STOCKS AND SHARES

To start a big business or an industry, a large amount of money is needed. It is beyond the capacity of one or two persons to arrange such a huge amount. However, some persons associate together to form a company. They, then, draft a proposal, issue a prospectus(in the name of company), explaining the plan of the project and invite the public to invest money in this project. They, thus, pool up the funds from the public, by assigning them shares of the company.

 IMPORTANT FACTS AND FORMULAE

1. Stock-capital: The total amount needed to run the company is called the stock-capital
2. Shares or stock: The whole capital is divided into small units, called shares or stock.
• For each investment, the company issues a share-certificate, showing the value of each share and the number of shares held by a person.
• The person who subscribers in shares or stock is called a share holder or stock holder.
3. Dividend: The annual profit distributed among share holders is called dividend.
• Dividend is paid annually as per share or as a percentage.
4. Face Value: The value of a share or stock printed on the share-certificate is called its Face Value or Nominal Value or Par Value.
5. Market Value: The stocks of different companies are sold and bought in the open market through brokers at stock-exchanges. A share (or stock) is said to be:
1. At premium or Above par, if its market value is more than its face value.
2. At par, if its market value is the same as its face value.
3. At discount or Below par, if its market value is less than its face value.
• Thus, if a Rs.100 stock is quoted at a premium of 16, then market value of the stock = Rs. (100+16) = Rs. 116.
• Likewise, I f a Rs. 100 stock is quoted at a discount of 7, then market value of the stock = Rs. (100-7) = Rs. 93.
6. Brokerage: The broker’s charge is called brokerage.
1. When stock is purchased, brokerage is added to the cost price.
2. When stock is sold, brokerage is subtracted from the selling price.
7. Remember:
1. The face value of a share always remains the same.
2. The market value of a share changes form time to time.
3. Dividend is always paid on the face value of a share.
4. Number of shares held by a person

                                                                  

=      Total Investment_ =    _Total Income    _  =      _Total Face Value

    Investment in 1 share      Income from  1 share      face Value of 1 share

Thus, by a Rs. 100, 9% stock at 120, we mean that:
(i) Face Value (N>V) of stock = Rs. 100.
(ii) Market Value (M>V) of stock = Rs. 120.
(iii) Annual dividend on 1 share = 9% of face value = 9% of Rs. 100 = Rs. 9.
(iv) An investment of Rs. 120 gives an annual income of Rs. 9.
(v) Rate of interest p.a = Annual income from an investment of Rs. 100.
       =   (9/120 * 100) % = 7 (1/2) %.

Ex. 1. Find the cost of:

 (i) Rs. 7200, 8% stock at 90;
 (ii) Rs. 4500, 8.5% stock at 4 premium;
 (iii) Rs. 6400, 10% stock at 15 discount.

Sol.     (i) Cost of Rs. 100 stock = Rs. 90
         Cost of Rs. 7200 stock = Rs. (90/100 * 7200 ) = Rs. 6480.

          (ii) Cost of Rs. 100 stock = Rs. (100+4)
          Cost of Rs. 4500 stock = Rs. (104/100 * 4500 ) = Rs. 4680

        (iii) Cost of Rs. 100 stock = Rs. (100-15)
        Cost of Rs. 6400 stock = Rs. (85/100 * 6400 ) = Rs. 5440.

Ex. 2. Find the cash required to purchase Rs. 3200, 7(1/2) % stock at 107                                 (brokerage (1/2) %)

Sol.  Cash required to purchase Rs. 100 stock = Rs (107+(1/2)) = Rs. (215/2).
         Cash required to purchase Rs. 100 stock = Rs [(215/2)*(1/100)*3200] = Rs. 3440.

Ex. 3. Find the cash realised by selling Rs.  2440, 9.5% stock at 4 discount (brokerage (1/4) %)

Sol. By selling Rs. 100 stock , cash realised = Rs. [(100-4)-(1/4)] = Rs. (383/4).
        By selling Rs. 2400 stock, cash realised = Rs. [(383/4)*(1/100)*2400] = Rs 2298.