Introduction of the Host

Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws. She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism. She has a passion for literature and Carnatic music. She is also a violinist.

About the Class
We bring you an online class titled 'Elementary Finance'. This will have 12 lessons - one a month. Each lesson is further subdivided into 4 chapters. And we will give you one new chapter every week.

Chapter 7 Lesson D - Other Avenue Of Investments

Investing In Shares & Stocks
In the previous lesson we dealt with investments in real estate and precious metals. In this chapter we will deal with investments in shares.

Shares are an equity investment that signifies ownership in a business. They represent the fractional ownership interest in a firm. By buying shares in a company you get an equity interest in the company.

There are two types of shares, preference and equity.
Preference Shares
Preference shares are those shares, which have the following rights:

• They have a right to receive dividend at a specified rate before any dividend is paid on the other shares.
• They have the right to return of capital before the return of equity capital in the event of winding up.

Preference shares may have additional rights like the right to participate in the profits after equity dividend has been paid or the right to receive a premium at the time of redemption. Preference shares may be cumulative or non-cumulative, redeemable or irredeemable, participating or non-participating, convertible or non-convertible preference shares.

Equity shares
Equity shares are those shares, which are entitled to receive dividend and repayment of capital after preference shareholders claims are settled. Shares may be issued for cash or for consideration other than cash. Equity shares may be issued in any of the following ways:

• Issue of shares at par which means that the shares are sold at the face value of the share.
• Issue of shares at a premium where the shares are issued at an amount more than the face value of the share.
• Issue of shares at a discount where the shares are issued at a rate below the face value of the share.

Advantages of owning equity shares

• These shares have voting rights.
• They carry a share in the dividends and hence increased market price.
• They have a preemptive right to buy new shares before they go public.
• They have a better hedge against inflation than with fixed income securities.

• The right to receive dividends can be claimed only after payment to preference shareholders.
• There is a possibility that there may be no dividends in a year.
• The market prices of shares are prone to fluctuations, which may not be favourable.

Stocks in various companies.
Remember that the stock you buy should be suited to your requirements and goals.

Blue Chips.
These shares offer ownership in high-quality companies as well as those, which are financially sound. Although the returns are modest these investments will be low risk ones. Blue chip shares are less prone to changes in the market. The shares in such companies have a good track record of payment of dividend as well as growth. For those who want a secure, long-term equity investment, a blue chip share is a safe bet.

Income stocks.
These are the stocks of highly stable industries like utility companies. These stocks will give a very high income while affording stability at the same time. They are high yielding and lower risk investments.

Growth stock.
These stocks are in companies, which have a very high growth rate like high technology business. These stocks pay low or no dividends because the earnings are retained. If you are young you can go in for these stocks. These stocks increase in price fast but are also prone to great fluctuations in price.

Defensive stock
These are safe securities although they yield lower returns. These stocks are generally not affected by changes in the economy. Stocks of utilities and consumer product companies are defensive stock. These are ideal for old people who can do well without the risk.

Cyclical stocks.
These are speculative stocks where the price fluctuates with changes in economy. Stocks of chemical and construction companies are cyclical stocks. These stocks are for young people who have a sound financial backing and are willing to take risks.

Speculative stocks.
These are stocks of newly established companies, which have a potential of big profits. They are high risk, high return investments. These stocks are for professional investors. Stocks in biotechnology companies are an example of speculative stocks.

Dividends
You can find out what the future dividends of a company will be based on the past track records.

Returns on shares.
The return on shares invested can be calculated by computing the total rupee return, dividend yield, and earnings per share.

The percentage return or holding period return
                                      (Selling price-investment ) + Dividend
                                =    --------------------------------------
                                                         Investment

Dividend yield on stock

This is the percentage return on the share investment at present market value.
                                       Dividend per share
                                  =   -------------------
                                           Investment
Or

                                      Dividends per share
                                      ---------------------
                                      Market price per share

Dividend yields are highest when the stock prices are low.

Dividend payout ratio.

                             Dividends per share
                       =   --------------------
                             Earnings per share

This ratio is used to value stock . This ratio varies among industries and from company to company within an industry. The price-earning ratio changes with a change in the economic conditions. While purchasing stock, take into consideration the present and future economic and stock market conditions. A high price earning ratio means that the stock market expects the future earnings of the company to be higher than the current earnings. A low price-earning ratio implies that profit opportunities exist in the long-term rather than in the short term.

It is advisable to trade in active stocks, as they have a better market and there are lesser chances of manipulation in prices.

In a bullish market the stock prices rise and the stock traded also increase, whereas in a bearish market, the prices drop and the market in general wears a pessimistic look.

When to buy stocks.
It is not advisable to buy shares in a bullish market, at a time where the shares are attractive. In such cases you will have to hold the stock for a longer period to get gains. Buy shares when the prices are low. Hold on to them and their prices will increase in the long run.

Investment Tips.

• It is very difficult to accurately predict the future of share markets. In deciding whether to buy or sell shares consider economic factors like inflation. A lower inflation rate is better for equity securities.
• Consider monetary factors like interest rates.
• Take into consideration psychological indicators like the potential buying power.
• Hold some money liquid to take advantage of buying opportunities.
• Buy stocks that no longer react to adverse economic reactions.
• Sell at the end of a bullish phase. Where the price of a scrip has increased so much that it would not be a good buy, consider selling the scrip because the price may start to fall.
• Diversify your portfolio instead of holding on to just one or two scrips. You will be vulnerable to price changes if you do not diversify.

Questions on Chapter 7 Lesson C
1. What are the factors to be considered while investing in real estates?
2. Explain investments in precious metals and stones.