Stocks and Shares

                            Stocks and Shares

Important Definitions and Results

Ø  The capital of a company is called the stock, e.g. 5% Stock at 97 means that if a person invests Rs 97, hecan buy stock worth Rs.100 and his annual income from the same is Rs.5.

Ø  The convenient unit in which the capital stock of a joint stock company is divided, is called a Share. These shares can be worth Rs.10/100 each. The company raises its capital by means of such shares.

Ø  The persons who purchase shares are called Share Holders.

Ø  The part of the profit of a company which is divided among the share holders is called Dividend. For example, a        20% dividend means that on a share of Face Value Rs.100, the share holder gets Rs.20. Similarly on a share of Rs.10, he gets Rs.2 and so on.

Ø  The value at which a company issues shares is called the Nominal Value, Face Value or Par Value of the share. This value is printed on the share certificate.

Ø  The value at which a share is available in markets is known as Market Value (Market Price) of the share.

Ø  If the Market Value = Face Value, then the share is at par.

Ø  If the Market Value > Face Value, then the share is at premium or above par.

Ø  If the Market Value < Face Value, then the share is at discount or below par.

Ø  When a company likes to borrow money from the shareholders or public for a Fixed Period at a Fixed Rate of Interest, the company issues Debentures or Bonds. So, Debentures are a Debt of a

company.

Ø  A debenture-holder receives interest on the face value of debentures at fixed rate of the company. The interest does not vary. The rate of interest payable by the company is also declared by the company before the issue of the instrument.

Ø  Dividend on Share is also calculated on Face-Value of the share only.

Ø  Shares and Debentures, are generally sold or purchased in a market known as Stock Exchange through authorized persons known as Share—brokers (Brokers).

Ø  Broker's commission is called Brokerage.

Ø  Brokers charge commission from the purchasers and also from the sellers.

Ø  Brokerage is calculated on Market Value of Shares / Debentures

Ø  Share Purchaser has to pay (Market Value + Brokerage)

Ø  Share-Seller will get (Market Value — Brokerage)

Warning against common mistakes

In solving questions on stock, the student must clearly distinguish between cash and stock. A stock is often denoted by the rate of dividend it yields. Hence "5 percent at 98" means that there is a certain stock which pays a dividend of Rs.5 on every Rs.100 (face value).

The market value of Rs.100 stock is Rs.98, i.e. a person can purchase a Rs.100 stock for Rs.98 from the market only and therefore there is a dividend of Rs.5 on an investment of Rs.98, i.e. by spending Rs.98 only, a person can have an income of Rs.5 (here the face value considered is Rs.100).

As per the questions that have appeared in the MBA entrance tests in the past the term stock has been used interchangeably with shares, debentures, bonds.

E20. Find the cost of Rs.9000 (face value), 9% stock at Rs.90.

Sol. . Cost of Rs.100 face value stock = Rs.90

Cost of Rs.9000 stock= Rs. 90/100 x 9000 = Rs.8100

.

E21.Which is the better investment, 6% stock at Rs.90 each or 8% stock at Rs.120 each?

Sol. First find the L.C.M of Rs.90 and Rs.120 which is Rs.360. Assume that he invests Rs.360 in each stock.

Now, the income from first investment = Rs 6 x 360 / 90 = Rs.24.

                                                                                  

The income from second investment = Rs 8 x 360/90    =   Rs 24

                      

Thus , both the investment bring the same income.

E22. Find the sum to be invested in 8% stock, available at Rs.10 premium to secure an annual income of Rs.600. (Assume face value of each stock = Rs.100)

Sol.      For an income of Rs.8, the investment = Rs.110.
For an income of Rs.600, the investment

= Rs. (110 x 600) = Rs.8250.

                  8

E23.A company pays a dividend at 5%. What should be the market price of the stock so that a man gets 6% net rate 

of return on his investment?

Sol. For an income of Rs.6, the investment = Rs.100. For an income of Rs.5, the investment

= Rs. [100/6x5]=Rs.831/3

Market price of Rs. 100 stock should be Rs.831/3

 .

E24.A man invests Rs.8100 partly in 6% stock at Rs.126 and partly in 5% stock at Rs.120. If the income from the two 

investments is the same, then find each of the investments.

Sol. Let the income from each investment be Rs.100. For a income of Rs.6, the investment is Rs.126. .•. for income of Rs.100, the investment

      =126 x 100 = Rs.2100.

               6

Similarly, for a income of Rs. 100, the second investment is

   =Rs. 120/5 x 100 = Rs.2400.  Ratio in first and second investment = 2100: 2400 or 7 : 8.

Obviously, the total investment of Rs.8100 when divided in the ratio 7 : 8 gives the answer, i.e.,

       Amount in the first investment 7x8100= Rs.3780. 15

Amount in the second investment

=8/15 x 8100=     Rs.4320.