Understanding Equity Markets Better!

People who have been following this Blog since sometime, would have come to know by now, that we want to encourage peers in the surrounding to be more vocal & at the same time well equipped with sufficient knowledge in the Financial Markets.

Main Objective of our existence only is to help & educate people to make their own Trustworthy & Reliable Financial Health.

We are now going to start a special & specific Literacy Campaign, totally dedicated to Equity Markets, as per the Reader’s Demand.

Opinions & Suggestions Invited. We want a 2-way Discussion to happen, so as to maximize the benefit for the audience. To attain the same, we are plan to conduct Online Workshops pertaining to highlight the Intricacies of Equity Markets on a monthly basis.

 

Regards,

Bharat

Knowledge Capsule on Stocks Basics

Off Late, I have been getting, most of the queries from the readers, on clarifying the Basic Differences & Aspects of Face Value (FV), Book Value (BV), Stock Splits & Bonus Shares issued & how do these affect our Investments, as an Individual.

Through this Post, I am trying to throw some light on these basic Concepts.

All About Stocks

What is a Face value of a Share?

Face Value (Par Value) of Share

All Companies issue shares, with a fixed denomination called the Face Value (or Par Value) of the share. This Face Value be indicated on the share certificate. Generally Indian shares has a Face Value of Rs. 10/-

Difference between Face Value and Market value

A Face Value has no relation, with the Market Value of the share. Market value of the share, will always change, depending upon the market conditions. But the Face Value, is a fixed value of the share, as per the books of the company.

Difference between Book Value & Market Value

Book Value is the price paid for a particular asset. This price never changes, so long as you own the asset. On the other hand, Market Value is the current price, at which you can sell an asset.

For example, if you bought a house 10 years ago for Rs 30,00,000, its Book Value, for your entire period of ownership, will remain Rs 3,00,000. If you can sell the house today, for Rs 50,00,000, this would be the Market Value.

Book values are useful, to help track profits and losses. If you have owned an investment, for a long period of time, the difference between Book and Market Values indicates the Profit (or Loss) incurred.

Market Value: The Market Value of a stock, represents the price, investors will pay to buy or sell the stock. Market value does not always represent the actual value of the company.

The terms “Overvalued” and “Undervalued” compare the Market Value of a Company’s Stock, to the Company’s Actual value, or Book value.
When a company’s stock, sells for more, than the company’s book value per share, analysts consider the stock Overvalued. Analysts consider stock that sells for less, than the company’s book value per share Undervalued.

For example, a Company’s Stock might trade at Rs 1000 per share, but the Company has a Book Value per share of Rs 900. Analysts would consider this stock Overvalued, because the Market pays more, per share, than the Company is worth.

Book Value: If a company went belly-up (i.e. it goes bankrupt) and sold all of its Assets and subtracted any Liabilities, the remaining value, which investors would receive, represents the Company’s Book Value.

In other words, Book Value, represents the total value of all the assets minus any liabilities. This value often gets referred to as Shareholders’ Equity or Owners’ Equity.

Real World

Because the Market value of a Stock, is driven by Supply and Demand, many Companies trade well above, or often below their Book value.

Split the Face Value of the Share

A Face Value or Par Value of the Company’s share, always remains the same, irrespective of the Market Price, of that share. Companies have to right to Split the Face Value of the share to Rs. 5, 2 or 1, to bring more Liquidity to the share.

Liquidity means, that more number of People, can now buy & sell the Share, as Price is in their reach, before the Split, when it was quoting higher, in Quantitave terms (Rs 4000 Seems to be more per share, as compared to Rs 400 or 40).

What are Bonus Shares?

Bonus Shares are additional free shares, issued to the shareholder by the company. Profitable Companies in India issue Bonus Shares. These are additional shares issues, given to the Shareholder, without any cost to existing shareholders.

What does the Ratio of Bonus Shares mean?

Bonus shares in India are issued in a definite proportion to the existing holding. (Eg. Ratios against the number of shares holding by the shareholder)

Example 2 : 1 bonus would mean, that you will get 2 additional shares (free), for every 1 share, you hold in the company. If you hold 50 shares of a company, a Bonus share of 2:1, will get 100 Bonus shares FREE. So your total number of shares in that company will be 150 instead of 50, without any additional cost (Is that exciting!!)

How Bonus Shares are Issued?

Bonus shares are issued by using on the free reserves of a company. Companies accumulate its reserves, by retaining part of its profit, over the years (the part that is not paid out as dividend). Sooner these free reserves increase. When the company issues Bonus shares, the reserves will convert into the Capital.

Finally you are also not paying for this and the Company profits are not affected.

Does it impact Stock Price?

Bonus Shares issue, adds to the total number of shares, in the market. If a company had 10 lakh shares. Now, with a bonus issue of 2:1, there will be 20 lakh shares issues. Now, there will be 30 lakh shares.

The Earnings of the Company, will have to be divided, by that new number of Shares.

Earnings Per Share (EPS) = Net Profit/ Number of Shares

As the profits remain the same, and the number of Shares increases, the value of Earnings Per Share (EPS) will go down.

In fact, the Stock Price, should also go down proportionately, to the number of new shares. But sometimes, in reality, the share prices may not go down, which gives more advantage to the share holder.

How to Grow your Money?

Makes it Easy to Buy and Sell

Whenever Bonus shares are issued, the stock becomes more liquid. And this make it easier to buy and sell.

Are Bonus Shares Good or Bad for me?

A bonus issue indicates that the company is booming and it is in a position to service its larger equity. Bonus share issue is considered as a Positive Sign for the Company.

Whenever a bonus issue is announced, the Company also announces, a Record date for the issue.

Record date is the date, on which the bonus shares takes effect, and shareholders are entitled to the bonus shares on that date.

Hope it helps. Please do share your feedback.

Carnage in Markets should not deter our Confidence

In the last post, we talked about as to, why are we afraid of Equity Markets?

Why are we Afraid of Equities?

Let’s today discuss, why are we shaken in our own conviction bets, once markets start correcting significantly.

Markets Globally have been correcting these days, due to Chinese Yen Devaluation (which means China is depreciating its own currency, so as to make Exports, across world too much competitive in turn catalysing & igniting the Currency War, specifically for Emerging Market Economies, such as India) & hence India too is not insulated from the economic happenings across the Globe.

This currency war started by China, has resulted in a Crackdown of around 1100 Points & 300 Points in our Broader Benchmark Indices (Sensex & Nifty) today. Shall we also become a part of this panic selling & sell our conviction bets at losses or at a meager profit?

All these meaningless thoughts, are flooded within our brains, from all nook & corners & as per our Human Investing Psychology, we tend to do normally, as per per our belief of our own fear.

Also as very aptly said by King of Wall Street-Mr Warren Buffet-“Buy when others are Fearful & Sell when others are Greedy”.

Hence our strategy, during these times of extreme volatility, should be to move a surplus from our Monthly Earnings, in a systematic way, to our Understandable Businesses & Managements, which definitely would become our conviction bets. This approach, would help us in enjoying the Rupee Cost Averaging. In other words, we should avoid investing Lump sum amounts, when every1 is busy in chasing the climbing stocks.

Food for Thought:            Use SIP Mode for a Long time horizon, even investing a meager amount of money, over years & years & enjoy Multiple benefits of as: Skewed Risk reward ratio in your favor, Rupee Cost Averaging, as said earlier, along with Compounding Growth Machines (High Conviction Stocks or Businesses), which you own stake in, i.e. your conviction stock. This in turn would eliminate the Beta element of risk & volatility as well.

Why are we Afraid of Equities?

Stock Market is a Gambling den— is a very frequently heard quote, which we have become habituated to hear, from our Parents or Traditional Investors. The main goal of these Traditional Investors is Capital Protection with little aim or aspiration for Growth.

I too started on the same notion,being no different from the herd, which has got deep inculcated within me, as my Father has always been fancied by the Conservative Asset Classes such as Fixed Income Instruments-comprising of Recurring Deposit’s (RD’s).Fixed Deposits (FD’s), Kisan Vikas Patra (KVP-Instruments for doubling your money in a span of time, where span stands a variable), Employee Provident Fund (EPF) & Public Providend Fund (PPF) to name a few & to some extent in Gold & Real Estate & those were considered as a Capital Protection Strategy.

Lately over the course of time, Economy & specifically Emerging Markets such as India have overwhelmingly matured & at the same time a monster or devil called Inflation, is always after us to eat a major chunk of our Capital.

Inflation is nothing but Power of Purchasing.

But as an Investor, who are en-cashing their Earning Opportunities, as early as at age of 22,we still have not become matured & flexible enough & are still unaware of the miracles, that could go beyond our imagination, with a simple Equation of Compounding, which we have been reading since our childhood.

Compounding Eqn: A=P* (1+r)^t

We can give ample amount of time for Gold to be with us, as most of the times, we are emotionally attached with this asset class. We never look back to other illiquid asst class: Real Estate. We can stay back relaxed, that my Property is going to give me hefty gains in the future, without anticipating any timeline for the same.

We can give EPF’s, PPF’s & FD’s of all the world, ample amount of time, for our brain-fed conservative or traditional returns, but when it comes to Equity Markets, we cannot refrain ourselves in deciding the Parameter t in the Compounding Eqn.

We want quick bucks in short span of times & finally we chase those stocks which are daily climbing high. Stocks are nothing, but give you an opportunity, to be a co-owner of the business being run by a Management.

What we end up chasing these daily climbing stocks is we buy high & get stuck up at top & once the stock starts its downwards journey, we are under tremendous self acclaimed pressure to sell that at lows, so to minimize our losses.

Why can’t we give an appropriate time to these Excellent or Good Businesses being run by extraordinary or superb & proven Managements & keep our ownership in these companies, close to our chest, as time to sell these stocks is never, as long as companies are growing.

Food for Thought: Are we really matured (Financially Literate) enough, even being so much Educated & excelling at an excellent pace in our professional lives?