The moment one decides to manage his funds deployed directly in Equities, it is imperative that one understands the risks and the various technical terms associated with it. Treat the exercise of Equity investments as part of learning your financial life. As in any walks of our lives, we are bound to make mistakes. But that should not deter from venturing out, sensibly, to learn and perhaps gain from this experience. One piece of advise is that do not stretch yourself financially or leverage or expose yourself to more than what you can afford. Always remember to have money in various asset classes before venturing into equities as an asset class.
After making a decision to commit certain funds, take time to learn some of the basic terms. The list here is not comprehensive but should be good enough to get you started.
Stock Exchange: The place where the stocks of companies are listed and transacted.
Market Capitalisation: This is the market value of the company at any given time based on the price of shares issued by the company. This is one of the main factors to be considered while selecting a stock in a particular exchange. Based on this, the stock on a particular exchange can be classified as Large, Medium and Small Cap. Small Cap stocks are more riskier compared to the Mid Cap which in turn is comparatively riskier than Large Cap.
Face Value: This is the basic value of the share issued by the company. Once the shares start trading in an exchange, usually the share price trades above this value. This value also determines how much money is paid when a dividend is declared. For example, consider a stock "A" that has Face Value of Rs.10. When a 50% dividend is declared, then Rs.5 (50% of Rs.10) will be paid out per share.
Book Value: This is the total value of the assets belonging to the company. If the company were to be liquidated, this value would be the likely amount generated. For technology stocks or telecommunication stocks, the ratio of Share Price to Book Value will be very high when compared to heavy industries. Sometimes, the Share Price/Book Value ratio is considered while selecting a stock.
Price: Market value of one unit of share traded in an exchange. This varies almost every second and is usually more than its Face Value. Usually, the company that is perceived, by the Market, to be good in the current or near term, commands a premium to the Face Value.
Earnings Per Share (EPS): The amount earned for the investment of one share. This is very useful in finding out the earnings capacity of the company. The higher the value the better. For example, if Face Value of a stock "A" is Rs.10 and its EPS is 50, then it means that for every Rs.10 invested, the company is making Rs.50.
P/E: Price to Earnings Ratio (P/E Ratio) is the ratio between the Share Price at any given time to the established EPS. This ratio is one of the important factors in selecting a stock. Every sector or industry has an industry-wide P/E and the individual company's P/E are weighed against this. Generally, higher the P/E, greater is the risk or the company's prospects are exceptional as perceived by the Market. Some sectors inherently have high or low P/E. Before selecting a stock, it is worth checking both the industry P/E and the individual company's P/E.
Price/Book Value: This is the ratio between the Share Price to the established Book Value. For some sectors or industries, like heavy industries, this ratio could be useful in determining if the stock is worth the buy.
Dividend: The amount paid out as a percentage of the Face Value of the stock. A 50% dividend on a stock whose Face Value is Rs.10, will fetch Rs.5 as dividend per share.
Dividend Yield: Usually, calculated as a percentage of the most recently paid dividend to the current share price. If one wants to invest in historically high dividend yield stocks, then this could be one of the factors to look into consideration.
Announcement Date: The date on which the dividend, if any, was announced by the company. This announcement will also contain the Effective Date.
Effective Date: This is the date on which the shares should be in ones possession to get the dividend payout.
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