Shares, Stock and Debentures

what is shares and debentures
  • To start any big business (company or industry), a large sum of money is needed and, in general, it is not possible for an individual to invest such a large amount. Then some persons, interested in the business, join together and form a company called joint stock company . They divide the estimated money required into small parts. Each such part is called a share . A share may have value Rs 5, Rs 10, Rs 25, Rs 100 etc. Each person who purchases one or more shares is called a share-holder The original value of a share is called its nominal value (abbreviated N.V.) or face value or printed value.
  • The price of a share at any time is called its market value (abbreviated M.V.) or cash value.
  • If the market value of a share is the same as its nominal value, the share is called at par .
  • If the market value of a share is more than its nominal value, the share is called at premium or above par. If a share of (face value) Rs 100 is selling at Rs 135, then it is said to be selling at a premium of Rs 35 or at Rs 35 above par.
  • If the market value of a share is less than its nominal value, the share is called at discount or below par. If a share of Rs 100 is selling at Rs 88, then it is said to be selling at a discount of Rs 12 or at Rs 12 below par. 6. The profit which a share holder gets for his investment from the company is called dividend. The dividend is always expressed as the percentage of the face value of the share. The dividend is always given (by the company) on the face value of the share irrespective of the market value of the share.

Shares are of two types:

(i) Preferred shares

(ii) Common shares or ordinary shares.

Preferred shares carry a provision that dividend of a specific percent must be paid to preferred shareholders before any dividend is paid to common shareholders. Note that there is no guarantee of any returns; even preferred shareholders will get some dividend only if the company has some profits after paying for all expenses and taxes.

Quotations:

"Shares of 15% at Rs 145" means that

(1) the face value of 1 share is Rs 100.

(2) the market value of 1 share is Rs 145.

(3) the dividend (profit) on 1 share is Rs 15 per annum.

(4) the income on Rs 145 is Rs 15 for one year.

STOCK

Joint stock companies or the government can also raise loans from the market by issuing bonds or promisory notes. They promise to pay a fixed amount (called redemption value) on a future date and interest payments at fixed periods until that time. The money paid to company or government for buying such bonds is called stock. However, even before redemption date, the stock can be sold and purchased in open market, and the rate varies, just like shares. Note that stock can be bought or sold in fractions, unlike shares.

Brokerage

Stocks and shares are sold and purchased in share market through stockbrokers, and their charges are called brokers commission or brokerage. Brokerage is usually calculated as percentage of face value (not market value or sale/purchase value), unless given otherwise.

Note that:

(i) Brokerage is added to market value while purchasing stock/shares.

(ii) Brokerage is deducted from market value while selling.

Thus a Rs 100 stock at 95 and brokerage ½% means that a buyer will spend Rs to buy a Rs 100 stock, while a seller will get Rs

. The difference between these prices shows profit margin of the broker. In real life, however, brokers use the formula which is beneficial to them. If a share of Rs 100 is selling at Rs 300, they will calculate brokerage as percentage of sale value; if a share of Rs 10 is being sold at Rs 2, they may charge a fixed brokerage of 20 paise per share; if a debenture of Rs 100 is being sold at Rs 80, they will charge brokerage as percentage of face value!

DEBENTURES

To meet working expenses, a company may borrow money from the public/shareholders by issuing debentures. They promise a fixed rate of interest for a fixed period. The main difference between stock/shares and debentures is that debentures give a fixed return, whether the company is in losses or profit. Also note that shares form a part of the capital of the company whereas debentures are debt taken by the company.

Illustrative Examples

Example

A man invests Rs 11200 in a company paying 6% dividend when its Rs 100 shares can be bought for Rs 140. Find

  1. his annual income
  2. his percentage income on his investment.

Solution

  1. Since Rs 100 share can be bought for Rs 140,

if the investment is Rs 140, income = Rs 6

if the investment is Re 1, income = Rs 6/140

if the investment is Rs 11200, income = Rs (6/140)×11200 = Rs 480
  • Rs 480 is the income on Rs 11200,

    percentage of income =(480/11200)×100% = 30/7 %

    =

  • Example

    Mr. Singh invested Rs 8000 in 7% hundred-rupee shares at Rs 80. After a year he sold these shares at Rs 75 each and invested the proceeds in 18% twenty five-rupee shares at Rs 41 each. Find

    1. his gain or loss after a year.
    2. his annual income from the second investment.
    3. the percentage of increase in return on his original investment.

    Solution

    1. Since Mr. Singh invested Rs 8000 at Rs 80 each, the number of shares bought by Mr. Singh = 8000/80 = 100

    Dividend received on one share = 7% of Rs 100 = Rs 7

    Hence the total dividend received after one year = Rs 7×100 = Rs 700

    As Mr. Singh sold his shares at Rs 75 each, the sale value of his shares

    = Rs 75×100 = Rs 7500

    The amount received (proceeds) after a year

    = Dividend received on shares +sale value of shares

    = Rs 700 +Rs 7500 = Rs 8200

    Gain after a year = proceeds -investment

    = Rs 8200 -Rs 8000 = Rs 200
  • Since Mr. Singh invested his proceeds i.e. Rs 8200 in twenty-five rupee shares at Rs 41 each, the number of shares bought = 8200/41 = 200

    Dividend received on one share = 18% of Rs 25

    = Rs (18/100)×25 = Rs 4.75

    Total dividend received on his second investment

    = Rs 4.75×200 = Rs 900
  • The increase in return = dividend on second investment -dividend on first investment

    = Rs 900 -Rs 700 = Rs 200

    The percentage of increase in return on his original investment

    = (200/8000)×100% = 2·5%

  • Example

    A company is authorised to issue 1 lac shares of face value Rs 100 each. It decides to issue 70000 shares in first instance. It fixes application money as Rs 40, allotment money as Rs 30 and first and second calls as Rs 15 each. The company receives applications for 50000 shares only. At a given time if investors holding 6000 shares have not paid first call money and investors holding 4000 shares have not paid second call money, describe various types of capital.

    Solution

    Example

    A man sold Rs 4500 of 3% stock. He sold the stock at 87¾ and invested the proceeds in 4% stock at 98¾. Find the change in his annual income. (Brokerage = ¼%)

    Solution

    Since he sells this stock at 87¾, brokerage ¼%, money received by selling this stock

    = Rs (4/99)×3937.50 = Rs 159·09

    Hence, increase in annual income = Rs 159·09 -Rs 135 = Rs 24·09

    Example

    A small investor holds some 6% preference shares quoting at 112 "cum-div". If he sells just after getting the dividend, what price would he get? What amount would he realise if he holds 50 shares?

    Solution

    Note that "ex-div" means "without dividend" and "cum-div" means including dividend.

    Thus cum-div price = ex-div price +dividend

    As cum-div price is Rs 112, the ex-div price after claiming the 6% dividend is Rs 112 -Rs 6 = Rs 106.

    Also, the amount realised by selling 50 shares = Rs 106×50 = Rs 5300

    Example

    A company has a total capital of Rs 2 crores divided equally into preference shares of 6% and ordinary shares, each of face value Rs 100. It gives an annual dividend of Rs 10 lacs. If a person holds 100 preference shares and 200 ordinary shares, how much dividend does he receive?

    Solution

    As the total capital is Rs 2 crores, the number of preference shares = (1 crore)/100 = 1 lac, and the number of ordinary shares is also 1 lac.

    = 1 lac × 6 = Rs 6 lac

    Dividend paid to ordinary shareholders

    = Rs 10 lac -Rs 6 lac = Rs 4 lac

    Dividend paid to ordinary shareholders

    Exercise

    1. At what price should a 6·25% Rs 100 share be quoted when the money is worth 5%?
    2. At what price should a 6·25% Rs 50 share be quoted when the money is worth 10%?
    3. A man buys Rs 40 shares of a company which pays 10% dividend. He buys the shares at such a price that his profit is 16% on his investment. At what price did he buy each share?
    4. A company with 10000 shares of Rs 100 each, declares an annual dividend of 5%.

    Source: www.ilovemaths.com

    Category: Forex

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