Stock Market Capitalization

Market Capitalization generally represents the collective value of the company. It can be obtained by multiplying their outstanding number of shares by the existing price per share.

Let’s take an example, if a company has 20,000,000 outstanding shares and with the share price of 20 Rs. per share then Market Capitalization of the company is Rs. 400,000,000 (20,000,000 x 20 Rs.). So, Market Capitalization is a price in which you will buy the Company’s outstanding shares.

For people who follow principles of value investing, then per-share price virtually is meaningless. The reason, why they don’t look at per-share cost, is because it changes with the observation of the people as well as reflects on what the market can pay for the share in a given time. Nonetheless, this perception keeps on changing the Market Capitalization of a Company.

Generally, stocks are classified as per the Market Capitalization. Various investment professionals and fund houses adopt diverse definitions to classify the stocks on the basis of market capitalization like Small Caps, Midcaps, and Large Caps. Some Analysts make use of different approaches as well as add Micro & Mega Caps in the classification. In such approaches, the market capitalization works as a pointer of the company’s size.

For the investors, it’s very important to have knowledge about how different the classes behave. The different market caps (small, mid and large) carry different risk levels and potential returns.
Let us see the standard approach for classifying the companies:

Mega Cap –

The companies with the market cap exceeding 20,000 Cr. The mega-caps are generally blue chip stocks having strong brand recognition; best track records and record of wealth creation, like SBI, Coal India, and many more.

Large Cap –

The companies with a market cap of 7,000 Cr to 20,000 Cr. The large and established companies with well-known products generally fall in this category, like Ashok Leyland. The mega stocks and the large-cap stocks both are considered as secure and stable investment options.

Mid Cap –

The companies with a market cap of 500 Cr.  to 7,000 Cr. The companies in this bracket are in the developing stage and the share price is volatile compared to the large & mega-cap companies. The mid-caps represent a significant part of the growth stocks. Some companies may not be the industry leaders; however, they might be on the way of becoming one.

Small Cap

The companies with the market cap up to Rs. 500 Cr. Even though the track records will not be very lengthy as the mid and mega caps, the small caps present this possibility of higher capital appreciation –however at a cost of the higher risk.

What Are Financial Instruments Of Stock Market?

Financial markets collectively bring millions of people together from across the world a wide range of financial instruments. Being one of the biggest markets, there’re many different securities and instruments that you can trade as well as take benefit of the price movements to get in optimal profit.

Traders and investors will turn to the stock market in order to achieve short term profits and to accomplish long-term financial goals, like retirement. When the equities falter, it will reduce the investment portfolio value made up mainly of stocks. Fortunately, there are a few financial instruments that belong to the separate asset classes, which aren’t generally linked to the performance of an equity market. Select the best ones to buy. It depends on the length of time that the investor has exposure and the amount of risk that he is able to tolerate.

Bonds –

The reason why the prices of the stock fall are that the corporate profits that drive market values are compromised. Bonds also known as fixed-income securities aren’t driven by the same conditions. Instead, the bonds are very sensitive to the interest rate environment or type of economic expansion that a particular region is experiencing.

Mutual Funds –

Mutual funds in India are quite popular firstly because of investment is less Eg:- you can start with low as Rs 500 SIP and secondly Risk is diversified. A mutual fund allows the people to invest their money Lump sump and to have this managed professionally. Mutual funds have the sound regulation so that there is no insecurity. There are a lot of thematic mutual funds one can select from, risk and reward might differ as per the plan.

Derivative Instruments –

There’re two types of derivative instruments –the futures and the options. Futures are contracts and agreement of two parties to buy or sell the fixed quantity of their assets at the particular time in future for the fixed rate. The option is similar contract, only that parties aren’t obligated to fulfill any terms of agreement. The contracts are traded in a market. Minimum value of the contract can be 2 lakhs.

Commodities –

In stable economic conditions, the commodities that are the contracts representing price for the resources like precious metals, energy, and agricultural products, will trade uniquely to the equities. When stock market declines, traders and investors will turn to the commodities for diversification. Simplest way for the retail investors to get exposure to the commodities is through exchange-traded mutual funds. In some economic conditions, line between the stocks and the commodities gets blurred.

Secondary Market –

In secondary market, earlier issued bonds, stocks, futures and options are bought and sold. In a secondary market, value of cost depend on demand and supply. The companies can influence the stock prices in secondary market, by various methods such as buybacks. Secondary market is a market for the outstanding securities and allows price discovery. Market value of the shares provides value to a Company.

There has been a big dilemma on which one is better, from the primary market and the secondary market. Basically, both of them share the same aim, helping companies to get capital funding. But, the major factor that will differentiate both of them is a process used for collecting the funds.

Primary Market –

The primary market is a market where the companies issue new securities with the purpose to attain capital. Firms and government institutions will gather their funds from this market by issuing bond and stock in a new issue market. And they will get equity capital by stock issue and the debt finance via a bond issue. This funds raising happens through Initial Public Offering or IPO. These securities are directly sold out to the investor. He is called the shareholder in such case. In return of these funds that investor contributes, he’s issued the share certificate that will represent interest for the company.

The security price is quite stagnant and on the face value in a primary market. Securities are available just for the short time frame, or issue window that are for some days. Here major preference will be given to the large investors who will buy more securities at one go. But, the common man can invest in IPO as the retail customer.

Secondary Market –

In the secondary market, the securities that have passed already through the primary market and issued will be traded as instruments. The instruments like bonds, stocks, options, and futures are traded over here. When the security is bought in a primary market and investor opts to sell it out, it comes on a secondary market for many other investors to purchase. The price of this security will be quite different from its face value though that is based on the performance of the market security. Thus, market performance and forces of the company decide the share price in the secondary market.

In secondary market the trade is done with the stock exchanges such as Bombay Stock Exchange, National Stock Exchange, Shanghai Stock Exchange and more where value of a share will be affected by an index of this exchange.