Tag: Stock Market

We are all aware that salary, rental, and company income are all taxed. Similarly, income/loss from selling equity shares is classified as ‘Capital Gains.’

So what is a capital gain? 

Any profit derived from the sale of a capital asset is referred to as a capital gain. The profit earned comes under the category of income. As a result, a tax must be paid on the income earned. The tax is known as capital gains tax, and it may be either long-term or short-term.

This categorisation is based on the length of time the shares have been held. The holding period is the length of time that an investment is held from the date of purchase to the date of sale or transfer.

Income is further categorised under the heading ‘Capital Gains’ into two types:

• Long term capital gains (LTCG)

• Short term capital gains (STCG)

 

Note: India’s capital gains tax is not required under the Income Tax Act if the person inherits the shares and there is no sale.

Computation of Tax on STCG on Shares:

If an equity share listed on a stock exchange is sold within a year after the acquisition, the seller may realise a short-term capital gain (STCG) or suffer a short-term capital loss (STCL). When the selling price is more than the purchase price, the seller makes a short-term capital gain profit. 

STCG = (Sale price) – minus (Purchase price) – minus (expenses incurred on sale)

Things to Remember:

• You have to pay short-term tax on shares at 15%, irrespective of your tax slab rate. Even if you are a senior citizen and have a higher slab rate, you must pay 15% on your STCG.
• If a stock exchange-traded equity share is sold within 12 months of purchase, the seller may realise a long-term capital gain (LTCG) or incur a long-term capital loss (LTCL) (LTCL).
• Before the introduction of Budget 2018, long-term capital gains on the sale of equity shares or equity-oriented units of mutual funds were tax-free, i.e., no tax was payable on gains on the sale of long-term equity investments.
• This exemption was removed from the 2018 Financial Budget. If the seller makes a profit on the sale of equity shares or mutual funds above Rs. 1 lakh, it will be subjected to 10% long-term capital gain taxes (plus any cess if applicable). The seller will not benefit from indexation effective from April 1, 2018. 

What about the Taxes on selling shares at a Loss?

Short-term Capital Loss 

• Any short-term capital loss from equity share sales may offset any short- or long-term capital gain from any capital asset sale. If the loss is not set off, it may be carried forward for eight years and offset against any short- or long-term capital gains made during the same period.
• A taxpayer can only carry forward the losses provided he has filed his income-tax return before the due date. Thus, even if your total income for the year is less than the minimum taxable income, you must file an income tax return to carry forward these losses.

Long-term Capital loss

• Long-term capital loss from equity shares was deemed a dead loss until Budget 2018 — it could not be modified or carried forward. It’s because long-term capital gains from listed equity shares are excluded. Similarly, they were not permitted to put aside or take forward their losses.
• Following the amendment of the Budget 2018 to tax such profits of more than Rs 1 lakh at 10%, the government has also stated that any losses originating from such listed equities, shares, mutual funds, and so on will be carried forward.

Capital Loss on Sale of Shares	Holding Period	Applicable Taxes	Carry forward provision
Short Term Capital Loss	Less than 12 Months	Set off against both STCG & LTCG	Available up to 8 years
Long Term Capital Loss	More than 12 Months	Set off not allowed	Not applicable

What is Securities Transaction Tax (STT)?

STT is levied on all equity shares traded or purchased on a stock exchange. The tax mentioned above applies solely to shares traded at a stock exchange. STT applies to any sale or buys on a stock market. As a result, the tax considerations outlined above only apply to shares on which STT is paid.

Capital Gain on Sales of Non-STT Paid Shares:

Capital Gain on Sale of Shares for Non-STT paid shares	Holding Period	Applicable Taxes
Short Term Capital Gains	Less than 12 Months	As per Slab Rates
Long Term Capital Gains	More than 12 Months	20% Tax

Exemptions and deductions under short-term capital gain tax on shares:

Sale of Unlisted Shares:

The Central Board of Direct Taxes (CBDT) department has given its opinion for sales of shares not listed on any stock exchange and does not have any official data related to trading. To minimize disputes/litigation and maintain a unified approach, income deriving from the transfer of unlisted shares will be taxed under the head ‘Capital Gain,’ regardless of the holding period (as per the CBDT circular Folio No.225/12/2016/ITA.1I dated May 2, 2016).

What if you are in the Business of Selling Shares?

If you have extensive share trading activity (for example, if you are a day trader with a lot of action or routinely trade in Futures and Options), your income is usually classed as business income. In this scenario, you must submit an ITR-3, and your revenue from share trading is reported under ‘income from business and profession.’

Certain taxpayers classify earnings or losses from stock sales as “income from a company,” while others classify them as “capital gains.” It has been hotly debated whether your profits/losses from selling shares should be classified as company income or capital gains.

What if selling shares is considered my regular business?

When you classify the sale of shares as business revenue, you may deduct the costs of earning that money. In such circumstances, the earnings are added to your total income for the fiscal year and, as a result, taxed at slab rates.

• Taxpayers get letters from the tax department and spend a significant amount of time and effort explaining why they picked a specific tax treatment for the sale of shares.
• If the taxpayer chooses to regard his listed shares as stock-in-trade, the income will be handled as business income. Regardless of the length of time, a listed share has been held. The AO must accept the taxpayer’s preferred position.
• If the taxpayer considers the income as capital gains, the AO will not contest it. This applies to listed shares held for longer than a year. However, this position, once adopted by a taxpayer in a given assessment year, is relevant in the following assessment years. The taxpayer cannot change their mind in the next years.
• Taxpayers are now given the option of how they wish to approach such income. They must, however, continue to use the same procedure in consecutive years unless there is a significant change in the facts of the case. It should be noted that the option is limited to listed shares or securities.

Tips to Reduce the Burden of Short Term Capital Gain Tax on Shares

With proper tax planning, you can reduce your Short term capital gain tax on shares. 

Some essential tips are as follows – 

1. Make use of Basic Exemption Limit: You can also open a Demat account in your spouse’s name and trade shares. If your spouse is not earning, you can benefit from the basic exemption limit. If your spouse is a senior citizen, you can reduce your burden even more since senior citizens have higher exemption limits. Refer to the latest tax slab rates applicable for the year here.
2. Setting-off losses can help reduce your current year tax: Short-term capital Losses incurred in share sale can be offset against short-term capital gains. This helps reduce your tax burden. Hence, it’s essential to maintain your transaction records properly to account for the losses also.
3. Carry Forward your losses to save future tax: Unutilised short-term capital Losses can also be carried forward and set off against the future short-term capital gains. You need to calculate the losses and disclose them in the current ITR filing to avail this benefit in the next year. Thus, it’s essential to file your ITR with the help of a tax practitioner, to carry forward these losses to the following year.

Some examples for the Calculation of Short Term Capital Gains Tax on Stocks

Example 1: Mr Janak is a paid worker. In December 2020, he acquired 100 equity shares of X Ltd. from the Bombay Stock Exchange for Rs. 1,400 per share. These shares were sold on the BSE in August 2021 for Rs. 2,000 per share (a securities transaction tax of 2% was paid at the time of sale). In this scenario, what is the nature of the capital gain?

Answers:

• Shares were acquired in December of 2020 and sold in August of 2021, implying that they were sold after holding them for less than a year, and so the gain will be a short-term capital gain. 
• Section 111A applies to STCG originating from the transfer of equity shares, units of equity-oriented mutual funds, or units of business trusts via a recognised stock exchange on or after 1-10-2004 if the transaction is subject to the securities transaction tax.
• Section 111A applies to STCG originating from the transfer of equity shares, units of equity-oriented mutual funds, or units of business trusts via a recognised stock exchange on or after 1-10-2004 if the transaction is subject to the securities transaction tax.
• If the prerequisites of section 111A are met, the STCG is referred to as STCG covered by Section 111A. Such gain is taxed at a rate of 15% (plus relevant surcharges and cess).
• In this situation, shares were sold after possessing them for less than 12 months via a recognised stock exchange, and the transaction was subject to STT. Hence, the STCG can be classified as STCG covered by Section 111A. Such STCG will be taxed at a rate of 15%. (plus surcharge and cess as applicable).

Example 2: Mr Poddar is a salaried worker. He acquired 100 equity shares of ABC ltd. in December 2020 for USD 70 per share. These shares were sold in August 2021 at $85 per share. Since the shares were traded in a recognised  international financial centre, there was no STT on the share transfer.

Answers:

• Section 111A applies to STCG resulting from the transfer of equity shares through a recognised stock exchange where the transaction is subject to the securities transaction tax.
• STCG subject to taxation under Section 111A is taxed at a rate of 15% (plus relevant surcharges and cess).
• However, beginning with the Assessment Year 2018-19, the benefit of a 15% concessional tax rate will be available even if the STT is not paid, provided that the transaction is conducted on a recognised stock exchange located in any International Financial Service Centre and the consideration is paid or payable in foreign currency.
• Mr Poddar sold shares of ABC Ltd. listed on a recognised stock exchange in an International Financial Services Centre in the stated instance (IFSC). Furthermore, payment is made in foreign currency.
• Shares were acquired in December 2020 and sold in August 2021. This indicates that they were sold after less than a year of ownership. As a result, the gain will be a short-term capital gain.
• The shares were sold at the International Financial Services entre (IFSC Stock Exchange), and the payment was made in Foreign currency, i.e., USD. 
• As a result, even though the transaction of sale was not subject to STT, the STCG might be referred to as STCG covered by section 111A.
• Such STCG will be taxed at a rate of 15% (plus surcharge and cess as applicable).

Debentures are a type of debt instrument. As a result, when their term finishes, debenture holders get their principal amount returned. The process of repaying the company’s debt is known as debenture redemption.

When debentures are redeemed, the debenture obligation is discharged. To put it another way, the quantity of investment required for debenture redemption is high. Thus, economic businesses make enough provision from profits and accumulate money to reclaim debentures.

Once the redemption of debentures gets completed, the company will remove or reduce the value of debentures from its liability.

Normally, a debenture certificate will have all the terms of redemption. The redemption approach can be as follows:

• Redemption can be done at par or at a premium
• The terms will provide the number of debentures to be redeemed at a specific period
• The company’s debenture prospectus will have all terms and conditions of redemption at the time of issuance of debentures.

What are debentures and the different types of debentures?

The term “debenture” is derived from the Latin word “debere,” which means “to borrow.”

A debenture is a written document that acknowledges a debt and bears the company’s common seal. It includes a deal for repayment of principal after a certain term, at intervals, or the company’s discretion, as well as interest payment at a fixed rate due typically half-annually or yearly on fixed dates.

Types of debentures summarized in the table below:

ViewPoint	Type 1	Type 2
Security	Secured Debentures	Unsecured Debentures
Tenure	Redeemable Debentures	Non-Redeemable Debentures
Mode of Redemption	Convertible Debentures	Non-Convertible Debentures
Coupon Rate	Zero-Coupon Debentures	Specific Rate debentures
Registration	Registered Debentures	Unregistered Debentures

Difference between Equity Shares and Debentures

Features	Shares	Debentures
Ownership in Company	Yes, Gives Ownership	Acknowledgment of Debt by Company
Returns on Investment	Dividends and capital appreciation	Payment of Interest
Repayment by Company	Not redeemed or returned	Redemption available
Voting Rights	Yes, voting rights are available	Not available
Risk of investment	High Risk	Low Risk
Convertibility	Cannot be converted to other instruments	Can be converted to shares if the debenture is convertible debentures

Methods of Redemption of Debentures

A company may issue a variety of debentures, which are classified as follows:

• One-time Payment

The business redeems the debentures by making a lump sum payment to the debenture holders at the maturity/expiry date specified in the terms specified during issuance.

If the debentures are not redeemed at a discount or premium, a lump sum payment equal to the total of the principal values of all debentures is paid out on the predetermined or maturity date specified in the debenture agreement. The issuing business may choose to repay the debenture value before it matures. Companies are better placed to simplify debenture payments since they know when they must pay them.

In the case of a lump sum or one-time payment, debenture holders need to be careful about the liquidity and solvency conditions of the company since redeeming an entire debenture amount can be done only if the company is well-capitalized and has comfortable liquidity positions.

Hence, the investors need to invest in such debentures only if the company has a good track record on such redemptions.

• Installment payment

Under this procedure, debentures are often redeemed in installments on specific dates throughout the period the debentures are in place. Divide the whole amount of debenture debt by the whole number of years. It should be mentioned that the legitimate reclaimable debentures are verified by the source of drawing the necessary number of lots from the debentures due for payment.

It’s like repaying a loan in installments where we pay the principal amount along with interest. By the end of the debenture period, the entire debenture would be paid off along with interest. Similarly, the interest amount would also get reduced as the principal amount is paid off.

• Buying from the open market

When a company acquires its debentures for the intention of canceling them, the act of acquiring and canceling the debentures constitutes debenture redemption by purchase in an open market.

If a company’s units are listed on a controlled exchange, it may also buy debentures on the open market. It will spare them the trouble of having to deal with administrative paperwork. 

This type of redemption helps the company to maintain its liquidity since the company can go for redemption when the liquidity is high and cut its final redemption value and vice versa. Also, if the debentures are available at a discounted price, the company gains from such purchases.

Example:

Company XYZ issues debentures of Rs. 20 crore for 5 years and gets listed in the market. The company purchases Rs. 10 cr value of debenture after 2 years from the market when they have sufficient liquidity and thereby reduce their redemption liability.

• By converting into fresh shares or debentures

In case of convertible debentures a company may redeem its debentures by exchanging them into shares or new debentures. If debenture holders believe the offer is advantageous, they may exercise their entitlement to convert their debentures into equity or a new category of debentures. These additional shares or debentures may be issued at face value, a discount, or a premium.

The businesses should bear in mind that the DRR account must be created in any financial institution in India that is approved by the Reserve Bank of India.

• Call and Put Option:

Some companies issue debentures with the option of call and put during redemption. The call option gives companies the right to purchase their debenture before or on the due date at a specific price. The put option provides the debenture holders the right to sell the debenture back to the company at an agreed price on or before the maturity period.

What Is Debenture Redemption Reserve?

According to the requirements of the Companies Act of 1956, the firm is required to put aside a percentage of its income each year and transfer it to the Debenture Redemption Reserve for the redemption of debentures until the debentures are redeemed.

According to Section 117C of the Companies Act of 1956 (as amended in 2000):

(a) Where a firm issued debentures after the commencement of this Act, it must establish a Debenture Redemption Reserve for the repayment of such debentures, to which a sufficient sum shall be credited each year until such debentures are redeemed.

(b) The sum allocated to the Debenture Redemption Reserve must not be used by the corporation for any purpose other than debenture redemption.

SEBI’s Regulations

The Securities and Exchange Board of India (SEBI) has established rules for debenture redemption:

1) Every firm must establish a Debenture Redemption Reserve if it issues a debenture that is redeemable after more than 18 months from the date of issuance.

2) Only non-convertible debentures and non-convertible portions of partially convertible debentures are required to establish a Debenture Redemption Reserve.

3) Before beginning the redemption of debentures, a firm must establish a Debenture Redemption Reserve equal to at least 50% of the debenture issuance amount.

4) Withdrawal from the Debenture Redemption Reserve is permitted only once the corporation has decreased 10% of the debenture debt.

The Debenture Redemption Reserve account is shown under “Reserves and Surpluses” on the liability side of the Balance sheet. When debentures are redeemed, the appropriate amount of Debenture Redemption Reserve is moved to General Reserve.

Understand with an example:

Assume a business issued 10 Crores in debentures on January 10, 2021, with a maturity date of December 31, 2025. In this situation, a 1 Crore (10% x 10 Crore) debenture redemption reserve must be established before the debenture’s maturity date.

Companies who fail to establish such reserves within 12 months of an issue of the debentures will be obliged to pay debenture holders 2 percent interest in penalties. Companies, however, are not required to immediately fill the reserve account with a hefty deposit. Instead, they do have the option of replenishing the account by a sufficient amount each year to meet the 10% threshold.

Companies must also reserve or deposit at a minimum of 15% of the number of their debentures set to maturity on March 31 of the following year by April 30 of each year. These monies, which may be placed in a scheduled bank or deposited in corporate or government bonds, must be used to repay interest or principal payments on debentures expiring during the fiscal year that can be used for any other purpose.

Creation of Debenture Redemption Reserve

When the firm agrees to create the Debenture Redemption Reserve Account, the value specified by the Debenture Redemption Reserve tables is deposited into the account and deducted from the profit and loss account. This demonstrates the company’s desire to put aside an amount of cash to develop a fund for repaying debentures. The business should immediately buy outside capital. 

If the debentures are acquired during the interest period, the price includes interest if they are purchased “cum-interest,” but if they are purchased “ex-interest,” the interest until the date of purchase is due to the seller in addition. To offset the impact, the amount of interest accumulated up to the date of purchase, if paid, is charged to the Interest Account, whereby the interest for the whole term will be credited. As a consequence, the account balance would be equal to the interest earned throughout the time wherein the debentures were kept by the company.

Debenture Redemption Reserve Requirement for Different Types of Company

Sr No	Debentures issued company	DRR Requirement
1	For both public and privately issued debentures, the Reserve Bank of India regulates All India Financial Institutions (AIFIs) and Banking Companies.	Not Applicable
2	Other Financial Institutions (FIs) within the meaning of clause (72) of section 2 of the Companies Act, 2013	DRR needs to be created
3	For listed companies   A)  All listed NBFCs (registered with RBI under section 45-IA of the RBI Act, 1934) and listed HFCs (Housing Finance Companies registered with National Housing Bank) for both public as well as privately placed debentures   B) Other listed companies for both public as well as privately placed debentures	No DRR Required       No DRR Required
4	For Unlisted Company A)   All unlisted NBFCs (registered with RBI under section 45-IA of the RBI (Amendment) Act, 1997) and unlisted HFCs (Housing Finance Companies registered with National Housing Bank) for privately placed debentures   B)  Other unlisted companies	No DRR Required       DRR Shall be 10% of the value of outstanding debentures issued

Investment of Debenture Redemption Reserve (DRR) 

• The cash placed or invested above should not be used for any purpose other than the redemption of debentures due during the above-mentioned year. Provided, however, that the amount being deposited or invested, as the case may be, must never at any time fall below 15% of the number of debentures expiring on March 31st of that year.
• In the event of partially convertible debentures, DRR must be generated in respect of the non-convertible component of the debenture issued in line with this sub-rule. The sum credited to DRR must not be used by the business for any purpose other than the redemption of debentures.
• It must be noted that allocation to DRR might be made at any moment before redemption. Investments in the above-mentioned securities can be made before the 30th of April for debentures maturing that year; however, for the sake of simplicity and ease, it is preferable to make the allocation and investment rapidly after the debentures are allotted, assuming that the company has sufficient profits.
• Also, in certain situations, the date of allocation may be absent; in such cases, allocation and investments should be completed on the first day of the fiscal year for which ledger accounts are to be created.

Who Oversees the Debenture Redemption and Safeguards the investors?

A debenture trustee works to safeguard the debenture investors and enforces the debenture trust deed. A debenture trustee ensures that the debentures were turned or redeemed in line with the requirements and circumstances under which they were issued to debenture holders.

A debenture trustee is a trustee of a deed of trust to ensure a body corporate’s issuance of debentures. The entity acting as debenture trustee must be either a scheduled bank engaged in commercial business, a major public bank, an insurance company, or a corporate body. To function as a debenture trustee, the firm must be registered with SEBI.

Companies release preference shares or preferred stocks to raise capital. They are also known as preference share capital. If any company is facing losses or is winding up, the last payments are made to the preference shareholders before the equity shareholders.

Preference shares enable shareholders to receive the dividends announced by the company. Preferred stocks shareholders always receive dividends before equity shareholders. If a company pays out a dividend to its investors, the preferred shareholders receive the first payout.

Features of Different Types of Preferred Stocks

The unique characteristics of preference shares have turned ordinary investors into expert investors even during bad phases of economic growth. Some features of preference shares are explained below:

• Preferred Shares can be converted into a common share

It is easy to convert preference shares into common stock. A shareholder willing to change its holding position can get it converted to a predetermined number of preference shares. In some types of preference shares, investors are provided with a specific date to convert their shares. In other types, shareholders might require permission from the company’s board.

• Payouts of Dividend

Shareholders with preference shares receive dividend payouts, while other shareholders might receive it later. Sometimes, the other shareholders do not receive the payout.

• Dividend Preference

Regarding dividends, preference shareholders receive dividends before equity or other shareholders.

• Voting Rights

Preference shareholders have the right to vote in case of any extraordinary events. But this is occasional. With preference shares, shareholders do not have voting rights in matters of the company’s management. 

• Preference Offered in Assets

In the case of the company’s liquidation, the preferred shareholders are prioritised over non-preferential shareholders on its assets.

What are the Different Types of Preference Shares?

The varied types of preference shares have been enumerated below:

• Cumulative Preference Shares

• This is the most preferred equity. Here, if the dividends are not paid, it is considered in arrears and prioritised over other dividend payments. 
• If a company cannot pay dividends to its shareholders, the cumulative dividends can be paid in later years as arrears.
• Per the law preference, shareholders must receive dividends before any common shareholders.

• Non-Cumulative Preference Shares

• Unlike the cumulative preferred shareholders, the non-cumulative shareholders are not compensated for the unpaid dividends.
• For instance, if a company fails to make a dividend payment even after an announcement, they are under no obligation to pay the dividends.

• Redeemable Preference Shares

• Redeemable shares are issued by a company to redeem them later. 
• The company opts for a buyback in near future.

• Irredeemable Preference Shares

• This type of share can only be redeemed if the company shuts down its operations or faces liquidation.

• Adjustable-Rate Preference Shares

• In this category, there is no provision of the fixed rate.
•  The dividend payment amount depends upon the existing specified rates in the market at all times.

• Callable Preference Shares

• Callable preferred shares are of a hybrid security.
• The issuing company here has the right to redeem the shares at a specified date and at a price specified by the corporation at the time of issuance.
• This preferred equity does not appeal much to its investors because of its characteristics.

• Convertible Preference Shares

• Convertible preferred shares can be converted to common equity at a specified price and time.
• This is the most versatile as well as appealing form of preferred stocks as it has diversified risk exposure.

• Non-Convertible Preference Shares

• Those preferred stocks that are not convertible are non-convertible preference stocks.
• This type of preferred equity cannot be converted into common equity.

• Participating Preference Stocks

• If the preferred stocks are of participating nature, they have the chance to earn higher than the stated rate of the fixed dividend. 
• The dividends on the participating preference shares are higher if the company receives more than its benchmark earnings.

• Non-Participating Preference Shares

• The dividends made to the non-participating preferred shareholders cannot be made from surplus profit.
• It has a fixed dividend rate.

Why Should Shareholders Prefer Preference Shares?

Preferred Shareholders enjoy the following benefits:

1. In the form of dividends, they get regular income.
2. Compared to bonds, preference shares have a higher potential for returns.
3. The lower amount of risk compared to common shares.
4. As per the Indian tax laws, the dividend income on preferred shares is tax-free up to Rs. 10,00,000.

Difference Between Preference Shares and Equity Shares

Some of the significant differences between preference shares and equity shares are explained below:

S.No	Category	Preference Shares	Equity Shares
	Voting Rights	In case of an extraordinary situation. Otherwise does not have any voting rights.	Common equity has got voting rights.
	Payments	Preferred equity holders receive dividends, both cumulative and non-cumulative.	Common shareholders are not entitled to fixed dividends. They may or may not receive dividends.
	Volatility	Preferred shares have got steady price movements.	Common shares react actively to the developments of the market.

Similarity Between Preferred Stocks and Equity Stocks

Preference stocks are classified as equity. It is similar to the general equity offered by a company. Preference shares are paid dividends from the profit after the tax, whereas preference shares have a fixed dividend rate.

Difference Between Preference Shares and Bond

The differences between preference shares and bonds have been discussed below:

S.No	Category	Preference Shares	Bond
	Classification	Preference shares as equity.	Bonds have been classified as debt.
	Dividend Payments	The dividend amounts are fixed but not guaranteed.	The interest on the bonds must be made as per schedule.
	Tradability	Preference shares are more of liquid nature as they trade on the stock exchange.	Bonds are over-the-market securities that have a negligible presence on the exchange.

Conditions to Redeem Preferred Stocks

The condition to redeem preference shares are:

• Permission is granted only to redeem fully-paid up preference shares.
• The redemption of the preferred stocks is allowed only from the profits available for the distribution of the shareholders.
• The proceeds of the equity or preference shares are issued solely for the redemption of preference shares.
• If the company wishes to redeem preference shares from the fresh proceeds of any newly-issued preference shares, at least 75% of the shareholders need to give consent, along with the tribunal’s approval, to carry out the activity.
• After receiving the existing shareholders’ consent and the necessary approvals, the shareholders who opposed the new preferred shares will immediately get their respective shares.
• Moreover, preference shares issued to redeem old preference shares cannot be added to the company’s existing share capital.

Conclusion

In previous years, several reputed companies, such as IL&FS Transportation networks, Tata Capital, and many more, have issued preference shares under private placement. The dividend rates of these preferred stocks are lucrative and tax-free, up to Rs. 10 lakh.

Preference shares have their risks and potential. Investors must study the company’s performance and growth potential. It would be wise to analyse its fundamentals and management before investing in preference shares. Yes, it is too much work. With TradeSmart, you will get instant ratings with all the company details listed on the stock exchange.

Hence, open a Demat Account with TradeSmart today, and invest in the best profitable companies.

Preference shares, often known as preferred stock, pay dividends to owners before ordinary stock payments. If a company files bankruptcy, the preferred stockholders will be paid first, followed by the common stockholders. Preference shares frequently pay a fixed dividend, but regular stocks do not. Preferred investors sometimes do not have voting rights, although ordinary stockholders do.

There are four types of Preference stock:

• Cumulative preferred stock
• Non-cumulative preferred stock
• Participating preferred stock
• Convertible preferred stock

Cumulative preferred stock provides a provision that requires the firm to pay all dividends, including those previously missed, to stockholders before regular shareholders get their dividend payments. Although these dividend payments are promised, they are not always made on schedule. Unpaid dividends are known as “dividends in arrears” and must be paid to the stock’s current owner at the time of payment. The holder of these preferred shares might get additional payments (interest) at regular intervals.

Preference shares, often known as preferred stock, pay dividends to owners before ordinary stock payments. If a company files bankruptcy, the preferred stockholders will be paid first, followed by the common stockholders. Preference shares frequently pay a fixed dividend, but regular stocks do not. Preferred investors sometimes do not have voting rights, although ordinary stockholders do.

There are four types of Preference stock:

• Cumulative preferred stock
• Non-cumulative preferred stock
• Participating preferred stock
• Convertible preferred stock

Cumulative preferred stock provides a provision that requires the firm to pay all dividends, including those previously missed, to stockholders before regular shareholders get their dividend payments. Although these dividend payments are promised, they are not always made on schedule. Unpaid dividends are known as “dividends in arrears” and must be paid to the stock’s current owner at the time of payment. The holder of these preferred shares might get additional payments (interest) at regular intervals.

Non-cumulative preferred shares have no unpaid or missed dividends. Suppose the corporation chooses not to pay dividends in any particular year. In that case, non-cumulative preferred stock owners have no right or power to pursue such deferred payments in the future.

Participants’ preferred shareholders are entitled to dividends equal to the usually established preferred dividend rate plus an extra payout based on a predefined scenario. This additional payout is intended to be made only if common shareholders’ total dividends surpass a specified per-share threshold. 

Participating preferred shareholders may be entitled to the purchase price of their shares. Besides, they may also receive a pro-rata portion of the leftover earnings recovered by common shareholders on liquidation of the firm.

Convertible preferred stock allows owners to convert a certain number of preferred shares into a preset number of common shares at any time after a predetermined date. Usually, convertible preferred shares are swapped in this manner at the shareholder’s desire. On the other hand, a company may add a provision on such shares that allows shareholders or the issuer to force the issuance. The performance of the common stock decides the eventual value of convertible common stocks.

Features of Preference Shares

Several factors have contributed to the popularity of these financial products among investors. The majority of these traits have resulted in individuals earning more money even during periods of slow economic growth. 

The following are the most appealing features:

• Preference shareholders have significantly more influence than regular shareholders in any organization. They are among the first to receive dividend payments.
• These shareholders have no voting rights in any corporate operations. Thus, one of the downsides of preference shares is the attributes. Although this is a significant disadvantage for any investor, it is why so many companies provide these shares. The situation is comparable to that of debtors.
• One factor often overlooked is that investors pay dividends on particular dates. It is equivalent to a monthly salary.
• If investors want to purchase a particular sort of these shares, they should hunt for irredeemable preference shares. The owner of these shares has a say when they mature.

Different types of Preference Shares

There are several varieties of preference shares available in India, which are listed below:

• Cumulative preferred stock 

Cumulative preferred stock provides a provision that requires the firm to pay all dividends, including those previously missed, to stockholders before regular shareholders get their dividend payments. Although these dividend payments are promised, they are not always made on schedule. Unpaid dividends are known as “dividends in arrears” and must be paid to the stock’s current owner at the time of payment. The holder of these preferred shares might get additional payments (interest) at regular intervals.

Cumulative preferred stock is usually marketed at a lower rate than non-cumulative preferred stock since the cumulative characteristic reduces investors’ dividend risks. The cumulative feature is incorporated in most preferred stock issuance due to the lower cost of capital. Only blue-chip firms with a long history of dividend payments can issue non-cumulative preferred stock without increasing their capital expenditures.

• Non Cumulative Preference Shares

Non-cumulative preferred stock has no unpaid or missed dividends. Suppose the business chooses not to pay dividends in any particular year. In that case, the non-cumulative preferred stock stockholders have no right or power to demand such foregone payments in the future.

• Redeemable Preference Shares

In the case of redeemable shares, a company can purchase back shares from shareholders for its use at a set date or by providing prior notice after a particular period.

• Irredeemable Preference Shares

The company can only redeem these shares if liquidated or stopped operations. 

• Participating preference shares

Participating preference shares are those in which the dividend-paying firm pays greater dividends to shareholders in addition to the preference dividend. This payment is carried out at a certain rate. Furthermore, during the company’s dissolution, participating preference shareholders have rights to the company’s surplus assets.

• Non Participating Preference Shares

Non-participating preference shareholders are only entitled to fixed-rate dividends, not surplus profits. The regular stockholders receive the extra profits.

• Convertible Preference Shares

Ordinary shareholders can convert their shares to preferred stock. Investors desiring to earn a preferred share dividend use these shares and gain from a rise in the common stock price. Thus, the advantages are twofold – stable income from preferred dividends and the possibility of bigger gains if the common stock price rises. This conversion is possible within the time frame specified in the memorandum.

• Non Convertible Preference Shares

These shares cannot be converted into ordinary shares of the issuer.

• Preference shares with a callable option

After a given date and at a specific price, the issuing company can call in or purchase back callable preference shares from shareholders. The prospectus for such events specifies:

• the call price, 
• the date after which the shares can be called, and 
• the call premium. 

Holders of cumulative preferred shares can receive dividends retrospectively for dividends not paid in previous periods, while non-cumulative preferred shareholders cannot. Thus, a cumulative preferred stock will be more expensive than a non-cumulative preferred stock. 

Similarly, suppose the performance criteria are met. In that case, participating preferred shares pay higher dividends, such as corporate earnings reaching a particular threshold. Like convertible bonds, convertible preferreds allow the holder to swap their preference shares for common shares at a predetermined exercise price.

• Adjustable-Rate Preference Shares

For such investors, the dividend rate is not set; the market interest rates decide it.

Why Should You Invest in Preference Shares?

Investors prefer certain stocks for a variety of reasons. Selecting these shares is the best way to future-proof your wealth while reaping the benefits if you are an investor. 

For example, suppose the company files bankruptcy. Then, all preferred shareholders will have first and preferential access to the assets auctioned off. 

Similarly, preferred owners will benefit if the company’s common stock begins to perform extraordinarily. They can convert a portion of their holdings into common stock and profit appropriately.

Thus, such perks of preferred stocks will tempt consumers with low-risk appetites when it comes to investing amid uncertain times.

Many corporations provide callable preference shares, which is an outstanding feature. The phrasing suggests that the investor can repurchase these shares at any time. 

Finally, most investors are only eligible for a limited amount of incentives. Like any other financial instrument, these shares come with inherent risks, emphasizing the disadvantages of preference shares. 

It is difficult to predict how much dividends the shares will pay out during market volatility. Thus, those with a low-risk tolerance should avoid taking too many risks with this investing option. The risks, on the other hand, can be severe.

Finally, companies with substantial market capitalization and the ability to pay large dividends to a huge shareholding base over time frequently issue preferred shares. It might be a risk-reduction measure that may or may not be effective. 

Preferred shares are an excellent option for investors seeking long-term income assurances. They appeal to a wide spectrum of investors due to their sheer diversity and alternatives. If you want to invest in such companies, ensure you understand the advantages and disadvantages and that they meet your investment objectives and risk profile.

Blue-chip stocks are just a set of high-priced stocks in the market. These stocks have showcased excellence and performed well over the years in the stock market. The companies that fall under blue-chip stocks are of great value due to their stable financial record over the past decades. One more primary reason for companies to become the said stock is the regular and attractive dividend payouts credited to its shareholders, making it popular. 

However, before investing in a blue-chip stock, investors should properly understand the stocks and equip themselves with the requirements of investing here. Below are some of the factors and points about blue-chip stocks and companies one should know before investing. 

What are Blue-Chip Stocks?

Blue-chip companies have large market capitalization, and the stocks issued by them are usually termed as blue-chip stocks. Such companies have a high brand name, image, and capitalization valuation. Due to such reasons, the shares of these companies are highly priced in the stock market. 

Blue-chip stocks can remain unchanged or unaffected during adverse conditions of the market and bring high yields to their investors during favorable  market conditions. One crucial identification of such companies is their domination in the respective industry. Blue-chip stock companies give their shareholders attractive returns during the year as they are consistent and remain ineffective from inflations, recessions, or any economic conditions in the country. 

A strong and stable financial condition, visionary managerial group, and a consistent growth record are traits of identifying a blue-chip stock in the market before stock investment. An individual investor interested in investing in these companies can invest directly or indirectly in mutual funds. 

What does the term “blue-chip” mean?

In 1923, a Dow Jones employee coined “blue-chip” to characterize high-priced stocks. He used this term based on the game of poker, where three types of coins are used to place the bets. The three coins are differentiated as blue, white, and red chips, with the blue ones having a higher value than the other two. 

Today, blue-chip stocks no longer mean high-priced stocks, but instead refer to stocks of high-quality organizations that have endured the test of time. It is still debatable how big a corporation must be to qualify for blue-chip status. However, a market capitalization of $5 billion is a widely regarded benchmark.

Features of Blue-Chip Stocks 

• Credibility: The primary reason for blue-chip stocks to have high credibility is the reputation and the image. Secondly, such companies have appropriate finances to pay back the pending dues without any such obligations and hardships. 

• Prospects of growth: Blue-chip stocks are companies that have remained in the market for decades. These companies have faced hardships as well as excellent market conditions. Such stocks have flattened on the growth curve. 

Reasons for Investing in Blue-Chip Stocks 

Blue-chip stocks are desired by investors of all categories and ages. If a person is still unsure about investing in blue-chip stocks – some of the reasons to do are as follows – 

• Portfolio building: Investing in blue-chip stocks encourages diversification in the stock market. Doing so will allow the investors to enjoy the best under different categories and varieties. 
• High-yielding return: Blue-chip stocks are companies with financial stability. These companies pay regular dividend, making the return on investment high and stable. 
• Facilitate structuring: Investing in blue-chip stocks will allow investors to stabilize their portfolios and take higher risks in other investments. This gives the investors an allowance to structure their portfolios much more efficiently and effectively. 
• Acts as a cushion: Blue-chip stocks can withstand any uncertainty in the external and internal environment of the market, allowing investors to safeguard their hard-earned money from any losses and bringing high yielding returns over the years. 

Advantages of Investing in Blue-Chip Stocks 

Some of the key pointers that highlight a blue-chip stock are its excellent valuation in the stock and capital market, credibility and image value of the blue-chip company, and the financial stability over the years. If investors choose to invest in the blue-chip stocks, they will gain some advantages. 

• Liquidity: Blue-chip stocks enjoy attractive investment opportunities for investors interested in the market. The primary reason for this is the name and reputation of blue-chip companies that have gained credibility and goodwill in the stock market over the past decades through their stable performance. This allows the blue-chip stocks to facilitate direct sale and purchase, making the liquidity easier and simpler.  

• Able to achieve financial objectives: Investors tend to keep blue-chip stocks in their portfolio for a lifetime, allowing them to structure their portfolios under blue-chip stocks. 
• Regularity in returns: Blue-chip companies pay regular and attractive dividends to their investors, providing stability to the stocks and gaining trust of the investors.  

Who should typically invest in blue-chip stocks?

Blue-chip stocks represent companies with a good cash flow, stable dividends, fewer debts, and massive brand value. These stocks are not entirely risk-free, but they also help investors reduce the risk of their portfolios. Even if its financial performance is not up to par for a few months or a year, a firm with varied activities will not experience high volatility in its stock price because the company’s other business sectors usually cover the losses of one business function. 

These companies are popular among affluent investors who have a track record of making wise decisions; however, it is highly recommended that investors who have recently started investing in equities keep good blue-chip stocks in their portfolios to help them earn and learn investing nuances with real money invested with minimal risk.

Investment

When an asset is purchased with the intention of generating income or creating wealth through it is referred to as an investment. 

An investor may earn money from their investment in two ways. One, if they invest in a tradable asset, they may be able to benefit from it. Second, if they invest in a return-generating plan, like rentals, they will make money through the accumulation of gains. 

Share market

A share market is a market where shares are traded. On a stock exchange, you may only purchase and sell equities that are listed on the exchange. Buyers and sellers come together on a stock exchange.

Why invest in the share market

We invest in shares to grow our wealth over time. While some people consider shares to be a risky investment, several studies have shown that investing in the appropriate stocks for a long time (five to ten years) may give inflation-beating returns. People can have short-term strategies as well when investing in the share market. While stocks may be quite volatile in a short period, buying the proper stocks can help traders earn quickly.

How to invest in the share market

People try to invest their extra money to make their fortune. The share market is an excellent location to do so. People who trade in shares have the flexibility to work from anywhere they want, anytime they want.

Anyone may now start trading with the use of electronic trading accounts.

Steps you can follow to invest in the share market properly

 

Broker

Two platforms are generally used in India for Stock Exchange:

•   Bombay Stock Market (BSE) – The longest-serving stock exchange of Asia functioning since 1875
•   National Stock Exchange (NSE) – The biggest stock exchange in India

The first step for retail traders is to register with brokerage companies or Depository Participants (DPs) so that they can access the stock markets. It is crucial to pick the correct DP, since they are used by ordinary investors to buy, sell and store equities. They create a user interface for every investor to engage with the stock market. Opening a 2-in-1 Demat + Trading account with a DP is better, since such accounts enable an investor to trade stocks comfortably. Such an account is also advantageous since it allows investors to see their holdings at a single glance.

Some DPs also provide their users with real-time market data. An investor should, therefore, be cautious while selecting their broker or DP. Once they have chosen a DP, they can move to the next documentation step.

 

Documents

In order to trade in stock markets, an investor needs a Demat account for holding their positions and a trading account for executing their transactions. To do so, the following documents are required:

•   Address proof
•   Identity verification
•   e-KYC – Some DPs will let you electronically link the AADHAR card to the trading account, avoiding the need to scan the AADHAR card manually.

  Additional information, such as an annual wage range, may be needed. 

Understand trading and investing

After an investor has submitted all of their papers, the DP will double-check their information and then provide the login information to the investor. They may now connect to their account and begin trading using these data. A person can use one of two strategies:

•   Trading: This technique enables investors to profit from short-term price swings. Intraday traders who close all their positions by the end of the day use this technique. The goal is to take huge, voluminous positions and sell at the first sign of a price change.
•   Investing: Unlike trading, investing entails possessing the holdings for an extended length of time. The idea here is to locate undervalued businesses, acquire their shares, and maintain their position through the transient market ups and downs.
  

  Company selection

It is critical to undertake comprehensive research on a company’s background before purchasing its shares. A trader should consider the following things:

•   The firm’s revenue model 
•   The stability of the company’s management
•   The company’s rivals, and so forth.
  

  Diverse portfolio

It is critical to have a broad and diverse portfolio while investing in the stock market. As a trader, an investor must diversify their portfolio to ensure that it is not overly exposed to the ups and downs of a single industry. Traders could also consider investing in large-cap firms for consistent but low returns, as well as small-cap companies for higher but less predictable profits.

What factors do I consider before investing in stocks?

When an investor decides to buy a stock to invest in, it is critical to complete their research before putting their hard-earned money into it. When purchasing a stock for the long term, an investor’s objective should be to locate good value. However, before investing confidence in a firm, an investor should conduct comprehensive research, assess the stock’s fundamentals, and determine whether it is a good fit for their portfolio.

Investors should always remember that they are not simply buying a stock; they are also becoming a stakeholder of that firm. Therefore, they must do their homework as an investor.

Before an investor buys any stock and spends their hard-earned money, they should identify a few crucial things about a firm to understand whether it fits in their portfolio.

1. Time: Before buying a stock, it is critical for an investor to determine and choose their time horizon. Depending on the financial goals, the investment time horizon might be short, medium, or long term.

•   Short-term investing: A short-term time horizon is defined as any investment that is expected to hold for less than a year. If an investor wants to buy a stock and hold it for less than a year, they should look for solid blue-chip firms that pay dividends. The firms have a strong financial sheet and are less vulnerable to risk.
•   Medium-term investing: A medium-term investment is one that an investor can plan to keep for one to ten years. Quality developing market equities and stocks with a moderate level of risk should be considered for medium-term investing.
•   Long-term investing: Finally, long-term investments are any assets that can be kept for a long period. If something goes wrong, these investments have time to recover and can provide a considerable return.

 

2. Strategy: Before purchasing a stock, an investor should research numerous investment techniques and select the one that best matches their investing style. The three main types of tactics utilised by the most successful investors are listed below:

•   Value investing: Value investing is when an investor buys stocks that are inexpensive compared to their rivals in the hopes of making a profit. It is said that Warren Buffett had used this approach to generate massive riches.
•   Growth investing: Growth investing refers to stock purchases that have outperformed the market in terms of sales and profitability. Growth investors feel that these stocks’ rising tendencies will continue, providing an opportunity to benefit.
•   Income investing: Finally, investors should seek out high-quality stocks that pay out big dividends. These dividends provide revenue that may be spent or reinvested to boost earnings potential.

3. Fundamentals: Every investor should check certain fundamentals before they go ahead and start investing in stocks. The following are some of the most significant ratios to think about:

•   Price-to-earnings ratio: The price-to-earnings ratio compares the stock price to the earnings per share of the firm. For example, if a firm trades at Rs. 20 per share and earns Rs. 1 per share yearly, its P/E ratio is 20, meaning that the share price is 20 times the company’s annual profits.
•   Debt-to-equity ratio: The debt-to-equity ratio is used to calculate how much a firm owes. High debt levels are bad since they indicate bankruptcy.
•   P/B ratio (price-to-book-value ratio): This ratio compares the stock price to the net value of the company’s assets, then divides by the number of outstanding shares.

4. Pattern of shareholders: Investors should look at the ownership pattern before purchasing a stock. Promoters are individuals or organisations with a significant impact on a company. They might own a significant portion of the firm or hold prominent management roles. So, investors should look for firms with large promoter ownership, a large domestic institutional investor holding, and a large foreign institutional investor holding.
5. History of dividends: Dividend stocks are well-known for paying out a portion of their profits to shareholders in the form of dividends. These dividend stocks should be considered by investors following the income investing method. If the investor’s purpose is to create income from their investments, they should research the company’s dividend history before purchasing its stock. Income investors should look at the company’s dividend yield, which is indicated as a percentage, if they want a high level of income compared to the stock’s price.
6. Volatility: On optimistic days, stocks with high volatility will climb swiftly, and on negative days, they will crash like a brick. If you invest in a low-volatility stock that moves slowly and a recent rise reverses, you can cash in your gains before they vanish. Stocks with rapid moves, on the other hand, do not allow you much time to quit the investment, and when a trend reverses, you may lose money.

Before an investor purchases and adds any stock to their portfolio, they must ascertain that they are purchasing the top firms. Stock screeners such as StockEdge can assist an investor in identifying firms that satisfy their investing or trading criteria.

An investor can choose to begin with a small amount of money if they wish. It’s more involved than just picking the appropriate investment (a challenging task in and of itself), and they must be conscious of the limitations of a rookie investor.

An investor needs to conduct some research to establish the minimum deposit requirements and then compare commissions to those offered by other brokers. It’s unlikely that an investor will be able to diversify their portfolio while spending a small amount of money on specific stocks. They may also have to decide on a broker with whom they want to create an account.

What is Earnings Per Share?

EPS or Earnings Per Share is one of the most important financial measures that indicates a company’s profitability. It is a significant variable to determine the share price of a company. It is a financial ratio indicating the amount of profit or loss for the period attributable to each equity share. It is crucial for investors and other people who are involved in the stock market and is frequently used by them to gauge a company’s profitability before buying shares of the company. A high Earning per share indicates that the company is very profitable, and more profit is available for distribution to the shareholders. In short, the higher the Earnings per share, the better the profitability of the company. It can be said that the Earnings per share are a basic yardstick of the profitability of a company that you can use to get an idea of whether the company is safe for the bet.

How is EPS calculated?

EPS Calculation: EPS calculation is very simple and easy. Earnings per share are generally calculated on a quarterly or annual basis.

 Ways of EPS Calculation:

• Basic Earning Per Share (EPS) Calculation:
  It is calculated by dividing the net income of a company by the number of its total outstanding shares.The EPS formula is:

  Basic EPS = (Net income – Dividend on Preference Shares) / Outstanding Shares at End-of-period

  For example, if a company has 5000 outstanding shares and the profit of the company is ₹50,000, then as per Earning per share formula, the earning per share would be:

  ₹50,000 /  5,000 = ₹10/share

  The EPS is ₹10 / share (assuming nil preference dividend).

  The resulting number, i.e., earnings per share of ₹ 10 in our example, can be considered as an indicator of the profitability of a company.

• Weighted Earning Per Share (EPS) Calculation:
  While doing the EPS calculation, you are advised to use the weighted ratio because, over time, the number of outstanding shares can change. Taking only the number of common outstanding shares at the end of the period would distort the outlook of the company by showing a skewed version of earnings. The weighted earnings per share formula is given below: 

  Weighted EPS = (Net income – Dividend on Preference Shares) / Weighted average outstanding shares 

  For instance, let us take the following data to calculate the weighted earnings per share.

Date of Change	No. of Outstanding shares	Weight	Weighted average share
1st April 2021	4,00,000	3/12 = 0.25	1,00,000
1st July 2021	5,00,000	6/12 = 0.50	2,50,000
1st Oct 2021	6,00,000	3/12 = 0.25	1,50,000
Total			5,00,000

Hence, the outstanding weighted average share for the given year = 5,00,000 shares.

To calculate the weighted earnings per share, we will divide the net income of the company by 5,00,000 shares, i.e., outstanding weighted average shares.

• Diluted Earnings Per Share (EPS) Calculation:
  It is computed for calculating the profit/ loss attributable to ordinary equity shareholders of the parent entity and if presented, profit/loss from continuing operations attributable to those equity shareholders.For computing diluted EPS, we have to adjust profit/ loss attributable to ordinary equity shareholders of the parent entity and the weighted average number of shares outstanding, for the effect of all dilutive potential ordinary shares.

  Diluted EPS = (Profit/ loss attributable to ordinary equity shareholders when dilutive potential shares are converted into ordinary shares)/(Weighted average number of equity shares + Weighted average number of dilutive potential ordinary shares)

How can you calculate EPS in MS Excel?

Once you have collected the necessary data, enter the net income, preference dividends, and the number of outstanding common shares into the three adjacent cells, say A3, A4, and A5. Now, in cell A6, input the following formula “=A3-A4” to subtract preference dividends from the net income. After that, in cell A7, input the following formula “=A6/A5” to get the EPS ratio.

 

Types of Earnings Per Share:

The calculation of earnings per share is quite simple. But there are different variations of earnings per share that are in use these days. Each variation tends to represent a different side of EPS. From retained earnings per share to GAAP earnings per share, you need to understand what these represent to make an informed decision about shares.

Because of these variations of earning per share, a share may appear overvalued or undervalued. Let us now understand the different varieties of earnings per share and what each variety represents about the performance of the company.

Normally, there are three broad categories in which earnings per share is divided:

1. Trailing EPS: This variation of earning per share is based on the figures of the previous year.
2. Current EPS: This variation of earning per share is based mostly on the available figures.
3. Forward EPS: This variation of earning per share depends on estimated figures and anticipated future progressions.

There are four types of EPS:

1. GAAP EPS or Reported EPS: This variety of earnings per share is derived from GAAP (Generally Accepted Accounting Principles) 
2. Book Value EPS / Carrying Value EPS: This EPS variation is also known as Carrying value earnings per share. Book Value EPS will enable you to compute the aggregate amount of the company equity in each share (an entity’s net asset value (total assets – total liabilities) on a per-share basis.). It is also helpful in estimating the worth of a share of a company in case the company is to be liquidated. 
3. Retained EPS: It implies that the company is holding the profits instead of apportioning them as dividends to the shareholders. Business owners may choose to use the earnings per share which were retained to pay off their present debts for expansion or may retain it as a reserve to satisfy future requirements. 

   Generally, Retained earnings per share are declared under the head- stockholders equity in the balance sheet.To compute the retained earnings per share, we have to add the net earnings and the net current earnings which were retained and then subtract the total amount of dividend distributed from it. Lastly, divide the remaining amount by the number of total outstanding equity shares.

   Therefore, you can compute the retained EPS calculations using the below formula –

   Retained EPS = ((Net earnings + net current retained earnings) – dividend distributed) / Total number of outstanding  equity shares

   On the other hand, if the amount of retained earnings is negative, subtract it from the net earnings of the subsequent accounting period.

4. Cash EPS: Cash earnings per share is one of the important variations of EPS as it supports you to get a better opinion about the financial standing of the company. It is so because the Cash earning per share shows the accurate amount of the cash that has been earned. Also, it is very difficult to temper the cash EPS variation. 

   For ease of your understanding, Cash EPS can be described asCash EPS = Operating Cash Flow / Total number of diluted shares outstanding

   Understanding the overall EPS variations: Let us understand the above-mentioned variations of Earnings Per Share with the help of a table –

EPS Variations	Calculations
GAAP EPS  or Reported EPS	It is computed as per GAAP (Generally Accepted Accounting Principles).
Pro Forma EPS or Ongoing EPS	It excludes an abnormal one-time profit in the net income.
Retained EPS	It is then computed by dividing the amount of net earnings and current retained earnings after subtracting the dividend paid from the total number of outstanding shares.
Cash EPS	For computing Cash EPS, total operating cash is divided by outstanding diluted shares.
Book Value EPS	For computing the EPS, take the current balance sheet into account.

Importance of Earnings Per Share

To measure the profitability & financial standing of a company, the points mentioned below highlight the importance/ need of earnings per share –

1. It will help you to create more income if you are investing in a company. To elaborate, a higher Earning Per Share shows a beneficial status, which in turn indicates that the entity may enhance its dividend payout over time.
2. It helps you to compare the performance of the various promising companies which helps investors make informed decisions regarding their investment options.
3. With the assistance of Earnings per share investors & other financial methods, you can determine the existing & anticipated value of the stock of the company. Further, EPS enables you to analyze whether the value of the stock price is as per its performance in the market. For instance, you can use the Earnings per share along with the Price Earnings Ratio (P/E) to calculate the same. In the formula of Price Earnings Ratio (P/E), ‘P’ stands for price, and ‘E’ stands for earnings which are calculated with the assistance of the EPS formula.
4. Earning per share not only assists in measuring the current financial performance but also assists in tracking the past performances of the companies. For example, a company with a regularly increasing Earnings Per Share is often recognized to be a dependable investment option. Similarly, a company with weak or irregular Earning Per Share is generally not selected by periodic investors.

Limitations of Earnings Per Share

When you look at the Earnings Per Share to make an investment or to make a trading decision, be aware of some of the possible drawbacks. For instance, a company can handle its Earnings Per Share by buying back its stock, thereby reducing the number of outstanding shares, and as a result, inflating the EPS amount given the same amount of earnings. EPS can also change due to changes in the accounting policy for reporting the earnings. Also, EPS has little to say about whether the stock of a company is under or overvalued because EPS does not take into account the price of the share.

Although EPS is believed to be one of the potent financial tools, you must keep in mind that earning per share has its drawbacks also.

The below list highlights some of the limitations of EPS which you must remember :–

1. When it comes to measuring the ability of a company to pay its debt, cash flow is a very important aspect. However, cash flow is also not recognized in the calculation of EPS, which shows a high earning per share may still not be effective for gauging the solvency of a company.
2. EPS doesn’t take into account the current price of the share of the company.
3. Companies might have used different accounting policies for determining earnings in different financial years. It may have an impact on EPS.

Hence, before you judge a company’s merit as an investment choice, you should also verify other crucial factors. In fact, to gain a good idea of the overall scope, market performance & profitability of a business venture, you should align EPS with the other financial parameters.

When trading in the stock market, one of the most important expenses that you will have to account for is the brokerage. However, many beginner traders miss out on doing that, partly because they fail to understand the impact that brokerage has on their revenue generating potential.

Whether you’re into full-time trading or just occasional investing, it is crucial for you to be aware of what the brokerage on a trade that you’re about to make is likely to be. And that requires calculating the brokerage on every single trade you make.

If that sounds overwhelming, don’t worry. In fact, it is extremely easy and takes only a couple of minutes to calculate the brokerage. But to get there, you would first have to understand the concept of brokerage. So, let’s start off by trying to decode what ‘brokerage’ means.

What is brokerage?

In order to start trading in the stock market, you need to have a trading account and demat account in your name. And to open these accounts, you would have to get in touch with a stock broker. In a way, the stock broker, also often known simply as the broker, acts as an intermediary that connects you and the stock market.

Now, in exchange for enabling you to buy and sell stocks on the share market through them, these stock brokers charge a fee. This fee is what is known as the brokerage. The brokerage is charged on every single trade that you execute, and this includes both ‘buy’ transactions as well as ‘sell’ transactions.

The brokerage charged by stock brokers is not fixed or regulated by any central authority. As a result, the brokerage charges across multiple service providers are not uniform or consistent. What this essentially means is that while one broker may choose to charge, say Rs. 20 for every successfully executed trade that you make as brokerage, another may charge a lower or a higher amount. This makes calculating brokerage slightly challenging. But once you know the rates and how to go about making the calculations, it gets extremely easy.

Why do different brokers charge brokerage at different rates?

In India, there are two different types of brokers – full service brokers and discount brokers. And depending on the category that a stock broker falls in, the brokerage they charge tends to vary.

Full service brokers, as the name itself signifies, provide a whole gamut of services ranging from investment advice, research reports, Portfolio Management Services (PMS), and more. And as a result, they tend to charge slightly higher amounts of brokerage. The brokerage charges of full service brokers generally tend to be a percentage of the trade value, ranging anywhere from 0.01% to 0.50% of the total trade amount.

Discount brokers, on the other hand, do not provide the additional services like investment advice and PMS. This allows them to keep their operational costs low, and consequently, it directly results in lower brokerage costs for the end user. That’s you. Nearly all discount brokers charge a nominal flat fee for every successful trade.

What are the different ways in which brokerage is levied?

Currently, in India, there are three different ways through which stock brokers levy brokerage charges. Let’s take an in depth look at these details.

●        Brokerage as a percentage of the trade value

According to this method, stock brokers charge a percentage of the total trade value as brokerage. Generally, full service brokers use this method of levying brokerage.

Since the brokerage that you would have to pay for each trade depends on the trade value itself, it tends to vary from one trade to another. Simply put, the higher the value of a trade, the higher the brokerage is likely to be. And vice versa.

●        Flat fee for every trade

This is by far the most popular method of levying brokerage on trades. While nearly all discount brokers have adopted this method of brokerage, some full service brokers have also migrated to this model.

In this model, for every trade that you make, a nominal flat fee of say Rs. 10 to Rs. 20 is charged. This is done irrespective of the value of the trade. Even if your trade value is in the hundreds or lakhs, the brokerage that you would have to pay will continue to remain the same.

●        Monthly trading plans

A few stock brokers have come up with monthly trading plans that allow you to place an unlimited number of trades in a month irrespective of the value of the trades. And in return, they charge a monthly subscription fee.

This is exceptionally convenient for very active traders who place multiple trades in a day, since it allows them to save quite a bit on brokerage. That’s not all. These kinds of plans don’t require you to calculate brokerages for every trade as well.

How to calculate brokerage for a trade?

Now that you know the different ways in which stock brokers charge brokerage, let’s take a quick look at a couple of examples and see how you can calculate the brokerage for a trade.

●        Brokerage as a percentage of the trade value

Assume that you’ve opened an account with a stock broker who charges 0.25% as brokerage for every trade that you make. Now, let’s say that you wish to buy 100 shares of Reliance Industries. The share price is currently at Rs. 2,500 per share. So, the brokerage that you would have to pay would be calculated as follows.

Brokerage on this trade = 100 shares x Rs. 2,500 x 0.25% = Rs. 625

After a couple of days, say the share price rises up to Rs. 2,600 and you wish to sell the shares for a profit. Here’s what the brokerage on this ‘sale’ transaction would come up to.

Brokerage on this trade = 100 shares x Rs. 2,600 x 0.25% = Rs. 650

As you can see, the total brokerage that you pay in this instance comes up to Rs. 1,275 (Rs. 625 + Rs. 650).

●        Flat fee for every trade

On the contrary, let’s now assume that you’ve partnered with a stock broker that charges a flat fee of Rs. 15 per trade. Going by the same example as seen above, you wish to purchase 100 shares of Reliance Industries at Rs. 2,500 per share.

The brokerage that you would have to pay for the ‘buy’ transaction would be Rs. 15 and for the ‘sale’ transaction would again be another Rs. 15. This effectively means that the total brokerage that you get to pay in this instance only comes up to Rs. 30, which is very economical.  

Using a brokerage calculator

Although the above calculations take only a couple of minutes to do, there’s a way to simplify it even further. Using a dedicated brokerage calculator can help you here. Here’s a quick overview of how you can use one.

For this example, let’s take the brokerage calculator from TradeSmart. Here are the steps that you would have to follow to use the TradeSmart brokerage calculator.

1. Firstly, navigate to the brokerage calculator page on the TradeSmart website.
2. Select the brokerage plan that you’ve opted for – Value Plan or Power Plan. In the Value Plan, the brokerage that you’re liable to pay on a trade is 0.007% of the trade value. And in the Power Plan, the brokerage is a flat fee of Rs. 15 per trade.
3. Once you’ve selected the right plan, choose the segment that you wish to trade in – Equity F&O, Currency, or Commodities.
4. Next, enter the particulars of the trade. This includes specifying the segment, trade quantity, buy price, sell price, and the exchange.
5. In the case of Power Plan, you may have to specify an additional field, namely the number of orders that you wish to execute.
6. As soon as you enter the above details, the brokerage that you will have to pay on the trade will automatically be displayed on your screen.

It is as simple as that! And in addition to the brokerage, the TradeSmart brokerage calculator also displays other charges that you would have to pay on the trade as well. This includes Turnover Charges, GST, SEBI charges, Stamp Duty, and Securities Transaction Tax (STT).

However, if your stock broker is someone other than TradeSmart, make sure to use their version of the calculator since the brokerage that they charge may be different.

Conclusion

Whether you’re using a dedicated calculator or performing the calculations manually, always remember to also account for the various other charges that you would have to pay in addition to the brokerage, such as the STT and the GST. This will ensure that you get a more comprehensive picture of the amount of expenses involved with a trade.

Foreign direct investment, also typically referred to as FDI, is an investment made in a business by an entity, individual or company, from a foreign country. The defining characteristic of FDI is that it represents a degree of direct control that the investor possesses with regards to their stake, rather than just facilitating a transfer of funds. FDI is one of the most vital channels for international direct investments and acts as an indicator of a nation’s socio-economic and political stability. Unlike Foreign Portfolio Investment, FDI allows the investor to hold a stake in a company based in a foreign country while exercising some control over their investment. FDI can also provide insight into the economic conditions of a country; the greater the number of foreign investments, the likelier it is that the recipient country has a dynamic and flourishing economy.

Understanding the Workings of Foreign Direct Investment

FDI can be categorized as ‘organic investment’ or ‘inorganic investment’.  Organic investments are when a foreign investor lends capital to a certain established business to facilitate its growth and expansion. On the other hand, when a foreign entity buys out said business, it is known as inorganic investment.

In emerging economies and developing markets such as India, FDIs are a stimulus that can provide a much-needed boost to a business that is in need of financial support. In order to direct investments through this channel, the Indian government has introduced a multitude of measures that serve to promote FDI in various sectors of the economy like IT, telecom sector, defence production and PSU oil refineries. In India, FDI is a promising candidate for becoming a spearhead for economic development, since it is a non-debt resource. Foreign direct investment has been made thanks to two main factors- globalisation and internationalisation. There are a few reasons for the viability and popularity of FDI; they have helped in overthrowing monopolistic business practices, they can provide control over businesses in foreign countries and they provide a helpful cushion that protects companies in the event of a sudden decline in business due to market fluctuations.

Exploring the Methods of Foreign Direct Investment

Foreign investors can partake in foreign direct investments in a number of different ways. They can expand their own operations in a foreign country, or they can obtain voting stocks of a business based in a different country. Here are a few different ways in which FDIs can be used to penetrate overseas markets:

1. Acquisitions or Mergers
2. Acquiring voting stocks in a company based in a foreign country
3. Proposing joint ventures with overseas firms
4. Expanding by means of a new subsidiary or branch of a domestic business in a foreign country.

What Are the Different Types of FDI?

The investment market is vast, with several avenues for investment opportunities. Even within FDI, there are four distinct types of investments, each with its own approach. Here are the different types of foreign direct investments:

      1. Horizontal FDI

Horizontal FDI is the most common type of foreign investment. It involves investing capital in a foreign company that belongs to the same industry sector that the investor conducts or owns business operations in. Thus, the investment is made through the domestic company in a foreign company, both of which produce similar goods and belong to the same industry. The distribution of funds is seen horizontally across the sectors, despite being in different countries since the core business undertaking is the same. It can also be seen as an expansion of the investor’s domestic business overseas.

2. Vertical FDI

A vertical FDI is when an entity invests within the supply chain of a business, but the component may not necessarily belong to the same industry. Thus the investor chooses to invest in a foreign company that can supply that component. For instance, a coffee producer may invest capital in overseas coffee plantations. Here, since the investing company is purchasing a provider in the supply chain, this is known as backward vertical integration. On the other hand, when the investor invests in a foreign company that is placed higher in the supply chain it is known as forwarding vertical integration. For example, the same coffee company may want to invest in a foreign grocery chain. Thus, the business expansion occurs on a different level in the business supply chain, but the undertakings are still associated with the primary business. This helps the investor is effectively strengthening their supply chain without drastically modifying their business.

3. Conglomerate FDI

When an investor chooses to invest in two entirely different businesses based in completely different industries, it is known as conglomerate FDI. In this scenario, the FDI is not directly linked to the foreign investor’s business. For instance, an automobile manufacturer may decide to invest in Pharma. Here, the investor is undertaking foreign business investments that are completely unrelated to their domestic business. This type is relatively uncommon since the difficulty of establishing a business in a new country is compounded by the difficulty of a breakthrough in a new market or industry. The goal of a conglomerate FDI is to expand into new niches and explore different business opportunities.

4. Platform FDI

Platform FDI is the final type of foreign direct investment. In this case, the investor’s business works towards expansion in a foreign country, with the ultimate aim of exporting the manufactured products to a completely different, third country. For example, a clothing brand based in North America may outsource their manufacturing process to a developing country in Asia, and sell the finished goods in Europe. Thus the expansion occurs in one foreign country, and the output is carried on to a different foreign country. This type of FDI is generally seen in free-trade regions in countries that are actively seeking FDI. Luxury clothing brands are a classic example of this type of FDI and manufacturing process.

What Are The Advantages and Disadvantages of FDI?

After 1991’s economic liberalization, India was able to open its markets to foreign investors. The past few decades have seen several government reforms that have been introduced to encourage foreign direct investments in the country. In addition to facilitating business expansion and economic growth, FDI also plays a significant role in building trade relations, creating new employment opportunities, improving managerial expertise, technological advancement and bettering infrastructure. According to the UN’s World Investment Report 2020, India received a record-shattering  USD 51 billion in FDI in the year 2019 across all economic sectors. However, in spite of their benefits, FDIs do carry certain disadvantages. Here is a brief overview of the pros and cons of FDIs.

Advantages :

• FDI can help garner tax breaks, preferential tariffs or certain incentives
• FDI can allow for greater investment diversification
• Countries receiving foreign capital can utilize it for maximizing employment opportunities
• Foreign capital can act as a stimulus for the recipient country’s economy
• FDIs can facilitate access to new technology and management strategies

Disadvantages :

• The involvement of foreign investors can cause other local or domestic businesses to lose out if they cannot keep up with the speed or scale of production
• Megacorporations can utilize FDIs as a tool for taking over domestic markets in foreign countries, and thus hamper local economies
• Profit repatriation is an everpresent risk; it is possible that the profits generated in a particular country may go directly to foreign investors and may not benefit the domestic economy at all

To Sum It Up

The last decade or so has seen a steady influx of foreign direct investment in India in numerous sectors such as automobiles, pharmaceuticals, transport and textiles. This inflow is expected to not only continue but also increase considerably in the coming years. Some economic sectors such as Indian airlines have been made 100% open to foreign investment. FDI infusion is also expected to help programs such as ‘Make in India’. If you’re looking to invest via foreign direct investment, you need to acquaint yourself with how FDIs work and what different types of FDI come into play. The investments made through FDIs can be greatly beneficial for your own business or can bring considerable returns through another.

Acquainting yourself with current terminology related to the stock market is a must, for new investors and seasoned traders alike.  This essential knowledge is necessary for understanding the share market and how investments are conducted. Moreover, this field-specific jargon is used by equity analysts and market experts to describe the state of the share market. By expanding your share market lexicon, you are equipping yourself with the fundamental know-how of the market and improving your chances of success as an investor or trader.

Stock market or share market terminology refers to the jargon which is commonly used in relation to the markets. These terms are used to break down stock market patterns, indices and trading strategies. For instance, “bull market” and “bear market” are two frequently used terms in the market. Bull market refers to when the economy is stable and the market is on an upward trajectory. Meanwhile, bear market is when the market is experiencing an extended period of decline in price. In order to ensure successful gains in the stock market and to understand economic events better, familiarizing yourself with such jargon is essential. This article aims to introduce and explain some essential terms that can aid you in your share market endeavours.

 

The ABC’s of The Share Market

Here is a glossary of stock market terms that you should know as a trader or an investor:

Agent:

In the share market, an agent is the brokerage firm that performs the buying and selling of stocks on behalf of the investor.

Ask/Offer:

The ask or offer is the lowest market price the owner is ready to sell an equity share at.

At the money:

This term refers to a scenario where an option’s strike price is the same as the market price of its underlying asset.

Bear Market:

This is a period during which the prices of equity shares is on a decline for a prolonged duration.

Broker:

A broker is an intermediary who conducts the sale and purchase of stocks on behalf of the investor, in exchange for a commission.

BullMarket:

When stock prices are on the rise for an extended period of time, the market is a bull market.

Beta:

Beta is a measure of the relationship between stock market movements and the price of an equity share. Market beta is 1, and if the beta of a stock is greater than one, it is considered riskier than the market.

Bid:

A bid is the highest price that a buyer agrees to pay for a certain stock.

Blue Chip Stock:

This term refers to equity shares offered by solid companies which have stable finances and high market capitalization.

Board Lot:

Every exchange board determines a standardized trading unit that depends on the price of each share. Common board lot sizes are 100, 500 and 1000 units.

Bonds:

This is a fixed income financial instrument that represents a particular amount lent to the bond’s issuer for a pre-determined period of time at a certain interest rate. It is issued by a company or the government.

Book:

This is an electronic record that organizes all the purchase and sale orders of stocks that are pending.

Business Day:

Any given day of the week from Monday to Friday, except for statutory holidays.

Call Option:

Call option refers to the right of the buyer to buy the underlying asset at a particular time at a specific price.

Capital:

Capital refers to an investor’s financial assets in various securities, fixed assets and cash.

Capital Gain or Loss:

This refers to the profit or loss sustained in the process of trading capital assets in the stock market; these include investment property, stocks, etc.

Capital Gains Distribution:

This refers to a distribution of gains by the issuer, which is taxable and typically paid to security-holders of funds, partnerships, trusts,etc. It is paid in cash or securities. The payable date, amount and record date are set by the issuer, and the respective exchange determines the entitlement date.

Certificate:

This is a physical document that represents ownership of a security such as a stock or a bond.

Clearing Number:

This refers to a clearing member or participating organization’s trading number.

Client Order:

When participating organization’s retail customer places an order, it is known as a client order.

Closing Transaction:

This refers to an order for closing out an open options or futures contract.

Close Price:

On a given trading day, this is the final price at which a company’s equity shares are traded or sold.

Commodities:

Commodities are the raw material products used for manufacturing goods, such as oil, timber, agricultural produce, metals, and so on. These are traded on a separate commodities exchange, and they are what futures contracts are based on.

Common Shares:

Common shares are financial instruments that indicate partial ownership or stake in a company, and they typically entail voting privileges for the shareholder. Common shareholders are paid after preferred shareholders, debt holders and creditor’s in case the company liquidates.

Convertible Securities:

Securities like debentures, bonds, preferred stocks which can be converted into other securities of the same issuer are known are convertible securities.

Debentures:

Debentures are another fixed-income investment, and are not backed by any collaterals or physical assets.

Defensive Stock:

Defensive stocks are those which offer stable and consistent returns, regardless of what state the stock market is in. IT, Pharmaceuticals and FMCG are defensive sectors.

Delta:

This refers to the ratio representing the change in a derivative’s price in reaction to a change in the underlying asset’s price. Higher the delta, greater the sensitivity of the derivative to the underlying asset’s price changes.

Diversification:

Diversification is the process of reducing investment risk by investing in a variety of securities from multiple companies in different economic sectors.

Dividends:

This refers to the sum paid by the issuer of a share directly to the shareholder.

Exchange-Traded Fund (ETF):

An ETF is a unique index mutual fund that is actually traded like it is a stock. It allows investors to buy multiple stocks at once through one single instrument, which gives returns similar to those of the corresponding stock market index it tracks.

Face value:

Face value is the cash value or sum of money that the holder of a security earns from the issuer at the date of maturity.

Initial Public Offering (IPO):

An IPO is an issue of shares offered by a company to the general public to raise capital with certain needs in mind.

International Securities Identification Number (ISIN):

This refers to a code that acts as a unique identification for every security. This is the international standard and constitutes two alphabetic characters representing the country code as directed by ISO 6166, followed by 9 alphanumeric characters that are the security identifier, with an ISIN check digit at the end.

Moving Average:

It refers to the average price per unit of an equity share with respect to a specific period of time. Some popular time frames used to study the moving average of a stock include 50- and 200-day moving averages.

One-sided Market:

Market situations where only sellers are present or only buyers are present, but not both simultaneously.

Portfolio:

A portfolio is a document listing all the securities or investments held by an institution or individual, and includes holdings of the investor from different companies as well as sectors in the economy.

Rupee Cost Averaging:

This is the act of investing a set number of rupees in a particular security, at fixed intervals over time. This lowers the average cost of each share, and the investor can buy fewer shares at a time of price hike and more shares when the prices drop.

Short Selling:

This is a trading strategy that involves the seller attempting to sell a security they do not own or have borrowed. The assumed risk is that the investor hopes to buy a certain stock for less than the current price.

Spread:

This is the difference between the ask price and the bid for an equity share. This can be seen as the difference between the price at which you would prefer to purchase the stock and the price at which you would like to sell it.

Volatility:

This refers to the price fluctuations in the market. During a trading session, very volatile stocks experience extreme highs and lows. Risky bets have the potential to bring great gains, if you have the experience to master them. However, they may also result in considerable loss after they crash.

Volume:

This is the number of stocks traded in a particular period on average, such as the daily trading volume.

Yield/Dividend yield:

This refers to the amount paid out by a company in dividends on a yearly basis, in comparison to the stock price.