More about Market-caps.

Hi there,

Market capitalisation or “market cap” is a simple indicator of the value placed on a company by the market at today’s prices. The computation of market capitalization and its meaning has been explained in beginners lessons 3:Market capitalization. Now let’s get into more details on market-cap. Stocks are classified into large, mid or small cap, based on their overall market cap. Indices such as the BSE Sensex and the CNX Nifty represent a basket of large-cap stocks.
However, What was a small-cap stock a few years earlier may graduate to a large-cap status, as the company ramps up in size and gains greater recognition from the market.

WHERE SHOULD YOU INVEST?

Well, that’s a difficult question to answer since much would depend on an investor’s attitude, age, financial capacity, investing aims and his ability to take risks. What I can do is to give you some pointers as to what you can expect by investing in these different caps.

WHAT TO EXPECT FROM LARGE CAPS.

1.Steady growth: Large-cap stocks usually represent well-known companies with a sizeable scale of operations; they often carry the potential for steady growth in line with the economy.
2.Less volatility: Earnings of Large cap companies will seldom grow in leaps and bounds, but may exhibit fewer surprises from quarter-to-quarter or year-to-year, as they are tracked by a veritable army of analysts!
3.Darling of FII’s: Foreign institutional investors seeking to dip their toes into the Indian markets often make their first investments in large-cap stocks. If you are the conservative type, and would like to buy and hold for the long term, you should probably pick your investments from the basket of large-cap stocks.
4.Leader of the pack:Large-caps are usually the first to lead any market recovery, while mid- and small-cap stocks tend to join in later.
5.Above par performance in bullish market: Large-cap stocks will usually perform well than mid and small caps during bullish periods.
6.Dividends:large cap companies generally have the history of paying out regular dividends.Small and mid-cap companies may not pay regular dividend since they keep investing the surplus in more ambitious projects.

WHAT TO EXPECT FROM MID CAPS AND SMALL CAPS.

1.High growth :Mid- and small-cap stocks usually represent companies that are in nascent businesses or those that are lower in the pecking order, within a sector, in terms of revenues or market share.
2.High volatility: Earnings of mid-cap and small-cap companies will grow in leaps and bounds and they may come up with surprises from quarter-to-quarter or year-to-year, resulting in high variation in stock prices.
3.Multi-baggers hide here: If you are hoping to find multi-baggers, you must invest in mid- and small-cap stocks.
4.High returns and high risk: Midcaps offer potential for higher returns because of their ability to register earnings growth at a faster pace. At the same time , you should be aware that they often carry higher risks than large caps. Their earnings could suffer bigger blips because of vulnerability to a downturn in the business.
5.Less liquidity: Small and mid-cap stocks are often not traded as actively as large caps, dwindling volumes could magnify the decline in prices of such stocks in the event of a market meltdown. It is, therefore, important to put your choice through a liquidity filter (check for the stock’s historical trading volumes over a couple of years) before investing in mid- or small-cap stocks.
6.First to fall in a market crash: If you are booking profits on your portfolio because you expect a big correction, your mid- and small-cap stocks should probably go first, as they would be most vulnerable to any meltdown in prices.
7.Below par performance during uncertainty: Mid- and small-cap stocks will usually under-perform large caps during periods of high uncertainty.
8.Least preferred stocks during uncertainity:Global events impacting FII flows , political upheavals or financial instability often prompt a “flight to safety” which results in liquidity fleeing mid- and small-cap stocks into the tried-and-tested large-caps.

TIPS FOR BALANCED APPROACH

If you now have a grip on how large-, mid- and small-cap stocks behave, here are a few additional pointers on investing based on market cap:
Tip #1:Maintain a balance: Maintaining a balance between large-, mid- and small-cap stocks in your portfolio is as important as spreading your investments across different sectors and businesses. Typically, you should have 60 % of your money invested in large caps, 30% in mid caps and 10% in small caps.
Tip #2:Never stick to a single cap: Making investments only in small and mid-cap stocks could make for high volatility while sticking only with the large-caps could deliver modest results.
Tip#3:Analyse your risk tolerance capacity: Decide on your allocations to each group based on your appetite for risk and to adhere to this, irrespective of market conditions.
Tip#4:Do your home work: shift your allocations between large-, mid- and small-cap stocks based on market conditions. That would give you maximum results. But practicing such a strategy is not for beginners. It can be quite difficult and may require timing skills and analytical abilities.

Have a nice Day !

You may like these posts:

  1. Measurement of size- market capitalization
  2. Understanding Earnings Per Share (or EPS)
  3. What drives the stock market ?

1 Response to “More about Market-caps.”

Christiana

September 20, 2011 at 5:41 pm

Kudos! What a neat way of thiinkng about it.

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