Trading

Bonus Issue And Its Effects Of Stock Price –

Bonus share is a free share of the stock given to the current shareholders of a company. It is based on number of shares that a shareholder owns. While an issue of the bonus shares will increase the number of shares owned and issued, it doesn’t increase the company value. Even though total number of the issued shares increases, ratio of shares number held by every shareholder stays constant. Issue of the bonus shares is been referred as the bonus issue. That depends on the constitutional files of a company, only some classes of shares will be entitled to the bonus issues, or can be entitled to the bonus issues for other classes.

What’s Bonus issue?

The company will reward their investors through bonus shares or through dividends. When the company declares their bonus issue, investors get bonus shares for the number of the company shares that they hold.

Let’s say for an example: If a XYZ company announced their bonus share 1:1 that means a shareholder will get 1 share for every 1 share he holds. Thus, if you hold 50 shares of XYZ company, so your net holding gets 100 shares. You don’t have to pay anything for the shares.

The bonus issue (scrip issue) is the stock split where a company issues the new shares without any charge to bring the issued capital in order with the employed capital (increased capital accessible to company after profits). It generally happens after the company has made some profits, and increasing the employed capital. Thus, bonus issue is seen as an option to dividends. And no new funds will be raised with the bonus issue.

Unlike the rights issue, the bonus issue doesn’t risk diluting any of your investment. Even though earnings for every share of stock may drop with proportion to new issues, it is compensated by a fact that you can have more shares. Thus, value of the investment must stay the same though the cost may adjust accordingly. This entire idea behind an issue of the Bonus shares is bringing Nominal Share Capital in line with true excess of the assets over liabilities.

Are bonus shares miraculous?

There are some things that match the joy of getting the fat bonus on work. This is what the shareholders of a good company will feel when the company wants to throw some shares (free) into their direction. Here is explaining what the bonus shares are and why investors want to invest in these companies. The free shares are offered to you and called as bonus shares. Earn money with the shares and they are the additional shares issues that are given free to the existing shareholders.

Market Jargons to Get Familiar With –

Individuals who have interest or enthusiasm in stock trading generally lack the domain knowledge about the market. Even though trading does not needs lots of money and time, it is important to equip yourself with some fundamental tools and training in order to take the correct decisions. Let us not dive into these technicalities, but here I provide you with the glossary of certain market jargons or terminologies that you need to know before starting your investment.

Bull market –

It is the term used for describing the market scenario. Bull market is actually when the prices of the share are increasing and public is highly optimistic that their share price may continue to go up.

Bear Market –

When the share prices fall down and public is pessimistic of the stock market, it is called a bear market. Public gets fearful that market will fall and thus, selling increases in such market.

Blue Chip Stock –

The stocks of well-established, financially-sound and large companies that hold the record of increasing rate of dividends over years to the stock holders. Generally, blue chip stocks have the market capitalization in crores.

Call Option –

This option gives the investor a right and not obligation of buying a stock at the specified rate within the specified time frame.
IPO: When the privately listed firms offer their shares to the public for the first time to enter in the share market, it is called IPO or initial public offering.

Market Correction –

The market correction happens when there is the pullback in the stock prices, and can be global or regional in nature.

Market capitalization –

This refers the rupee value of a company’s share. It’s calculated by multiplying total number of the shares by the present market share rate. It’s used to define the large cap, small cap or mid cap companies based on the market capitalization.

Market Bottom –

These are the low phase of the market trend that is on a decline. Essentially, market bottom is a point where downturn levels off just after the decline period, and shows a little signs of stabilizing.

Trend Reversal –

It shows changes in direction of the individual investments or market. Sometimes called reversal, the trend reversal identifies the shift in the investment activities, which is anticipated to stay in place for a good period of time.

Valuation –

A type of fundamental analysis, which compares valuation of security and group of securities within its historical context. The valuation analysis will evaluate potential merits of the investment or to assess the business or asset value.

ASBA –

Application supported by blocked amount or ASBA is a process developed by Stock Market Regulator of India SEBI to apply to IPO. In this, IPO applicant’s account will not get debited until the shares are given to them.

That is all. Apart from these, there are many more market jargons involved in trading and investing. But, these are some of the key and important terms used in the share market that the beginner needs to know.

How Dividends Can Impact Stock Market –

There are many different factors that affect stock prices. Demand and supply plays an important role in the up and down of the stock prices. Some other factors include fear and greed. There is something else when the company pays the dividend. In real stock market trading, it isn’t always a case. At any event, you must know the terms like ex-dividend, payout date and record date to know how the company’s dividend policy will affect the trading price of the stock.

The company will issue dividends in stock or cash. Generally, they’re paid from the specific periods, generally quarterly/annually. In essence, these are the share of the company profits, which are paid to the owners of a stock. The dividend payments will affect equity of the company and distributable equity is reduced.

What happens when dividends falls?

If any company reduces dividend that it pays on the stock, then the stock is less attractive to the investors. It means the stock price may drop. Suppose you have this stock, you won’t just get the lower dividend, but your share prices will fall as well. Market reacts quickly to any dividend changes, thus even a small hint of the dividend reduction will cause the stock to fall down in the price.

What happens when dividends increase?

When the dividends increase, stock gets attractive to the buyers. This increased demand may make sellers to increase the price to get more profits. Suppose you have this dividend stock, then share price may go up as dividend rises. Generally, investors consider increasing dividends the sign of company’s good health. Ensure company issues dividend stock reports of their growing profits all along with the rising dividend. Also, avoid those companies that increase their dividends by not increasing the profits to make the stock look attractive, because such companies might not pay an increased dividend with time.

How to anticipate such change in dividends?

You must pay attention to several non-company indicators or reports so you may anticipate any changes in the dividends. Continue with the analyst ratings or expectations, industry announcements and news headlines that can affect the company issuing your stock. You can use these market signals to decide whether dividend will increase or fall so that you will make buying or selling decisions before you receive any announcement of the reduced or high dividend.

Exchange traded funds – What It Is All About?

Exchange-traded funds are a simple or low-cost way of getting investment returns just like share index or underlying asset. But, some ETFs are highly risky and complex than others. So, here we will explain the challenges and what you have to know before investing in it.
Exchange-traded funds are securities that resemble index funds; however, it can be bought or sold during a day like common stocks. The investment vehicles allow the investors ease to purchase the basket of securities just in one single transaction. ETFs, offer complete convenience of the stock all along with the mutual fund diversification. ETF is the basket of stocks, which replicates the composition of Index, like BSE Sensex or S&P CNX Nifty. ETFs trading value can be based on the asset value of an underlying stock it represents. Just think of this as the Mutual Fund you buy and sell at the price that will change throughout a day.

Benefit of ETF –

• Trading like any other stocks

– You may buy and sell ETF during the market hours on the real time basis and put any advance orders on your purchase like stops or limits. In conventional mutual funds, buy and sale is done just one time in a day after your fund NAV gets calculated.

• Low investment cost

– ETFs are known as the lowest expense ratios than others scheme, it is passive investment style and low turnover that helps to keep its costs low.

• Diversification gain

– For Nifty ETF, you have the full basket of over 50 stocks and stay diversified.

• Easy and transparent

– Underlying securities are well known and the quantities are also pre-defined (for conventional fund schemes, one has to wait for monthly factsheet). There is no form filling required when you transact in a secondary market. The investment is made straight from the exchange or fund house.

• Supports small investments 

– ETFs are the best tool for the investors who want to start with the small corpus. Minimum ticket size has to be 1 unit (for IIFL Nifty ETF, one unit is 1/10th of the Nifty level, that is Rs500, if Nifty is 5000). The premium and discount tends to be much higher in futures segment, than ETFs.

• ETFs are taxed just like stocks 

– Investors will take benefit of the special rates for the short term and the long-term gains.

Target audience

• First time investors
• Long term investors
• Traders who don’t have enough of capital for investing in the index futures
• Investors looking for the low cost portfolio
• Arbitrageurs to do operations with the low impact cost
• Institutional investors who want to park cash temporarily during the portfolio transition

Before Investing in Exchange Trade Funds

• The main goal of Exchange Trade Funds is to be an index and not to beat an Index.
• One can invest in exchange trade funds with a lot of secondary market liquidity
• Always invest in the key benchmarks ETFs instead sectoral funds –
• Investor will need to bear cost of brokerage or other statutory levies like Securities Transaction Tax and more, when units are purchased and sold on a stock exchange.

Stock Market Index –

Stock market index is the statistical measure that shows changes happening in the market. To make an index, some similar types of stocks are selected from the securities listed on an exchange and combined together.

Stock market index will appear like a barometer that shows an overall condition of a market. They will facilitate the investors to categorize the general market pattern. And investors will take stock market as their reference and will decide which stocks to invest in.

The main criteria of selection for stock can be the kind of industry, size of a company and market capitalisation. The stock market index value is computed by using values of its underlying stocks. If there is any change in underlying stock prices, it will impact an overall index value. Suppose prices of these underlying securities increase, index will also increase.

Thus, the stock index reflects the market sentiment and the direction of movements of the products in the commodities, financial, and other markets.

Some notable stock indices in India include:

• Benchmark indices are BSE Sensex and NSE Nifty
• Broad-based indices are BSE 100 and Nifty 50
• Indices based on the market capitalization like BSE Midcap and BSE Smallcap
• Sectoral indices are CNX IT and Nifty FMCG Index

Part of the SEC operation is maintaining standards for orderly, efficient and fair markets. For doing this, SEC regulates many stock market participants. It includes:

Stock exchange –

The stock exchanges play a very important role in the share markets of India. They offer the organized market for the companies and investors to buy & sell shares. In India, the two main stock exchanges are: Bombay Stock Exchange (or BSE) and National Stock Exchange (or NSE).

Capital market regulators –

For the capital market to work smoothly and competently, proper regulation is important. In India, there are 3 capital market authorities and they are: Ministry of Finance, Securities & Exchange Board India and RBI.

Brokers –

Brokers are the major stakeholders in this capital market. They’re professionals who will facilitate the stock trading for the clients. Most of the brokers deal in different kinds of securities in the stock market. They help the clients to buy and sell shares in a market and take fixed percentage of the trade value as their commission. There are many popular broking agencies that make trading simple for investors in India.

Depository & depository participants –

The depository holds the investor’s securities in an electronic format. It can be done through Depository Participants (or DPs). The two Depositories are National Securities Depository Ltd and Central Depository Service Ltd. These are registered at SEBI. Apart from safe-keeping of the securities, depositories facilitate an easy and smooth transfer of the securities between the accounts.

Listed companies –

Finally, companies listing their stocks on exchange are the stakeholders. After all, it’s their stock, which are getting traded. Therefore, they are highly concerned about activities in the stock market. Furthermore, their decisions will directly affect other stakeholders.

Final Words –

Stock market is a living breathing body. There are many different stakeholders and all of them have a crucial role to play for the smooth functioning of the stock market.