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1. INTRODUCTION

Over the last few decades, the average person's interesting the equity market has grown

exponentially. This demand coupled with advances in trading technology has opened up the

markets so that nowadays nearly anybody can own equity. Despite their popularity, however, most

people don't fully understand equity. Chances are you've already heard people say things like

"Watch out with equity--you can lose your shirt in a matter of days!” People thought that equity

were the magic answer to instant wealth with no risk. Equity can (and do) create massive amounts

of wealth, but they aren't without risks. The only solution to this is education. The key to protecting

yourself in the equity market is to understand where you are putting your money.

Equity or Share or Stock

Equity is a share in the ownership of a company. Equity represents a claim on the company's assets

and earnings. As you acquire more equity, your ownership stake in the company becomes greater.

Whether you say shares, equity, it all means the same thing. The importance of being a shareholder is

that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes

paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get.

An equity share, commonly referred to as ordinary share also represents the form of fractional or

part ownership in which a shareholder, as a fractional owner, undertakes the maximum

entrepreneurial risk associated with a business venture. The holders of such shares are members

of the company and have voting rights.

The holders of such shares are members of the company and have voting rights. A company may

issue such shares with differential rights as to voting, payment of dividend, etc.

Holding a company's equity means that you are one of the many owners (shareholders) of a

company and, as such, you have a claim (albeit usually very small) to everything the company

owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every

trademark, and every contract of the company. As an owner, you are entitled to your share of the

company's earnings as well as any voting rights attached to the equity.

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STOCK MARKET AND STOCK EXCHANGES

Stock Markets: Stock Market is a market where the trading of company stock, both listed

securities and unlisted takes place. It is different from stock exchange because it includes all the

national stock exchanges of the country. For example, we use the term, "the stock market was up

today" or "the stock market bubble." Also known as the equity market, it is one of the most vital

areas of a market economy as it provides companies with access to capital and investors with a

slice of ownership in the company and the potential of gains based on the company's future

performance.

Stock Exchanges: Stock Exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocks or other

securities. The members may act either as agents for their customers, or as principals for their own

accounts.

Stock exchanges also facilitates for the issue and redemption of securities and other financial

instruments including the payment of income and dividends. The record keeping is central

but trade is linked to such physical place because modern markets are computerized. The trade

on an exchange is only by members and stock broker do have a seat on the exchange.

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2. HISTORY

History of Indian Stock Market: Indian stock market marks to be one of the oldest

stock market in Asia. It dates back to the close of 18th century when the East India Company used

to transact loan securities. In the 1830s, trading on corporate stocks and shares in Bank and

Cotton presses took place in Bombay. Though the trading was broad but the brokers were hardly

half dozen during 1840 and 1850.

An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall

of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This banyan

tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange flourished

with 60 brokers. In fact the 'Share Mania' in India began with the American Civil War broke

and the cotton supply from the US to Europe stopped. Further the brokers increased to 250.

The informal group of stockbrokers organized themselves as the The Native Share and

Stockbrokers Association which, in 1875, was formally organized as the Bombay Stock Exchange

(BSE).

BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the

BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and

Hammam Street in downtown Mumbai) was acquired, and a building was constructed and

occupied in 1930.

Premchand Roychand was a leading stockbroker of that time, and he assisted in setting out

traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange

and they are still being followed.

Several stock broking firms in Mumbai were family run enterprises, and were named after

the heads of the family.

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The following is the list of some of the initial members of the exchange, and who are still running

their respective business:

D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with Merrill

Lynch)

Jamnadas Morarjee (now known as JM)

Champaklal Devidas (now called Cifco Finance)

Brijmohan Laxminarayan

In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock

exchange in the country under the Securities Contracts (Regulation) Act.

The most decisive period in the history of the BSE took place after 1992. In the aftermath

of a major scandal with market manipulation involving a BSE member named Harshad

Mehta, BSE responded to calls for reform with intransigence. The foot-dragging by the

BSE helped radicalise the position of the government, which encouraged the creation of

the National Stock Exchange (NSE), which created an electronic marketplace. NSE started

trading on 4 November 1994. Within less than a year, NSE turnover exceeded the BSE. BSE

rapidly automated, but it never caught up with NSE spot market turnover. The second strategic

failure at BSE came in the following two years. NSE embarked on the launch of equity

derivatives trading. BSE responded by political effort, with a friendly SEBI chairman (D. R.

Mehta) aimed at blocking equity derivatives trading. The BSE and D. R. Mehta succeeded in

delaying the onset of equity derivatives trading by roughly five years. But this trading, and the

accompanying shift of the spot market to rolling settlement, did come along in 2000 and 2001 -

helped by another major scandal at BSE involving the then President Mr. Anand Rathi. NSE

scored nearly 100% market share in the runaway success of equity derivatives trading, thus

consigning BSE into clearly second place. Today, NSE has roughly 66% of equity spot turnover

and roughly 100% of equity derivatives turnover.

Stock Exchange provides a trading platform, where buyers and sellers can meet to transact

in securities.

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3. Types of Equity

TYPES OF EQUITY SHARES

Common Stock: Common shares are the most frequently issued and traded types of stock,

hence the name. A common share makes you an owner of the corporation. This gives you not

only a portion of all profit distributions but also entitles you to vote in the annual shareholder

meeting. In this meeting, held once a year, shareholders elect the board of directors and vote on

other critical matters. If you own more than half of all common stock in a corporation, you can

have full control over how it is run.

Over the long term, common stock, by means of capital growth, yields higher returns than almost

every other investment. This higher return comes at a cost since common stocks entail the most

risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money

until the creditors, bondholders and preferred shareholders are paid.

Preferred stock: Preferred stock entitles the owner to a fixed income stream that is far more

reliable and predictable than that provided by common shares. Preferred shares carry an original

issue price, also known as par value, and a coupon rate. The shareholder receives a dividend every

year that equals the par value multiplied by the coupon rate. A preferred stock that has a par value

of $500 and coupon rate of 10 percent, for example, pays the owner $50 every year. Unlike lenders,

preferred stockholders cannot sue the company if it fails to pay this amount. The board of directors

has the authority to suspend preferred dividend payments if it deems it necessary.

This is different than common stock, which has variable dividends that are never guaranteed.

Another advantage is that in the event of liquidation, preferred shareholders are paid off before the

common shareholder (but still after debtholders). Preferred stock may also be callable, meaning

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that the company has the option to purchase the shares from shareholders at any time for any reason

(usually for a premium).

There are other types of equity shares discussed below

Rights Issue / Rights Shares: These are the shares issued to the existing shareholders of a

company. Such kind of shares is issued to protect the ownership rights of the investors.

Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization

of accumulated reserves from the profits earned in the earlier years.

Cumulative Preference Shares. A type of preference shares on which dividend accumulates if

remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on

equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the dividend

payable on the same accumulates, if not paid. After a specified date, these shares will be converted

into equity capital of the company.

Participating Preference Share: The right of certain preference shareholders to participate in

profits after a specified fixed dividend contracted for is paid. Participation right is linked with the

quantum of dividend paid on the equity shares over and above a particular specified level.

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4. TERMINOLOGIES

‘Equity’/Share

Total equity capital of a company is divided into equal units of small denominations, each called

a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into

20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then

is said to have 20, 00,000 equity shares of Rs 10 each. The holders of such shares are members of

the company and have voting rights.

• Warrants

– Certificate issued along with a bond or preferred stock

– Entitles holder to buy specific no. of securities at a specific price

• Convertible Debentures

– Can be converted in stock at specified date in future

– At the discretion of either the issuer/lender

– Issuer can borrow at lower cost if the lender has convertibility option

• IPO (Initial Public Offer): The first issue by a company to public investors

• Public Issue: Any issue by a company to public investors

• GDR / ADR (Global Depository Receipt/ American Depository Receipt): Issue of securities that

are listed in an international stock exchange; each security representing a specified number of

securities listed in the local stock exchange.

• Buyback: Acquisition of securities by the issuer from existing investors, through a public offer

or purchases in the secondary market.

Face Value: The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares,

it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the

holder at maturity. Also known as par value or simply par. For an equity share, the face value is

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usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the

share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt

security, face value is the amount repaid to the investor when the bond matures (usually,

Government securities and corporate bonds have a face value of Rs. 100). The price at which the

security trades depends on the fluctuations in the interest rates in the economy.

Dividend: Dividend is a percentage of the face value of a share that a company returns to its

shareholders from its annual profits. Compared to most other forms of investments, investing in

equity shares offers the highest rate of return, if invested over a longer duration.

Market Capitalization

Number of equity shares outstanding x market value per equity share. Represents the market

value of the entire company .

Enterprise Value

Enterprise value is a figure that, in theory, represents the entire cost of a company if someone

were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market

capitalization because it takes a number of important factors such as preference shares, debt and

cash that are excluded from the latter matrix.

Enterprise value = Mkt cap + preference shares + outstanding debt - cash and cash

equivalent

Market capitalization =Number of outstanding shares *

CMP

Intrinsic Value

It is discounted value of cash that can be taken out of a business during its remaining life. It is an

estimate rather than a precise figure, and it is additionally an estimate that must be changed if

interest rates move or forecasts of future cash flows are revised. Two people looking at same

set of facts will come up with different intrinsic value figures.

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Beta

A measure of the volatility of a stock relative to the overall market. A beta of less than one

indicates lower volatility than the market; a beta of more than one indicates higher volatility

than the market. Generally Consumer and utility stocks have low beta compared to cyclicals and

industrials.

Book Value

It shows the historic cost of the assets as reduced by the depreciation. It is significant for

evaluating Banking company stocks. Stocks of companies holding large blocks of land and other

hidden assets are evaluated on this basis. It does not make sense to look at book value for

companies in high

growth businesses. BV = Shareholders funds / No. Of Equity

shares

Cost of Capital

This is the cost of borrowing funds from the market. The ROE and the ROCE should be more

then the cost of capital or else it would make little sense for the company to borrow funds. For

stocks in the emerging markets the cost of capital should be 300 to 400 basis points above the

risk free rate of return. COC = Risk free rate of return + Equity risk premium.

Debt Equity Ratio

Long-term debt divided by shareholders' equity, showing relationship between long-term funds

provided by creditors with respect to the Shareholders funds. A high Debt Equity ratio indicates

high risk while a lower ratio may indicates lower risk. Short-term debt is not included as long as

cash is greater then short-term debt. As equity increases relative to debt, the company becomes

a more attractive investment. Finally, bond debt is preferred to bank debt because bank debt is

due on demand. Companies that repay back debt experience PE expansion compared to

companies that take on debt.

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DER = Long term loans / Shareholders

Funds

Dividend yield

This is the current yield on a stock. Dividend paying companies have in built bottoms. When

the stock prices fall too much their dividend yield becomes attractive enough for existing

investors to hold on as well as for new investors to get in. This is a basic criterion for a value

investor Stocks that pay dividends are obviously favored over stocks that don't . Dividend

paying stocks are likely to fall less in an economic downturn As stock prices fall with no fall in

dividends, the dividend yield rises attracting new investors. Finally, if you do buy a stock for

dividend , you should make sure that the company has a history of paying

the dividend in both good times and bad. DY = Dividend per share /

Market Price

Discounted cash flow statement

Discounted Value of free cash flow that a business generates during a particular period of time.

Companies embarking on a major Capital expenditure program will experience reduced free

cash flow and lower valuations. A rise in interest rates increases the cost of capital and also

reduces valuations Most of the analyst fraternity uses this concept. The risk free rate is used as

the discount rate. This evaluation tool is

helpful only for evaluating stable businesses rather then high growth

businesses

Earning per share (EPS):

This is the net income divided by the number of shares outstanding however; both the

numerator and denominator can change depending on how you define "earnings" and "shares

outstanding. The E.PS as an absolute figure means nothing and is significant only when viewed

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in relation to the price of the stock. EPS

= Net Profits / No. Of Equity Shares

Enterprise Value

EV = Market Capitalization +

Debt.

Enterprise value for cash rich companies is market cap as reduced by cash. During bear markets

smart Investors are able to spot a number of companies that are available at zero or negative

enterprise value. In 2002 Trent was available at Rs 60 when it had Rs 100 as cash on its balance

sheet. The stock has been a multibagger since.

EVA

Economic Value added is the excess of ROCE over the cost of capital . Companies with higher

EVA's are able to generate higher PE's and are generally wealth creators compared to

companies that have a low or negative EVA.

EVA = (ROCE - Cost of capital) Capital

employed

Free Cash flows

The amount of cash left in a company after all expenditure both revenue and capital has been

accounted for. This is also known as net addition to cash. Free cash flow per share = Cash

earnings - capital spending. Companies that generate substantial free cash flows make for very

good investments.

Growth in Stock Price vs. Growth in earnings

A dangerous signal is generated when the stock price of a company increases faster than its

earnings. Invariabily this wleads to a higher PE multiple and makes the stocks liable for

decline. Generally it is better to ivest into businesses their earnings growing at an equal pace to

their stock prices.

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Market Capitalization

The market cap is the amount of money that the acquirer would need to buy back all the

outstanding shares. In case of absurd valuations the market cap reaches stupid levels. During

the 2000 tech boom Himachal Futuristic sold at a market cap of Rs 20,000 crores. Multibaggers

(stocks that go up a number of times) generally have a very small market cap to start with.

Companies with a market cap of more then US $ 1 billion are classified as large caps, between

US $ 250 million to 1 $billion as mid caps and less then 250 million as small caps.

Market price x No. Of Equity

shares

Market Cap to Sales

It is the number of times the sales exceeds the market cap. For companies in growth businesses

the market cap to sales could be about 3 times whereas for companies in low growth businesses

it should be equal to 1. The sales number is the most difficult to fudge and therefore the market

cap to sales is a more reliable indicator in corporate analysis. In the 2000 technology bubble

Infosys traded at a market cap to sales of more than 100! Market Cap / Sales

PEG

This is known as the Price earnings to growth ratio. It should be less then equal to 1 Growth in

Earnings vs. the P/E Ratio. The ratio will be lower for slow growers and higher for fast growers.

PEG = PE / Sustainable Growth

Price Earnings (PE)

This is one of the most widely used tools in sizing up stocks. Simply put, it is how much

investors are willing to pay for a rupee of the company's earnings. It is also termed as referred

to as a "multiple." When you calculate a P/E based on the past year's earnings, the P/E is called

"trailing." Another way to determine a P/E is to substitute future earnings projections. This is

the "forward" P/E.

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5. How to invest in stock

It is not a coincidence that most wealthy people invest in the stock market. While fortunes can be

both made and lost, investing in stocks is one of the best ways to create financial security,

independence, and generational wealth. Whether you are just beginning to save or already have a

nest egg for retirement, your money should be working as efficiently and diligently for you as you

did to earn it. To succeed in this, however, it is important to start with a solid of understanding of

how stock-market investment works.

Determine your asset allocations

In other words, determine how much of your money you will put in which types of investments.

Decide how much money will be invested in stocks, how much in bonds, and how much

you will hold as cash and cash equivalents (e.g. certificates of deposit, treasury bills, etc.).

The goal in this step is to determine a starting point based on your capital market

expectations and risk tolerance.

Select your investments

A portion of the universe of potential options has been eliminated based on the risk and return

objectives. To make a final selection, you must decide the following:

Whether to buy individual stocks to gain exposure to an asset class, or a mutual fund or ETF that

will provide greater diversification.

Based on your macro and micro expectations, whether are there sectors or countries you should

invest in more or less heavily?

Which fixed income instruments (investments that provide a returns in the form of fixed periodic

payments, e.g. bonds) are best suited to take advantage of your interest rate and inflation

expectations and thus compliment your stock portfolio

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Purchase your stock

Once you've decided how much of which stocks to buy, it is time to purchase your stocks. Find a

brokerage firm that meets your needs and place your stock orders.

You can either select a discount broker, who will simply order the stocks you want to purchase, or

a full-service brokerage firm, which will cost more but will also provide information and guidance.

There are two different types of orders you can place. A market order is a request buy or sell an

investment immediately at the best available current price. The benefit is your order is very likely

to be executed promptly. A limit order is a request to buy or sell an investment at a specific price

or better. The benefit is that your order will only be executed if the stock reaches the price you

specified.

Some companies offer direct stock purchase plans (DSPPs) that allow you to purchase stock

without a broker. If you are only planning to buy a small amount of stock from one or a few

companies, this may be your best option. Search online or call or write the company whose stock

you wish to buy to inquire whether they offer such a plan

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6. Company research Investor should do company research analysis which can help in deciding which particular stocks to choose. Types of research

Fundamental Analysis:

Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't

really investing if you aren't performing fundamental analysis. Because the subject is so broad,

however, it's tough to know where to start. There are an endless number of investment strategies

that are very different from each other, yet almost all use the fundamentals.

The biggest part of fundamental analysis involves delving into the financial statements. Also

known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and

all the other financial aspects of a company. Fundamental analysts look at this information to

gain insight on a company's future performance. A good part of this tutorial will be spent learning

about the balance sheet, income statement, cash flow statement and how they all fit together.

Basics

When talking about stocks, fundamental analysis is a technique that attempts to determine a

security’s value by focusing on underlying factors that affect a company's actual business and its

future prospects. On a broader scope, you can perform fundamental analysis on industries or the

economy as a whole. The term simply refers to the analysis of the economic wellbeing of a

financial entity as opposed to only its price movements.

Fundamental analysis serves to answer questions, such as:

Is the company’s revenue growing?

Is it actually making a profit?

Is it in a strong-enough position to beat out its competitors in the future?

Is it able to repay its debts?

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When talking about stocks, fundamental analysis is a technique that attempts to determine a

security’s value by focusing on underlying factors that affect a company's actual business and its

future prospects. On a broader scope, you can perform fundamental analysis on industries or the

economy as a whole. The term simply refers to the analysis of the economic wellbeing of a

financial entity as opposed to only its price movements.

Fundamental analysis serves to answer questions, such as:

Fundamentals: Quantitative and Qualitative

We could define fundamental analysis as “researching the fundamentals”, but that doesn’t tell

you a whole lot unless you know what fundamentals are. As we mentioned in the introduction,

the big problem with defining fundamentals is that it can include anything related to the economic

well-being of a company. Obvious items include things like revenue and profit, but fundamentals

also include everything from a company’s market share to the quality of its management.

The various fundamental factors can be grouped into two categories: quantitative and qualitative.

The financial meaning of these terms isn’t all that different from their regular definitions. Here

is how the MSN Encarta dictionary defines the terms:

Quantitative – capable of being measured or expressed in numerical terms.

Qualitative – related to or based on the quality or character of something, often as

opposed to its size or quantity.

In our context, quantitative fundamentals are numeric, measurable characteristics abouta

business. It’s easy to see how the biggest source of quantitative data is the financial statements.

You can measure revenue, profit, assets and more with great precision.

Turning to qualitative fundamentals, these are the less tangible factors surrounding a business -

things such as the quality of a company’s board members and key executives, its brand-name

recognition, patents or proprietary technology.

Quantitative Meets Qualitative

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many

analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the

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Coca-Cola Company, for example. When examining its stock, an analyst might look at the

stock’s annual dividend payout, earnings per share, P/E ratio and many other quantitative factors.

However, no analysis of Coca-Cola would be completewithout taking into account its brand

recognition. Anybody can start a company that sells sugar and water, but few companies on earth

are recognized by billions of people. It’s tough to put your finger on exactly what the Coke brand

is worth, but you can be sure that it’s an essential ingredient contributing to the company’s

ongoing success.

Technical Analysis:

Technical analysis really just studies supply and demand in a market in an attempt to determine

what direction, or trend, will continue in the future. In other words, technical analysis attempts

to understand the emotions in the market by studying the market itself, as opposed to its

components. If you understand the benefits and limitations of technical analysis, it can give you

a new set of tools or skills that will enable you to be a better trader or investor.Technical analysis

is a method of evaluating securities by analyzing the statistics generated by market activity, such

as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic

value, but instead use charts and other tools to identify patterns that can suggest future activity.

Just as there are many investment styleson the fundamental side, there are also many different

types of technical traders. Some rely on chart patterns, others use technical indicators and

oscillators, and most use some combination of the two. In any case, technical analysts' exclusive

use of historical price and volume data is what separates them from their fundamental

counterparts. Unlike fundamental analysts, technical analysts don't care whether stock is

undervalued - the only thing that matters is a security's past trading data and whatinformation

this data can provide about where the security might move in the future.

The field of technical analysis is based on three assumptions:

1. The market discounts everything.

2. Price moves in trends.

3. History tends to repeat itself.

1. The Market Discounts Everything

A major criticism of technical analysis is that it only considers price movement, ignoring the

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fundamental factors of the company. However, technical analysis assumes that, at any given

time, a stock's price reflects everything that has or could affect the company - including

fundamental factors. Technical analysts believe that the company's fundamentals, along with

broader economic factors and market psychology, are all priced into the stock, removing the need

to actually consider these factors separately. This only leaves the analysis of price movement,

which technical theory views as a product of the supply and demand for a particular stock in the

market.

2. Price Moves in Trends

In technical analysis, price movements are believed to follow trends. This means that after a trend

has been established, the future price movement is more likely to be in the same direction as the

trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself

Another important idea in technical analysis is that history tends to repeat itself, mainly in terms

of price movement. The repetitive nature of price movements is attributed to market psychology;

in other words, market participants tend to provide a consistent reaction to similar market stimuli

over time. Technical analysis uses chart patterns to analyze market movements and understand

trends. Although many of these charts have been used for more than 100 years, they are still

believed to be relevant because they illustrate patterns in price movements that often repeat

themselves.

.

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7. RETURN ON EQUITY AND TAXATION

Return on equity (ROE) measures the rate of return for ownership interest (shareholders' equity)

of common stock owners. It measures the efficiency of a firm at generating profits from each unit

of shareholder equity, also known as net assets or assets minus liabilities. ROE shows how well a

company uses investments to generate earnings growth. ROEs 15-20% are generally considered

good.

ROE is equal to a fiscal year net income (after preferred stock dividends, before common

stock dividends), divided by total equity (excluding preferred shares), as a percentage. As

with many financial ratios, ROE is best used to compare in the same industry.

High ROE yields no immediate benefit. Since stock prices are most strongly determined

by earnings per share (EPS), a 20% ROE company will cost twice the amount (in Price/Book

terms) as a 10% ROE company.

The benefit of low ROEs comes from reinvesting earnings to aid company growth. The

benefit can also come as a dividend on common shares or as a combination of dividends and

company reinvestment. ROE is less relevant if earnings are not reinvested.

The sustainable growth model shows us that when firms pay dividends, earnings growth

lowers. If the dividend payout is 20%, the growth expected will be only 80% of the ROE

rate.

New investments may not be as profitable as the existing business. Ask "what is the

company doing with its earnings?"

ROE is calculated from the company perspective, on the company as a whole. Since

much financial manipulation is accomplished with new share issues and buyback, the

investor may have a different recalculated value 'per share' (earnings per share/book

value per share).

TAXATION

Long-term capital gains on stocks and equity mutual funds are not taxed. But short-term gains are

taxed at 15%.

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8. Advantages and Disadvantages of Equity

Advantages and disadvantages from the viewpoint of a Shareholder

Advantages

1. Higher Dividend : The equity shareholders earn more by way of dividend compared to other

alternatives during prosperous time

2. Voting Right: Equity shares holders have a voting right. Shareholders can participate in the

Management of company through voting right. They can vote for many important matters such as

election of director& auditor, approval of dividend recommended by director.

3. Capital Appreciation: Equity shareholders get the benefit of capital appreciation, when boom

condition prevail.

4. Right Shares: An Existing company has to offer the new issue of its shares to existing

shareholders as right shares on priority basis.

5. Good Liquidity Position: The liquidity position of Equity shareholders is improved because

these shares are freely traded in all national level stock exchanges.

Disadvantages

1. Uncertain Return: No fixed rate of dividend is to be paid to equity shareholders. Only

directors have the authority to decide whether to declare dividend or not.

2. Residual Claim On Income As Well As Assets Equity: Shareholders have last priority on

income as well as assets after satisfying claims of others-- debenture holders, secured

lenders, unsecured lenders, other creditors, & preference shareholders.

3. Low Market Value: When low dividends are declared or postpone the dividend , the market

value of equity shares decline & investors suffer a capital loss.

4. Risky Investment: Equity prices tend to fluctuate widely, so making equity investment

risky.

5. Higher Speculation: During boom phase of stock market, Equity shares may encourage too

much speculation.

6. Dilution of Control: The issue of new Equity shares may dilute the ownership & control of

existing shareholders while a preemptive right to retain their proportionate ownership; they

may not have funds to invest in additional shares.

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