Equity Bond Basics

download Equity Bond Basics

of 40

  • date post

  • Category


  • view

  • download


Embed Size (px)

Transcript of Equity Bond Basics

  • 8/6/2019 Equity Bond Basics



    Stock market is a term used to describe the physical location where the buying and selling of

    stocks take place as well as the overall activity of the market within a particular country. The

    correct term to be used in pertaining to the physical location for trading stocks is stock

    exchange. Every country may have a couple of different stock exchanges that are usually traded

    on only one exchange although a lot of large corporations may be listed in several different


    Stock markets perform the following functions:

    y Connecting those who seek money with those who can provide it.y Create an auction mechanism in which prices can be decided for investments.y Distributing the future risk of investments across many millions of individuals.y Connecting financial institutions together to create money.


    If you are the owner of a restaurant and you want t0o sell your stock of goods lying in the

    restaurant, you might do it by word-of-mouth, or by placing an ad in the newspaper. This would

    certainly make the whole process a lot easier.

    However, it creates a problem down the line for investors who want to sell their shares in the

    restaurant. The seller has to go out and find a buyer, which can be hard. A "stock market" solves

    this problem. Stocks/Shares of publicly traded companies are bought and sold at a stock market

    (also known as a stock exchange). Bombay Stock Exchange (BSE) is an example of such a


    In your neighborhood, you have a "supermarket" (like Big Bazaar) that sells food. The reason

    you go to Big Bazaar is because you can go to one place and buy all of the different types of

    food that you need in one stop -- it's a lot more convenient than driving around to the vegetable

    vendor, the dairy farmer, the baker, etc. The BSE is a supermarket for shares. The BSE can be

    thought of as a big room where everyone who wants to buy and sell shares of stocks can go to, to

    do their buying and selling.

  • 8/6/2019 Equity Bond Basics


    The exchange makes buying and selling easy. You don't have to actually travel to Mumbai to

    visit BSE -- you can call a stock broker who does business with the BSE, and he or she will deal

    with the BSE on your behalf to buy or sell your shares. If the exchange did not exist, buying or

    selling shares would be a lot harder. You would have to place a classified ad in the newspaper,

    wait for a call and haggle on a price whenever you wanted to sell stock. With an exchange in

    place, you can buy and sell shares instantly.


    The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are

    the two primary exchanges in India. In addition, there are about 22* Regional Stock Exchanges.

    However, the BSE and NSE that have established themselves as the two leading exchanges and

    account for about eighty per cent of the equity volume traded in India.

    The Indian stock markets operate five days a week from 9.55 am to 3.30 pm. They are closed on

    Saturdays, Sundays and other declared Public Holidays.

    The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants,

    Mutual Funds, FIIs and other participants in Indian secondary and primary market is the

    Securities and Exchange Board ofIndia (SEBI) Ltd.


    Wouldn't you love to be the owner of a prosperous business without actually working for the

    company? Imagine having the ownership in companies, seeing those companies grow, and

    collecting the dividend cheques year after year, without involving yourself in the workings of the

    business. This situation might sound like a fancy dream, but it's closer to reality than you might


    Materializing this flight of imagination could be possible only by holding one of the greatest

    tools ever invented for building wealth, undoubtedly, the stocks or equities!!!

    A share of stock (also referred to as equity shares) represents a share of ownership in a company.

    For growth of the business, a company can raise money from the public by offering them

    ownership in return for their money. Once the money is raised, the company lists on the stock

    exchange where the shares of the company can be openly bought and/or sold by the investors. So

  • 8/6/2019 Equity Bond Basics


    basically if you want to invest in a company, you will have to buy the shares of that particular

    company from the stock exchange at the current share price, provided that company is listed on

    the stock exchange.

    Equities are a part, if not the cornerstone, of nearly every investment portfolio. When you start

    on your road to financial freedom, you need to have a solid understanding of equities and how

    they trade on the stock market.

    In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds,

    shareholders' capital or similar terms) represents the remaining interest in assets of a company,

    spread among individual shareholders of common or preferred stock.


    An equity investment generally refers to the buying and holding of shares of stock on a stock

    market by individuals and firms in anticipation of income from dividends and capital gains, as

    the value of the stock rises. It may also refer to the acquisition of equity (ownership)

    participation in a private (unlisted) company or a startup company. When the investment is in

    infant companies, it is referred to as venture capital investing and is generally understood to be

    higher risk than investment in listed going-concern situations.

    The equities held by private individuals are often held via mutual funds or other forms of

    collective investment scheme, many of which have quoted prices that are listed in financial

    newspapers or magazines; the mutual funds are typically managed by prominent fund

    management firms, such as Schroders, Fidelity Investments or The Vanguard Group. Such

    holdings allow individual investors to obtain the diversification of the fund(s) and to obtain the

    skill of the professional fund managers in charge of the fund(s). An alternative, which is usually

    employed by large private investors and pension funds, is to hold shares directly; in the

    institutional environment many clients who own portfolios have what are called segregated

    funds, as opposed to or in addition to the pooled mutual fund alternatives.

    A calculation can be made to assess whether an equity is over or underpriced, compared with a

    long-term government bond. This is called the Yield Gap or Yield Ratio. It is the ratio of the

    dividend yield of an equity and that of the long-term bond

  • 8/6/2019 Equity Bond Basics


    Ownership equity includes both tangible and intangible items (such as brand names and

    reputation / goodwill).

    Accounts listed under ownership equity include (example):

    y Share capital (common stock)y Preferred stocky Capital surplusy Retained earningsy Treasury stocky Stock optionsy Reserve


    Share capital or issued capital or capital stock refers to the portion of a company's equity that has

    been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent

    item of capital value. For example, a company can set aside share capital, to exchange for

    computer servers instead of directly purchasing the servers from existing equity.

    Share capital usually comprises the nominal values of all shares issued, less those repurchased by

    the company. It includes both common stock (ordinary shares) and preferred stock (preference

    shares). If the market value of shares is greater than the their nominal value (value at par), the

    shares are said to be at a premium (called share premium, additional paid-in capital or paid-in

    capital in excess of par).


    Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special

    equity security that has properties of both an equity and a debt instrument and is generally

    considered a hybrid instrument. Preferreds are senior (i.e., higher ranking) to common stock, but

    are subordinate to bonds.

  • 8/6/2019 Equity Bond Basics


    Preferred stock usually carries no voting rights, but may carry a dividend and may have priority

    over common stock in the payment of dividends and upon liquidation. Preferred stock may have

    a convertibility feature into common stock. Terms of the preferred stock are stated in a

    "Certificate ofDesignation".

    Similar to bonds, preferred stocks are rated by the major credit rating companies. The rating for

    preferreds is generally lower since preferred dividends do not carry the same guarantees as

    interest payments from bonds and they are junior to all creditors.


    Capital surplus (also referred to as additional paid in capital, paid in capital in excess of par or

    share premium), is an accounting term that frequently appears as a balance sheet item as a

    component of shareholders' equity. Capital surplus is used to account for the capital that a firm

    raises in excess of the par value (nominal value) of the shares (common stock).

    Taken together, common stock (and sometimes preferred stock) issued and paid plus capital

    surplus represent the total amount actually paid by investors f