Equity Shares/ Stocks Market
Equity shares are the shares of Public Limited companies issued to the public for raising capital for the company. The shareholder gains the voting rights in the company and become eligible for receiving dividend when declared.Of all the financial securities equity shares are the most fascinating one. While fixed income investment avenues are important to most of the investors, equity shares seem to capture people’s interest the most. The potential ups and downs associated with equity shares make them interesting and even exciting.
Limited companies raise capital from the market by issuing equity shares to the public. company issues equity shares to the public through a public offer. The price at which shares are issued is known as the offer price which is decided as per the formula prescribed by SEBI. After the public issue the shares get listed in the stock exchanges and get traded. The initial public issue of shares is in the primary market and thereafter when the shares are traded in the stock exchanges it is in the secondary market. The market price of an equity share is the price at which it is traded in the market. If the company performs well equity shares may trade significantly high above the issue price and if the company fails to perform equity shares fall below the issue price,
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Equity Shareholder rights
The equity capital of the company represents the ownership capital and equity shareholders collectively own the company. The shareholders enjoy the following rights.
1, Right to Income: Equity shareholders have a residual claim to the income of the company. That means the income left after satisfying the claims of all others belong to the equity shareholders. But the Board of Directors has the prerogative to decide how it should be split between dividend and retained earnings. Dividend provide current income to equity shareholders and retained earnings get added to the Reserves, thereby increasing the net worth of the company and tend to increase the market price of equity shares.
- Right to control: The equity shareholders have right to control as owners of the company. They elect the board of directors and have the right to vote on every resolution placed before the company. The board of directors in turn selects the management that controls the operation of the company. Hence equity shareholders in theory exercise an indirect control over the operations of the company.
. 3. Pre-emptive right: Equity shareholders have the right to subscribe to the right issues of the company, thereby maintaining their proportional ownership by purchasing additional equity shares issued by the company.
4 Right in liquidation: Equity shareholders have only a residual claim over the Assets of the company in the event of liquidation of the company. Claims of all others- debenture holders, secured and unsecured lenders, preferential shareholders and other creditors- have got prior claim compared to equity shareholders.
Features: Equity shares are to be held in electronic form in Demat accounts. One can buy even one single share. When the company first time issue shares it is done at a predetermined price directly from the company. There after the price is determined by market forces and can be bought and sold at the stock market only. You have to be more than 18 years of age to open demat account. Minor’s demat account can be opened by guardians. You can buy and sell shares in a stock market through a broker who is an intermediary. As shares form part of the company’s capital there is no maturity period and you have to sell them in the market. Shares/stock market investments are considered to be high risk investments and returns are not assured
Stock market in India
The market where outstanding financial securities, mainly the equity shares are traded is referred to as the Stock market. At present the stock market in India consists of seven stock exchanges. The National Stock Exchange or NSE is the largest and premier stock exchange in the country. But the Bombay Stock Exchange BSE established in 1875 is the oldest stock exchange and more companies are listed in the Bombay Stock Exchange compared to the NSE. Equity shares issued to the public at large in the country are to be listed in either NSE or BSE. Listing means admitting the securities of a company to the trading privileges of a stock exchange. Trading in shares in secondary market is permitted only in the stock exchanges and that also through Share brokers. Just like all stock exchanges the brokers are also to be registered with SEBI.
Till recently the shares were traded in the trading floor of the stock exchange just like in any other Marketplace. But now the whole process has changed. All the shares are traded electronically using computers or mobile phone. It is now possible for individuals to use the brokers platform and trade in shares or securities online themselves. A stock exchange decides the rules for delivery of the shares and settlement of funds as per SEBI guidelines. All the shares have to be held in electronic or dematerialised format. Hence public has to open Demat accounts before buying and selling of shares.
Investors and Traders
People enter Stock market for investment purpose or for Trading Purpose. When they invest, they buy shares in companies of their choice and hold on to them for very long time to get dividends and enjoy the growth benefit due to compounding. Traders are short term investors who buy and sell the securities within a short duration say few days or within the same day.
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Fundamental Analysis
The technique/tool helping the Investors is known as Fundamental Analysis. Fundamental Analysis attempt to evaluate a security’s intrinsic value by analyzing the fundamentals of the company. Mainly the following factors :
- Earning Per Share is called EPS. This is a measure of profitability.
- EPS = Net Profit of The Company divided by Number of Outstanding Shares
- Price to Earnings Ratio is called P/E ratio. This is a measure of valuation.
- P/E = Price of Stock divided Earnings Per Share
- Price to Book ratio is called P/B ratio. This is a measure of valuation for banking and financial companies.
- P/B = Price of Stock divided Book Value of Stock/Company
- Debt to Equity ratio is called D/E. This is a measure of indebtedness.
- Debt to Equity Ratio = Total Liabilities of the company divided Total shareholder’s equity
- Return on Equity Ratio is called RoE. It is a profit measure that can be generated with the money that has been invested by its shareholders.
- Return on equity = Net Income of company divided by Shareholder’s equity
Technical Analysis
The Technique which help Traders is known as Technical Analysis. Technical analysts mainly concentrate on the past price history of the shares. Technical analysis is a trading technique used to evaluate and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume over a period of time. Unlike fundamental analysis, Technical Analysis focus on patterns of price movements, trading signals and various other analytical charting tools to evaluate a security’s strength or weakness.
Technical analysis involve putting stock information like prices, volumes on a chart and applying various patterns and indicators to it in order to assess the future price movements. The time frame in which technical analysis is applied may range from intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data to many years.
What makes Technical Analysis an effective tool to analyse price behaviour is explained by following theories given by Charles Dow, who is supposed to be the Guru of Technical Analysis.:
- Price discounts everything
- Price movements are not totally random
- What is more important than why
Fundamental Analysts some times take the help of Technical Analysis for timing the buying and selling decisions, whereas Technical Analysts do not look up to fundamental analysis.
People invest in share market to grow their investment through appreciation of share price. Apart from trading and investing in shares nowadays stock market offers various derivative products like Futures and Options also. These new products have become so popular with people that about 80-90 % of the turnover in the NSE is in the derivative segment..