Important Formulas - Stocks and Shares - Quantitative Aptitude (Quant) - CAT

1. Introduction

To start a big business or an industry, a large amount of money is required. This may be beyond the capacity of one or two individuals. Hence, a number of individuals join hands to form a company called Joint Stock Company.

2. Stock Capital

The total amount of money required by the company is called the stock Capital.

3. Shares or Stock

The whole capital of the company is divided into equal units. Each unit is called a share or a stock.

4. Shareholder or Stockholder 

Each individual who purchases one or more shares is called a shareholder (stockholder) of the company.
The company issues share certificates to each of its shareholders indicating the number of shares allocated and the value of each share.

5. Face value

Face value of a share is the value printed on the share certificate. It is also called nominal value or par value.
The face value of a share always remains the same.

6. Market value

The stocks of different companies can be traded (bought or sold) in the market through brokers at stock exchanges. The price at which a stock is traded in the market is called its market value.
a. If the market value of a stock is higher than its face value, the stock is traded at a premium or above Par
b. If the market value of a stock is same as its face value, the stock is traded at par
c. If the market value of a stock is less than its face value, the stock is traded at a discount or below Par

The market value (trading price) of a share can vary time to time.
Let's consider an example . Assume that the face value of a company X is Rs.10 and it is now traded at a premium of Rs.2. Then its market value now is (Rs.10 + Rs.2) = Rs.12.
Similarly, if the company X having face value of Rs.10 is now traded at a discount of Rs.2, it means the market value of X now is (Rs.10 – Rs.2) is Rs.8

7. Dividend

The annual profit of a company is distributed among its shareholders. The distributed profit is called the dividend.
Dividends are declared annually, semi-annually and quarterly as per the company regulations.
Dividend on a share is normally expressed as a certain percentage of its face value. Sometimes, it is also expressed as a certain amount per share.

8. Brokerage

As we have seen earlier, stocks of different companies can be traded (bought or sold) in the market through brokers at stock exchanges. The brokers charge is called brokerage
Brokerage is added to the cost price when the stock is purchased.
Brokerage is subtracted from the selling price when the stock is sold

9. Number of shares held by a person 

= Total Investment of the person/Investment in 1 share
= Total Income/Income from one share
= Total Face Value/Face value of 1 share

10. What does the statement "Rs.100 , 8% stock at Rs.110" mean?

It means,

The face value of the stock = Rs.100
Market value (MV) of the stock = Rs.110
Annual dividend per share = 8% of the face value = (100×8)/100 = Rs.8
Ie, here , an investment of Rs.110 gives an annual income of Rs.8
Rate of interest per annum = Annual income from an investment of Rs.100 = 8×100/110 = 7.27%
Please note that generally investors invest in shares not merely because of this annual return. They also will have a capital gain if the market value the share goes higher.