Market capitalisation: meaning, shortcomings, and related NSE indices

What is market cap or market capitalisation?

Also known as market cap or m cap, market capitalisation is one of the ways to calculate the value of a listed company. It represents the total value of a company based on the current market value of its stocks.

How to calculate market capitalisation?

Now that you know what is market cap, the following is the formula to calculate the m cap of a company,

MC = N x P

where,

MC is for market capitalisation

N is the number of outstanding shares

P is the current market price per share

Let’s calculate the market cap for XYZ Co. It has 10 lakh shares of market value Rs 10 per share. As such, the m cap of XYZ Co. is Rs 100 lakh.

You can also use the market cap method of valuation to value a stock exchange. As per Wikipedia, NSE had a total market capitalisation of over $2.27 lakh cr as of Apr 2018.

What is free-float market capitalisation?

The market cap of listed companies considers the total outstanding equity shares—the total number of shares—issued by a company. These include shares held by the promoters, management, employees of the company, institutional investors, and the public. Of these, the equity held by investors other than the public is called ‘restricted shares’, which can’t be traded by the public.

On the other hand, the shares held by the public are called free-float stocks because these can be traded on the bourses without restrictions. Depending on the shares available for the public, a company can have low or high free-float stocks. 

So, the point we driving home is that market cap considers the total equity of a company, irrespective of who holds it. This means you can’t ascertain how liquid a stock is. To overcome this shortcoming of the market cap method of valuing a company, a called free-float market cap was introduced. This method considers only the free-float stock of a company however excludes shares owned by the entity’s executives.

Categories of market capitalisation

There are three types of market cap:

• Largecap
• Midcap
• Smallcap

Categories of companies based on market cap

Based on the market capitalisation of an entity, listed companies in India are broadly classified into 3 categories. The stocks issued by such companies are also categorised accordingly.

Smallcap companies

These are relatively newer or younger companies that may have recently been listed on the stock market. Since these are fairly new in their industry and the market, smallcap companies are risky and have lesser financial resources and smaller balance sheets. These features make them highly volatile and relatively more vulnerable to economic turmoil.

Fortunately, their newness gives smallcap companies a bigger room for growth, which is why they have the potential to become more profitable with time. But if they fail, they would do so equally badly.

Stocks issued by smallcap companies are called smallcap stocks.

Midcap companies

These listed companies are matured when compared to smallcap businesses and so have relatively lesser potential to grow. However, midcap companies are more stable than smallcap businesses, which makes them less risky. But this is not true in all cases.

Some midcap businesses face the challenge of beating competition from largecap companies in order to survive. Moreover, some midcap companies may have formerly been largecap businesses that couldn’t weather economic conditions and lost to their competitors. Yet others may be operating in a smaller niche and have little growth prospects.

Stocks issued by midcap companies are called midcap stocks.

Largecap companies

Among all three categories, largecap companies are the most matured, which leaves relatively the least scope for growth. As such, the returns of these businesses are also lower than the midcap and smallcap companies. Typically, largecap companies are market leaders because they may have overcome tough economic and market conditions and emerged stronger. These features also make largecap companies less risky and the most stable of all.

Largecap companies have larger balance sheets and ample financial resources, which make them better positioned to survive an economic downturn. Generally, largecap companies generate more cash than what’s necessary for their business and so distribute it as a dividend to investors. That’s why you can find the best dividend stocks in largecap companies.

Stocks issued by largecap companies are called largecap stocks.

Table of difference between largecap, midcap, and smallcap companies                

Criteria	Smallcap	Midcap	Largecap
Risk	Very high	High	Low
Return	Very high	High	Low
Stability	Low	High	Very high

Which stocks should you have in your investment portfolio?

After familiarising yourself with the types and features of listed companies based on market cap, you may be wondering stocks of which category(ies) you should include in your investment portfolio. Well, the answer is to have a diversify your portfolio. Doing this would help minimise the risk.

When doing so, invest in a combination of smallcap, midcap, and largecap stocks based on these factors:

• Goals
• Risk appetite
• Return expectation

For instance, if you are looking to invest for retirement, you can consider investing a larger portion of your portfolio in largecap stocks as they are stable. On the other hand, if you can stomach high risk and are looking to create wealth over years, you can consider allocating the majority of funds in smallcap and midcap stocks.

Shortcomings of market cap as a method to evaluate a company

Though the market cap of a company indicates the risk associated with its stock and potential returns it can generate, this method is not versatile. This is mainly because the market capitalisation is influenced by various factors:

• Demand for a company’s products and the ability to meet it
• Fluctuations in the market
• Reputation and reliability of a company
• Change in the stock prices
• Exercising the warrant on stocks
• Performance of competitors
• Change in the number of outstanding shares due to buyback of shares, issuance of new and bonus shares

Alternative to value a company: Enterprise value

Since market cap only considers the equity value of a company, the method doesn’t show a fair picture of the entity. Ergo, some investors use the ‘Enterprise value’ to evaluate an entity. This method not only considers the market cap of a company but also its short- and long-term debts, which shows a truer picture of an entity. Here’s the formula.

EV = MP + D – C

Where,

Enterprise value = EV

Market cap = MP

D = Short- and long-term debt

C = cash and cash equivalents, liquid assets of a company but not marketable securities​

NSE indices based on the market cap

Following is a list of NSE indices based on the m cap:

Nifty 50

This is a diversified index that accounts for stocks of top 50 Indian companies listed on NSE belonging to 13 sectors of the market. Nifty 50 represents the performance of the broader market

Nifty 100

This index represents the top 100 listed companies based on the full market cap from Nifty 500 and represents the performance of largecap stocks. The Nifty 100 tracks the combined performance of Nifty 50 and Nifty Next 50

Nifty Next 50

This index represents the 50 companies of Nifty 100 that are excluded in the Nifty 50

Nifty 200

This index reflects the performance of largecap and midcap stocks. It includes stocks of Nifty 100 and Nifty Midcap 100 indices

Nifty 500

This represents the top 500 NSE-listed companies that are selected based on the full market capitalisation from the eligible universe

Nifty Midcap 50

Captures the movement of the stocks of the listed companies in the midcap segment of NSE. Nifty Midcap 50 represents the top 50 Indian companies listed on NSE based on the full m cap from Nifty Midcap 150 index

Nifty Midcap 100

Represents the movement of 100 midcap companies

Nifty Smallcap 100

This index tracks the behaviour of 100 smallcap stocks

Nifty Midcap 150

This represents the next 150 stocks (of companies ranked 101-250) based on the full market capitalisation from Nifty 500. This index measures the performance of midcap companies

Nifty Smallcap 50

This tracks the smallcap segment. The Nifty Smallcap 50 represents the top 50 Indian companies listed on NSE selected based on the average daily turnover from the top 100 stocks selected based on the full market cap in Nifty Smallcap 250 index

Nifty Smallcap 250

The index represents the remaining 250 listed companies (ranked 251-500) from Nifty 500 index. Nifty Smallcap 250 tracks the performance of smallcap companies

Nifty Midsmallcap 400

This reflects the behaviour of the midcap and smallcap stocks. The Nifty Midsmallcap 400 index includes companies belonging to Nifty Midcap 150 and Nifty Smallcap 250 indices

Source: NSE

Conclusion

Now that you know what is market capitalisation and how listed companies are classified based on the same, it is time to do your homework and plan your investments smartly. Most financial advisors swear by one rule of investment–diversification. It is recommended that you don’t park all your funds in:

• Large-cap stocks to dodge risks
• Midcap stocks to be average returns
• Smallcap to earn high returns at the cost of high risk

Instead, analyse your risk appetite, return expectation, and goals before investing in stock(s) of largecap, midcap, and smallcap companies. As mentioned before, diversifying your investments is the best way to optimise your returns.

Why should you prioritise investing?

If you are new to investing, asking “why I need to invest” is a rather sensible question, the answer to which is simple. Assume that you’re a 90s kid. Now go down the memory lane and see if you remember the 25 paise and 50 paise coins. 

If not anything, the coins could at least buy you a ‘peppermint’ or a random toffee. But what value do the coins have now? Can they buy you anything at all? No! And it’s only been close to 3 decades since then.

That’s the whole point.

Money’s worth today is less than what it was yesterday and it more than what it will be tomorrow. The reason: money compounds in value. This cautionary principle of finance is called the ‘time value of money’ (TVM).

Interest: give and take

TVM is why lenders charge interest to their borrowers: because the sum they lend today is worth more than what they may receive tomorrow. It is also the same principle because of which you receive interest on a savings bank account and why you pay more for a piece of cake today than you paid a few years ago.

Saving vs investing

Given an option of receiving Rs 15,000 today or in 5 years, which would you choose? Without doubt, most of you would go with the first option, which then brings you to the next question: would you save it or spend it?

If you would save Rs 15,000, how would you do it? Store the money in your cupboard or park it in a scheme that offers interest? If you choose to do the first, you are only setting aside the money and not adding to its value. But if you take the second route and invest in a scheme, you can earn interest on the sum and grow it (unless, of course, the scheme is a sham).

What is investing?

Investing is an act of allocating money to an asset class with consideration of earning a benefit (return) in the near future. Therefore, it is the only way to grow your savings.

What should you know before investing?

Investing doesn’t mean to allocate your funds blindly. There are certain rules to consider for your investments to bear fruits.

Investments carry zero to high risk

No investment is devoid of risks. Depending on the asset class you choose, your funds are at more than just one type of risks as follows:

1. Market risk: the risk that you may not receive the entire principal amount when the investment matures or asset (gold, house property) is sold
2. Liquidity risk: the risk that you may not be able to sell the asset at the prevailing market price at a short notice. Such a type of risk is high in case of real estate and gold
3. Credit risk: this arises when your borrower is likely to default on repayments and is relevant in the case of bonds and loans
4. Reinvestment risk: is the chance that you may not enjoy returns at the same interest rate on reinvesting your maturity proceeds. This risk may arise in case of bonds and fixed deposits
5. Volatility risk: this is when an asset class doesn’t guarantee returns due to various economic factors. Equity is the best example of investments with high volatility

Risk and return are directly related to each other

As a thumb rule, high risk translates into high returns. While some instruments such as a fixed deposit are known to offer guaranteed returns, there are others like equities that are highly risky and may not yield any returns. However, historically, stocks are known to have generated the highest returns over the long-term. Fixed deposits and bonds, on the other hand, are low-risk vehicles that offer lower returns compared to equities.

The takeaway here is that if you want to chase high returns, you necessarily have to assume high risks. But genius is not in taking high risks with an expectation of earning high returns. Instead, it is in taking calculated risks, which you can stomach without forgoing the principal.

Investments should be in line with your goals

Investing without an objective is like driving without direction. You will go on investing but not have a clear idea of why you are doing so. Therefore, before investing, ask yourself what is your purpose of investing. Do you want to buy a home or a car, fund your children’s education or save for your retirement?

Once you establish an investment objective, you’ll know how much you have to invest. You’ll know the quantum of returns you need to achieve your goal. Besides, you’ll also have an idea of how long you would want to stay invested to accumulate your desired amount.

Start investing early to benefit from the power of compounding

Many people, especially those who are young, ask “Why invest today and not after a few years. The answer to this question is very simple: money gets compounded over time. When you are young and early in career, you have fewer responsibilities, thanks to which you can save and invest more.

Let us say that you are aged 25 and want to accumulate a nest egg for your retirement. Considering you want to retire at the age of 50, you have 25 years in hand to invest. If you postpone investing to, say, 30. You’ll only have 15 years left to invest. Here, the effect of compound interest wouldn’t be as significant as in the case of the first scenario. So, the sooner you invest, the more time your money gets to multiply. There, hope you got the answer to “why invest today”!

Consider tax benefits associated with the investment

In a bid to encourage you to save and invest, the government offers several tax benefits and deductions under various sections of the Income Tax Act. For instance, Section 80C and 80D allow you to claim tax deductions when you make eligible investments and expenses. Besides, the government, from time to time, also announces additional tax benefits as and when they think fit.

Given such lucrative opportunities to save tax, make a smart move by choosing investments that help you save and earn attractive returns. But be mindful when choosing an instrument. It shouldn’t happen that in a bid to save tax, you end up investing in a tax-saving instrument that doesn’t meet your risk profile and/or return expectation.

Folks, we hope to have given not one or two but several good-enough reasons to help you get started. Remember, your money will only grow if you actively put in efforts. Nothing comes easy, not even money!

COVID-19: Decoding The Market Impact

Global markets, including India, have been in a meltdown over the past few sessions, with the US markets registering the fastest 10% decline from record highs inhistory. Nifty too has retreated notably, falling below post-Budget session lows.

Map showing countries where Coronavirus has spread

The red circles represent nations and regions within those nations where the virus has spread. The larger the circle size, the larger is the number of cases in those nations/regions, and vice versa. As can be seen from the above three charts, the virus has now started spreading rapidly worldwide, with a number of confirmed cases and deaths continuing to increase.

• Chemicals:

Going forward the sector may face disruptions in several areas i.e sourcing raw materials from China and managing additional orders from downstream product manufacturers who sourced from Chinese competitors (though this may be transitory).

• Auto & Auto parts:

Delay in resolving corona issue is posing challenges as China is our 2nd largest trade partner in the auto component space. As smaller components are majorly imported from China, we may find an increase prices of components in after market will increase.

Positive:

Aftermarket supplies are directly affected. Prices in aftermarket have increased significantly, which benefits organised players.

• Consumer Durables:

Consumer durable companies will see limited impact on sales in near term as they have inventory of finished goods. However, if raw material supplies from China does not resume from March then companies will start seeing impact in sales with plant shut downs.

The disruption in logistics (mainly the sea routes to and from China) has increased freight cost and will escalate further if things will not get controlled 

• Steel Sector:

China Steel demand gets impacted

We continue to find aftermath of Coronavirus concerning for the sector as:

1) Steel inventory has swelled to record-high levels

2) Supply chain disruptions are expected to owe to the ongoing auto slowdown.

Domestic steel prices fare lower

On the positive side, we are seeing the first signs of a demand pick-up in China. By mid-March, nearly 70% of companies are expected to resume operations.

Banking and Financial Services & Insurance:

Supply disruption may impact the working capital and stretched the payment, hence this may have a negative impact on asset quality.

Deteriorating macro-economic factors due to global supply disruption may have the negative impact personal loans; therefore personal loan growth may be impacted going forward.

Update on Bullions

                                                            
In the past few trading session, Bullions slipped from the higher levels as the war-like situation between US and Iran took a backseat. US-China is about to sign the phase 1 of their trade deal tomorrow, which is building a positive sentiment in the world market as a result of which we saw a correction in Gold.

Technical Levels:

 Gold

Gold has its immediate support at 39250 and resistance is seen at 39650.

Break and close below 39250 will see further correction in it till 39050---38750 levels or else it can touch its resistance level of 39650 again.

The correction in Gold is likely to continue, do not jump to buy yet. If any positive reversal will be seen, we will provide a further updates.

Trade with levels only.

 Silver

Silver has its major support at 45750 and resistance is seen at 46550

Break and close below 45750 will see a downside panic till 45050---44600 levels in the coming days.

If it will be unable to sustain below 45750 levels, then we can expect it touch its resistance level of 46550 again 

No positive sign in Silver is seen yet, do not jump to buy. If any positive reversal will be seen, we will provide a further updates.

Trade with levels only.

Updates on Bullion, Base Metals, and Energy Levels (30th Dec 2019)

Gold traded slightly higher on Monday highest in more than two months on Monday in thin year-end trading as the dollar dipped and U.S. military strikes in the Middle East supported safe haven buying. On the other hand Crude oil traded sideways on the upper level supported by the positive expectation over the US and China trade deal and positive industrial data while traders being cautious on the Middle East following U.S. airstrikes in Iraq and Syria

Today. traders should concentrate on the Goods Trade Balance along with Prelim Wholesale Inventories m/m and Chicago PMI from the house of the US which will impact on Bullions and Base Metals. If the forecast figure match with the actual data then the possible impact are as follows:

Technical Levels

Gold (Feb)

Support at 38900 and Resistance at 39100.

Break and sustain below 38900 will take it to 38650-38500 or else it could test its resistance again.

Fresh buying will do on a close above 39100.

Trade with the levels only.

Silver (March)

Support is at 46450 and resistance is at 47250.

Break and sustain below 46450 will take it to 46000-45800 or else it could test its resistance again.

Fresh buying will do on a close above 47250

Trade with the levels only.

Crude Oil (Dec)

Immediate support at 4370 and resistance at 4450.

Break and sustain above 4450 will take it to 4530 -4550 or else it could test its support again.

Fresh selling will co on a close below 4370.

Trade with the levels only.

Natural Gas (Jan)

Support at 156 and resistance at 163.

Trade within the range and wait for the confirmation.

Nickel (Jan)

Support at 1025 and Resistance at 1060.

Trade within the range and wait for the confirmation.

Copper (Jan)

Support at 443 and Resistance at 448.

Break and close above 446 will take it to 449-451 or else it could test its support again.

Fresh selling will do on a close below 443.

Trade with the levels only.

More will update soon.

Updates on Bullion, Metals, and Energy Levels 26th Dec 2019

Gold traded higher on Thursday as uncertainty around the signing of the 'phase one' trade deal between the United States and China boosted safe-haven flows into the métal. On the other hand, Crude oil traded higher buoyed by a report showing lower U.S. crude inventories, by hopes of an end to the China-U.S. trade dispute and. OPEC-led efforts to constrain supply.

Today, traders should concentrate on the Unemployment Claims from the house of the US which will impact on metal and Bullions segment. If the forecast figure match with the actual data then the possible impact are as
follows:

Technical Levels

Gold (Feb)

Support at 38725 and Resistance at 38860.

Break and sustain above 38860 will take it to 39020-39080 or also it could test its support

again

Fresh selling will do on a close below 38725.

Trade with the levels only.

Silver (March)

Support is at 46850 and resistance is at 47100.

Break and sustain above 47100 will take it to 47250-47400 or else it could test its support again.

Fresh selling will do on a close below 46850.

Trade with tho level only.

Crude oil (Dec)

Immediate support at 4350 and resistance at 4380.

Break and sustain above 4380 will take it 4430 -4450 or else it could test its support again.

Fresh selling will do on a close below 4350.

Trade with the levels only.

Natural Gas (Jan)

Support at 158.50 and resistance at 162.50.

Break and close above 162.50 will take it to 167-168 or else it could test its support again.

Fresh selling will do on a close below 158.50.

Trade safely with the levels only.

Nickel (Jan)

Support at 1040 and Resistance ct 1060.

Break and close above 1060 will take it to 1090 -1100 or else it could test its support again.

Fresh selling will do on a close below 1040.

Trade safely with the levels only.

Copper (Jan)

Support at 443 and Resistance at 446.

Break and close above 446 will take it to 449-45l or else it could test its support again.

Fresh selling will do on a close below 443.

Trade with the levels only.

More will update soon...