Understanding Shares and Stocks
Whenever someone starts a new business, some money is needed to start the business. This initial investment is called the CAPITAL. In large companies & enterprises, it is very much possible that there could be more than one person investing the money. These could be either partners or shareholders. Both mean the same thing except for the liability they have for the business. It is easier for a shareholder to quit the business, by selling his SHARES in the stock exchange, whereas a partner cannot leave just like that.
So what is a Share? In simple terms, it is a certificate issued by the business or the company which signifies that the holder of this certificate is entitled to a specific part/ share of profits in the business.
Some Basic Terms
When the business is new, then all shareholders will typically share profits in proportion to the investment that they have made in the business – or in proportion to the number of shares that they hold. The shares issued by the business are sold for usually Rs. 10 or Rs. 100 at the time of the first issue. The amount of money invested during the first time purchase of that particular share is called THE FACE VALUE of that share. After a certain amount of time, when the trading of the shares starts, the value of these shares that an investor might give may be different from the face value of that particular share. To quote an instance, a share of TCS with face value of Rs 1 was quoted at Rs. 900 in the year 2001. While buying or selling shares in the stock exchange, you use an intermediary between the seller and the buyer – the broker. His charges – brokerage – are typically a percentage of the Purchase / Sale price – i.e., the market value and not the face value, but in questions you will always calculate the brokerage on the face value.
The earnings are distributed by the company/ business to the owners of the company through way of dividend. It is always declared as a percentage of the face value of that particular share.
Sometimes, companies require money at somewhat later stage. If the company is making profits, then the market value of the share is higher than the face value of the shares. Then it is said to issue at a premium. Example, TCS is issuing shares, the face value of the shares being INR 10 at INR 200. Therefore, the premium in this case is INR 190. Similarly, if that particular share is issued at a price which is less than the face value of that share, it is said to be issued at a discount.
In so many competitive examinations you see stocks and shares aptitude questions.
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Important points related to Shares and Stocks
- Stock: It is the value of capital of a company, the unit of which is usually Rs. 100 unless stated otherwise. Stock is always bought, sold or held.
- 4 percent at 85: It means that Rs. 100 stock can be purchased for Rs. 85 and Rs. 4 is the annual income on Rs. 100 stock or Rs. 85 investment or cash spent.
- Brokerage: It is the sum of money paid to a stock dealer on the sale and purchase of stocks. It is paid on the face value.
Note: While buying, brokerage is added in the purchase price i.e. it increases the purchase price, whereas while selling, it is reduced from the selling price i.e. it reduces the selling price.
- Stock at par: When the cash price or the selling price of the INR 10 stock is INR 10, the stock is said to be valued at par.
- Stock above par: When the buying price or the selling price of INR 10 stock is more that INR 10, it is said to be valued at above par. In other words, it is said to be valued at a premium.
- Cash: It is the money spent or received while buying or selling the stock. Cash is always invested or received. In other words, when cash is spent, it is also called investment.
- Market Price: The price at which that particular stock is bought or sold, it is called the Market Value or the Market price of the stock.
- Stock below par: When the buying or the selling price of a stock is less than that of its face value, it is said to be sold at a discount. In other words, it is also said to be sold below par.
Important Formulas of Stocks and Shares
In shares and stock questions, there could be two – three methods to find answer to a particular question. It is advised to remember all the following formulas.
- Stock purchased/sold = Investment × 100/Market Price
- Investment/Cash required = Stock × Market Price/100
- Income/Dividend = Stock × Rate/100
- Stock purchased/sold = Income × 100/Rate%
- Investment/Cash required = Income ×Market Price/Rate%
- Income/Dividend = Investment × Rate/Market Price