Common Terms and Financial Ratios

If you want to follow the trends in share market or any financial news about any stock, you need to know few financial terms to better understand about stocks.

IPO : Initial Public Offering is the first time a company offers it’s shares to the public to raise capital to meet it’s financial needs. Company promoters sets a price for the share and interested buyers can buy the shares with the help of Investment Banks.

Secondary Market: Also known as share market, once the IPO is completed the shares are listed for trading in share market. Here the shares transactions happen via Stock Brokers.

Face Value (FV): If a company want to raise capital to meet financial needs, it offers it’s shares to public by IPO (Initial Public Offering). The Face value or Par value is the true value of a share, at which the share was first issued to raise capital

Market Value (MV): Once the company lists the shares in open market the value of share may increase or decrease as per demand and supply. If more investor are willing to buy the shares, share value goes up. The real time value of share the is listed on stock market is called Current Market Price (CMP) or Market value(MV).

Earnings per Share (EPS): It is the per share value of profit. If a company has 100 shares, the profit earned by company is Rs. 20,000

EPS will be – Total Profit/ Number of Shares = 20000/100 = 200

PE ratio : Price to earning ratio is the most used financial ratio to decide the health of a stock. In simple terms it is the ratio of current market price of a share to the earnings per share value – (CMP/EPS). Low PE suggests the stock is performing well where as High PE denotes non performing stock.

Understanding PE: If you have invested Rs. 100 in fixed deposit in a Bank, and the Bank offered an interest rate of 8%. That means you will get Rs. 8/- profit on an investment of Rs. 100/- You can replicate the same example to the stock you purchased, in the above example share value is Rs. 100/- and Earnings Per Share (EPS) is Rs. 8/- so PE will be – 100/8 = 12.5, and in the above example if interest rate is 10%, EPS will be Rs. 10/- and PE will be – 100/10 = 10. So simply we can say the lower the PE the better is the performance of the stock.

Dividend : Dividend is the portion of the profit that is given to share holders. If a company has 100 shares and earned a profit of Rs. 20,000. But the company needs Rs. 10,000/- for business expansion. In this scene, the Earning Per Share is Rs. 200 but the dividend will be just Rs. 100.

TIP: It is always better to choose a company which is having good EPS and pays less dividend.

 

 

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