# Shares, Stock and Debentures

- To start any big business (company or industry), a large sum of money is
needed and, in general, it is not possible for an individual to invest such a
large amount. Then some persons, interested in the business, join together and
form a company called
. They divide the estimated money required into small parts. Each such part is called a**joint stock company**. A share may have value Rs 5, Rs 10, Rs 25, Rs 100 etc. Each person who purchases one or more shares is called a**share**The original value of a share is called its*share-holder**nominal value*(abbreviated N.V.) or face value or*printed value.* - The price of a share at any time is called its
*market value*(abbreviated M.V.) or*cash value.* - If the market value of a share is the same as its nominal value, the share
is called at
*par*. - If the market value of a share is more than its nominal value, the share
is called at
*premium*or above par. If a share of (face value) Rs 100 is selling at Rs 135, then it is said to be selling at a premium of Rs 35 or at Rs 35 above par. - If the market value of a share is less than its nominal value, the share is called at discount or below par. If a share of Rs 100 is selling at Rs 88, then it is said to be selling at a discount of Rs 12 or at Rs 12 below par. 6. The profit which a share holder gets for his investment from the company is called dividend. The dividend is always expressed as the percentage of the face value of the share. The dividend is always given (by the company) on the face value of the share irrespective of the market value of the share.

**Shares are of two types:
** (i) Preferred shares

(ii) Common shares or ordinary shares.

**Preferred shares** carry a provision that dividend of a specific
percent must be paid to preferred shareholders before any dividend is paid to
common shareholders. Note that there is no guarantee of any returns; even
preferred shareholders will get some dividend only if the company has some
profits after paying for all expenses and taxes.

**Quotations:**

"Shares of 15% at Rs 145" means that

(1) the face value of 1 share is Rs 100.

(2) the market value of 1 share is Rs 145.

(3) the dividend (profit) on 1 share is Rs 15 per annum.

(4) the income on Rs 145 is Rs 15 for one year.

**STOCK**

Joint stock companies or the government can also raise loans from the market by issuing bonds or promisory notes. They promise to pay a fixed amount (called redemption value) on a future date and interest payments at fixed periods until that time. The money paid to company or government for buying such bonds is called stock. However, even before redemption date, the stock can be sold and purchased in open market, and the rate varies, just like shares. Note that stock can be bought or sold in fractions, unlike shares.

**Brokerage**

Stocks and shares are sold and purchased in share market through
stockbrokers, and their charges are called **brokers commission** or **
brokerage**. Brokerage is usually calculated as percentage of face value
(not market value or sale/purchase value), unless given otherwise.

Note that:

(i) Brokerage is added to market value while purchasing stock/shares.

(ii) Brokerage is deducted from market value while selling.

Thus a Rs 100 stock at 95 and brokerage ½% means that a buyer will spend Rs
to buy a Rs 100 stock, while a seller will get Rs.
The difference between these prices shows profit margin of the broker. In
real life, however, brokers use the formula which is beneficial to them. If a
share of Rs 100 is selling at Rs 300, they will calculate brokerage as
percentage of sale value; if a share of Rs 10 is being sold at Rs 2, they may
charge a fixed brokerage of 20 paise per share; if a debenture of Rs 100 is
being sold at Rs 80, they will charge brokerage as percentage of face value!

**DEBENTURES**

To meet working expenses, a company may borrow money from the public/shareholders by issuing debentures. They promise a fixed rate of interest for a fixed period. The main difference between stock/shares and debentures is that debentures give a fixed return, whether the company is in losses or profit. Also note that shares form a part of the capital of the company whereas debentures are debt taken by the company.

## Illustrative Examples

### Example

A man invests Rs 11200 in a company paying 6% dividend when its Rs 100 shares can be bought for Rs 140. Find

- his annual income
- his percentage income on his investment.

### Solution

- Since Rs 100 share can be bought for Rs 140,

if the investment is Rs 140, income = Rs 6

if the investment is Re 1, income = Rs 6/140

if the investment is Rs 11200, income = Rs (6/140)×11200 = Rs 480 - Rs 480 is the income on Rs 11200,

percentage of income =(480/11200)×100% = 30/7 %

=

### Example

Mr. Singh invested Rs 8000 in 7% hundred-rupee shares at Rs 80. After a year he sold these shares at Rs 75 each and invested the proceeds in 18% twenty five-rupee shares at Rs 41 each. Find

- his gain or loss after a year.
- his annual income from the second investment.
- the percentage of increase in return on his original investment.

### Solution

- Since Mr. Singh invested Rs 8000 at Rs 80 each, the number of shares
bought by Mr. Singh = 8000/80 = 100

Dividend received on one share = 7% of Rs 100 = Rs 7

Hence the total dividend received after one year = Rs 7×100 = Rs 700

As Mr. Singh sold his shares at Rs 75 each, the sale value of his shares

= Rs 75×100 = Rs 7500

The amount received (proceeds) after a year

= Dividend received on shares +sale value of shares

= Rs 700 +Rs 7500 = Rs 8200

Gain after a year = proceeds -investment

= Rs 8200 -Rs 8000 = Rs 200 - Since Mr. Singh invested his proceeds i.e. Rs 8200 in twenty-five rupee
shares at Rs 41 each, the number of shares bought = 8200/41 = 200

Dividend received on one share = 18% of Rs 25

= Rs (18/100)×25 = Rs 4.75

Total dividend received on his second investment

= Rs 4.75×200 = Rs 900 - The increase in return = dividend on second investment -dividend on first investment

= Rs 900 -Rs 700 = Rs 200

The percentage of increase in return on his original investment

= (200/8000)×100% = 2·5%

### Example

A company is authorised to issue 1 lac shares of face value Rs 100 each. It decides to issue 70000 shares in first instance. It fixes application money as Rs 40, allotment money as Rs 30 and first and second calls as Rs 15 each. The company receives applications for 50000 shares only. At a given time if investors holding 6000 shares have not paid first call money and investors holding 4000 shares have not paid second call money, describe various types of capital.

### Solution

Authorised capital = 1 lac × 100 = Rs 1 crore

Issued capital = 70000 × 100 = Rs 70 lacs

Subscribed capital = 50000 × 100 = Rs 50 lacs

As both calls have been issued,

Called up capital = Rs 50 lacs

Uncalled capital = 0

Paid up capital = 40000×100 + 6000×70 + 4000×85 = Rs 47,60,000

Unpaid capital (or calls in arrear) = 6000×30 + 4000×15 = Rs 2,40,000

### Example

A man sold Rs 4500 of 3% stock. He sold the stock at 87¾ and invested the proceeds in 4% stock at 98¾. Find the change in his annual income. (Brokerage = ¼%)

### Solution

Since the man holds Rs 4500 stock at 3%, his annual income

= Rs (3/100)×4500 = Rs 135

Since he sells this stock at 87¾, brokerage ¼%, money received by selling this stock

= Rs 87.50×(4500/100) = Rs 3937·50

Now in new stock, investment of Rs 99 (i.e. 98¾ + ¼)earns a return of Rs 4.

Hence investment of Rs 3937·50 will earn an income of

= Rs (4/99)×3937.50 = Rs 159·09

Hence, increase in annual income = Rs 159·09 -Rs 135 = Rs 24·09

### Example

A small investor holds some 6% preference shares quoting at 112 "cum-div". If he sells just after getting the dividend, what price would he get? What amount would he realise if he holds 50 shares?

### Solution

Note that "ex-div" means "without dividend" and "cum-div" means including
dividend.

Thus **cum-div price = ex-div price +dividend
** As cum-div price is Rs 112, the ex-div price after claiming the 6%
dividend is Rs 112 -Rs 6 = Rs 106.

Also, the amount realised by selling 50 shares = Rs 106×50 = Rs 5300

### Example

A company has a total capital of Rs 2 crores divided equally into preference shares of 6% and ordinary shares, each of face value Rs 100. It gives an annual dividend of Rs 10 lacs. If a person holds 100 preference shares and 200 ordinary shares, how much dividend does he receive?

### Solution

As the total capital is Rs 2 crores, the number of preference shares = (1
crore)/100 = 1 lac, and the number of ordinary shares is also 1 lac.

Hence total dividend paid to 6% preference shareholders

= 1 lac × 6 = Rs 6 lac

Dividend paid to ordinary shareholders

= Rs 10 lac -Rs 6 lac = Rs 4 lac

Dividend paid to ordinary shareholders

= (4 lac)/(1 lac) % = 4%

Thus the dividend received by a person holding 100 preference shares and 200
ordinary shares

= Rs (100×6 + 200×4) = Rs 1400

## Exercise

- At what price should a 6·25% Rs 100 share be quoted when the money is worth 5%?
- At what price should a 6·25% Rs 50 share be quoted when the money is worth 10%?
- A man buys Rs 40 shares of a company which pays 10% dividend. He buys the shares at such a price that his profit is 16% on his investment. At what price did he buy each share?
- A company with 10000 shares of Rs 100 each, declares an annual dividend of 5%.

(i) What is the total amount of dividend paid by the company?

(ii) What would be the annual income of a man who has 72 shares in the company?

(iii) If he received only 4% on his investment, find the price he paid for each share. - A man sold some Rs 100 shares paying 10% dividend at a discount of 25% and invested the proceeds in Rs 100 shares paying 16% dividend quoted at Rs 80 and thus increased his income by Rs 2000. Find the number of shares sold by him.
- A man invests Rs 6750, partly in shares of 6% at Rs 140 and partly in shares of 5% at Rs 125. If his total income is Rs 280, how much has he invested in each?
- Divide Rs 5300 into two parts such that if one part is invested in 7% hundred-rupee shares at Rs 98 and the other in 8% at par, the resulting incomes are equal.
- Divide Rs 95680 into two parts such that if one part is invested in 8% Rs 100 shares at 4% discount and the other in 9% Rs 100 shares at 8% premium, the annual incomes are equal.
- A person invested 20%, 30% and 25% of his savings in buying shares of three different companies A, B and C, which declared dividends of 10%, 12% and 15% respectively. If his total income on account of dividends be Rs 2337·50, find his savings and the amount which he invested in buying shares of each company.
- A person transfers the shares of face value Rs 11000 from 4% at 92 to 5% at 110. Find the change in his income.
- A person invests equal amounts in 5% stock at Rs 110 and 6% stock at Rs 126.If his total income from the investments is Rs 82, find the amount invested in each case.
- Sohan invests Rs 6760 partly in 5% stock at Rs 120 and the rest in 4% stock at Rs 96.If he derives equal income from each investment, how much has he invested in each stock?
- What amount of money will Ankita get by selling 6% debentures worth Rs 20000 at 15% discount, the face value of each being Rs 100 and brokerage 2% of transaction amount?
- A company has a total capital of Rs 4 crores divided equally into preferred shares of 6% dividend, and ordinary shares of face value 100 each. The company gives an annual dividend of 20 lacs. Find the dividend received by a shareholder holding 200 preferred shares and 3000 ordinary shares.
- A company has a capital stock of Rs 200000 divided into 500 shares of 6% preferred stock and 1500 shares of common stock, each with par value of Rs 100. The company declares a dividend of Rs 15500. If Mohan holds 30 shares of preferred stock and 75 shares of common stock, find the amount of dividend he receives.
- A person invested equal sums of money in 5% debentures and 6% preferred shares. Income was same in both cases. If debentures were available at par, find the issue price of preferred shares.

## Answers

**1.**Rs 125

**2.**Rs 31·25

**3.**Rs 25

**4.**(i) Rs 50000 (ii) Rs 360 (iii) Rs 125

**5.**400

**6.**Rs 3500, Rs 3250

**7.**Rs 2500, Rs 2800

**8.**Rs 47840 in 8%; Rs 47840 in 9% shares

**9.**Rs 25000; Rs 5000, Rs 7500, Rs 6250

**10.**Increase of Rs 20

**11.**Rs 840

**12.**Rs 3380 in each stock

**13.**Rs 16660

**14.**Rs 2400

**15.**Rs 805

**16.**Rs 120