Share Market Guide (English) by Sudha Shrimali
Ultimate Share Market Trading Book
- There are numerous books available in the market on the subject of share market. However, in this book, The author attempts to elucidate the complicated aspects of financial domain in a clear and simple manner.
- The modus operandi of the share market, commodity market, mutual funds and idiomatic language used in the market are explained with illustrations. The author presents her suggestions for selection of a good broker.
- Explanations on the factors impacting the market, references to historical crashes of the market, asset allocation and discussions on popular methods of investment for the benefit of readers are the special features of the book.
- This would work as a great guide not only for beginner investors but also for students of degree courses, academic certifications and professional examinations.
Know the Share Market
What is a Share?
There are many ways of investing in the capital market; like shares and bonds, debentures, mutual funds or other securities of investment, etc. Each investment has some unique specialties, benefits, purposes and reasons. Of all these ways of investment, the most common and the most popular is the investment made in shares in the share market. Actually, investing in shares is a process of acquiring a part of the ownership of a company. By investing in the shares of a company, the investor becomes a part-owner of the company. In such an investment, while a person reaps the benefits of being a partner in a company, the risks pertaining to the business are also included. Buying and selling the shares of a company are the activities of investment. An investor, who buys the shares (or equities) of a company, becomes its shareholder (or equity holder). The terms 'share', 'equity' and 'scrips' mean the same thing. We must consider the share as the link to a company.
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The Process of Transacting Shares
There are two methods to buy and sell the shares. Shares of the enlisted companies in the stock exchange are bought and sold in the stock exchange. However, an investor can buy and sell shares enlisted in the stock exchange through a broker. Alternatively, the investor can buy the shares from another shareholder or directly from the company. When a company places its shares before the general investor for the first time, and gives them the opportunity to buy its shares, it is called the 'Initial Public Offer'. All other issues after that are called 'Public Issues. The shares presented to the investors for purchase are either new shares issued by the company or some portion of the shares owned by the company. Hence, shares act as a tool of the company for pulling out the capital of the common investor.
Why are Shares Issued?
The requirement of more capital is inevitable for any business firm to increase its business and carry-on the trade. Since this requirement cannot be fulfilled by a handful of people, every company sets up a corporate structure, and includes a large number of people, by selling them its shares, so that they can acquire enough capital in order to fulfill their need. Buying the shares of any classified Public Ltd. Company can prove to be a good choice for any investor because there are no restrictions on the sale of its shares. An investor can buy the shares of any company according to his desire and wisdom, and can sell it off when he gets a good price for them. Thus, he can earn a profit and invest his money elsewhere. So, as long as the investor holds a share, he has the right to the dividend offered to him on his shares. He is also accountable for a part of the risks involved in holding these shares, so that if any company decides to call it back a day, then the shareholders are the last to settle accounts with. As a rule, when such a situation arises, the company gives priority to settle all its dues and debts, and then divides the balance wealth amongst the shareholders. Practically, in most cases, after paying off all its debts, the company is left with no funds and, therefore, during such circumstances, the shareholders do not get anything from the company.
A shareholder in a company has limited responsibility that is, besides the money he pays to the company in lieu of the shares bought by him, the company can, under no circumstances, demand extra money from him. Hence, in a situation where the company has to close down, the equity shareholder has to suffer the greatest loss only because he does not get his money back.
The risk in daily investment and daily share trading is of a different kind. It is generally possible that a person buys the shares at a certain rate and then there is a fall in its value in the share market. In that case, the rate of his shares also falls, and if the investor sells his shares at these rates, then he has to suffer a loss. On the contrary, if the shares are sold at a time when the rates are high, then he makes a profit.
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How Many Kinds of Shares are there?
In common language, equity shares are simply called ‘shares. There are different kinds of shares. Each one has a unique characteristic. Hence, the investor can choose a share according to his requirement and his wisdom. In India, the two kinds of share options are available to the investors are:
Equity share Preference share
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Equity Shares or Ordinary Shares
The shares that the investor acquires from the Primary or Secondary markets are ordinary shares. Such shareholders are part-owners of the company and are accountable for the profit and loss of the company. Their proprietary rights over the company are in accordance with the number of shares they have. They have the right to vote in the general body meeting to formulate the policies of the company. Similarly, they are also partners in the profits, losses and the risks faced in the business. If the company stops its business completely, then after paying off all its liabilities, the company distributes the balance capital wealth amongst the ordinary shareholders in proportion to the number of shares held by them.
Preference Shares
Unlike the equity shares (ordinary shares), the preference shares are issued by the company to the selected investors,
promoters and friend investors as a matter of policy. The price of these preference shares may vary from the current price of the ordinary shares. As against the ordinary shareholder, the preference shareholder does not have the right to vote. The preference shareholdergets a fixed amount of profit (dividend) every year. Generally, the preference shareholders are more secure than ordinary shareholders are, because, in the event of the closure of the company, the preference shareholders are given priority for paying back the capital over the ordinary shareholders. As per its policy, a company can even convert, partly or wholly, the preference shares into ordinary shares. However, if a company is performing very well in its business. then its ordinary shareholder has more advantages.
The preference shareholder is the first to get his share of the profits, but still he is not considered as a partner of the company.
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Based on the profits, there are three kinds of preference shares:
1. Noncumulative Preference Shares: If, for some reason, the company does not earn any profit in the first year, but instead, earns it in the second year, the investor cannot claim profits for both the years. 2. Cumulative Preference Shares: If, for some reason,the company does not earn any profit in the first year and comes to the position of earning a profit in the second year, the investor can claim the dividend for both the years.
3. Redeemed Cumulative Preference Shares:
The capital of such a shareholder is returned to him along with the dividend at the end of the term. The association of such a shareholder with the company is completely for a short term, and depends on the desire of the company.
OPERATION OF SHARES Shares in the Balance Sheet
It is essential to understand how the different kinds of shares are being operated. When we look into the annual report of any company, we can see many topics pertaining to shares referred to as 'Term! Let us try to understand these words:
1. Share Capital
We can see the words like 'equity share'in the debt column of the balance sheet. In the event of closure of the company, this amount should be paid back to the shareholders because this amount is not a part of income or expenditure; hence, it is not shown in the profit and loss ledger. On the contrary, it is enlisted under the name of 'share capital' in the Debt ledger.
2. Authorised Share Capital
Authorised Share Capital' is another term pertaining to the shares which can be seen in the balance sheet. This is the maximum share of the total capital that a company can acquire (up to the defined limit) after issuing the shares. Along with the objectives of the company, its authorised capital is also pre-defined in the company's memorandum. The next concern is the face value of a share. The face value of a share can be Rs. 10, Rs. 5, Rs. 2 or even Re. 1.
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3. Issued Share Capital
Issued share capital means the total number of shares issued until the preparation of the balance sheet. The company can find out the remaining shares it can issue, further by calculating the difference between the issued share capital and authorised share capital, mentioned in the company's memorandum.
In most cases, the issued share capital is kept low because the company never wishes to complete its full limit of authorised share capital in one go. Hence, it utilises only a part of its authorised share capital. Besides the current year data, the previous year's data is also shown in the balance sheet to calculate the change between two years.
Subscribed capital is the total number of shares purchased by the investors (public) out of the issued shares by the company. When the investors buy all the shares issued by the company, then the issued shares and the subscribed share capital become equal. This helps us estimate the total number of shares, purchased shares, and the shares remaining for the investors (public). The final form of share capital is known as ‘paid-up share capital.
5. Bonus or Right Shares
The balance sheet defines the number of bonus shares issued. This tells us the proportion of share capital acquired from selling shares and the proportion of share capital acquired from issuing bonus shares to the investors. Bonus shares are issued to the shareholders free of cost.
Why are Bonus Shares Issued?
The bonus shares are related to capitalisation of reserves'; hence, we need to first understand what 'capitalisation of reserves' means. When a company makes profit during the financial year of its business, then the company reserves the balance amount for future expansion after withholding a part of the amount for its regular liabilities, debts and dividends. Year after year, the company's profits keep accumulating to form a reserve for the company. The company, as perits policy and the government's rules, issues bonuses and capitalises a portion of this reserve capital. Under this process, the existing shareholders receive bonus shares in proportion to their shares. This is called the bonus issue. Thus, the company's reserve fund is converted into equities. Actually, this is just a book entry. No cost is levied on bonus shares and even the number of shareholders remains unaltered.
As such, the proportional ownership of investors also remains unchanged. What can happen is that after issuing bonus shares, the market price of the shares of the company may be proportionate to the bonus issue
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