Unit-1
Shares and mutual funds
Part-A
Q1) Explain shares. (8)
A1)
Share is the smallest unit of the capital of a company. In other words, A unit of ownership, that represents an equal proportion of a company’s capital is called as shares.
A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company.
A share is the smallest unit of the total share capital of the company
The share is regarded as unit of account that can represent several monetary instruments such as stocks, mutual funds, etc.
Share market is the aggregation of buyers and sellers of stock shares or stock.
Any stock exchange is for trading the stocks.
Types of shares:
Mainly the shares are of two types i) Preference shares and ii) Equity shares or common shares or ordinary shares.
i) Preference shares: These shares have a priority over the equity shares. From the profits made by a company, a dividend at a fixed rate is paid to them first, before distributing any profit amount to the equity shareholders. Also, if and when the company is closed down then while returning of the capital, these shareholders get a preference.
Further types are:
- Cumulative and non-cumulative preference.
- Participating and non-participating preferences.
- Convertible and non-convertible preferences
- Redeemable and non-redeemable preferences.
Again, preference shares are mainly of two types:
Cumulative Preference shares: In case of loss or inadequate profit, the preference shareholders are not paid their fixed rate of dividend, then the dividend is accumulated in the subsequent years to these shareholders & is paid preferentially whenever possible.
Non-cumulative Preference shares: As in the case of cumulative preference shares, here the unpaid dividends do not accumulate.
Q2) What is share market. (7)
A2)
Shareholders are allowed to buy or sell shares like commodities. Selling or buying a share for a price higher than its face value is legal. The share prices are allowed to be subject to the market forces of demand and supply and thus the prices at which shares are traded can be above or below the face value.
The place at which the shares are bought and sold is called a share market or stock Exchange and the price at which a share is traded is called its Market Price (MP) or the Market value. If the market price of a share is same as its face value, then the share is said to be traded at Par.
If M.P. Is greater than face value of a share, then the share is said to be available at a premium or above par and is called premium share or above par share
If M.P. Is lower than face value of a share, then the share is said to be available at a discount or below par & the share is called a discount share or below par share.
Q3) Define equity shares and bonus shares. (5)
A3)
Equity shares:
These are sold in the market to public, there by collecti8ng the required huge capital for the company. They are entitled to get dividend only after the fixed rate of dividend is paid to preference shareholders. Similarly, at the time of winding up of the company, only after returning preference share capital in full, and if there is any surplus, it will be paid to equity share holder.
Bonus shares: Bonus shares are additional shares given to the shareholder without any additional cost; based on the number of shares that a shareholder own. Normally, bonus shares are declared in the ratio.
These shares are issued to existing equity shareholders and represent divided paid in the form of shares instead of cash payment. These are fully paid shares and are distributed in proportion of numbers of shares in possession of the share’s holders.
Q4) What are open ended and closed ended funds? (7)
A4)
There are many mutual funds but all mutual funds are of two types- open ended funds and closed ended funds.
Open-ended Fund-
There is no limit to the number of units purchased and sold in open ended fund
It has no fixed maturity period.
A number called Net Asset Value is used to determine the value of a share in open-ended fund at any time.
Investor can buy and sells his units at Net Asset Value (NAV) which are declared on a daily basis.
Closed-ended Fund-
In closed-ended fund will issue a fixed number of shares are issued to the public. The price of share in a closed-ended fund is determined by market-demand.
These types of funds are not redeemable.
This fund also known as “Closed-end investment” or “closed-end mutual fund”.
Part-B
Q5) Nitu had bought 100 shares of Colgate at ₹685 per share, the face value of each share begins₹10. The company decided to split the shares so that. The new face value would be ₹ 2 per share. If the market price of the shares after the spilt is ₹250 each, find out the numbers of shares held by Nitu and her gain after split .
A1)
Nitu bought 100 shares of face value ₹ 10, at ₹ 685 per share.
She spent ₹ (100 x 685) =₹68,500 for buying these shares
When a share of face value ₹ 10 was split into shares of face value ₹ 2 each, then foe old value 10/2 = 5 new shares are assigned. Thus 100 shares of nitu with face value 10 were converted 100 x 10/2 = 500 shares of face value of ₹ 2 each.
Thus, into now has 500 shares of Colgate with face value ₹ 2.
The market value of each share after spilt is ₹ 250
The market value of 500 shares of Nitu is
₹ (500 x 250) = ₹ 125000
Her gain is ₹ (1,25,000-68,500) = ₹ 56,500.
Q6) Rahul purchased 500 shares of Rs. 100 of company A at Rs. 700 /-. After 2 months, he received a dividend of 25 %. After 6 months, he also got one bonus share for every 4 shares held. After 5 months, he sold all his shares at Rs. 610/- each. The brokerage was 2% on both, purchases &sales. Find his percentage return on the investment (8)
A2)
For purchase: Face value = Rs. 100 /-
No. Of shares = 500, market price = Rs.700/-
Dividend = 25%, brokerage = 2%
Purchase price of one share = 700 + x700= 714
∴Total purchase = 500 x 714 = Rs.3,57,000/-
Dividend =of 100 i.e. Rs. 25 /- per share
∴Total dividend = 500 x25 = Rs. 12,500 /-
Now, bonus shares are 1 for every 4 shares.
No. Of bonus shares = x 500 = 125
∴Total No. Of shares = 500 +125 =625
For sales, No. Of shares = 625, market price = 610,
Brokerage 2%
Sale price of one share = 610 - 2% of 610 = 597.8
∴Total sale value = sale price of one share x No. Of shares = 597.8 x 625 = Rs. 3, 73,625/-
Net profit = sale value + Dividend - purchase value = 3,73,625 + 12500 - 3,57,000 = Rs. 29,125/-
∴% gain = x 100 = 8.16
= 8.16
Q7) How many shares of market price of Rs.130 each, can be purchased for Rs.50150 with brokerage being 0.5%? (5)
A3)
It is given that-
Market price for one share = Rs. 130
Total amount invested = Rs.50,150
And brokerage = 0.5
Brokerage per share = 0.5% of market price
Purchased price for one share = Market price + Brokerage
= 130+0.65 = 130.65
Q8) There are two investments given below, then find out which investment is better?
7% of Rs. 100 shares at Rs. 120 or 8% of Rs. 10 shares at Rs. 13.50? (7)
A4)
Suppose the investment amount is = Rs. X
First situation-
It is given that- rate of dividend = 7%
F.V = 100, and Market value = Rs. 120
Second situation-
It is given that- rate of dividend = 8%
F.V = 10, and Market value = Rs. 13.50
Here we see that the dividend in second situation is more than the first situation.
Hence we conclude that the second situation is more profitable for investment.
Q9) Amandeep purchased 150 shares of BOB at Rs. 210 on 3rd Jan 2019. On 13th Feb. 2019, the company decided to split all the shares of company so that the face value of the share become Rs. 10 from Rs. 20 per share. The market price as on 30th July, 2019 is Rs. 300. Find number of shares held by Amandeep as on 30th July 2019. Also Find gain as on 30th July 2019. (5)
A5)
It is given that-
Total number of shares = 150
M.V. = Rs. 210, F.V. =Rs. 20.
Total amount invested = Number of shares × M.V.
= 150 × 210
= 31,500
Number of shares held on 30th July 2019
Actual value of shares on 30th July 2014
= 300 × 300
= 90,000
Profit = 90,000 – 31,500
= 58,500
Q10) Rakhi invested Rs. 25,000 in LPU M.F. With entry load 1%. Find the N.A.V. If the number of units purchased was 120. (5)
A6)
Let N.A.V. Of 1 unit = Rs. X
Purchase price of 1 unit = NAV + Entry load
It is given that-
Amount investment = Rs. 25,000
No. Of unit purchase = 120.
From equation (1) and (2), we get-
1.01 X = 208.33
Q11) Mr. Dev invested Rs. 5,000 every month for 5 months in RELIANCE systematic investment plan (SIP) with N.A.V. Of 35, 41, 40, 45 and 50 respectively the entry load was
2%. After 9 months she sold all the units when N.A.V. Of 48.
(7)
A7)
Amount invested every month = 5,000.
Entry Load = 2%. Exit Load = Nil.
Selling price of 1 unit = 48
Month | N.A.V. | Entry load | Purchased price of 1 unit | Number of unit purchased |
1 | 35 | 0.70 | 35.70 | 5000/35.70 = 140.056 |
2 | 41 | 0.82 | 40.82 | 119.560 |
3 | 40 | 0.80 | 40.80 | 122.549 |
4 | 45 | 0.90 | 45.90 | 108.932 |
5 | 50 | 1 | 51 | 98.039 |
Total |
|
| 215.22 | 589.136 |
Average price of 1 unit = Total Amount Invested / Total no. Of unit purchased
= 25,000/589.136
= 42.435
Average (mean) price of 1 unit = Total amount / 5
= 215.22 / 5
= 43.044
Total S.P. = 48 × 589.136
= 28,278.528
Gain = S.P. – Purchase price
= 28,278.528 – 25,000 = 3,278.528