Tuesday, June 24, 2008


Share : Any business has a lot of assets: The machinery, buildings, furniture, stock-in-trade, cash, etc.
It will also have liabilities like Bank loans, money owed to people from whom things have been bought on credit, are examples of liabilities.
Assets - Liabilities = Capital.
Capital is the amount that the owner has in the business. As the business grows and makes profits, it adds to its capital.
This capital is subdivided into shares (or stocks).
So if a company's capital is Rs 10 crore (Rs 100 million), that could be divided into 1 crore (10 million) shares of Rs 10 each.Part of this capital, or some of the shares, is held by the people who started the business, called the promoters.
The other shares are held by investors. These investors could be people like you and me or mutual funds and other institutional investors.
owning a share means that you own a share of the company's profits,liabilities,assets,its losses.

If the company has divided its capital into shares of Rs 10 each, then Rs 10 is called the face value of the share. Face value is the nominal price of the stock.
When the share is traded in the stock market, however, this value may go up or down depending on supply and demand for the stock.
If everyone wants to buy the shares, the price will go up. If nobody wants to buy them, and many want to sell the shares, the price will fall.
The value of a share in the market at any point of time is called the price of the share or the market value of a stock. So the share with a face value of Rs 10, may be quoted at Rs 55 (higher than the face value), or even Rs 9 (lower than the face value).

Number of shares in a company * Market value of a share = Market capitalisation.

The Nifty has 50 stocks covering 24 sectors, as against 30 stocks and 13 sectors for the Sensex.
The price of every stock increases or decreases due to stock specific news and index news.
stock specific news corresponds to the specific sector,product launch,government actions towards a specific sector.Bankex represents the change in the prices of bank stocks. For instance, bank stocks may not be performing and that will be reflected in the Bankex falling or remaining stagnant even though the Sensex might have gone up.
Index news depends on the overall news of the country.
NSE has a mid-cap index that is made up of mid-sized companies that is smaller companies.

PE ratio: It is a term used to determine the value of the company or an entire index, Sensex.
PE of a company = Market price / Earnings per share(EPS)
The unit of PE is 'multiple' or 'times'.This multiple (times) implies the amount an investor is ready to pay for every one rupee earned (profit) by a company.

EPS = Net profit/Number of shares,
If the EPS is grown over the years , it means the company is doing well.
EPS remains same over a quarter or an year depending on the company and as the market price changes everyday, PE ratio also changes.As any stock market analyst will tell you, a low PE stock is considered cheap and hence valuable. A high PE stock on the other hand is assumed to be expensive.

PE cannot be used to compare companies belonging to two different sectors.PE is also calculated to the Sensex.

PE = market price * number of shares outstanding / EPS* number of shares outstanding
But market price * number of shares outstanding = market capitalisation and
EPS * number of shares outstanding = net profit.
Therefore, PE = Market capitalization/ Net Profit.
calculating the PE for the period gone by it will be called as historical PE. PE calculated for next financial year or any time after that is called as forward PE.

source : rediff

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