Stock & Shares

Important Formulas: Stocks and 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.

Stock Capital
The total amount of money required by the company is called the stock Capital.

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

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.

Face value
Face value of a share is the value printed on the share certificate. It is also called nominal value or par value. The face value of a share always remains the same.

Market value
The stocks of different companies can be traded (bought or sold) in the market through brokers at stock exchanges. The price at which a stock is traded in the market is called its market value.
If the market value of a stock is higher than its face value, the stock is traded at a premium or above Par.
If the market value of a stock is same as its face value, the stock is traded at par.
If the market value of a stock is less than its face value, the stock is traded at a discount or below Par.
The market value (trading price) of a share can vary time to time.
Assume that the face value of stock of 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 stock of 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.

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.

Brokerage
As we have seen earlier, 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.
Brokerage is subtracted from the selling price when the stock is sold.
Number of shares held by a person
= Total Investment of the person/Investment in 1 share
= Total Income/Income from one share
= Total Face Value/Face value of 1 share

What does the statement Rs. 100, 8% stock at Rs. 110 mean?
It means,
The face value of the stock = Rs. 100
Market value (MV) of the stock = Rs. 110
Annual dividend per share = 8% of the face value = 100 × 8/100 = Rs. 8
i.e., an investment of Rs. 110 gives an annual income of Rs. 8
Rate of interest per annum = Annual income from an investment of Rs. 100 = 8 × 100/110 = 7.27%
Please note that generally investors invest in shares not merely because of this annual return. They also will have a capital gain if the market value the share goes higher.

Example: The price of a Rs. 10 share of a company is Rs. 13 and the company declares dividend of 12%, find how many shares can be purchased for a sum of Rs. 2,600?

Also find - (i) the dividend, (ii) the rate of interest on the investment.

No. of shares = = 200
Nominal value of the shares = 10 × 200 = Rs. 2,000
Dividend = 12% of Rs. 2,000 = Rs. 240
Rate of interest =

Example: A company declares dividend of 12% on Rs. 100 shares. A man buys such shares and gets 15% on his investment. Find at what price he had bought the shares.

Dividend on Rs. 100 share = Rs. 12
Let the market value of a share be Rs. x.
? % income on Rs. x = × 100 ? = 15 ? x = Rs. 80

Example: Which is better investment : (i) 5% shares at Rs. 120 or (ii) 6% shares at Rs. 132? (The nominal value of the share is Rs. 100)

Income-tax on Rs. 3 = 3 × 4 P = 12 P
? Now Rs. 4 = interest on Rs. 100
Now Rs. 4 = interest on Rs. 100
? Rs. 2.88 = interest on Rs. × 2.88 = interest on Rs. 72
? The market price of the stock is Rs. 72.