Wednesday, October 15, 2008

Equity Shares


If you watch any news channel or listen to any of your colleagues talking you would have invariably heard the term "Shares". The term shares used here refers to "Equity Shares". "Equity Shares" are the most common types of shares and are the most widely traded stock market instruments.

"Equity" means ownership. Anyone who holds one share of XYZ company owns a portion of the company.

How are Equity Shares formed?

Any company that satisfies the conditions laid down by SEBI (Securities and Exchange Board of India) can issue equity shares. SEBI is the governing body for all market related instruments in India.

Let us say XYZ company wants to go public. (Going public is the word used in market terminology to refer to the event of a company issuing equity shares for the first time) It would file an application with SEBI. If it is filing a request to raise a capital of say Rs. 1 crore, it would be issuing 10 Lac equity shares of face value 10 each.

The terms Face value and Market value would be used through this article. Let us first understand what they are.

Face Value - The Face Value of the share refers to the intrinsic value of a share. This is the value at which the company issues its shares to the common public.

Market Value - Once a share is issued to the public, it would be bought and sold through recognized exchanges like the NSE or BSE. The price at which a particular share is being bought /sold is termed as Market Value.

Net capital Raised by the company = 1,00,00,000/-
No. of Shares issued through the public offering = 10,00,000 (Out of these 10 lac shares, the company would be holding at least 51% that is 5,10,000 shares with itself. The remaining 4,90,000 shares would be available for the public)

When XYZ files its application, based on the profit making capability, its revenue etc the company and SEBI would decide on the market value at which the share would be available for the public to buy. Say for e.g., the share with the face value of Rs. 10/- could be available at the price of Rs. 50/- for purchase through the public offering.

Net Amount raised by the company through the public offering = 4,90,000 * 50 = Rs. 2,45,00,000/-

Every individual who wants to buy the shares of XYZ limited would be filling in forms and paying the amount corresponding to the number of shares they want to buy. Say you want to buy 100 shares of XYZ you would be paying them Rs. 5000/- to buy those 100 shares.

Once the process of issuing shares is over the shares would be allotted to the people who had placed the purchase request. Based on the credibility of the company, the no. of people who place requests to buy its shares would vary. Sometimes the issue could be oversubscribed and sometimes it could be under subscribed. If the issue of XYZ limited was oversubscribed, then you may not get the exact 100 shares that you wanted. You may get a certain
number of shares based on the number of times the issue was oversubscribed.
Say you get 60 shares, then the remaining Rs. 2000/- would be returned to you.

Whatever we have discussed about till now is termed as the "PRIMARY MARKET". The Market in which fresh share offerings given by companies are bought.

Once the public issue is over, the share would get listed in any of the two or both of the Registered stock exchanges in India. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Once the companies shares are listed in the NSE/ BSE it would be available for the public to buy/sell. Say at the end of the first trading day the share closes at a
price of Rs. 53/- then the total market capitalization of XYZ limited is = 10,00,000 * 53 = 5,30,00,000/- The Market capitalization of the company would keep varying everyday based on its share price movement.

This Trading that happens everyday on the shares of companies that are listed in registered stock exchanges is termed as "SECONDARY MARKET"


What are the benefits of holding a company's share?

1. If you hold shares of a company, you are one of the owners of that company. Every year the company would send you its annual statement, its profit & loss accounts etc. Also if they have made a good profit, they would even declare a Dividend. A Dividend is something like Interest that you receive from a bank for holding a deposit with it. The only difference is
that you may or may not get Dividends. Assuming you hold 100 shares of XYZ limited and they declare a dividend of 50% per equity share it means you would be getting Rs. 5/- per share that you hold in the company. The Dividend % that any company declares is on the Face value of its share. That is you would be getting Rs. 500/- as a dividend.

2. Whenever the company takes any major decisions like change of the CEO or Acquisition of another company etc, you would be communicated. There would be a share holders meeting and only if at least 51% of the company's share holders approve the corporate action would happen.

3. As you know, the shares of the company would be traded in the secondary market everyday. Say after 3 months the Market value of the share of XYZ limited has become Rs. 70 per share, you can sell the shares of XYZ and make Rs. 7000/- which is a profit of Rs. 2000/- in 3 months.

Note: The last point about profit is the main reason why people tend to trade in the Secondary Market. The price of a share can go either ways. It can both increase & decrease. People who buy the shares of a company whose Market price is increasing make profits and similarly people who hold shares of a company whose market price is decreasing make losses.

Hope you were able to get a basic idea of what an equity share is and how it is used in the Stock Markets.

40 comments:

  1. thanks da for giving me this info

    ReplyDelete
  2. hiii this 's udaya

    i got knowledged about basic .. thx.

    ReplyDelete
  3. Thank you very much...
    I got the things which I wanted in a very simple and clear way...
    Keep going with ur Blogs and suggestions on BNFS domain.....

    ReplyDelete
  4. GREAT JOB MAAAN..THANX A LOT ..

    ReplyDelete
  5. Hi Anand,

    Thanks for the articles. They have been written in a very clear way and is very useful for novices like me.

    Cheers,
    Nirai

    ReplyDelete
  6. thanks brother for the information.
    I am about to invest on the stocks but do not know anything about it..
    But after reading this info... i got a brief idea of what stock is.....and how to invest on it....
    Thanks a lot

    ReplyDelete
  7. heyyyyyyy this great basic thank you so much for your guidance

    ReplyDelete
  8. Hi,

    A Lots of Thanks

    I am looking for this kind of article and i get it here

    very very thanks

    ReplyDelete
  9. A very good tutorial and give me a basis knowledge of stock market

    ReplyDelete
  10. i need details about face value and how to decide market value and who would be decide market value.

    ReplyDelete
  11. Thanx a lot for the info ....

    ReplyDelete
  12. i really appreciate for ur valuable suggestions ......... hope u"ll keep on guiding younsters also in future!!!!!!!!

    I"l request you to plz guidelines more on this thrgh tabular form.......

    ReplyDelete
  13. hey this was a pretty good basic stuff for a beginner thanks

    ReplyDelete
  14. good article...very informative!

    ReplyDelete
  15. It was a gud job...Beginners like me wud definitely find this useful...

    Regds
    Prasanna

    ReplyDelete
  16. thanks fellla!!!!!!!!!!!!
    it's helpful!!!!!!!!!

    ReplyDelete
  17. thanks for u r post..I have little confusion between face value and market value...If possible can u explain me

    ReplyDelete
  18. @ Anonymous

    Face Value - The Face Value of the share refers to the intrinsic value of a share. This is the value at which the company issues its shares to the common public.

    Market Value - Once a share is issued to the public, it would be bought and sold through recognized exchanges like the NSE or BSE. The price at which a particular share is being bought /sold is termed as Market Value.

    Face Value is the value of the share. For ex: If a company that has a net worth of 10 lakhs issues 1 lakh shares, each share has a value of Rs. 10. This would be the face value. The value at which this share is traded in the stock market is the market value. it can be higher or lower than a stocks face value

    ReplyDelete
  19. Hi anand what is day trading..swing trading...position trading?

    ReplyDelete
  20. Day Trading - This refers to buying a share at the beginning of the trading day and selling it before the trading day ends. Shares cannot be held for more than a single trading day by a person.

    Swing Trading - Swing trading is commonly defined as a speculative activity in financial markets whereby instruments such as stocks, indexes, bonds, currencies, or commodities are repeatedly bought or sold at or near the end of up or down price swings caused by price volatility.A swing trading position is typically held longer than a day, but shorter than trend following trades or buy and hold investment strategies that can be held for months or years. Profits can be sought by engaging in either Long or Short trading.

    Position Trading - A position trader may have very similar actions or strategies as a long-term investor, but they will be less concerned with the fundamentals of a company and more concerned with using charts to select and manage positions. Position traders attempt to profit from holding a stock or an ETF for as long a period of time as possible, particularly if they can hold for more than a year and get the benefit of long-term capital gains taxes, which are reduced from short-term capital gains taxes.

    Though most position traders do look at some sort of fundamental analysis, sector strength, or some other non-chart information, they will enter, manage, and exit trades based strongly on the long-term price charts of the weekly, or sometimes even monthly, time frames and try to capture really big market moves as indicated by the charts, indicators, or trends.

    ReplyDelete
  21. Thank u very much to help me by this information.

    ReplyDelete
  22. In day trading you said that "Shares cannot be held for more than a single trading day by a person. " but in the above example,the share holder sold his 100 shares after 3 months(at Rs.70 per share)please explain.one more thing i could not understand is that even if the face value was Rs 10 per share, SEBI and the co had decided its value worth RS 50 per share and the owner bought 100 shares for 50 each(50*100=5000)... now does that mean 50 is the FIRST market value of the share? and all face value is concerned with is just paying dividends??????

    ReplyDelete
  23. @ Vandana

    Yes - Day trading means you sell your shares at the end of day and you cannot hold it for more than one day. The example is about regular share trading where you can hold on to it for as long as you want.

    Yes - that 50 rupees will be the first market value or the offer price of the IPO

    Yes - face value is concerned only with dividend amounts.

    ReplyDelete
  24. hey Anand, very good basic tutorial...keep up the good work....
    i have a question here...
    u said that for any corporate action, at least 51% of the share holder should agree but as you previously mentioned that 51% of the total share would be hold by company itself then that means company can take any corporate action without consent of the any share holders.
    Am i understanding it right?
    or were you talking about the 51% of the public shareholder?

    Cheers!!!
    Ashish

    ReplyDelete
  25. @ Ashish

    If the company owns more than 51% of the shares outright (like Wipro where Azim Premji owns nearly 80%) then they can do so.

    But, in most practical cases, the owners have around 40% or something and the rest is owned by public and other companies. In that case, they have to get the acceptance of majority stockholders before they decide on anything major

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  26. A good Article...Nice one

    ReplyDelete
  27. Anand-many thanx for the sensible tutorial -makes things easier to understand.methinks -am going to visit your blog regularly for an equally sensible approach.
    Prof Jannavi Tandon

    ReplyDelete
  28. Thanks.Appreciate your efforts.Your post is very helpfull.

    ReplyDelete
  29. thnx for the info....:)

    ReplyDelete
  30. Simply great information for beginners....:-)

    ReplyDelete
  31. Anand, still I have doubt in swing trading and position trading ...not getting difference with respect to day trading

    ReplyDelete
    Replies
    1. Deepak - I dont recommend day trading and nor do I give advise on the same. You can contact your Demat account provider to understand what each type of trading is.

      Delete
  32. "Say at the end of the first trading day the share closes at a price of Rs. 53/-"

    What trading day means ? what share closes means ? Can u explain a bit in detail about secondary market. I cant understand it properly !!

    Btw your blog is awesome bro :D

    ReplyDelete
    Replies
    1. Srihari - Trading day means a day when the stock market is open for operations (week days). Share closes means - when the trading day comes to an end.

      Lets say today is the trading day, by 4 pm when the stock market closes, the price of that share is 53 rupees. I have published a book titled "The Most Comprehensive Financial Guide for Women " where I have explained in great detail about primary market, secondary market and everything you will need to learn about investments and finances. you can consider buying that to learn more about them.

      check out a preview of the book and details of its price here: http://anandvijayakumar.blogspot.com/p/books-by-this-blog-author.html

      Anand

      Delete
  33. Thank you sir....

    ReplyDelete
  34. Hi Anand.

    Great blog.

    I want to know when all the shares listed in public(say 49%) are sold by a company and now no one is ready to sell the share. What will happen in such a case?
    Does the company have to put in more shares to be listed in BSE or NSE?
    Does this related to splitting of a share?

    Plz explain...

    ReplyDelete
    Replies
    1. Vinit - A company has 100% shares. 50% or more is held by the promoter/owner and the rest is bought and sold in the market. IF there is no share to buy in the market, nothing happens. people just wait for someone to sell in order to buy thats all. There a minimum % of shares to be available for the public. the higher the volume that is traded in the exchange, the better it is for the company.

      If the company sells of its ownership share of 49% or 50% the whoever owns the most number of shares automatically becomes the owner of the company.

      No, this is not share splitting. In case of share splits - if there are 100 shares in the company, with 50 held by owner and 50 in public, after split, owner will have 100 and public will have another 100

      Delete

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