University Of Delhi

Commerce

Finance For Everyone

Unit-5 / Lesson 2

STOCK MARKETS-
SOME BASIC CONCEPTS
(Part 2)
Contents:
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 EQUITY SHARES
• There are 2 kinds of Share Capital as per companies’ law: Equity Share
Capital and Preference Share Capital .
• Equity shares represent the extent of ownership in a company.
• An equity share, normally known as ordinary share is a part ownership
where each member is a fractional owner.
• These types of shareholders in any organization possess the right to vote
and select the company’s management.
• Equity shares are defined as long-term financing options for firms looking to
raise capital.
• Equity share capital remains with the company. It is given back only when
the company is closed.
• there is no fixed rate of dividend on the equity capital.
 Preference Share
• Preference shares are shares in a company that are owned by people who
have the right to receive part of the company's profits before the holders of
ordinary shares are paid.
• Preference shares are always redeemable.
• The maximum duration from issue of preference shares to redemption can
be 20 years.
• If the company enters bankruptcy, preferred stockholders are entitled to be
paid from company assets before common stockholders.
• For instance, if companies decide to pay dividends to their shareholders,
preference shareholders are the first to receive dividend payouts from the
company.
• Preference shareholders don’t have voting rights, whereas equity shares
have voting rights.
 DIVIDEND
• A portion of a company's profit paid to shareholders. Dividend refers to a
reward, cash or otherwise, that a company gives to its shareholders.
• Preferred stockholders, who do not have voting rights, are typically given
preference over common stockholders, who do have voting rights.
• A company may want to reward its shareholders by paying them a certain
amount out of the profits of the company. Such an amount is called dividend.
• Unscheduled dividend payments are known as special dividends or extra
dividends.
• Dividends can be issued in various forms, such as cash payment, stocks or any
other form.
• A company's dividend is decided by its board of directors, and it requires the
shareholders' approval.
• For example, if a company issues a stock dividend of 5%, it will pay 0.05 shares
for every share owned by a shareholder.
Types of Dividends
Cash:This is the most typical form of payment and involves the direct transfer of
cash from the corporation to its shareholders. Payment is typically made
electronically but can also be made via check or cash.
Stock: Stock dividends are paid to shareholders through the issuance of new
shares.
Assets:A corporation is not confined to providing shareholder distributions in the
form of cash or stock. Other assets, such as investment securities, physical assets,
and real estate, may also be distributed by a firm
Special: A special dividend is one issued outside of a company's standard dividend
policy It is typically the outcome of having extra cash on hand for some reason.
Other:A company may not have sufficient funds to issue dividends in the near
future , so instead it issues a scrip dividend, which is essentially a promissory
note to pay shareholders at a later date.
 DEBENTURE
• The root of the word Debenture is the Latin word debenture which means
“there are due”.
• This is a clear hint that Debenture means a kind of debt arrangement.
• A debenture is a type of long-term business debt not secured by any collateral.
• As per companies’ law, debenture means any instrument of a company that is
evidence of a debt.
• A debenture is essentially a long-term loan that a corporate or government
raises from the public for capital requirements.
• For example, a government raising funds to construct roads for the public.
Debenture holders are the creditors.
• Some debentures can convert to equity shares while others cannot.
• Interest paid on debentures is often called coupon.
• Such debentures which can be converted into shares are called Convertible
Debentures and those which cannot be converted into shares are called Non-
Convertible Debentures.
 DEMAT ACCOUNT
• A demat account helps investors hold shares and securities in an electronic
format.
• ‘Demat’ is the shortened form of ‘dematerialization’ which is the process by
which physical certificates of an investor are converted to electronic form.
• Demat accounts began being offered in the year 1996 in India.
• Once stocks are held in dematerialized form in demat accounts, there is less
and less need for holding physical certificates.
• This kind of account is also called a dematerialised account.
• Dematerialisation is the process of converting the physical share certificates
into electronic form, which is a lot easier to maintain and is accessible from
anywhere throughout the world.
• It also helps to keep proper track of all the investments in one place.
 HOLDING PERIOD
• Holding period, put simply, is the period or duration for which an
investor holds the investment before selling it.
• The time for which an investor has ownership of a stock is called the
holding period.
• In simple words , A holding period is the amount of time the
investment is held by an investor, or the period between the purchase
and sale of a security.
• It helps to determine the returns and taxing procedure of any security.
• why holding period is important: taxation. Depending on your holding
period, the tax you are liable to pay may be more or less .
 OPENING PRICE & CLOSING PRICE
• The listed closing price is the last price anyone paid for a share of
that stock during the business hours of the exchange where the
stock trades.
• An opening price is not identical to the previous day's closing price.
• "Closing price" generally refers to the last price at which a stock
trades during a regular trading session.
• The opening price is the price from the first transaction of a
business day. Sometimes these prices are different.
 MARKET CAPITALISATION
• market capitalization-refers to the total value of all a company's shares of stock.
• Market capitalization, or market cap, is one measurement of a company's size.
For example, a company with 20 million shares selling at $50 a share would
have a market cap of $1 billion.
• Market capitalization is the aggregate value of the company based on its
current share price . Market cap can also give you an idea of how stable or risky
a company is.
• Market capitalization is important because it allows potential investors to
understand the true value of companies and size.
• It helps investors to predict the future performance of the stock of a company
because it reflects what the market is willing to pay for the stock.
• It allows investors to understand the relative size of one company versus
another.
 BONUS SHARES

• Bonus shares are additional shares given to the current

shareholders without any additional cost.
• These are company's accumulated earnings which are not given
out in the form of dividends but are converted into free shares.
• Companies issue bonus shares to make their stock more attractive
for retail investors.
 SHARE BUYBACK
• Share buyback, or share repurchase, is when a company buys back its own
shares from investors.
• It can be seen as an alternative way to return money to shareholders.
• Share buy-back also called share repurchase.
• as the name indicates is the process of a company acquiring its own shares.
• The company may buy shares directly from stock market or offer to buys
shares from its shareholders directly at a pre-announced and fixed price .
• Once shares are repurchased, they are considered cancelled, but they can
be kept for redistribution in the future.
 DERIVATIVES
• A derivative is a contract between two parties which derives its value/price
from an underlying asset.
• In other words, derivatives derive their value from the underlying instrument
which could be stocks, bonds, currencies, interest rates, commodities, etc.
• The most common types of derivatives are futures, options, forwards and
swaps.
• It is a financial instrument which derives its value/price from the underlying
assets.
• Its value is determined by fluctuations in the underlying asset.
• Common examples of derivatives include futures contracts, options contracts,
and credit default swaps.
End……