Equity And Shares

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Investment is time, energy, or matter spent in the hope of future benefits actualized within a specified date or time frame. Investment has a different meaning in finance from that in economics. In finance, investment is buying or creating an asset with the expectation of capital appreciation, dividends (profit), interest earnings, rents, or some combination of these returns.

Ever thought of owning your dream company? Well, all you need to do is go ahead and buy the company and lo and behold you are the owner. Equity, short for equity share, generally refers to a share of ownership in a company. Shareholders are one of the chief stakeholders of the company. Unlike the board of the company, they are not bound by fiduciary duties to ct in the best interests of the shareholders.

Equity Trading

Why Equity ?

We will try to explain why equity is preferred by many who invest.

  • It ensures long term growth of funds.
  • Investors get a part of the company's profits as dividends.
  • As the value of shares owned by the investors goes up in the market, investors can sell them and get higher returns.

Here we try to explain why companies go for equity

  • During the course of business, companies may require funds for investing in R&D, expansion, technology up gradation, diversification etc. It would be attractive, hence, to divide the ownership into small marketable units. Hence equity.

Types of shares

Now that we have seen why shares are attractive to both company and investors we will proceed to see the different types of shares.

  • Common Stock/ Equity Shares - The common equity shares.
  • Preferred Stock/ Preference Shares - The types of shares in which, the investors get a fixed amount of returns every year, and their principal could be redeemed, but don't have voting rights.

Accounts

Following are the different accounts that should be maintained for trading in stock market.

  • Beneficial owner / Demat account - An account with a depository participant in the name of the client for the purpose of holding and transferring of securities.
  • Trading account - Account opened by broker in the name of the investor for maintenance of transactions executed while buying and selling securities.
  • Client / Bank account - A bank account in the name of the client debiting and crediting money due to trading in securities.

Documents

Following are the documents that need to be provided.

  • Proof of identity (PAN cards)
  • Proof of address (any of the electricity bills, telephone bills, ration cards etc.)
  • Bank account details (a cancelled cheque for capturing MICR.)
  • Nominee details.

Trading process

  • Investor/trader decides to trade
  • Order is placed with broker regarding buying/selling, the number/quantity of respective securities are also specified
  • Order is matched with the price order available
  • Order execution is electronically communicated to the broker's terminal
  • Trade confirmation slip is issued to the trader/investor by broker
  • Within 24 hour of trade execution, contract note is issued to investor/trader by the broker
  • Pay in of funds before T+2 days
  • Pay out of funds before T+2 days

IPO

We often come across this word. It stands for Initial Public Offer. It refers to shares floated by a company for the first time. The process of IPO is as follows:

  • Book building is the process of marketing a public offering of the shares of a company.
  • IPO grading is the grade assigned by Credit Rating Agencies (CRAs) registered with SEBI to the Initial Public Offering of equity shares or any other security.
  • The shares are booked by the investors.
  • The shares are traded in primary market for the first time.

Selecting the company

Once the investor has decided to invest in equity, how does he decide which company's shares to buy? There are two criteria for selection:

  • Company fundamentals.
  • Ratios.

Company fundamentals

Company fundamentals refer to the foundation and working of the company. It constitutes:

  • Industry - that is the sector of the industry. Shares of companies of sectors that are performing well also tend to do well at the markets. E.g.: Shares of pharmaceutical firms might do better than let's say, fertilizer firms.
  • Promoters - that is who owns the company. Naturally, companies owned by some of the big corporate families evoke more trust than entrepreneurs.
  • Market Capitalization - the market capitalization of the companies shares are an important measure of its performance.
  • Type of business - that is whether the company is service-oriented or product-oriented. Service-oriented companies may in the short- term show large profits due to small establishment cost.
  • Inception - that is the age of the company. An established company's shares might do well because they are respected and they have lot of experience.
  • Raw materials - the raw materials used by the company affect the company's operations and its profits, these in turn affect the returns. E.g.: company which imports its raw materials has to pay a part of its profits towards import duties; hence, the total amount of profits available to the shareholders also goes down, taking down the dividends.
  • Finished goods - that is who uses the company's products. If they are used by industries, then the performance of those industries affects the company's profits. It's desirable that the company's products are used by different industries so that the probability of loss due to bad performance of one industry is mitigated.
  • Promoter's stakes - that is how much of the company does the promoter own? E.g.: a company in which promoter's stake is 50% is more attractive to the investor than company with 75% promoter stake since, in the former case, 50% shares are available whereas in latter case, only 25% shares are available.
  • Free float - this is the number of shares that are available for trading, it does not include the promoter's stake. The higher the free float, the more attractive the sock.
  • FII holding - this is also a good indicator as; foreign investors would be interested in investing in profitable business.
  • FII cap - this is the industry-wise figure of the foreign investment allowed.
  • Capacity utilization - this is the measure of what proportion of the infrastructure is the company utilizing. E.g.: If a bottle manufacturing unit has a capacity of 2000 bottles/day, it means that it can manufacture 2000 every day. If the company manufactures only 1000 bottles, then its capacity utilization is50%. Capacity utilization indicates the company's efficiency, and also the demand for its products, which in turn indicate it's profitability. And as we know, profitability affects returns.

Ratios

  • Price -to -book ratio (PBR) - PBR is a measure of a company's book value to its current market price. The calculation can be performed in two ways, but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).
  • Deb to equity ratio (D/ER) - D/ER is one of the most important ratios. Formula D/ER = Debt/Equity
  • Dividend Payout ratio (DPR) - The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. Formula - DPR = Dividends/Net Income for the same period
  • Dividend yield ratio (DYR) - The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio. Formula Current Dividend Yield = Most recent full-year dividend/Current Share Price
  • Dividend cover - Dividend cover is the ratio of company's earnings (net income) over the dividend paid to shareholders, calculated as earnings per share divided by the dividend per share. Formula - Dividend Cover = EPS/Dividend Per Share 
  • Return On Capital Employed (ROCE) - ROCE is a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. Formula - ROCE = EBIT/Capital employed *100 
  • Return on Equity (ROE) - ROE shows how well a company uses investment dollars to generate earnings growth. ROE is equal to a fiscal year's net income after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. Formula - ROE = Net Income/Total Equity 
  • Cash profits: This gives the measure of the amount of profits the company earns in terms of cash. It is given by - Profit after Tax + Depreciation
  • Interest coverage: this is the measure of the company's ability to pay its interests to those from whom it has borrowed. This is for the debenture holders. It is given by - EBDIT/Interest 
  • PAT growth:- PAT represents the company's profits left after the payment of tax. The company's PAT growth is given by comparing PAT figures of the current and past years.

Role of advisors

There are two types of advisors:

  • Investment advisors - They advice clients on investment matters on professional basis. An investment advisor could be an individual or a firm.
  • Financial advisors - They are professionals who render investment advice and financial planning services to individuals and businesses. Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation.

A stock index or stock market index is a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average).

Indices

It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of Income from dividends and capital gains, as the value of the stock rises.

Equity Gainer

In financial accounting, owner's equity consists of the net assets of an entity. Net assets is the difference between the total assets of the entity and all its liabilities.

Unfortunately risk is not understood by many investors. In short run, risk is in volatility of price of underlying asset i.e., how much it can rise and fall given a period of time. But in long run risk is not volatility but the risk is to maintain the purchasing power of your money.

Equity Loser

Stock valuations, which are often much higher, are based on other considerations related to the business' operating cash flow, profits and future prospects; some factors are derived from the accounting statements..

Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. As a forex trader you can choose a currency pair that you expect to change in value and place a trade accordingly.

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