We often come across terms related to shares and stock markets in the newspapers, and many a times we are not very clear with the meanings of these terms. In this post, an attempt has been made to explain the basic terms related to shares. In some of the following posts; the types of shares, terms related to the stock exchange, derivatives and trading will be discussed.
Share: A share represents a faction of an individual’s ownership in the company. For example, if the equity share capital of a company is Rs 500000, and it is divided into 5000 shares, the value of one share is Rs500000/Rs 5000 = Rs100. Thus, an individual holding 1000 shares has a 20% ownership in the company. There are several types of shares, equity and preference shares being the most common ones.
Face value: The face value of a share means the price of the share. For example, if a company has total equity share capital of Rs 500,000, and the number of shares are 5000, then the face value of each share is Rs 500,000/5000=Rs100.
Issue price: Issue price refers to the price at which the shares are offered to the public. Issue price of a share may be more or less than the face value. If the shares are offered at a price that is greater than the face value, it is said to be issued at a premium. On the other hand, if a share is offered for share at a price less than its face value, it is said to be issued at a discount.
Market Price: Market Price of a share is the price at which the shares are being currently changes.
Now, a trick question: Which amongst the following will be WOW choice:
- A Rs.9 of XYZ and Co. share with face value Rs.1; or
- A Rs.99 of XYZ and Co. share with face value Rs.1?
Well, as long as you have the same amount of money to invest, it doesn’t make a pinch of difference. You will end up with the same amount of percentage holding with XYZ and Co. folks.
Market Capitalisation: The term Market Capitalisation refers to the total value of all shares of a company. For example, if the number of shares are 100 and the market price of each share is Rs 50, the market capitalisation is Rs50*100=Rs 50000. It should be noted that the market capitalisation is not calculated taking into account the face value of a share.
Stock: A stock refers to a bundle of shares. It should be noted that unlike a share, a stock can be expressed in fractional terms. For example, if 1 stock=100 shares, 25% of the stock would mean (25 %)*(100 shares) = 25 shares
Dividend: Dividend refers to that portion of the earnings of the company that are distributed between the shareholders. The dividend is always calculated on the face value of a share.
Divided per share: It is calculated by the formula-(Face value)*(%age divided declared). For example, if a company has declared a dividend of 10%, and if the face value of one share is Rs10, the dividend a person who holds 10 shares of the company is (Rs10*10%)*10= Rs10.
Bonus shares: Bonus refers to those shares that are issued by companies free of cost to the existing shareholders, generally on a pro-rata basis. For example, if a company declares a bonus issue in the ratio of 1:5, each shareholder who has five shares is entitled to receive one bonus share.
Price-Earnings Ratio: It is the ratio of the Market price per share and the Earnings per share. For example, if the market price is Rs10, and the earnings per share is Rs2, the Price Earnings Ratio is Rs 10/ Rs2 = 5. (Earnings per share is calculated by the formula- Profit/Number of shares)
We hope were able to explain clearly the meaning of some frequently used terms. Please feel free to revert back with queries and comments. That’s our dividend for this share of information investment.
(Co-authored with Dola Halder, B. Com. (Honours), SRCC)
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Is the dividend compounded?
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