Equity Share-An Investment Opportunity

Equity share are sub divison of company's equity capital for ex: if a comapny has a paid up capital (capital for starting the business) of 1 lakh it can be subdivided to 10,000 shares of face value of Rs 10 So the value of comapny is 1,00,000 rs (10000 shares*10 Fv) If the above mentioned company has a market price of 20 Rs the market value(market capitalization of the company is 10,000 * 20 ie 2 lakh Rs Out of these 6000 shares are with promoter and rest 4000 shares is called free float and free float capitalization(share available in market for trading) is Rs 80000.Again back to equity shares out of these one lakh paid up value is utilized for purcahsing asset and machniery for business.So equity shares is unit contribution for company's capital and equity share holders own's the business and like any other bodies who have majority holding(51%) of Shares can make decision for smooth running of business. So equity holders have voting right and are the owners of company and represents a claim on the company's assets and earnings.Another important feature of share is its limited liability, which means that, as an owner of a share, investor are not personally liable if the company is not able to pay its debts unlike partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders). Owning share means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets. Company some time issue preference share for raising the money but does not have any voting right but have preference over equity holder in divident and claim to company asset if company is wounded up than Equity holder. Buying equity shares menas investing in company's business So if the company's business flourishess the equity share holders are the most benifited and company will give portion of net profit as dividend to equity holder also since equity holder hold ownership if the companies business suffer it will affect the equity share holder also and if company is wounded up equity holder will get only left over if any after paying the debtors and preference holders. Now the main question for Investor How will investor benifitted by investing in equity share? .In an simple example we will come to more about Equity share. Suppose three person A,B,C started a company ABC which has a paid up value of about 10 lakh rupees. A's contribution to capital is 6 lakh,B's 3 lakh and C's 1 lakh.So company issued 1 lakh shares of face value Rs 10 out of which A has 60000 share,B 30000 shares and c 10000 shares.The orginal share value as new company will be equal to face value so in this case it is Rs 10.On the very first year company had made a net profit of 6 lakh and the dividend policy of company is to share 20% of NetProfit with share holder So total dividend amount is 20/100*6 lakh ie 1.2 lakh and DPS(Dividend per share - Total dividend /No of share) ie 1.2 L/1 Lakh So DPS is 1.2 Rs So the dividend yield is 1.2/10 ie 12 % much better than 8 % from bank.Here company made Profit of 6 lakh So EPS(Earning Per Share) is 6 Rs (Net profit/No of Shares) 6 Lakh/1 Lakh.As company made 6 lakh profit on Total 10 lakh invested So Return On Equity is 60 % After paying dividend remaining 4.8 lakh is added to capital.So Book Value (Equity+Reserves)/No shares=(10 lk+4.8 lk)/1 Lk=14.8 here even though the face value is Rs 10 after 1 year share's Book value(accounting value) rose to Rs 14.8.Next year company purchased some land for business for 3 lakh and maintained 50 % return on equity So net profit is (40/100)*14.8 Lk ie 7.4 lk profit As per dividend policy total Dividend is 1.48 Lk and DPS is 1.48 Rs(yeild is 14.8%) EPS is 7.4 Rs and 5.92 lakh is added to capital So now book value is Rs 20.72 Again next company added asset and maintained the 50 % return on equity So total profit is 10.36 Lk and out of these Dividend is 2 lk DPS is 2 RS(20 % yield) and now Book value is 28.Next year if same scenario take place Book value will be around 40 and yield will be 28 % Next year it will be 60 and 40 % Next year 90 and 60 % and so on.Is this Book Value of Rs 90 is the fair value of company? Answer is No why? Because some asset purchased for 20 lakh by the company had grown 10 fold to 2 crore and fair value should have to be above Rs 200.Now look back 6 year back the value invested was 10 lakh on company and return as dividend alone accumulated as 15 lakh a whooping 150 % return and value has increased to 2 crore+90 lakh ie total 3 crore in 6 year This means the fair value of a share should be Rs 300!.If at this stage the company plans to raise money from public for expansion it will give share on fair value ie 300 Rs per share ie why in many IPO's(Intial Public Offering) the price band is much above the face value.So in equity investment the return is based on companies performance So if company is steadily increasing its profit our share value will also grow but it will not happen in 2 or 3 months it will take some years and the effect of compounding will add to our fortune ie why every one is saying invest in shares for long term and also if company's performance is dismissal it will affec our value also.The Financial analyst will try to ascertain the fair value of company by a detailed study of company.So it is better to invest in good company with good management in sunrise sector..If we are looking back the past return in some of the equity share we will astonished to find return they have provided to investor in past Shares like infosys not only provided the return but had made the investor millionaire Even if are going to look at equity return from 2000 onward we can find that those who have invested for long term had made good fortune.But how many had made good fortune in stock market investment?? Answer a very few people.This is mainly due to lack of awareness about Stocks and Market,lack of patience etc.So if you want to sucess in equity invetment invest regularly even you can consider investing money in Stock market like SIP(Simply invest a fixed amount that you can,in some goos companies on all months but rather looking at price of share just watch the companies financial performance),Be patient,Invest systematically and wisely,Sure you can make good fortune in market.

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Equity Share-An Investment Opportunity

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