Installment #3 - Market Capitalization

Dear prudent Investors,

For a change this thread starts of with a note whereas most of the threads end with a note…

Note: Though this thread is a little longer, understanding the concepts explained out here should not take much time…BTW, sorry for this long thread. In future I will try and keep it short. I am in the process of learning “how to write precise and concise threads/emails”. I am doubtful if I would ever get to learn this art in my lifetime…

Sensex has crossed the 16000 mark (infact it is at around 16800 while I write this email) and here’s my 3rd installment of this series…The market has taken around 50-60 trading sessions (if my memory is correct) to reach 15000 -16000 level. My belief is that it will take less than 30 sessions to move from 16000 – 17000 level which only goes to show the kind of impact that a policy decision (now in this case it is the FED rate cut in US on Sep 19th ) can have on the INDEX

Guyz... As far as my personal disclosures are concerned, overall it’s been a profitable day for me…

1. Puravankara bought @ 400(in IPO) and sold @ 445 – Overall profit of Rs. 3600 (off course you will have to deduct the brokerage of around 300 bugs)
2. ICICI bank bought @ 850 and sold @ 995 – Overall profit Rs. 2900
3. Tata motors bought @ 673 and sold @ 755 – Overall profit of Rs. 1640

These are (2 & 3) still unrealized profits. But then today these stocks are trading in these ranges and I am hopeful that it will get sold out at these prices. Now I would want to consolidate all these money into IT stocks (Satyam, Wipro and HCL) that are on its way towards an all time low (or) 52 week low (configuring an alert in ICICI DEMAT can be quite useful here.. I have already started using this facility for timing my buy decisions when the share prices are on its 52 week low for the chosen stocks)

Now in this installment let me introduce you to a few key terminologies that I have understood and digested so far. I think I could fairly relate to these terminologies and factor in these concepts and numbers in all my judgments to buy a share @ some X price.

Market capitalization – All of us may not have heard of this terminology “Market capitalization” including me (atleast till the time i.e., last month that I read the dummies book on Stock marketsJ).

I am pretty sure every one in CC would have heard of this term Small Cap, Mid Cap, Large Cap etc., So, what does the term “Cap” mean here...?? It simply means Capitalization.

Market Capitalization =

1. Value of the company (or) Market value of outstanding shares*
2. No of outstanding shares * Market value of the share

* Outstanding shares is the number of shares held by the investors

So, say for example if the current value of infosys share is Rs. 1800 and no of outstanding shares is 1000 then the market capitalization is 1000* Rs. 1800 = Rs. 1800000

Now that we know about the funda for classifying a stock as smallcap, largecap what is the most common misconception of a naive? “Higher the stock price the larger the company”

If you have understood market capitalization concept you should be able to understand how ridiculous this understanding is. Still, till last month I had this misconception. Now I am fairly clear on this concept.

Lessson#2

Always make “Apple to Apple comparisons” why trying to judge the performance of the companies relatively. To make apple to apple comparison the minimum requirement is that the companies that we compare:

• are involved in the same line of business ( I mean the same sector)
• Then understand whether it is a Midcap, Smallcap, Largecap etc., based on Market Capitalization to ensure that they are of the same size.

A couple of months back my understanding about this concept was flawed. Believe me, understanding this simple yet effective. Understanding this concept has made me a better/ (to be professional) investor. Now when I look back at some of my choices that I have made few of them could be attributed to the sheer misunderstanding of this concept.

Let’s talk about EPS (Earnings per share) and P/E ratio in the next installment, quite an interesting concept in equities.

Thanks,
Kiru.