MARKET CAPITALIZATION

UNDERSTANDING MARKET CAPITALIZATION Let's say in a room there are 100 boxes, each priced at Rs 100. What would be the value of all the boxes? It would amount to Rs100 x 100 boxes = Rs 10,000 If we replace the “boxes” with “shares of a company”, then according to the above working, the cost of all the shares of the company would be Rs 10,000, which is nothing but the total value of outstanding shares or market capitalization of the company. However, this brings us to another term, “OUTSTANDING SHARES”. OUTSTANDING SHARES are shares currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. However, one should note that shares that have been repurchased by the company are not considered as a part of outstanding shares. Now, if the price of the boxes were to go up due an increase in demand, the total prices of the entire set of boxes would go up. Similarly, when the value of the shares goes up, so does the market capitalization. Now the question is why would the price of the share go up or come down? The price of a share would go up, if the demand for the goods of the company rises. It would also go up if people's expectation from the company goes up on the back of a new management, innovation, expected demand or some recognition won by the company. Companies whose total value of Market Capitalization is above x cr. are called “Large Cap” companies. Companies whose Market Capitalization is between y cr. and z cr are called “Mid-Cap” companies and companies whose market capitalization is below w cr. are called “Small Cap” companies. Large Cap companies are thus large and stable companies in relation to Mid Cap companies, which again are seen as more stable in comparison to Small Cap companies. So in terms of risk, the Large Cap companies are the least risky while the “Small Cap” companies are most risky. However, the probability of growth is more in the “Small Cap” companies followed by the Mid Cap companies and then by the Large Cap companies. Hence investors have to decide the balance between risk and return when making an educated and informed decision. The reason why Small Cap companies have a higher probability is because not only are they small but perhaps early into a business with larger growth opportunities into the future. As the companies grow (issue fresh capital and/or increase in share price) they become mid cap companies at some point in time and eventually large cap companies. The reason why Large Cap companies are less risky is because of their size, better brand value, better credit worthiness and better grip over the industry due to their experience.

IIP, the key tracker of industrial production

IIP, the key tracker of industrial production Just like the body temperature when measured, (in degrees Fahrenheit or degrees Centigrade) gives us an indication of the health of the person, in the same way, the IIP is the number denoting the condition of industrial production during a certain period. These figures are calculated in reference to the figures that existed in the past. Currently the base used for calculating IIP is 1993-1994. Importance of IIP IIP represents the state of health of the industry. If the IIP exhibits an increasing trend, it indicates that industrial production is steadily rising, thus indicating a healthy state of affairs for the economy. Under such conditions, one can expect a growth in the GDP. On the other hand, a decreasing trend of IIP indicates falling industrial production which becomes a cause for concern for economic growth. Today it is important because with the news of recession hovering over the horizon, better IIP figures would bring in hope and optimism among investors and the stock market with regards to the state of the economy. Its relation with stock markets The optimism amongst the stock markets and investors may translate into the markets going up. This is because the markets expect that company profits are set to rise and thereby leading to the growth in the country’s GDP. It could also lead to an improvement in the country’s economy, thus making it an attractive investment destination to foreign investors. Computation of IIP The first time IIP was used with the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 7 times. Currently, IIP uses 1993-94 as the reference year. The products included are the ones used on consistent basis and can comprise of small scale sector as well as unorganized production sector. They are segregated into 3 parts: 1. Manufacturing 2. Mining 3. Electricity They are also classified on the basis of usage: 1. Capital goods 2. Basic goods 3. Non-basic goods 4. Consumer durables 5. Consumer non-durables The numbers for IIP are released within 6 weeks after the end of the month. This data is collated from 15 different agencies like The Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization and Central Electricity Authority. But at times, the entire data may not be easily available. Hence, some estimates are done to generate provisional data, which is then used to calculate provisional index. Once the actual data is available, this index is updated subsequently. Though IIP does indicate the condition of the country’s economy, it should not be taken as the sole basis for investment. This is because some sectors may show higher performance on the basis of underlying speculative practices. So one needs to ascertain the reasons behind an increase or decrease in IIP figures, before investing.

HOW TO SPOT A SCAM IN MARKET?

HOW TO SPOT A SCAM IN MARKET? Scams in the stock market are common today. Wondering how you can avoid being affected by them? You must understand the phenomenon and learn to recognize the telltale signs. Read on to know how! With activity in the stock market ever on the rise, scamsters are aware that every investor wants to subscribe to stocks from particular industries, such as software as part of their portfolio because these stocks yield higher returns. Here’s the architecture of a typical scam: Currently, more than 4500 companies are listed in the B2 category on the BSE. The B2 category is a subset of listed shares that have higher market capitalization and liquidity than the rest. Stocks of these companies are hardly traded as these companies are no longer in operation. Scamsters take over and change the entity of such a company to that of a software company. They hire people, install required equipment and claim to process software export orders. In reality, they do not have the requisite infrastructure or personnel to process export orders. Next, they set up a subsidiary abroad by hiring a representative to run operations or by renting a small place. They conduct export transactions using free ports, such as Hong Kong, Singapore, and Dubai. They pay cash in India and obtain dollars from the subsidiary. In the company books, these dollars are reflected as income from exports. The promoters then hire market operators to publish stories indicating huge orders or collaborations and predict excellent profits for the company. This is substantiated by the net profit figure boosted by the forged export income in the company’s books. The Earnings Per Share (EPS) for the company appears healthy and is priced low when compared to other companies, and the stock is deemed to be an excellent buy. A few market operators then start transactions on the stock and increase liquidity for the counter. Consequently, the trade volumes for the share rise. The share price increases 3 to 5 times in a short period of time. The promoters then start taking advantage of this buoyant situation and sell their stocks to investors. The price of the share goes down suddenly and the investors end up with dead stock. The promoters are able to obtain a good price for stocks of their company. Further, they get a tax rebate by converting hoarded cash into export income! So before investing in any stock, do check the company’s background carefully and performance of the stock at least for the past two quarters. It’s best to avoid investing in stocks that show too much fluctuation in prices...............

Difference between Profit and Loss statement and Cash Flow statement

Understanding the difference between P & L statement and Cash Flow statement Let us look at the following examples:- 1) A man trying to swim across a flooded river to grab a huge prize promised to him for doing the feat. 2) A person going hungry for 100 days to win a competition. 3) An employer promising his employee 24 times his monthly salary for a job. But the only catch being that the salary would be paid together at the end of the first year. 4) An organization spends a large sum of money in a brand campaign but does not have enough money left to pay the salaries of the employees. 5) A man buying the best car available but running out of money to buy fuel. 6) A person getting admitted into the best university but having money that would only fund half the course. In the all the above examples, we have seen that somewhere there dangles an appetizing proposition but the path that is drawn up to make it to the goal is fraught with danger. For example, the man who is crossing the river has little probability to survive till the other end. If he cannot make it, then what is the use of the grand prize? Similarly, the person going hungry for 100 days may not live to enjoy the fruits of his perseverance. The employer who promises double salary to the employee takes the thunder away when he places the condition before him that he'll get paid only at the end of the year. How would the employee survive the year without being paid? Likewise, buying a great car but having little left to maintain and run it becomes a futile and meaningless act and so also would be the case when a person goes to the best university only to realize that he does not have enough to fund the entire course. An incomplete course, quite obviously has little value. There is no logical concept like half a doctor or half an engineer or three fourths a lawyer. You are either a professional or you are not. The above examples have been explained to help one understand the difference between the Profit and Loss Statement and Cash Flow statement. While the profit and loss statement gives an indication of the operational efficiency of a business, it does not entirely reflect the cash flow of the business. For example, if you are a sculpture and you invest 10K in materials to sculpt statues. You then sell those to a client for 20K, and make a profit of 10 K. In the P/L statement, you would record this 10 K profit even though you haven't received the money. Now the client may take up to an “X” number of days to pay you. This is one of the main differences between a P/L statement and Cash Flow statement. The P/L statement uses accrual accounting. This is when all revenues are recorded when earned, and expenses when incurred. Now, in your sculpting business, the company may get a huge order and spend a lot of money in supplying the goods on credit, and this as a result would leave the company with inadequate amount of money for salaries. So even if the business opportunity is large, organizations should know how to manage their money. They have to understand that paying employees on time and maintenance of machines need to be given priority over simply chasing orders. This is why the cash flow statement is a reflection of a company's health, whether it is able to pay bills on time and its ability to finance growth. Simply looking at the P/L statement may not give the kind of insights, However, a P/L statement shows a thorough account of revenues and expenses and is helpful for a person to gauge the earnings per share and whether to invest in a company or not. In the end, it is important to look at both of these statements together to get a better understanding of how the business is doing as a whole. Each statement gives vital information, and they work hand in hand. If the net income is low on the P/L statement, then invariably there is a weak cash flow and one will be able to see where the cash is being spent on the cash flow statement. Looking at these statements separately and drawing conclusions will only leave you will half the piece of the pie and leave you in situations like the ones mentioned above.