Friday, February 22, 2013

Excellent Trading School - 4 - Basic FAQ's

What is Stock Split?
A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase, however, the market capitalization or the value of shares held by the investors post split remains the same as that before the split.

For e.g. If a company has issued 1,00,00,000 shares with a face value of Rs.10 and the current market price being Rs. 100, a 2-for-1 stock split would reduce the face value of the shares to 5 and increase the number of the company’s outstanding shares to 2,00,00,000, (1,00,00,000*(10/5)). Consequently, the share price would also halve to Rs. 50 so that the market capitalization or the value shares held by an investor remains unchanged. It is the same thing as exchanging a Rs. 100 note for two Rs. 50 notes; the value remains the same .

Why do companies announce Stock Split?
there are mainly two important reasons.
As the price of a security gets higher and higher, some investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more "attractive" level
To buy 1 share of company ABC you need Rs. 40 pre-split, but after the stock split the same number of shares can be bought for Rs.20, making it attractive for more investors to buy the share.
Second reason. Splitting a stock may lead to increase in the stock's liquidity, since more investors are able to afford the share and the total outstanding shares of the company have also increased in the market.

What is Buyback of Shares?
A buyback can be seen as a method for company to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by the company with the purpose to improve the liquidity in its shares and enhance the shareholders’ wealth.

What is Rolling Settlement?
Under rolling settlement all open trade positions at the end of the day result in payment/ delivery ‘n’ days later. Currently trades in rolling settlement are settled on T+2 basis where T is the trade day.

For example, a trade executed on Monday is settled by Wednesday (considering two working days from the trade day). The funds and securities pay-in and pay-out are carried out on T+2 days.

What is Pay-in and Pay-out?
Pay-in day is the day when the securities sold are delivered to the exchange by the sellers and funds for the securities purchased are made available to the exchange by the buyers. (for eg. delivery of goods to buyer and payment to sellers)

Pay-out day is the day the securities purchased are delivered to the buyers and the funds for the securities sold are given to the sellers by the exchange. (for eg. delivery of goods to buyer and payment to sellers)
At present the pay-in and pay-out happens on the 2nd working day after the trade is executed on the stock exchange called T+2 .

What is Book-closure/Record date?
Book closure and record date help a company determine exactly the shareholders of a company as on a given date. Book closure refers to the closing of the register of the names of investors in the records of a company.

Companies announce book closure dates from time to time. The benefits of dividends, bonus issues, rights issue accrue to investors whose name appears on the company's records as on a given date which is known as the record date and is declared in advance by the company so that buyers have enough time to buy the shares, get them registered in the books of the company and become entitled for the benefits such as bonus, rights, dividends etc. With the depositories now in place, the buyers need not send shares physically to the companies for registration. This is taken care by the depository since they have the records of investor holdings as on a particular date electronically with them.

What is No-Delivery Period?
Whenever a company announces a book closure or record date, the exchange sets up a no-delivery period for that security. During this period only trading is permitted in the security. However, these trades are settled only after the no-delivery period is over. This is done to ensure that investor's entitlement for the corporate benefit is clearly determined.

What is an Ex-dividend date?
The date on or after which a security begins trading without the dividend included in the price, i.e. buyers of the shares will no longer be entitled for the dividend which has been declared recently by the company, in case they buy on or after the ex-dividend date.

What is an Ex-date?
The first day of the no-delivery period is the ex-date. If there are any corporate benefits such as rights, bonus, dividend announced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not get benefits.

What is an Annual Report?
An annual report is a formal financial statement issued yearly by a Company. The annual report shows assets, liabilities, revenues, expenses and earnings - how the company stood at the close of the business year, how it fared profit-wise during the year, as well as other information of interest to shareholders. Companies publish annual reports and send to shareholders free of cost. Remember an annual report of a company is the best source of information about the financial health of a company.

What is the difference between Equity shareholders and Preferential shareholders?
Equity Shareholders are the owners of the company, who therefore, have right to get dividend, as declared, and a right to vote in the Annual General Meeting for passing any resolution.

The act defines a preference share as that part of share capital of the Company which enjoys preferential right as to: (a) payment of dividend at a fixed rate during the life time of the Company; and (b) the return of capital on winding up of the Company.

But Preference shares cannot be traded, unlike equity shares, and are redeemed after a pre-decided period. Also, Preferential Shareholders do not have voting rights.

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