UnderstandingShares and Stock

Market

Capital appreciation- if the market price of the shares in which you invest increase you will get the maximum benefits from the resulting price difference.

Tax free capital gains- if you hold a share for more than one year before selling it, your income will come under long term capital gains, which is totally tax free.

Tax free dividend- the dividend you receive on your shareholding will be again tax free irrespective of the duration you hold that share.

Side income- investing in share market acts as a source of additional income apart from your professional work. If properly invested, it can multiply your money beyond your wildest imagination.

Why invest in shares?

Requirements for investingYou must turn 18 before you can invest.

After turning 18, you need to have a bank account and a De-mat account.

A De-mat account is special kind of account which allows you to buy/sell shares, debentures, commodities, etc.

A De-mat account can be linked to your bank account.

Shares represent ownership of a company. When an individual buys shares in a company, they become one of its owners.

Shareholders choose who runs a company and are involved in making key decisions, such as whether a business should be sold.

Equity shares

AUTHORIZED SHARES Authorized shares refer to the largest number of shares that a single corporation can issue. The corporation may retain some of the shares in its treasury for future use.

OUTSTANDING SHARESOutstanding shares refer to the number of stocks that a company actually has issued during IPO. This number represents all the shares that can be bought and sold by the public, as well as all the restricted shares that require special permission before being transacted.

FREE FLOATThis refers to a company's shares that are freely bought and sold without restrictions to the public. The float consists of regular shares that many of us will hear or read about in the news.

Terms used for shares

1500 authorised

1300 outstanding

800 free float

500 restricte

d

200 treasury

For example:-A company has 1,500 authorized shares. If it offered 800 shares free floatgave 500 to the executives restricted sharesand retained 200 in the treasury, then

Number of shares outstanding = 1300 shares (800 float shares + 500 restricted shares).

Terms used for shares

Graph

SEBI SEBI stands for securities and exchange board of India.

It is the highest regulatory authority in the country to regulate stock exchanges and share prices.

Companies have to take permission from SEBI to issue more shares.

 Initial public offering (IPO) or stock market launch is when the shares of a company are sold to the general public, on a stock exchange, for the first time.

Through this process, a private company transforms into a public company. IPOs are used by companies to raise expansion capital, to possibly monetize the investments of early private investors, and to become publicly traded enterprises.

IPO is also referred to as "going public.”Example- Alibaba

Initial public offering

A stock exchange is a form of exchange which provides services for stock brokers and traders to buy or sell stocks, bonds, and other securities. Example- NYSE

Brokers:-An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.

Brokers have a special ticket which allows them to trade on stock exchange on behalf of the investors.

Stock exchange

BSE and NSE

Formula for calculating Sensex:(sum of free flow market cap of 30 top companies) × index factor

Where, index factor = 100/market cap value in 1978-79.In 1978-79 Sensex was 100 (the starting value).

Sensex

30 top companie

s

Bombay Stock

Exchange

Nifty50 top

companies

National Stock

Exchange

Short-sellingThe sale of shares that is not owned by the seller. Short selling is motivated by the belief that a share's price will decline.

The seller borrows shares from someone and sells it in the market at a higher price and when the share price drops he buys the shares and gives it back to the person from whom he borrowed.

The borrower charges some commission.

When talking about stocks, fundamental analysis attempts to determine a security's value from underlying factors that affect a company's actual  business and its future prospects. The term simply refers to the analysis of the economic well-being of a financial entity. It involves delving into the financial statements for example revenue, expenses, assets, liabilities etc.

Fundamental analysts look at this information to gain insight on a company's future performance.

Lets study about some fundamental aspects.

Fundamentals

Face value is the value of the share that appears on the certificate and in the balance sheet of the company.

It is the lowest price that can offered at the time of IPO

The face value can be 1 Rs, 2 Rs, 5 Rs, 10 Rs,100 Rs and rarely 1000 Rs.

Different face value depends on company’s policy.

Face value

Market Capitalization• The total market value of all of a company's outstanding shares. •Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share.• The investment community uses this figure to determine a company's size.

Market cap = no of outstanding shares x current market priceFor example:- if the current share price of infosys is Rs 100 and its total no of outstanding shares are 200 then market cap

= 200x100 = Rs 20,000

Other example include - Apple and Tcs

A dividend is defined as a payment made by a corporation to its shareholders. It is the reward given to shareholders for owning stocks in the corporation. So, dividends are a key way for companies to attract investors to buy their stock.

The shareholder does not pay any tax on the dividend they receive.

Dividend is always declared on the face value. It may be declared as a percentage or Rs per share.

Dividend

For example: the face value of the share of Infosys in Rs1 and it declares a dividend of 300%. dividend = face value x percentage = 1 x 300 100 = Rs 3 or the company may simply declare a dividend of Rs 3 per share.This basically means that for ever share you own you will receive Rs3. So if you own 1000 shares of Infosys, you will receive Rs 3000 as dividend.

Dividend Yield reflects the amount paid as dividend per share as a percentage of the share price in markets.

Dividend yield is a way to measure how much cash you are getting for each rupee invested in an shares.

It is generally quoted as percentage of share price.

Dividend yield

For example: if Infosys declares a dividend of Rs 3 per share and its current market price is Rs 100 then the dividend yield (%) will be = dividend x 100 current market price

= 3 x 100 100 = 3%In simple terms its mean that you are getting a return of 3% on your investment in Infosys in terms of dividend.

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

EPS= net income total no of outstanding shares

Earning per share

For example:- if Infosys earns a net income of Rs 9,00,000 for the current financial year and its total no of outstanding shares is 90,000, then its EPS is = 9,00,000 90,000 = Rs 10

A valuation ratio of a company's current share price compared to its per-share earnings. It shows how much investors are willing to pay per rupee of earnings that company generates.

P/E Ratio =Market Value per Share Earnings per Share (EPS)

Price/earning ratio

For example:- The EPS of Infosys is Rs 10 and the current market value is Rs 100, then P/E ratio is = 100 10 = 10This means that investors are willing to put Rs 10 in the company so that the company generates Rs 1by doing its business.

Application of P/E ratioP/E ratio is a comparative measure. It should be compared with industry P/E or P/E of another company in the same sector.

In general, IT companies have higher P/E, while manufacturing companies have lower P/E.

Ideally P/E varies from 10 to 20, but changes according to sectors.Example 1:- the industry P/E of IT sector is 20, while the P/E of Infosys is 24. It means people have higher expectations for Infosys in general.Example 2:-The P/E of Infosys is 24 and that of Wipro is 22. This means Infosys is more expensive than Wipro.

The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

When the book value is divided by the total no of outstanding shares we get book value per share. It is the part of the company's assets that shareholders would theoretically receive if a company were liquidated. This is called book value per share(BVPS).

Book value

For example:- if the total assets of Infosys is Rs 10,00,000, its tangible assets is Rs 2,00,000 and its currents liabilities are Rs 1,00,000 then, Book value= 10,00,000-2,00,000-1,00,000 = Rs 7,00,000BVPS = 7,00,000/ 90,000 = Rs 7.78

To raise more funds, the promoter may take loan from the market and as security he may give a part of his shareholding to the creditor.If the promoter is unable to pay back the loan amount in time, the creditor may start selling the share in the market that will bring down the share price. Example- jubilant food works

Pledged shares

The number of shares or contracts traded in a security or an entire market during a given period of time.

It is simply the amount of shares that trade hands from sellers to buyers as a measure of activity.

If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period.

The higher the volume during that price move the more significant the move.

Volumes

For example:- If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction.

News affect the price of the share in the short term. News can pertain to a single company or the economy in general.

It should be noted that a share should not be purchased/sold just because you heard some good or bad news about it.

1. Direct news• This type of news affect the share price directly. It may be

favorable or unfavorable.• This news may be related to some new product launch or news

of some inside embezzlement in the company.

Impact of news

For example:- the news reads “Honda to launch new car Mobilio”This will increase or decrease the Honda share price depending the utility of the car and response from the public.

(but this is not necessary every time since the share of the company depends on many other factors)

2. Indirect news• This type of news may require some inference as to

how it will affect the shares you hold. Again it may be favorable or unfavorable.

• It may include declaration of good financial results by your companies competitor, or any new government policy affecting the business of your company or some new technology adopted by your competitor etc.

Impact of news

For example:- the news reads “aviation fuel to go down, airlines happy”.This news might increase the share price of spice jet.

(but again I repeat this is not necessary every time since the share of the company depends on many other factors)

Mutual funds An investment programme that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.

Mutual funds

Always invest for the long-term- The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high.

Don't rely solely on 'good advice’- A smart investor should never invest buy shares of companies he doesn't know much about. Relying on 'advice' from friends is not always a great idea. Do some groundwork yourself.

Diversify your portfolio- Diversification can help an investor manage risk and reduce the volatility of an asset's price movements. The key is to find a medium between risk and return; this ensures that you achieve your financial goals without taking much tensions.

Don’t Invest Money You Can’t Afford to Lose- Don’t ever invest money that you cannot afford to lose. Investing should only be done with your “capital” – that is the money you’ve set aside to grow your wealth long-term.

Precautions while investing

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