Investment in Equity Shares.
The choice between momentum or value stocks
There are many avenues of investment. One of the risky but sure methods to get a good return is through investing in equity shares. During an active working lifetime, people can take risks by leaps and bounds. Before you invest in shares you must know what is an equity share, Why are people so crazy to buy shares, how to invest in equity shares, and whether they should buy momentum or value shares
The ABC of an equity share
(i)What is an equity share? Some of the features of shares that everyone should know before investing in shares
This looks like a very basic question but one should be familiar with it before beginning to invest in it.
(a) Par value/issue price: An equity share has certain important characteristics. It has a par value which means the face value of the share. Therefore, you may call it par value or face value interchangeably. The issue price is usually not the face value of the share.
Most of the time the issue price sold in an Initial Public Offering (IPO) is a price higher than the par /face value of the share. This is called the premium price.
(b)face/Market value: while face value is the par value or basic price of the share the market price is the price ruling on the day you wish to buy or sell the share. The market price of the share changes every day depending on the demand and supply of shares. It can change many times during the day as well.
When you actually want to trade in or trade out the share, recheck the price in the market and then buy or sell.
( C) Dividend: An equity shareholder has the advantage of earning a dividend on his shareholding, out of the profits of the company after keeping a reserve as a basic legal requirement of the company. the dividend is based on the par value of the share.
Do not be surprised to see that dividend is far below the market price. If a share is ruling at $80 in the market 10% dividend does not mean $8. It depend on the par value. So if par value is 10$ and you have 200 shares in the market 10% would mean that you will receive $200 as dividend.
(ii) Why are people so crazy to buy shares?
An equity share has a dual advantage. It not only has an annual dividend as a reward for its shareholders out of its earnings, but it also has capital appreciation in the market. No other form of investment is able to acquire this double benefit.
The market for shares is dynamic and the price keeps on changing, as we discussed, so the price difference between the actual purchase price and the price in the market is a gain that a person makes on his equity shares. This is called capital gain.
(iii) What is the risk in the shares?
We discussed that the market is dynamic and can change every moment. this the risk of the shares. Their price can increase or decrease. Just as an investor makes a profit on the difference in market price and his purchase price, a crash in the market can bring an immense loss of the equity shareholder.
Suppose an investor bought a share at $30 and the company did not perform and the share value fell to 10$ in the market. On the day the shareholder wants to sell the share, the price is continuously falling and falls to $5. If he is holding 200 shares, he receives $1000 on the sale of shares. Originally he bought the share at $30 x $200= $6000. His loss is $5000
Evaluation of an equity share
(iv) How should a person invest in equity shares? There are several techniques for investing in shares the two most popular ones are the ‘Fundamental Analysis’ and ‘Technical Analysis.’
(a) Fundamental Analysis: To find out how the share is performing and whether it should be purchased or not the simple rule is to follow the Fundamental Analysis or the EIC approach. This means E for the economy, I for Industry, and C for company.
Take the broader picture or view of the country as a whole and how it is faring. Then look at the particular industry segment of the share and whether it is getting any government benefits or taxation benefits.
Lastly, see how the corporate organization is working and the past trend of its earnings per share. You can also calculate the intrinsic value of the share through this technique.
(b) Technical analysis: This is a Dow Jones technique, Analysis is done with the help of charts and trends, and time series. If the price is rising for a short period and then it changes, it is a short-term change but when it keeps on peaking it becomes a trend. The rising trend is a bull market and a falling trend is a bear market.
Choice of Value and Momentum investing
The investor should finally make a choice as to whether he should use a value base or momentum base to buy shares.
A value base is when you make a proper analysis through fundamental analysis by taking the EIC picture and moving from the wider to the narrow minute details of shares and do not follow the herd mentality.
Momentum investing means that you follow the trend. Buy the performing stocks and sell the shares not doing well.
Both the techniques are different and the philosophy behind it is quite opposite. The value base is based on the intrinsic value of a share. This means buying at a low price which is less than the intrinsic value and sell at a higher price than the value when the price in the market rises.
Momentum is based on the current preference of people. even if the price is high, buy the stocks as the price is rising and will fetch good results.
Finally, what are the learnings?
Shares can be evaluated through different methods. It is most important to understand the features of shares before we begin to purchase them. Unless we know the basics we should not invest in them.
Just as they can make high profits, they can also bring us heavy losses. Dividends are never distributed according to the market price.
Face value is the same as par value but the market price is different. Capital appreciation depends on the market price.
We can evaluate the shares/stocks according to intrinsic value by using fundamental analysis or see the momentum through technical analysis. The choice is entirely based on stable returns or considering current trends or momentum in the market.