- The original value of a share is called its nominal value or face value orprinted value.
- The price of a share at any time is called its market value or cash value.
- If the market value of a share is the same as its nominal value, the share is called at par.
- If the market value of a share is more than its nominal value, the share is calledat premium or above par.
- If the market value of a share is less than its nominal value, the share is called at discount or below par.
- The profit which a shareholder gets for his investment from the company, is called dividend.
- The dividend is always expressed as the percentage of the face value of the share.
- The dividend is always given (by the company) on the face value of the share irrespective of the market value of the share.
- To start any big business (company or industry), a large sum of money is needed and, in general, it is not possible for an individual to invest such a large amount. Then some persons, interested in the business, join together and form a company called joint stock company. They divide the estimated money required into small parts. Each such part is called a share. A share may have value Rs 5, Rs 10, Rs 25, Rs 100 etc. Each person who purchases one or more shares is called a share-holder The original value of a share is called its nominal value(abbreviated N.V.) or face value or printed value.
- The price of a share at any time is called its market value (abbreviated M.V.) orcash value.
- If the market value of a share is the same as its nominal value, the share is called at par.
- If the market value of a share is more than its nominal value, the share is called at premium or above par. If a share of (face value) Rs 100 is selling at Rs 135, then it is said to be selling at a premium of Rs 35 or at Rs 35 above par.
- If the market value of a share is less than its nominal value, the share is called at discount or below par. If a share of Rs 100 is selling at Rs 88, then it is said to be selling at a discount of Rs 12 or at Rs 12 below par. 6. The profit which a share holder gets for his investment from the company is called dividend. The dividend is always expressed as the percentage of the face value of the share. The dividend is always given (by the company) on the face value of the share irrespective of the market value of the share.
Shares are of two types:(i) Preferred shares
(ii) Common shares or ordinary shares.
Preferred shares carry a provision that dividend of a specific percent must be paid to preferred shareholders before any dividend is paid to common shareholders. Note that there is no guarantee of any returns; even preferred shareholders will get some dividend only if the company has some profits after paying for all expenses and taxes.
Quotations:
"Shares of 15% at Rs 145" means that
(1) the face value of 1 share is Rs 100.
(2) the market value of 1 share is Rs 145.
(3) the dividend (profit) on 1 share is Rs 15 per annum.
(4) the income on Rs 145 is Rs 15 for one year.
STOCK
Joint stock companies or the government can also raise loans from the market by issuing bonds or promisory notes. They promise to pay a fixed amount (called redemption value) on a future date and interest payments at fixed periods until that time. The money paid to company or government for buying such bonds is called stock. However, even before redemption date, the stock can be sold and purchased in open market, and the rate varies, just like shares. Note that stock can be bought or sold in fractions, unlike shares.
Brokerage
Stocks and shares are sold and purchased in share market through stockbrokers, and their charges are called brokers commission or brokerage. Brokerage is usually calculated as percentage of face value (not market value or sale/purchase value), unless given otherwise.
Note that:
(i) Brokerage is added to market value while purchasing stock/shares.
(ii) Brokerage is deducted from market value while selling.
Thus a Rs 100 stock at 95 and brokerage ½% means that a buyer will spend Rs
to buy a Rs 100 stock, while a seller will get Rs
. The difference between these prices shows profit margin of the broker. In real life, however, brokers use the formula which is beneficial to them. If a share of Rs 100 is selling at Rs 300, they will calculate brokerage as percentage of sale value; if a share of Rs 10 is being sold at Rs 2, they may charge a fixed brokerage of 20 paise per share; if a debenture of Rs 100 is being sold at Rs 80, they will charge brokerage as percentage of face value!
to buy a Rs 100 stock, while a seller will get Rs. The difference between these prices shows profit margin of the broker. In real life, however, brokers use the formula which is beneficial to them. If a share of Rs 100 is selling at Rs 300, they will calculate brokerage as percentage of sale value; if a share of Rs 10 is being sold at Rs 2, they may charge a fixed brokerage of 20 paise per share; if a debenture of Rs 100 is being sold at Rs 80, they will charge brokerage as percentage of face value!DEBENTURES
To meet working expenses, a company may borrow money from the public/shareholders by issuing debentures. They promise a fixed rate of interest for a fixed period. The main difference between stock/shares and debentures is that debentures give a fixed return, whether the company is in losses or profit. Also note that shares form a part of the capital of the company whereas debentures are debt taken by the company.
Example
A man invests Rs 11200 in a company paying 6% dividend when its Rs 100 shares can be bought for Rs 140. Find
- his annual income
- his percentage income on his investment.
Solution
- Since Rs 100 share can be bought for Rs 140,if the investment is Rs 140, income = Rs 6if the investment is Re 1, income = Rs 6/140if the investment is Rs 11200, income = Rs (6/140)×11200 = Rs 480
- Rs 480 is the income on Rs 11200,
