Why Share Price is Not Important

Market Cap is the True Measure of a Company's Value

Why is a stock that cost Rs.50 cheaper than another stock priced at Rs.10?
This question opens a point that often trips up beginning investors: The per-share price of a stock is thought to convey some sense of value relative to other stocks. Nothing could be farther from the truth.
In fact, except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.
The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. For that number, we need the market capitalization or market cap number.
The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here’s an example:
Stock price: Rs. 50
Outstanding shares: 50 million
Market cap: Rs. 50 x 50,000,000 = Rs. 2.5 billion
To prove our opening sentence, look at this second example:
Stock price: Rs.10
Outstanding shares: 300 million
Market cap: Rs.10 x 300,000,000 = Rs.3 billion

This is how you should look at these two companies for evaluation purposes. Their per-share prices tell you nothing by themselves.

What does market cap tell you?
First, it gives you a starting place for evaluation. When looking a stock, it should always be in a context. How does the company compare to others of a similar size in the same industry?

The market generally classifies stocks into three categories:
Small Cap under $1 billion
Mid Cap $1 - $10 billion
Large Cap $10 billion plus

Some analysts use different numbers and others add micro caps and mega caps, however the important point is to understand the value of comparing companies of similar size during your evaluation.
You will also use market cap in your screens when looking for a certain size company to balance your portfolio.

Conclusion: Don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn’t tell you much. Focus instead on the market cap to get a picture of the company’s value in the market place.

Understanding EPS

Comparing the earnings of one company to another really doesn’t make any sense, if you think about it. Using the raw numbers ignores the fact that the two companies undoubtedly have a different number of outstanding shares.

For example, companies A and B both earn Rs. 100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?

It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.

EPS = Net Earnings / Outstanding Shares

Using our example above, Company A had earnings of Rs. 100 and 10 shares outstanding, which equals an EPS of 10 (Rs.100 / 10 = 10). Company B had earnings of Rs.100 and 50 shares outstanding, which equals an EPS of 2 (Rs.100 / 50 = 2).

So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what the market thinks of it.

You should note that there are three types of EPS numbers:

• Trailing EPS – last year’s numbers and the only actual EPS
• Current EPS – this year’s numbers, which are still projections
• Forward EPS – future numbers, which are obviously projections

OPEN INTEREST explained!!!

What is Open Interest?
Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day.It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery.Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.

How to calculate Open Interest?

Each trade completed on the exchange has an impact upon the level of open interest for that day.For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract.If both traders are closing an existing or old position ( one old buyer and one old seller) open interest will decline by one contract.The third and final possibility is one old trader passing off his position to a new trader ( one old buyer sells to one new buyer). In this case the open interest will not change.

Benefits of monitoring open interest.

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn.Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend ( up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves.A leveling off of open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market.

Open Interest - A confirming indicator

An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

How is P/E of SENSEX calculated???

SENSEX P/E Ratio can be calculated in the same way as a company's P/E ratio is calculated.
The steps can be like this:

1. Divide Total Market Cap of Sensex Constituents by the total number of outstanding shares of the constituents. This will provide the numerator of the P/E ratio, i.e., price per share.
2. Similarly, total the trailing earnings of all the constituents and divide the resultant sum once again with the total number outstanding shares of the constituents to get EPS, the denominator.
3. Divide the numerator/denominator and you have the Sensex P/E ratio in hand.

A short-cut method is:

P/E = Market Cap/Total Earnings