A written report on equity

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1. INTRODUCTION
Over the last few decades, the average person's interesting the equity market has grown
exponentially. This demand coupled with advances in trading technology has opened up the
markets so that nowadays nearly anybody can own equity. Despite their popularity, however, most
people don't fully understand equity. Chances are you've already heard people say things like
"Watch out with equity--you can lose your shirt in a matter of days!” People thought that equity
were the magic answer to instant wealth with no risk. Equity can (and do) create massive amounts
of wealth, but they aren't without risks. The only solution to this is education. The key to protecting
yourself in the equity market is to understand where you are putting your money.
Equity or Share or Stock
Equity is a share in the ownership of a company. Equity represents a claim on the company's assets
and earnings. As you acquire more equity, your ownership stake in the company becomes greater.
Whether you say shares, equity, it all means the same thing. The importance of being a shareholder is
that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes
paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get.
An equity share, commonly referred to as ordinary share also represents the form of fractional or
part ownership in which a shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The holders of such shares are members
of the company and have voting rights.
The holders of such shares are members of the company and have voting rights. A company may
issue such shares with differential rights as to voting, payment of dividend, etc.
Holding a company's equity means that you are one of the many owners (shareholders) of a
company and, as such, you have a claim (albeit usually very small) to everything the company
owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every
trademark, and every contract of the company. As an owner, you are entitled to your share of the
company's earnings as well as any voting rights attached to the equity.

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STOCK MARKET AND STOCK EXCHANGES
Stock Markets: Stock Market is a market where the trading of company stock, both listed
securities and unlisted takes place. It is different from stock exchange because it includes all the
national stock exchanges of the country. For example, we use the term, "the stock market was up
today" or "the stock market bubble." Also known as the equity market, it is one of the most vital
areas of a market economy as it provides companies with access to capital and investors with a
slice of ownership in the company and the potential of gains based on the company's future
performance.
Stock Exchanges: Stock Exchanges are an organized marketplace, either corporation or mutual
organization, where members of the organization gather to trade company stocks or other
securities. The members may act either as agents for their customers, or as principals for their own
accounts.
Stock exchanges also facilitates for the issue and redemption of securities and other financial
instruments including the payment of income and dividends. The record keeping is central
but trade is linked to such physical place because modern markets are computerized. The trade
on an exchange is only by members and stock broker do have a seat on the exchange.

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2. HISTORY
History of Indian Stock Market: Indian stock market marks to be one of the oldest
stock market in Asia. It dates back to the close of 18th century when the East India Company used
to transact loan securities. In the 1830s, trading on corporate stocks and shares in Bank and
Cotton presses took place in Bombay. Though the trading was broad but the brokers were hardly
half dozen during 1840 and 1850.
An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall
of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This banyan
tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange flourished
with 60 brokers. In fact the 'Share Mania' in India began with the American Civil War broke
and the cotton supply from the US to Europe stopped. Further the brokers increased to 250.
The informal group of stockbrokers organized themselves as the The Native Share and
Stockbrokers Association which, in 1875, was formally organized as the Bombay Stock Exchange
(BSE).
BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the
BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and
Hammam Street in downtown Mumbai) was acquired, and a building was constructed and
occupied in 1930.
Premchand Roychand was a leading stockbroker of that time, and he assisted in setting out
traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange
and they are still being followed.
Several stock broking firms in Mumbai were family run enterprises, and were named after
the heads of the family.

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The following is the list of some of the initial members of the exchange, and who are still running
their respective business:
 D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with Merrill
Lynch)
 Jamnadas Morarjee (now known as JM)
 Champaklal Devidas (now called Cifco Finance)
 Brijmohan Laxminarayan
In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock
exchange in the country under the Securities Contracts (Regulation) Act.
The most decisive period in the history of the BSE took place after 1992. In the aftermath
of a major scandal with market manipulation involving a BSE member named Harshad
Mehta, BSE responded to calls for reform with intransigence. The foot-dragging by the
BSE helped radicalise the position of the government, which encouraged the creation of
the National Stock Exchange (NSE), which created an electronic marketplace. NSE started
trading on 4 November 1994. Within less than a year, NSE turnover exceeded the BSE. BSE
rapidly automated, but it never caught up with NSE spot market turnover. The second strategic
failure at BSE came in the following two years. NSE embarked on the launch of equity
derivatives trading. BSE responded by political effort, with a friendly SEBI chairman (D. R.
Mehta) aimed at blocking equity derivatives trading. The BSE and D. R. Mehta succeeded in
delaying the onset of equity derivatives trading by roughly five years. But this trading, and the
accompanying shift of the spot market to rolling settlement, did come along in 2000 and 2001 -
helped by another major scandal at BSE involving the then President Mr. Anand Rathi. NSE
scored nearly 100% market share in the runaway success of equity derivatives trading, thus
consigning BSE into clearly second place. Today, NSE has roughly 66% of equity spot turnover
and roughly 100% of equity derivatives turnover.
Stock Exchange provides a trading platform, where buyers and sellers can meet to transact
in securities.

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3. Types of Equity
TYPES OF EQUITY SHARES
Common Stock: Common shares are the most frequently issued and traded types of stock,
hence the name. A common share makes you an owner of the corporation. This gives you not
only a portion of all profit distributions but also entitles you to vote in the annual shareholder
meeting. In this meeting, held once a year, shareholders elect the board of directors and vote on
other critical matters. If you own more than half of all common stock in a corporation, you can
have full control over how it is run.
Over the long term, common stock, by means of capital growth, yields higher returns than almost
every other investment. This higher return comes at a cost since common stocks entail the most
risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money
until the creditors, bondholders and preferred shareholders are paid.
Preferred stock: Preferred stock entitles the owner to a fixed income stream that is far more
reliable and predictable than that provided by common shares. Preferred shares carry an original
issue price, also known as par value, and a coupon rate. The shareholder receives a dividend every
year that equals the par value multiplied by the coupon rate. A preferred stock that has a par value
of $500 and coupon rate of 10 percent, for example, pays the owner $50 every year. Unlike lenders,
preferred stockholders cannot sue the company if it fails to pay this amount. The board of directors
has the authority to suspend preferred dividend payments if it deems it necessary.
This is different than common stock, which has variable dividends that are never guaranteed.
Another advantage is that in the event of liquidation, preferred shareholders are paid off before the
common shareholder (but still after debtholders). Preferred stock may also be callable, meaning

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that the company has the option to purchase the shares from shareholders at any time for any reason
(usually for a premium).
There are other types of equity shares discussed below
Rights Issue / Rights Shares: These are the shares issued to the existing shareholders of a
company. Such kind of shares is issued to protect the ownership rights of the investors.
Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization
of accumulated reserves from the profits earned in the earlier years.
Cumulative Preference Shares. A type of preference shares on which dividend accumulates if
remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on
equity shares.
Cumulative Convertible Preference Shares: A type of preference shares where the dividend
payable on the same accumulates, if not paid. After a specified date, these shares will be converted
into equity capital of the company.
Participating Preference Share: The right of certain preference shareholders to participate in
profits after a specified fixed dividend contracted for is paid. Participation right is linked with the
quantum of dividend paid on the equity shares over and above a particular specified level.

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4. TERMINOLOGIES
‘Equity’/Share
Total equity capital of a company is divided into equal units of small denominations, each called
a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into
20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then
is said to have 20, 00,000 equity shares of Rs 10 each. The holders of such shares are members of
the company and have voting rights.
• Warrants
– Certificate issued along with a bond or preferred stock
– Entitles holder to buy specific no. of securities at a specific price
• Convertible Debentures
– Can be converted in stock at specified date in future
– At the discretion of either the issuer/lender
– Issuer can borrow at lower cost if the lender has convertibility option
• IPO (Initial Public Offer): The first issue by a company to public investors
• Public Issue: Any issue by a company to public investors
• GDR / ADR (Global Depository Receipt/ American Depository Receipt): Issue of securities that
are listed in an international stock exchange; each security representing a specified number of
securities listed in the local stock exchange.
• Buyback: Acquisition of securities by the issuer from existing investors, through a public offer
or purchases in the secondary market.
Face Value: The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares,
it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the
holder at maturity. Also known as par value or simply par. For an equity share, the face value is

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usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the
share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt
security, face value is the amount repaid to the investor when the bond matures (usually,
Government securities and corporate bonds have a face value of Rs. 100). The price at which the
security trades depends on the fluctuations in the interest rates in the economy.
Dividend: Dividend is a percentage of the face value of a share that a company returns to its
shareholders from its annual profits. Compared to most other forms of investments, investing in
equity shares offers the highest rate of return, if invested over a longer duration.
Market Capitalization
Number of equity shares outstanding x market value per equity share. Represents the market
value of the entire company .
Enterprise Value
Enterprise value is a figure that, in theory, represents the entire cost of a company if someone
were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market
capitalization because it takes a number of important factors such as preference shares, debt and
cash that are excluded from the latter matrix.
Enterprise value = Mkt cap + preference shares + outstanding debt - cash and cash
equivalent
Market capitalization =Number of outstanding shares *
CMP
Intrinsic Value
It is discounted value of cash that can be taken out of a business during its remaining life. It is an
estimate rather than a precise figure, and it is additionally an estimate that must be changed if
interest rates move or forecasts of future cash flows are revised. Two people looking at same
set of facts will come up with different intrinsic value figures.

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Beta
A measure of the volatility of a stock relative to the overall market. A beta of less than one
indicates lower volatility than the market; a beta of more than one indicates higher volatility
than the market. Generally Consumer and utility stocks have low beta compared to cyclicals and
industrials.
BookValue
It shows the historic cost of the assets as reduced by the depreciation. It is significant for
evaluating Banking company stocks. Stocks of companies holding large blocks of land and other
hidden assets are evaluated on this basis. It does not make sense to look at book value for
companies in high
growth businesses. BV = Shareholders funds / No. Of Equity
shares
Cost of Capital
This is the cost of borrowing funds from the market. The ROE and the ROCE should be more
then the cost of capital or else it would make little sense for the company to borrow funds. For
stocks in the emerging markets the cost of capital should be 300 to 400 basis points above the
risk free rate of return. COC = Risk free rate of return + Equity risk premium.
Debt Equity Ratio
Long-term debt divided by shareholders' equity, showing relationship between long-term funds
provided by creditors with respect to the Shareholders funds. A high Debt Equity ratio indicates
high risk while a lower ratio may indicates lower risk. Short-term debt is not included as long as
cash is greater then short-term debt. As equity increases relative to debt, the company becomes
a more attractive investment. Finally, bond debt is preferred to bank debt because bank debt is
due on demand. Companies that repay back debt experience PE expansion compared to
companies that take on debt.

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DER = Long term loans / Shareholders
Funds
Dividend yield
This is the current yield on a stock. Dividend paying companies have in built bottoms. When
the stock prices fall too much their dividend yield becomes attractive enough for existing
investors to hold on as well as for new investors to get in. This is a basic criterion for a value
investor Stocks that pay dividends are obviously favored over stocks that don't . Dividend
paying stocks are likely to fall less in an economic downturn As stock prices fall with no fall in
dividends, the dividend yield rises attracting new investors. Finally, if you do buy a stock for
dividend , you should make sure that the company has a history of paying
the dividend in both good times and bad. DY = Dividend per share /
Market Price
Discounted cash flow statement
Discounted Value of free cash flow that a business generates during a particular period of time.
Companies embarking on a major Capital expenditure program will experience reduced free
cash flow and lower valuations. A rise in interest rates increases the cost of capital and also
reduces valuations Most of the analyst fraternity uses this concept. The risk free rate is used as
the discount rate. This evaluation tool is
helpful only for evaluating stable businesses rather then high growth
businesses
Earning per share (EPS):
This is the net income divided by the number of shares outstanding however; both the
numerator and denominator can change depending on how you define "earnings" and "shares
outstanding. The E.PS as an absolute figure means nothing and is significant only when viewed

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in relation to the price of the stock. EPS
= Net Profits / No. Of Equity Shares
Enterprise Value
EV = Market Capitalization +
Debt.
Enterprise value for cash rich companies is market cap as reduced by cash. During bear markets
smart Investors are able to spot a number of companies that are available at zero or negative
enterprise value. In 2002 Trent was available at Rs 60 when it had Rs 100 as cash on its balance
sheet. The stock has been a multibagger since.
EVA
Economic Value added is the excess of ROCE over the cost of capital . Companies with higher
EVA's are able to generate higher PE's and are generally wealth creators compared to
companies that have a low or negative EVA.
EVA = (ROCE - Cost of capital) Capital
employed
Free Cash flows
The amount of cash left in a company after all expenditure both revenue and capital has been
accounted for. This is also known as net addition to cash. Free cash flow per share = Cash
earnings - capital spending. Companies that generate substantial free cash flows make for very
good investments.
Growth in Stock Price vs. Growth in earnings
A dangerous signal is generated when the stock price of a company increases faster than its
earnings. Invariabily this wleads to a higher PE multiple and makes the stocks liable for
decline. Generally it is better to ivest into businesses their earnings growing at an equal pace to
their stock prices.

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Market Capitalization
The market cap is the amount of money that the acquirer would need to buy back all the
outstanding shares. In case of absurd valuations the market cap reaches stupid levels. During
the 2000 tech boom Himachal Futuristic sold at a market cap of Rs 20,000 crores. Multibaggers
(stocks that go up a number of times) generally have a very small market cap to start with.
Companies with a market cap of more then US $ 1 billion are classified as large caps, between
US $ 250 million to 1 $billion as mid caps and less then 250 million as small caps.
Market price x No. Of Equity
shares
Market Cap to Sales
It is the number of times the sales exceeds the market cap. For companies in growth businesses
the market cap to sales could be about 3 times whereas for companies in low growth businesses
it should be equal to 1. The sales number is the most difficult to fudge and therefore the market
cap to sales is a more reliable indicator in corporate analysis. In the 2000 technology bubble
Infosys traded at a market cap to sales of more than 100! Market Cap / Sales
PEG
This is known as the Price earnings to growth ratio. It should be less then equal to 1 Growth in
Earnings vs. the P/E Ratio. The ratio will be lower for slow growers and higher for fast growers.
PEG = PE / Sustainable Growth
Price Earnings (PE)
This is one of the most widely used tools in sizing up stocks. Simply put, it is how much
investors are willing to pay for a rupee of the company's earnings. It is also termed as referred
to as a "multiple." When you calculate a P/E based on the past year's earnings, the P/E is called
"trailing." Another way to determine a P/E is to substitute future earnings projections. This is
the "forward" P/E.

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5. How to invest in stock
It is not a coincidence that most wealthy people invest in the stock market. While fortunes can be
both made and lost, investing in stocks is one of the best ways to create financial security,
independence, and generational wealth. Whether you are just beginning to save or already have a
nest egg for retirement, your money should be working as efficiently and diligently for you as you
did to earn it. To succeed in this, however, it is important to start with a solid of understanding of
how stock-market investment works.
Determine your asset allocations
In other words, determine how much of your money you will put in which types of investments.
 Decide how much money will be invested in stocks, how much in bonds, and how much
you will hold as cash and cash equivalents (e.g. certificates of deposit, treasury bills, etc.).
 The goal in this step is to determine a starting point based on your capital market
expectations and risk tolerance.
Select your investments
A portion of the universe of potential options has been eliminated based on the risk and return
objectives. To make a final selection, you must decide the following:
 Whether to buy individual stocks to gain exposure to an asset class, or a mutual fund or ETF that
will provide greater diversification.
 Based on your macro and micro expectations, whether are there sectors or countries you should
invest in more or less heavily?
 Which fixed income instruments (investments that provide a returns in the form of fixed periodic
payments, e.g. bonds) are best suited to take advantage of your interest rate and inflation
expectations and thus compliment your stock portfolio

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Purchase your stock
Once you've decided how much of which stocks to buy, it is time to purchase your stocks. Find a
brokerage firm that meets your needs and place your stock orders.
 You can either select a discount broker, who will simply order the stocks you want to purchase, or
a full-service brokerage firm, which will cost more but will also provide information and guidance.
 There are two different types of orders you can place. A market order is a request buy or sell an
investment immediately at the best available current price. The benefit is your order is very likely
to be executed promptly. A limit order is a request to buy or sell an investment at a specific price
or better. The benefit is that your order will only be executed if the stock reaches the price you
specified.
 Some companies offer direct stock purchase plans (DSPPs) that allow you to purchase stock
without a broker. If you are only planning to buy a small amount of stock from one or a few
companies, this may be your best option. Search online or call or write the company whose stock
you wish to buy to inquire whether they offer such a plan

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6. Company research
Investor should do company research analysis which can help in deciding which particular
stocks to choose.
Types of research
Fundamental Analysis:
Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't
really investing if you aren't performing fundamental analysis. Because the subject is so broad,
however, it's tough to know where to start. There are an endless number of investment strategies
that are very different from each other, yet almost all use the fundamentals.
The biggest part of fundamental analysis involves delving into the financial statements. Also
known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and
all the other financial aspects of a company. Fundamental analysts look at this information to
gain insight on a company's future performance. A good part ofthis tutorial will be spent learning
about the balance sheet, income statement, cash flow statement and how they all fit together.
Basics
When talking about stocks, fundamental analysis is a technique that attempts to determine a
security’s value by focusing on underlying factors that affect a company's actual business and its
future prospects. On a broader scope, you can perform fundamental analysis on industries or the
economy as a whole. The term simply refers to the analysis of the economic wellbeing of a
financial entity as opposed to only its price movements.
Fundamental analysis serves to answer questions, such as:
 Is the company’s revenue growing?
 Is it actually making a profit?
 Is it in a strong-enough position to beat out its competitors in the future?
 Is it able to repay its debts?

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When talking about stocks, fundamental analysis is a technique that attempts to determine a
security’s value by focusing on underlying factors that affect a company's actual business and its
future prospects. On a broader scope, you can perform fundamental analysis on industries or the
economy as a whole. The term simply refers to the analysis of the economic wellbeing of a
financial entity as opposed to only its price movements.
Fundamental analysis serves to answer questions, such as:
Fundamentals: Quantitative and Qualitative
We could define fundamental analysis as “researching the fundamentals”, but that doesn’t tell
you a whole lot unless you know what fundamentals are. As we mentioned in the introduction,
the big problem with defining fundamentals is that it can include anything related to the economic
well-being of a company. Obvious items include things like revenue and profit, but fundamentals
also include everything from a company’s market share to the quality of its management.
The various fundamental factors can be grouped into two categories: quantitative and qualitative.
The financial meaning of these terms isn’t all that different from their regular definitions. Here
is how the MSN Encarta dictionary defines the terms:
 Quantitative – capable of being measured or expressed in numerical terms.
 Qualitative – related to or based on the quality or character of something, often as
opposed to its size or quantity.
In our context, quantitative fundamentals are numeric, measurable characteristics abouta
business. It’s easy to see how the biggest source of quantitative data is the financial statements.
You can measure revenue, profit, assets and more with great precision.
Turning to qualitative fundamentals, these are the less tangible factors surrounding a business -
things such as the quality of a company’s board members and key executives, its brand-name
recognition, patents or proprietary technology.
Quantitative Meets Qualitative
Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many
analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the

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Coca-Cola Company, for example. When examining its stock, an analyst might look at the
stock’s annual dividend payout, earnings per share, P/E ratio and many other quantitative factors.
However, no analysis of Coca-Cola would be completewithout taking into account its brand
recognition. Anybody can start a company that sells sugar and water, but few companies on earth
are recognized by billions of people. It’s tough to put your finger on exactly what the Coke brand
is worth, but you can be sure that it’s an essential ingredient contributing to the company’s
ongoing success.
Technical Analysis:
Technical analysis really just studies supply and demand in a market in an attempt to determine
what direction, or trend, will continue in the future. In other words, technical analysis attempts
to understand the emotions in the market by studying the market itself, as opposed to its
components. If you understand the benefits and limitations of technical analysis, it can give you
a new set of tools or skills that will enable you to be a better trader or investor.Technical analysis
is a method of evaluating securities by analyzing the statistics generated by market activity, such
as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic
value, but instead use charts and other tools to identify patterns that can suggest future activity.
Just as there are many investment styleson the fundamental side, there are also many different
types of technical traders. Some rely on chart patterns, others use technical indicators and
oscillators, and most use some combination of the two. In any case, technical analysts' exclusive
use of historical price and volume data is what separates them from their fundamental
counterparts. Unlike fundamental analysts, technical analysts don't care whether stock is
undervalued - the only thing that matters is a security's past trading data and whatinformation
this data can provide about where the security might move in the future.
The field of technical analysis is based on three assumptions:
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the

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fundamental factors of the company. However, technical analysis assumes that, at any given
time, a stock's price reflects everything that has or could affect the company - including
fundamental factors. Technical analysts believe that the company's fundamentals, along with
broader economic factors and market psychology, are all priced into the stock, removing the need
to actually consider these factors separately. This only leaves the analysis of price movement,
which technical theory views as a product of the supply and demand for a particular stock in the
market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a trend
has been established, the future price movement is more likely to be in the same direction as the
trend than to be against it. Most technical trading strategies are based on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms
of price movement. The repetitive nature of price movements is attributed to market psychology;
in other words, market participants tend to provide a consistent reaction to similar market stimuli
over time. Technical analysis uses chart patterns to analyze market movements and understand
trends. Although many of these charts have been used for more than 100 years, they are still
believed to be relevant because they illustrate patterns in price movements that often repeat
themselves.
.

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7. RETURN ON EQUITY AND TAXATION
Return on equity (ROE) measures the rate of return for ownership interest (shareholders' equity)
of common stock owners. It measures the efficiency of a firm at generating profits from each unit
of shareholder equity, also known as net assets or assets minus liabilities. ROE shows how well a
company uses investments to generate earnings growth. ROEs 15-20% are generally considered
good.
ROE is equal to a fiscal year net income (after preferred stock dividends, before common
stock dividends), divided by total equity (excluding preferred shares), as a percentage. As
with many financial ratios, ROE is best used to compare in the same industry.
High ROE yields no immediate benefit. Since stock prices are most strongly determined
by earnings per share (EPS), a 20% ROE company will cost twice the amount (in Price/Book
terms) as a 10% ROE company.
The benefit of low ROEs comes from reinvesting earnings to aid company growth. The
benefit can also come as a dividend on common shares or as a combination of dividends and
company reinvestment. ROE is less relevant if earnings are not reinvested.
 The sustainable growth model shows us that when firms pay dividends, earnings growth
lowers. If the dividend payout is 20%, the growth expected will be only 80% of the ROE
rate.
 New investments may not be as profitable as the existing business. Ask "what is the
company doing with its earnings?"
 ROE is calculated from the company perspective, on the company as a whole. Since
much financial manipulation is accomplished with new share issues and buyback, the
investor may have a different recalculated value 'per share' (earnings per share/book
value per share).
TAXATION
Long-term capital gains on stocks and equity mutual funds are not taxed. But short-term gains are
taxed at 15%.

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8. Advantages and Disadvantages of Equity
Advantages and disadvantages from the viewpoint of a Shareholder
Advantages
1. Higher Dividend : The equity shareholders earn more by way of dividend compared to other
alternatives during prosperous time
2. Voting Right: Equity shares holders have a voting right. Shareholders can participate in the
Management of company through voting right. They can vote for many important matters such as
election of director& auditor, approval of dividend recommended by director.
3. Capital Appreciation: Equity shareholders get the benefit of capital appreciation, when boom
condition prevail.
4. Right Shares: An Existing company has to offer the new issue of its shares to existing
shareholders as right shares on priority basis.
5. Good Liquidity Position: The liquidity position of Equity shareholders is improved because
these shares are freely traded in all national level stock exchanges.
Disadvantages
1. Uncertain Return: No fixed rate of dividend is to be paid to equity shareholders. Only
directors have the authority to decide whether to declare dividend or not.
2. Residual Claim On Income As Well As Assets Equity: Shareholders have last priority on
income as well as assets after satisfying claims of others-- debenture holders, secured
lenders, unsecured lenders, other creditors, & preference shareholders.
3. Low Market Value: When low dividends are declared or postpone the dividend , the market
value of equity shares decline & investors suffer a capital loss.
4. Risky Investment: Equity prices tend to fluctuate widely, so making equity investment
risky.
5. Higher Speculation: During boom phase of stock market, Equity shares may encourage too
much speculation.
6. Dilution of Control: The issue of new Equity shares may dilute the ownership & control of
existing shareholders while a preemptive right to retain their proportionate ownership; they
may not have funds to invest in additional shares.

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