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Important Formulas - Stocks and Shares

1. Introduction
To start a big business or an industry, a large amount of money is required. This may be beyond
the capacity of one or two individuals. Hence, a number of individuals join hands to form a
company called Joint Stock Company.

2. Stock Capital
The total amount of money required by the company is called the stock Capital.

3. Shares or Stock
The whole capital of the company is divided into equal units. Each unit is called a share or a
stock.

4. Shareholder or Stockholder
Each individual who purchases one or more shares is called a shareholder (stockholder) of the
company.
The company issues share certificates to each of its shareholders indicating the number of
shares allocated and the value of each share.

5. Face value
Face value of a share is the value printed on the share certificate. It is also called nominal value
or par value
The face value of a share always remains the same.

6. Market value
The stocks of different companies can be traded (bought or sold) in the market through brokers
at stock exchanges. The price at which a stock is traded in the market is called its market value.
7. a. If the market value of a stock is higher than its face value, the stock is traded at a premium or
above Par
b. If the market value of a stock is same as its face value, the stock is traded at par
c. If the market value of a stock is less than its face value, the stock is traded at a discount or
below Par
8.
The market value (trading price) of a share can vary time to time.
9.
Let's consider an example . Assume that the face value of a company X is Rs.10 and it is now
traded at a premium of Rs.2. Then its market value now is (Rs.10 + Rs.2) = Rs.12.
Similarly, if the company X having face value of Rs.10 is now traded at a discount of Rs.2, it
means the market value of X now is (Rs.10 Rs.2) is Rs.8

10. Dividend
The annual profit of a company is distributed among its shareholders. The distributed profit is
called the dividend.
Dividends are declared annually, semi-annually and quarterly as per the company regulations.
Dividend on a share is normally expressed as a certain percentage of its face value. Sometimes,
it is also expressed as a certain amount per share.

11. Brokerage
As we have seen earlier, stocks of different companies can be traded (bought or sold) in the
market through brokers at stock exchanges. The brokers charge is called brokerage

Brokerage is added to the cost price when the stock is purchased.


Brokerage is subtracted from the selling price when the stock is sold
12.
Number of shares held by a person = Total Investment of the person Investment in 1
share= Total Income from one share=Total Face Value Face value of 1 share

13. What does the statement "Rs.100 , 8% stock at Rs.110" mean?


It means,
The face value of the stock = Rs.100
Market value (MV) of the stock = Rs.110
Annual dividend per share = 8% of the face value = 1008100 = Rs.8
Ie, here , an investment of Rs.110 gives an annual income of Rs.8
Rate of interest per annum = Annual income from an investment of Rs.100 = 8100110 = 7.27%
Please note that generally investors invest in shares not merely because of this annual return.
They also will have a capital gain if the market value the share goes higher.