📝 Topics Covered

• The Sub-Prime Crisis (2007–2008)
• Market Capitalization (M-Cap) & Slabs
• Types of Orders Based on Quantity
• Market Indices (Nifty, Sensex, etc.)
• Important Trading Terms

📉 The Sub-Prime Crisis (2007–2008)

• Cultural Reference: Movie: The Big Short
• Prime Borrower: A borrower who is highly capable of repaying a loan (good credit history).
• Sub-prime Borrower: A borrower with a poor or non-existent credit history.

What Happened? (An Overview)

• The Setup: The Federal Reserve lowered the federal funds rate from 6.5% (May 2000) down to 1% (June 2003).
• The Boom: Low interest rates led to a massive increase in people taking mortgage loans to buy their own homes.
• The Complexity: These home loans were pooled together and turned into complex financial instruments like Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs).
  • The originating banks sold these bundles to Investment Banks (like Lehman Brothers).
  • People were now indirectly paying the Investment Banks, while the original bank acted purely as a middle-man collecting interest fees.
• The Crash: The Federal funds rate steadily climbed back up, reaching 5.25% by June 2004.
  • Due to the increase in rates, sub-prime borrowers could no longer afford their loan EMIs and defaulted on massive scales.
  • This led to a devastating chain reaction where one sub-prime lender after another filed for bankruptcy, eventually causing a global financial meltdown.

🏢 Market Capitalization (M-Cap)

• Definition: The total market value of a company’s outstanding shares at any given time.
• Formula: M-Cap = Total No. of shares × Market Price of one Share

Free Float M-Cap

This metric only counts the shares that are readily available for trading in the open market.

• Excluded: Promoter stakes, Government/Strategic investor stakes, and Lock-in shares.
• Included (Free Float): FIIs (Foreign Institutional Investors), DIIs (Domestic Institutional Investors), HNIs, and Retail investor stakes.
• Formula: Free float M-Cap = No. of free-floating shares × Market Price of shares

Slabs of M-Cap

SEBI categorizes companies based on their market capitalization rankings. These slabs change over time.

• Large Cap:
  • Old Rule: M-Cap > ₹10,000 crores.
  • New Rule: Top 100 companies by M-Cap rank.
  • Note: Generally, highly reliable BlueChip stocks fall under Large Cap.
• Mid Cap:
  • Old Rule: M-Cap between ₹500 to ₹10,000 crores.
  • New Rule: Companies ranking from 101 to 250.
• Small Cap:
  • Old Rule: M-Cap < ₹500 crores.
  • New Rule: Companies ranking 251 and below.

Top Companies in India by M-Cap (Examples)

• Reliance Industries
• Tata Consultancy Services (TCS)
• HDFC Bank
• Hindustan Unilever (HUL)
• ITC / Infosys

🛍️ Types of Orders Based on Quantity

• AON (All or None): An order that must be executed in its entirety or not at all.
• MF (Minimum Fill): An order that requires a minimum specified number of shares to be executed for the trade to go through.
• DQ (Disclosed Quantity):
  • This order enables a buyer/seller to disclose only a fraction of their total actual order quantity to the market.
  • Useful when placing a very large bulk order to prevent dramatic price swings.
  • Generally used by large institutional investors.

📊 Market Indices (Index)

• Definition: An index comprises top companies logically representing all major sectors of an economy.
• Re-balancing: Indices are routinely re-balanced (usually on a semi-annual basis) with a prior intimation of 4 weeks.

Advantages of an Index

• Acts as a Benchmark for Equity mutual funds to compare performance.
• Serves as an Indicator of the overall health of the Economy.
• Allows for Historical & Latest performance comparisons.
• Provides opportunities for Index Investment (like Index Mutual Funds or ETFs).

Types of Indices

• Broad Market Benchmark: Nifty 50, Sensex
• Sectoral Index: Nifty Auto, Nifty IT, Nifty FMCG
• Market Cap Index: Nifty Smallcap 250, Nifty Midcap 150
• Thematic Index: Nifty Consumption, Nifty PSU Bank

The Top Indexes in India

• Nifty 50
  • The flagship index of the NSE (National Stock Exchange).
  • Comprises the top 50 companies.
  • Origin: N-SE + F-IFTY = N-IFTY.
  • Base Value: 1000 | Base Year: 1995.
• Sensex 30
  • The flagship index of the BSE (Bombay Stock Exchange).
  • Comprises the top 30 companies.
  • Origin: Sens-itivity + Ind-ex = Sensex.
  • Launched: 1986. Originally launched backdated to a base of 100 in the Base Year 1979.

(Note: An increase in the M-Cap of a Nifty 50 constituent stock will actively result in an increase in the overall NIFTY index score, following the formula: (New M-Cap - Old M-Cap) / Old M-Cap).

India Index Services & Products Ltd. (IISL)

• A group company of the NSE.
• Owns and manages over 67 indices under the NIFTY Brand.
• Because these indices are IISL products, you can actively Buy/Sell them in the Futures & Options (F&O) segment.
• The inclusion and exclusion of companies in Nifty are decided by IISL.

Lot Size for Trading Nifty: Traditionally 75 shares (subject to SEBI changes). A single lot value might trade high (e.g., ₹8 lakhs), but you can buy it by using margin (e.g., paying ~10% of the price).

Stock Weightage in an Index

The methodology to calculate a stock’s contribution/weightage to the index is based on:

1. Free-float M-Cap (Most widely used).
2. Price Weight.
3. Equal Weight.

🌍 World Indices

• Japan: Nikkei 225
• Hong Kong: Hang Seng
• France: CAC 40
• Germany: DAX
• USA: NASDAQ, S&P 500, Dow Jones

📖 Important Trading Terms

• Bid-Ask Spread: The numerical difference between the best buying price and the best selling price of an asset.
• Block / Bulk Deal: When a massive number of shares change hands in a single transaction. These require official disclosures to the exchange and are monitored by the Market Surveillance Team of BSE, NSE, and SEBI.
• Ring Trading: Illegal speculation/SattaBazi occurring outside authorized exchanges.

Reference

• Subprime Mortgage Crisis, Its Timeline and Effect
• Collateralized Debt Obligations