THE BASICS OF SHARE MARKET.

Before you start this blog you should go through my first blog.

The Terminology

Before going to study the market we need to know some terms and definitions mentioned in The Companies Act, 2013. It will help us to find out the actual  behaviour to be done by us in the market.

Let us research about the Terms:-

* COMPANY:

To invest in a company first we need to what is a company.

In simple words a company is a person but it is an artificial person, it means a company does not have life but in the eyes of law it have an artificial existence, and it is incorporated under companies act 2013 or any previous companies acts. 

* SHARES:

This term is very familiar to us but we need to know the actual meaning of this.

A share is only a unit of equity ownership in a company, and if we add all the shares of that company then we will reach at the total capital of the company. A company can have unlimited number of shares, and The Face value of that share can be different from the market value of the share.

The value in which we have to deal with is the Market value of the share. And it fluctuates in seconds.

*EQUITY:

This is the actual thing we have to deal with in the market.

Equity shares holders are the real owners of the company, they have voting rights and they will get the dividend at last. But for the voting right we have to hold the share at least for one year of purchasing the share.

*DIVIDEND:

Dividend is the profit share of the company which you will get if you are the owner of that share in the books of company at the time of dividend distribution. It can be once a year or more than once a year as per the company policy.

*PROFIT - EARNING RATIO:

Profit - Earning ratio (P/E ratio) is the ratio of share price to its earning per share. Its evaluate the current market price of the share is expensive or cheap. That means it determines the value of a share is overvalued or undervalued compared to its earnings. 

*MARKET CAP:

Market capitalisation is the value of outstanding shares of the company. It is calculated by multiplying the price of a stock by total number of outstanding shares. Normally higher the Market Cap means higher trustworthy company to deal with. 

*DEBT-EQUITY RATIO:

Normally Debt to Equity ratio means the ratio of Debt/ Loans compared to its total assets. For example if ANY BODY CAN TRADE have a debt of 10cr. and its total assets valued at 25cr. then Debt to equity ratio would be 0.4, which is a very good valuation on the basis of this ratio. one thing we have to remember that this must be less than 1.

*RETURN TO EQUITY RATIO:

In simple words this is the rate of return a share holder of a company receive on their share holdings. If we think of a good Return to Equity ratio then it should be more than 15%.

*CAGR TO SALES:

Compound Annual Growth Rate to sales. in the normal sense it is the rate of growth in sales of a company that calculated by putting a simple formula - CAGR = (Ending Value/Beginning Value) ^ (1/Number of Periods) – 1.

If I will try to simplify this formula then it can be described in following steps:

1. 1.Divide the investment value at the end of the period by the initial value.
2. 2.Increase the result to the power of one divided by the tenure of the investment in years.
3. 3.Subtract one from the total. 

These are some important things to know about before you start investing in Indian Share Market. and there are so much more things to study about but these are the fundamentals. 

Written by :

CA SOUMYARANJAN SAHU.