Stocks Highest Return
Stocks Highest Return
The Basics of Stock Market Capitalization
We all know stock markets go up and down. Some companies become the shining star, while others end up losing favor with the public. The media reports this variation as change in “market cap.” So it is important to understand what market cap is, and how it will help you in your investment decision.
In simple terms, market cap denotes the size of the company. It can be calculated as the market price of the share of the company multiplied by the no of outstanding shares.
Market cap = (share price) x (no of shares issued)
Market cap denotes the opinion of the market about the company. The company with a higher market cap denotes the positive opinion of the market about the company and vice versa. The companies operating in a sector that has a bright future tend to have a higher market cap.
Based on market cap, companies can be divided into large cap, mid cap and small cap. They go in the descending order of large cap, mid cap and small cap. Large cap companies are also called as blue chip companies they form he biggest companies in the universe of companies listed on the stock exchange. E.g. of large cap companies include RIL, L&T, BHEL etc.
Next on the list are mid cap companies. Their market cap is lesser than large caps but more than the small cap companies. E.g. Ashok Leyland, Dena Bank, Mind Tree Consulting are some of the more famous mid cap companies. Lastly there are small cap companies whose market cap is the smallest. E.g. 3i Infotech, Parekh Aluminex and SREI Infrastructure are some examples of small cap companies.
When it comes to investment, always select large caps over others, as they are safer than others. Next on the list are mid caps and then go for small caps for investment. Having said that, small caps can give you the highest returns than others during the bull market. But when the going gets tough, large caps will give your portfolio the security that it requires. (Find out about Forex Trading. Also make sure to visit Etoro.)
However there are times when the market cap will not be sufficient to determine whether the company is a sound investment or no. This is because the share price of the company is decided by the market sentiments and not the financial position of the company. E.g. during the US crisis, investors had trashed the stocks of reputed companies like TCS and Infosys. Similarly after the Satyam crisis, investors took a negative outlook on the companies like Wipro, though there was nothing to worry. This ultimately impacted the market cap of these companies.
The market cap they use is the value of the publicly tradable part of the company. Thus, market cap is one measure of “float” i.e., share value times an equity aggregate, with free and public being others. Hence it doesn’t make sense to depend only on the market cap for selecting stocks for investment. Instead use other methods like PE ratio, debt equity ratio and the company’s growth prospects to get good stocks for investment.
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