Unit-4
Shares and mutual funds
Share is the smallest unit of the capital of a company. In other words, A unit of ownership, that represents an equal proportion of a company’s capital is called as shares.
The share is regarded as unit of account that can represent several monetary instrument such as stocks, mutual funds, etc.
Share market is the aggregation of buyers and sellers of stock shares or stock.
Any stock exchange is for trading the stocks.
There are two stock exchanges in India-
- National stock exchange
- Bombay stock exchange
Note- if a person owns the shares of a company’s stock is known as shareholder.
Here we study two types of shares-
Ordinary shares or common stock-
These types of shares entitle the shareholder to share in the earnings of the company as and when they occur and to cast a vote at the company’s annual general metting’s and other official meetings.
Note- if the share is ordinary in the course of company’s business then it is called equity share.
Preference shares or preferred stock-
These types of shares entitle the shareholder to a fixed periodic income or interest but generally do not give him or her voting rights.
These types of shares are cumulative, non-cumulative, convertible etc.
Face value or nominal value-
It is the original cost of the stock shown on certificate.
Dividend-
Dividend is declared by the company on the face value of a share. When the company makes profit, we receive a part of it and it is the primary source of income.
Bonus shares-
Bonus shares are additional shares given to the shareholder without any additional cost; based on the number of shares that a shareholder own.
Brokerage-
Brokerage is the commission charged by broker for buying and selling of shares from buyer or seller.
Important formulae-
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Note-
- Buying: Actual price of the share = Market value + Brokerage per share
- Selling: Actual price of the share = Market value - Brokerage per share
Example: How many shares of market price of Rs.130 each, can be purchased for Rs.50150 with brokerage being 0.5%?
Sol. It is given that- Market price for one share = Rs. 130 Total amount invested = Rs.50,150 And brokerage = 0.5 Brokerage per share = 0.5% of market price Purchased price for one share = Market price + Brokerage
= 130+0.65 = 130.65 |
Example: There are two investments given below, then find out which investment is better?
7% of Rs. 100 shares at Rs. 120 or 8% of Rs. 10 shares at Rs. 13.50?
Sol. Suppose the investment amount is = Rs. X First situation- It is given that- rate of dividend = 7% F.V = 100, and Market value = Rs. 120 Second situation- It is given that- rate of dividend = 8% F.V = 10, and Market value = Rs. 13.50 Here we see that the dividend in second situation is more than the first situation. Hence we conclude that the second situation is more profitable for investment.
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Example: Mrs. Kapoor invested to Rs. 80,000 to purchase equity shares of Reliance company at market value of Rs. 210 each through a broker, charging 1% brokerage. The face value of a share is Rs. 10. How many shares did saptak purchase?
Sol. It is given that- Total Investment = 80,000 M.V. = Rs. 210, F.V. = Rs. 10, Brokerage = 1% Now, Brokerage per share = 1% of M.V. So that, Purchase price of 1 share = M.V. + Brokerage = 210 + 2.1 = 212.10 |
Example: Amandeep purchased 150 shares of BOB at Rs. 210 on 3rd Jan 2019. On 13th Feb. 2019, the company decided to split all the shares of company so that the face value of the share become Rs. 10 from Rs. 20 per share. The market price as on 30th July, 2019 is Rs. 300. Find number of shares held by Amandeep as on 30th July 2019. Also Find gain as on 30th July 2019.
Sol. It is given that- Total number of shares = 150 M.V. = Rs. 210, F.V. =Rs. 20.
Total amount invested = Number of shares × M.V. = 150 × 210 = 31,500
Number of shares held on 30th July 2019
Actual value of shares on 30th July 2014 = 300 × 300 = 90,000 Profit = 90,000 – 31,500 = 58,500
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Key takeaways-
- Share is the smallest unit of the capital of a company.
- If a person owns the shares of a company’s stock is known as shareholder.
- if the share is ordinary in the course of company’s business then it is called equity share
- Dividend is declared by the company on the face value of a share
“Mutual Fund is a pool of money collected from investors and invest in stocks.”
In other words- An investment programme funded by shareholder’s, that trades in diversified holding and professionally managed is called as mutual funds.
A mutual fund is basically at less risk as compared to shares. All the profits or losses of the fund are shared by all the investors in the same proportion as the amount of contribution made by them.
Mutual fund investments are subject to market risk.
There are many mutual funds but all mutual funds are of two types- open ended funds and closed ended funds.
Open-ended Fund-
There is no limit to the number of units purchased and sold in open ended fund
It has no fixed maturity period.
A number called Net Asset Value is used to determine the value of a share in open-ended fund at any time.
Investor can buy and sells his units at Net Asset Value (NAV) which are declared on a daily basis.
Closed-ended Fund-
In closed-ended fund will issue a fixed number of shares are issued to the public. The price of share in a closed-ended fund is determined by market-demand.
These types of funds are not redeemable.
Net Asset Value-
A mutual funds price per share or unit is called Net Asset Value or N.A.V. All mutual funds buy and sells, orders are processed at the N.A.V of the trade date
Entry Load and Exit load-
Entry load and Exit load are the brokerage while buying and selling the mutual fund respectively.
Entry load is charged at the time, an investor purchases the units and exit load is charged at the time of sale of all units.
Note-
Example: Amit invests Rs. 65,000 in ABC mutual fund where N.A.V. of Rs. 98. How many units he bought, if entry load is 2%. Sol. Amount Invested = Rs. 65,000 N.A.V. = Rs. 98, Entry Load = 2% Actual Purchase amount of 1 unit = NAV + Entry load |
Example: If a ICICI M.F. had a N.A.V. of Rs. 60 at the beginning of the year and if percentage increase in NAV during the year was 15% Find absolute change in N.A.V. Sol. NAV at the beginning of the year = Rs. 60 Percent change in NAV = 15% Absolute change in NAV = (% change in NAV) × (NAV at beginning of year) NAV at the end of the year = (Absolute change in NAV) + (NAV at beginning of the year) = 9 + 60 = 69
Example: Rakhi invested Rs. 25,000 in LPU M.F. with entry load 1%. Find the N.A.V. if the number of units purchased was 120. Sol. Let N.A.V. of 1 unit = Rs. X Purchase price of 1 unit = NAV + Entry load It is given that- Amount investment = Rs. 25,000 No. of unit purchase = 120. From equation (1) and (2), we get- 1.01 X = 208.33
Example: Mr. Sharma purchased 500 units of Bajaj M.F. at Rs. 8,000 and sold all the units after 2 months when NAV of Rs. 35. The short term gain tax was 10% of the profit. Find his net profit or loss. Sol. It is given that- No. of unit purchased = 500 Purchase Amount = Rs. 8,000 Now selling Price of all the units
= 35 × 500 = 17,500
So that Profit = SP – Purchasing Price = 17,500 – 8,000 = 9,500 Short term gain tax = 10% of profit Net profit = 9,500 – 950 = Rs. 8,550
Key takeaways-
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References-
- Mathematics and Statistics for Business – R. S. Bhardwaj – Excel Books.
- Business Mathematics and Statistics – Subhanjali Chopra – Pearson publication.
- Fundamentals of Business Mathematics and Statistics – ICAI – ICAI.
- Business Mathematics and Statistics – Dr. J K Das, N Das – McGraw Hill Education.
- Mathematical and statistical techniques, Dr. Abhilasha S. Magar & Manohar B. Bhagirath