Stocks & Shares

To start a big business or an industry, a large amount of money is required. This may be beyond the capacity of one or two individuals. Hence, a number of individuals join hands to form a company called Joint Stock Company.

For example, "stock" is a general term used to describe the ownership certificates of any company, and "shares" refers to the ownership certificates of a particular company. So, if investors say they own stocks, they are generally referring to their overall ownership in one or more companies.

IMPORTANT FACTS AND FORMULAE

1. Stock Capital:

The total amount of money needed to run the company is called the stock capital.

2. Shares or Stock:

The whole capital is divided into small units, called shares or stock.

For each investment, the company issues a 'share-certificate', showing the value of each share and the number of shares held by a person.

The person who subscribes in shares or stock is called a share holder or stock holder.

3. Dividend:

The annual profit of a company is distributed among its shareholders. The distributed profit is called the dividend.

Dividends are declared annually, semi-annually and quarterly as per the company regulations.

Dividend on a share is normally expressed as a certain percentage of its face value. Sometimes, it is also expressed as a certain amount per share.

4. Face Value:

The value of a share or stock printed on the share-certificate is called its Face Value or Nominal Value or Par Value.

5. Market Value:

The stock of different companies are sold and bought in the open market through brokers at stock-exchanges. A share or stock is said to be:

(i) At premium or Above par, if its market value is more than its face value.

(ii) At par, if its market value is the same as its face value.

(iii) At discount or Below par, if its market value is less than its face value.

Thus, if a Rs. 100 stock is quoted at premium of 16, then market value of the stock = Rs.(100 + 16) = Rs. 116.

Likewise, if a Rs. 100 stock is quoted at a discount of 7, then market value of the stock = Rs. (100 -7) = 93.

6. Brokerage:

The broker's charge is called brokerage.

(i)  When stock is purchased, brokerage is added to the cost price.

(ii) When stock is sold, brokerage is subtracted from the selling price.

Remember:

(i) The face value of a share always remains the same.

(ii) The market value of a share changes from time to time.

(iii) Dividend is always paid on the face value of a share.

(iv) Number of shares held by a person

 = Total Investment = Total Income Investment in 1 share Income from 1 share

 = Total Face Value . Face of 1 share

7. Thus, by a Rs. 100, 9% stock at 120, we mean that:

(i) Face Value of stock = Rs. 100.

(ii) Market Value (M.V) of stock = Rs. 120.

(iii) Annual dividend on 1 share = 9% of face value = 9% of Rs. 100 = Rs. 9.

(iv) An investment of Rs. 120 gives an annual income of Rs. 9.

(v) Rate of interest p.a   =   Annual income from an investment of Rs. 100

 = 9 x 100 % = 7 1 %. 120 2

Recapitulation of the concepts – I

1.    Stock Capital: The total amount of money needed to run a company is called its stock capital.

2.    Shares or Stock: The whole capital of the company is divided into equal units. Each unit is called a share or a stock.

3.    Shareholder or Stockholder: Each individual who purchases one or more shares is called a shareholder (stockholder) of the company. The company issues share certificates to each of its shareholders indicating the number of shares allocated and the value of each share.

4.    Dividend: The annual profit distributed among shareholders is called dividend. It is paid annually as per share or as a percentage. Dividend is always paid on the face value of a share.

5.    Face Value: The value of a share or stock printed on the share-certificate is called its Face Value or Nominal Value or Par Value. The face value of a stock always remains the same.

Recapitulation of the concepts – II

1.    Market Value: The stocks of different companies can be traded (bought or sold) in the market through brokers at stock exchanges. The market value of a share changes from time to time. The price at which a stock is traded in the market is called its market value. A share or stock is said to be:

a)    At premium or above par, if its market value is more than its face value.

b)    At par, if its market value is the same as its face value.

c)    At discount or below par, if its market value is less than its face value.

Example: Assume that the face value of a company X is Rs.10 and it is now traded at a premium of Rs.2. Then its market value now is (Rs.10 + Rs.2) = Rs.12.

Similarly, if the company X having face value of Rs.10 is now traded at a discount of Rs.2, it means the market value of X now is (Rs.10 – Rs.2) is Rs.8

2.    Brokerage: Stocks of different companies can be traded (bought or sold) in the market through brokers at stock exchanges. The brokers’ charge is called brokerage.

Brokerage is added to the cost price when the stock is purchased and subtracted from the selling price when stock is sold.

Tip #1: Interpret the question correctly

Rs.100, 10% stock at 120 means:

a)    The face value of stock = Rs.100

b)    Dividend= 10% of the Face Value = Rs.10

c)    Market Value = Rs.120.

Question: Find the cash required to buy Rs.3200, 7.5% stock at 107.

Solution:

Face Value = Rs.3200 => 32 shares must be purchased [Assume Face Value = Rs.100]

Market Price of 32 shares = 3200 x 107 = Rs.3424

Question: In order to obtain an income of Rs.650 from 10% stock at Rs.96, what amount must one invest?

Solution:

Face Value = Rs.100

Dividend = 10% of Rs.100 = Rs.10

Thus, for gaining Rs.650, investment = 96 x (650 / 10) = Rs.6240.

Question: Which is better investment: 11% stock at 143 or 9.75% stock at 117?

Solution:

Let the investment be Rs. X. Then,

Income on 1st stock = X x 11 / 143 = X / 13

Income on 2nd stock = X x 9.75 / 117 = X / 12

Thus, income on 2nd stock > Income on 1st stock. Hence, 2nd stock is a better investment.

Tip #2: If investment is not mentioned, choose the investment in the relevant stock as x

Question: Juno invests a part of Rs.12000 in 12% stock at Rs.120 and the remainder in 15% stock at Rs.125. If her total dividend per annum is Rs.1360, how much does she invest in 12% stock at Rs.120?

Solution:

Let the investment in the 1st stock be X. Then, investment in 2nd stock = 12000 – X.

Income on 1st stock = 12 / 120 x X = X / 10.

Income on 2nd stock = 15 / 125 x (12000 – X) = 3(12000 – X) / 25

=>    X / 10 + 3 (12000 – X) / 25 = Rs.1360.

=>    5x + 72000 - 6x = 1360 x 50.

=>    x = Rs.4000.

Question: Rs.9800 are invested partly in 9% stock at 75 and 10% stock at 80 to have equal amount of incomes. Find the investment in 9% stock.

Solution:

Let the investment in the 1st stock be X. Then, investment in 2nd stock = 9800 – X.

Income on 1st stock = 9/75 x X = 3X/25 & on 2nd stock = 10/80 x (9800 – X) = (9800 – X)/8.

=>    3X / 25 = (9800 – X) / 8

=>    24x = 9800 x 25 - 25x

=>    49x = 9800 x 25

=>    x = Rs.5000.