Beginners’ Guide Part B: Basics to start your investment in share market

What benefits will I have if I own some “Kitta” of shares?

As already mentioned, owning shares (few kittas or big volume doesn’t matter) of companies makes you eligible to share the profit of that company. While sharing its profit, the company basically opts for 2 modalities.

Bonus shares:-
The word “Bonus” is the way someone/some institution shares joy/profit with associated people/institutions. In this case, when the company whose share you have held makes some profit, it may decide to reward all the shareholders (owners) in form of additional bonus. Let’s get it more simplified with an example. Let us assume that you have grabbed 20 kittas of shares in IPO of a XYZ company and the company made a handsome profit this year. In this case the company might decide to issue bonus shares at the rate of 25% to its shareholders. Now, since you have 20 kitta of shares, its 25% is 5 more kitta of shares and the same will be credited (added) to your Demat account in the form of bonus share. This time, you don’t need to pay a single penny but you are getting 5 additional shares to your Demat account and the earlier 20 Kitta shares are still intact.

Let’s do some basic math now. Your 20 Kitta had initially cost you Rs 2,000 and you are getting extra 5 kitta i.e. Rs 500 worth of shares totally free. Now, the cost price was definitely Rs. 100 but the secondary price in secondary market could be higher (perhaps Rs 200, hopefully Rs 300 or even more). In this case, the basic math says that your investment initially was Rs. 2,000 but the it is now worth more than Rs 2,000.

However, on the flip side, since you are shareholder of the company, you might also have to share the loss of the company. In such a scenario, the company might not prefer giving out the bonus shares for that particular year and the price of its shares in secondary market may even tumble below the base price of Rs. 100.

Cash Dividends:-
Cash dividends are also bonus, but shared in terms of cash. Some companies might not need additional capital, so there is no need to increase its number of shares by providing bonus shares. In such a case, the company will opt to share its profit by distributing the cash dividend. Let us go back to earlier example of owning 20 kitta of shares. In that case, if the company decides to provide 25 % cash dividend, then you will receive 25 % for every kitta share you own i.e. Rs. 25 as cash dividend for every one share. In total, you will be receiving Rs. 500 for 20 kitta shares (25*20=500). This may sound little unattractive than bonus shares which could later be sold in higher price but having something is still greater than nothing at the end.

Note: 5% capital gains is deducted for all bonus and cash dividends. For example, in the above example, if you were eligible to receive 5 kitta shares or Rs 500 cash, you are liable to pay 5% (i.e. 5% of Rs 500 = Rs 25) as tax. So, you will receive Rs 475 as cash dividend. In case of bonus shares, you might have to pay Rs 25 first to receive bonus in your demat account.

Profit in Secondary market:-
It’s a basic human understanding that if we can purchase some items in lower rate and sell them later in higher price, we undoubtedly have a margin of profit. Same is the case in share market as well as you can always opt to sell your shares (transfer the ownership) to other buyers (interested owners) if you find appropriate percentage of profit in such a transaction. There are shares of hundreds of companies being traded currently in the share market and most of them were offered at Rs. 100 during their early days. The trading in secondary market is, however, associated with several risk factors (follow up coverage would be done in upcoming parts).

What are Right Shares?

Sometimes, the company might need to increase its capital (growth in ownership through multiplication of existing shares). In that case, the company might opt to issue right shares for its existing shareholders. Such shares are dedicated only for the existing shareholders of the company who are offered the right shares in the price of Rs. 100 in certain proportion (no matter how much should be its value in the secondary market). In such a case, the existing shareholder visibly has upper hand in profitability as the cost price is Rs. 100 and the selling price could be much higher.

Let us go back once again to our earlier example. You had 20 Kitta shares and received 5 more Kitta as bonus. Now your total balance is 25 Kitta. Then, if the company needs to increase the capital (number of shares), it decides to hike it by 40% by offering 40% shares in right shares to existing shareholders. In this case, 40 % of your existing 25 kitta shares is equal to 10 kitta of more shares. This time, you aren’t getting those 10 kitta free of cost but you are supposed to pay Rs. 100 for each of them i.e. Rs. 1,000 for 10 kitta of new shares. Again, the earlier principle applies here as the price in secondary market could be Rs. 200 or more which allows you to make visible profit in your investment.

What investment options do I have as an amateur investor?

Knowledge about share market is something one is supposed to cultivate along with growing experience in the field. The ultimate goal of every small and big investor generally is to understand the technical and non-technical sides of stock market so that s/he can identify the best buying and selling points to unload and offload his/her holdings to multiply the value of shares s/he currently holds. However, this knowledge comes with training, maturity and after having spent considerable time watching the trends of market. However, there are some investment sectors other than secondary market where the amature and beginner investors can step into with relatively low risk.

Let us scroll through few such investment options:

IPO (Initial Public Offering)

Much has already been defined about IPOs. For a quick reminder, let’s just conclude with a statement that IPO is the market instrument through which the companies collect cash from general people for their business purpose and these people are made the owners/share holders of the company. These days, many companies are coming up with IPOs and many new and old investors have flocked to this investment instrument due to its relatively low risk.

The ratio between the offered IPO shares and the public demand has been going with huge discrepancy these days as there are undoubtedly many interested investors. Let it be clear that we can apply to the IPO shares of the companies with a minimum seed fund of Rs. 5,000 or minimum 50 Kitta. Due to high volume of applications, everyone who applies cannot be guaranteed of receiving shares in IPO, therefore, the shares are allotted using lottery system. Almost every IPO these days are oversubscribed by multiple times and one investor can expect to be allotted with some 10 Kitta of shares in a lottery basis. Therefore, it is generally advisable to apply with Rs. 5,000 for any IPO these days. If you feel like applying with more money and you actually have some more to spare, I would suggest you to open multiple accounts in the names of your other family members and supply your applications in their names. This way, your probability of being allotted with some 10 or more kitta shares increases. By the way, if you fail to receive shares or could grab only few Kitta shares, then you will have your remaining cash back in your bank account.

FPO (Further Public Offering)

Sometime, the companies that had already issued IPO might need to collect more cash from the public which leads to the issuance of FPO. Here, be informed that FPO may or may not be issued in the price of Rs. 100 per share. The company may attach some premium value to the FPO shares and the price is usually determined by their trading price in secondary market. For an example, when Standard Chartered Bank had issued FPO, the price of its shares at secondary market was around Rs. 1,800. So, it had offered FPO shares in somewhat cheaper rate i.e. Rs. 1,290. The company used Rs. 100 as its par value per share but the remaining Rs. 1,190 was used as the earning of the bank. Now, you may think why would one purchase shares of public offering in such a hefty price? Let us revisit the above statement again. At the time the bank issued its FPO shares, the price in secondary market was hovering around Rs. 1,800. Now, if one gets shares in Rs. 1290, there’s a clear profit margin of Rs. 500. As a result, even that public issue was oversubscribed by manifold.

While applying for shares in FPO, the companies generally require you to make an application for minimum 10 Kitta of shares. In this case, the seed fund of Rs. 5,000 (as in the case of applying for IPO shares) may or may not be adequate to apply for such shares. Let it also be clear that FPO shares these days are also oversubscribed, therefore, it’s suggested to apply with some wit; to opt to apply with multiple applications as in the case of IPO. This will definitely increase your chance of being allotted at least few kitta shares if the process undergoes the lottery system.

Part A

Post a Comment