Formulas
a) The face value of a share always remains the same.
b) The market value of a share changes from time to time.
c) Dividend is always paid on the face value of a share.
d) Number of shares held by a person
$=\dfrac{Total\; Investment}{Investment\; in\; 1\; share}$ = $\dfrac{Total\; Income}{Investment\; from\; 1\; share}$ = $\dfrac{Total\; Face\; Value}{Face\; of\; 1\; share}$
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.
Stock Capital
The total amount of money required by the company is called the Stock Capital.
Shares or Stock
The whole capital of the company is divided into equal units. Each unit is called a share or a stock.
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.
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.
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.
a.At premium or Above par, if its market value is more than its face value.
b.At par, if its market value is the same as its face value.
c.At discount or Below par, if its market value is less than its face value.
The market value (trading price) of a share can vary time to time.
Example :
Assume that the face value of a company X is Rs.10 and it is now traded at a premium of Rs.2. Find Market value ?
Face value of a company X is Rs.10
Traded at a premium of Rs.2
Then its market value now is (Rs.10 + Rs.2) = Rs.12.
Exercise:
Face value of a company X is Rs.10
Traded at a discount of Rs.2
The market value of X now is (Rs.10 – Rs.2) = Rs.8
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.
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.
I). When stock is purchased, brokerage is added to the cost price.
II). When stock is sold, brokerage is subtracted from the selling price.
Number of shares held by a person
$=\dfrac{Total\; Investment}{Investment\; in\; 1\; share}$ = $\dfrac{Total\; Income}{Investment\; from\; 1\; share}$ = $\dfrac{Total\; Face\; Value}{Face\; of\; 1\; share}$
Example:
How many shares of market value Rs. 25 each can be purchased for Rs. 13000 brokerage being 2%?
Cost price of each share = 25 + 2% of 25= 25.50
No.of shares = (13000/25.50)= 509.80
Exercise:
Cost of each share = (20 + 2.5% of 20) = Rs.20.5
Therefore, number of shares = 8200/20.5 = 400
What does the statement, Rs. 100, 9% stock at 120,mean?
a) Face Value of stock = Rs. 100.
b) Market Value (M.V) of stock = Rs. 120.
c) Annual dividend on 1 share = 9% of face value = 9% of Rs. 100 = Rs. 9.
d) An investment of Rs. 120 gives an annual income of Rs. 9.
e) Rate of interest per annum = Annual income from an investment of Rs. 100
=$\left(\dfrac{9}{120}\times100\right)$%=7$\dfrac{1}{2}$%