analysis
- Well traded stocks and Liquidity factors