Stock related terms - Stocks, Dividend, Capital Gains and Market Capitalization

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Essential Key Financial Terms Before Investing in Company Stocks

Investing in company stocks requires a strong understanding of key financial terms to make informed decisions. Here's a detailed explanation with examples for the essential financial terms you listed, organized into their respective categories:

Stock-Related Terms

Stock / Share: A stock or share is like owning a small piece of a company. When you buy a stock, you become part-owner of that company. Stocks are traded on stock exchanges, and their prices fluctuate based on the company’s performance, market trends, and investor sentiment.

This ownership gives you certain rights and benefits, such as:

  1. Claim on Profits: If the company makes a profit, you may receive a portion of it in the form of dividends (cash or additional shares).
  2. Potential for Growth: If the company grows and its value increases, the price of your stock may rise, and allows you to sell it for a profit, known as a capital gain.
  3. Voting Rights: Some stocks (like common stocks) give you the right to vote on major company decisions, such as electing board members or approving mergers.

Types of Stocks:

  1. Common Stock:
    • Offers voting rights.
    • May pay dividends, but its not compulsory.
  2. Preferred Stock:
    • Usually does not offer voting rights.
    • Provides a fixed dividend and has a higher claim on assets in case of company liquidation.
Dividend:  A dividend is a portion of a company’s profits that is distributed to its shareholders as a reward for investing in the company. It can be in cash or additional shares. Not all companies pay dividends; it depends on the company's financial health and policies.

Capital Gains: It refer to the profit an investor earns when they sell an asset, such as stocks, bonds, real estate, or mutual funds, for a higher price than the original purchase price. It represents the increase in the value of an asset over time.

Types of Capital Gains:

  • Short-Term Capital Gains: Profits from selling an asset held for a short period (typically less than 1 year). These are usually taxed at a higher rate.
  • Long-Term Capital Gains: Profits from selling an asset held for a longer period (more than 1 year). These usually benefit from lower tax rates.

Market Capitalization (Market Cap): Market capitalization is the total value of a company’s outstanding shares in the market.


How to Calculate Market Capitalization:

Formula:

The formula to calculate Market Capitalization is:

Market Capitalization=Stock Price × Total Number of Shares Outstanding

Example:

If a company has 10 million shares outstanding, and each share is priced at Rs 500, the market capitalization would be:

Market Capitalization=500×10,000,000=5,000,000,000 (Rs 500 crore)

This value represents the total worth of the company's shares in the market.

Categories of Market Capitalization: The Securities and Exchange Board of India (SEBI) ranks companies listed on stock exchanges based on their market value (market capitalization).

  1. Large-Cap:  Large-cap companies are the top 100 companies with the highest market value, typically Rs 20,000 crore or more each. These are also known as blue-chip stocks and are considered stable and reliable investments.
  2. Mid-Cap: Mid-cap companies are ranked 101 to 250 based on market capitalization, typically valued between Rs 5,000 crore and Rs 20,000 crore. While they often have a good track record, they carry more risk than large-cap companies. Their market presence is smaller, so they may not always be included in major market indexes.
  3. Small-Cap: Small-cap companies are ranked 251 and below, with a market capitalization of less than Rs 5,000 crore. They are often new startups or businesses with higher growth potential but greater risk.


Dr. Swati Gupta


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