Invest/Trade: Market Capitalization??
Can you take a decision of investment or day trading on the basis of the market capitalization of the company? In this article we will basically discuss the same, hence we choose the Title “Invest/Trade : Market Capitalization ?”. Let us first discuss the basics of market capitalization.
Stock of Listed companies in the market flows or traded freely in the market at different values irrespective of their listed or issue price. On the basis of same one can calculate and define the size of the company in the market only, irrespective of the actual size of the company or its other parameters like revenue, EBITDA, actual profit or losses occur by them. On the basis of market-cap (M-Cap) one can take a position for a short or long span or even you can select the Stock for day trade. However one has to look for fundamentals of the company before investing for long run. As it is well said that price of the share will definitely follow the actual values of the company in the long run. Investing is a long run process and need to be done in a systematic manner for gaining profit.
Market cap can be divided into these categories*:
- Large Cap (Blue chip Companies) (M-Cap Above $ 10 BN )
- Mid Cap (M-Cap B/w $ 2 BN to $ 10 BN)
- Small Cap (M-Cap less than $ 2BN)
*SEBI keep changing the range of values for the categorization purpose of the companies in the market in the above three categories, resulting in change in companies position in the above categories. We try to describe Invest/Trade : Market Capitalization for your easiness to trade or invest.
Formula for Calculation:
One can calculate the market cap of a company by a very simple formula: Market Cap = No of shares outstanding x Market value per share. These are basically divided on the parameters of the actual market value of the firm.
Big companies with heavy and controlling market cap in Indian stock market are as follows :
- HDFC Bank
Large Cap (Bluechip Companies):
- Large Cap Companies are generally known as Blue chip companies. These are considered quite safe for the long term investment purpose. Also, they give good returns, but you cannot always expect for multi beggar returns on the same. Initial investment in these companies (investment at very starting phase), when these companies are very small and new in the market, gives healthy returns in the long run. These are basically fully grown companies and chances of expansion and growth in these companies are generally low. They have good name in the market and stock of most of these companies traded at very good values in the market. These are fully expanded companies and using their resources very well at full capacity.
Mid Cap :
- Mid Cap companies are those which are in their growing or development phase, these are no more rookie in their field of business and achieve a level of break even at least. Generally they have very well chances to be a blue chip companies in future as level of growth expected. Utilization of their resources are now at good stages or some of them using maximum capacity of their resources and equipment. Stocks of these companies are consider little risky for the investment. Also chances of getting good returns are quite high in this case. One can also get the future blue chip companies which provide you multi beggar returns in the future by exploring mid cap stocks in detailed on fundamental grounds of the stock. Stock prices of such companies generally traded at decent levels and one can take good number of share at small value of investment as compare of Large cap companies.
Small Cap :
- Small Cap companies are those which are having very low market cap ranging for less than $ 2 BN. These are basically newborn companies which are in their initial phase or seed phase. These are more risky to go with, but if you go with proper homework about its parentage, values and new thing or issue company is resolving basically and how helpful it would be in the nearby future or impact of the work or service produced by this new age company should be evaluated. One can definitely make gold with its investment in these companies as these are those companies which have potential to grow like nothing in future. But also they are inherent issues of losses as chances of failure of new born companies are also very high. One can take position in these companies for better future returns in terms of long period holding. Invest/Trade : Market Capitalization becomes necessity at some levels.
Points To Ponder:
- Bigger the market cap with strong parentage of the company can give you assurance to at least save you from big losses in the market and better than the investment in the other mid or small cap stock.
- Mid cap companies are in their growing phase or already attain break even and henceforth chances of future growth are quite high. You can expect multi beggar returns in these investments.
- Higher the number of shares, higher would be the profit value, as increase in one scrip could be small. For example Mr. A Buy 200 scrip of Ashok Leyland @ Rs. 84.00 and Mr. B Buy 2000 Scrip of the same company at the same rate. Let us consider after 1 month rate of per scrip increase from Rs. 84.00 to Rs. 90.00 and Mr. A sold his all scrips but Mr. B keep his position. After one month Mr. B Sold all his scrip at Rs. 89.00 per scrip.
Then Profit of Mr. A = 200 x (90-84) = 200 x 6 = 1200. Profit of Mr. B = 2000 x (89-84) = 2000 x 5 = 10000.
So even though selling of Mr. B is at lower price than the selling of Mr. A, Mr. B books more profit only because Mr. A holds less number of shares than Mr. B.
4. Market Cap can not be considered stand alone point to take any position in the company.
5. Fluctuation of share of Large Cap companies are quite low, hence it can not be use as easy money making machine for the big bulls of the market, as they are not able to fluctuate share value of big companies by big value. Contrary to this in case of shares of small companies, as the share values are quite low, big traders take position as per the existing positions in the market and easily break your stop loss as maximum volume generally builds on it. Henceforth it is well said that one should take positions specially for small period in these stocks only and also can be used for the day trade or positional trade.
We can now say that one can take investment and trading decision on the basis of market capitalization and herewith the topic Invest/Trade : Market Capitalization answered. Follow us http://www.mynsetrade.com