1. Market price of every share is made by 2 things
(1st thing )face value of share + (2nd thing) premium of share= market price of share
For example share of reliance communication ltd is traded at 65 face value of this share is 5 rupees and market premium is 60 so currant market price is 5+60=65
2.Face value is not changed in normal trading it is changed only if board of directors passed a resolution in this purpose. In trading only share premium is changed by demand and supply formula suppose I bid for buying 1000 share of reliance communication ltd in open market and no one agree to sell his shares @65 (at premium of 60) so premium is increase 60 to 61 62 63 64 65 66 67……and so on until circuit limit .
Suppose one could agree to sell his share @75 so in this case he get 70 rupee premium and if my trade is done then currant market price is now 75 it means 70 as(premium)+5(face value)=75
3. it means I buy a share of 5 rupee in 75 rupee my partnership in company equity is only 5 rupees if company give me 50% dividend then it is not 75/2=37.50 it is 5/2=2.5 per share only because I give 5 rupees to company and 70 rupees to seller of stock. So my partnership in company capital is only 5 rupees.
4. When buyer is more ( demand is more) in a share then it price is up ( premium is up) and seller is more ( demand is down) when price of share is down (premium is down).
5. No one control the share premium it is decided by buyer and seller agreement. Sometime exchange fixes a circuit limit to control excess speculation in share price.
6. One other useful information that why one could pay premium for buying a share? It is due to share EPS ( earnings per share) for example face value of xyz stock is 1 rupee only but per share earnings of xyz stock is 4.78 per share so why any one give us his share at only 1 rupee ( because this share earn approximately 5 rupee a year) so he give us his share if we give him a premium of 199 rupee because currant market price of xyz stock is 200 ( 1+199) it means we pay him 40 year of earnings advance to buy a share it is called P/E ( price/earnings per share). So P/E of xyz stock is 40.
7. one another thing sometime a company has low equity like MMTC, this company have only 5,00,00,000 share of 10 rupee face value and promoter hold 99.33 percent share so remain 335000 share trade in this market if these share hold by some investors and demand is still in market then price is go higher and higher you wonder currant market price of MMTC is 32440 and EPS is 43 and P/E is 754 ( means we pay 754 year earnings to buy a share of MMTC) ( this article is originally write at 25.06.2010 so price given this exaple is for 25.06.2010) 8. last point premium may negative also for example pan India corporation ltd is an 10 rupee face value share but it currant market price is 0.70 only means premium of this share is -9.30 .
( this article is originally write at 25.06.2010 so price given this example is for 25.06.2010)
Key words:- what is EPS P/E face value of a share , how price of a share change in market , why price of mmtc is very high. Premium of a share.
LAST UPDATED AT 07.05.2012
Respected readers,
first of all please remember i am not an authorized stock adviser so stock given here not to treated as stock advice by mahesh kaushik. i just disclose my own buying activity in this market so investor can get idea to choose a stock and learn my way of investing.
1.NOCIL:-
Buying date:-3 APRIL 2012 Quantity:-150 share buying price:-@17.25 total investment:-2587 rupee status:-HOLD.
2.FIRST SOURCE SOLUTION
Buying date:-3 APRIL 2012 Quantity:-300 share buying price:-@10.84 total investment:-3252 rupee status:-HOLD.
3. COUNTRY CLUB INDIA LTD:-
Buying date:-3 APRIL 2012 Quantity:-400 share buying price:-@6.65 total investment:-2660 rupee status:-HOLD.
4.RELIANCE COM:-
Buying date:-9 APRIL 2012 Quantity:-35 share buying price:-@83 total investment:-2905 rupee status:-HOLD.
5.GUJARAT SIDHEE CEMENT LTD:-
Buying date:-9 APRIL 2012 Quantity:-300 share buying price:-@9.24 total investment:-2772 rupee status:-HOLD.
6.PUNJ LLOYD LTD:-
Buying date:-24 APRIL 2012 Quantity:-50 share buying price:-@52.75 total investment:-2637.50 rupee status:-HOLD
7.KAMDHENU ISPAT LTD:-
Buying date:-24 APRIL 2012 Quantity:-200 share buying price:-@18.25 total investment:-3650 rupee status:-HOLD
In my shargenius blog most of investors ask me a common question that "HOW I CHOOSE A STOCK FOR INVESTMENT?" so today i disclose my stock screening criteria
1. FACE VALUE:- this is your basic amount which invest in company , in other words face value is your real share in company equity capital for example if a company have 10,00,000 share of 10 rupee face value than share capital of company is 10,00,000*10= 1,00,00,000 , and if you buy 50 share of this company at market price of 100 than you invest 50*100=50000 but your partnership in company share capital is 50*10=500 only , remain 4500 is give as a premium to seller who sell his stocks to you.
if you buy a stock in 3500 which face value is 1 rupee than your investment in company is only 1 rupee remain 3499 is premium to seller.
so if i want to buy an infra stock and choose 3 stock name A B C for screening suppose face value of A stock is 10 rupee and market price 68 , face value of B stock is 2 rupee and market price is 48 face value of C stock is 1 rupee and market price is 12 .
which stock is cheap in A , B , C ?
now we compare stocks market price in 1 rupee face value so we divide each stock market price by his face value so in similar face value of 1 rupee market price for A stock is 68/10=6.80 for B stock 48/2=24 for C stock 12/1=12 so stock A is cheapest stock .
2.YEAR HIGH AND YEAR LOW:- now i see year high and year low for each stock if stock is down more than 50 % from year high than i AVOID this stock for example year high f stock A is 256.55 year low is 96 and stock traded at 108.55 than i AVOID this stock because good companies never down more than 50 % within a year until something is wrong
in opposite a stock is traded more than 50 % from year low than i AVOID it for example company B is traded at 56 and year high for this company is 65.25 year low is 19.55 than i AVOID it because i think this stock is already run very fast and it is better to wait market fall.
3.PROMOTERS HOLDING:- now i see promoters holding if promoters holding is below 15-20 % than i think stock is not good for investing , if promoter holding reducing in quarter by quarter than i think something is wrong and avoid this type of stock but if promoters increase there holding than i think this is good.
4. BASE PRICE:- Finally i check base price of stock , this is a new concept which replace my old criteria of 200 DMA and book value because i think base price is more reliable and more stable thing if a stock just cross his base price in upside and traded 10-20 % high from base price than i think buying price is a good value buy but in opposite stock cross his base price in downside than it is risky to buy. i write a separate article about calculation of base price in this website so please read it for more understanding about base price .
INNOVATION OF BASE PRICE SYSTEM:- i work in stock market since 2005 and i always see that stocks are volatile in nature . no one say clearly in this market what is the right price for buy a stock and when the time start to sell stocks?
i check and learn various stock analysis method like technicals , 200 DMA , fundamental analysis but no one is success more than 50-70 % so my research not satisfied with these old criteria like EPS , book value , DMA etc.
finally i innovate a new term BASE PRICE ( 3 year average price )and i think this may be change of your thinking in investing of stocks .
WHAT IS THE BASE PRICE:- Base price of a stock is an average price of his last 3 year trading sessions closing price . base price show real fair value price of stock which market give him. in other words we say base price means 3 year DMA of stock. in calculation of base price do not forget to adjust bonus and stock spilt for example if a 10 rupee face value stock market price is 100 and stock spilt in 2 rupee face value than you count before spilt price is 20 instead of 100. remember for base price or 3 year DMA calculation your stock must be listed from 3 year because if you calculate base price below 3 year price history than it is not work fine.
HOW TO USE BASE PRICE OR 3 YEAR DMA IN STOCK SELECTION FOR INVESTMENT:-if a stock just cross his base price in upside and traded 10-20 % high from base price than i think buying price is a good value buy but in opposite stock cross his base price in downside than it is risky to buy. if you buy a stock below base price than it is cheap but your waiting period may be 1-2 year for a decent return and if your stock market price is more than 20% of base price than valuation of stock is already high. my simple formula for investment horizon's buy below 20% of bas price and sell above 20% of base price . but for trading purpose buy 5 % above on base price ( in uptrend means stock cross his base price from downtrend to uptrend ) and sell 15 % above on base price.
HOW TO CALCULATE BASE PRICE OR 3 YEAR DMA:- Base price or 3 year moving average is a new concept given by me so no any software is available to calculate it ,so we calculate it manually with help of ms excel for example recently i buy NOCIL and if you want to calculate it base price than download it last 3 year price history from BSE India website using following link
http://www.bseindia.com/stockinfo/stockprc.aspx
and when sum of last 3 year closing price is divided by number of trading day we get 3 year average price 20.52 ( in 12 April 2012 ) so i think CMP 16.50 of NOCIL is a fair price for investment of 6 to 24 months horizon's and target is 24+ to book profit. but for trading i not buy it at CMP and wait to cross 21 and after crossing of 21 i buy it for trading purpose and book profit near 23-25 in short term in that case base price also work as stop loss.
.jpg)
HOW MANY AMOUNT WILL BE INVEST IN A SINGLE STOCK ?
This is an another question which ask by many investors in my sharegenius blog that how to decided investment amount in a particular stock? sometime i see most of investor put all of his money in a single stock or in 2-5 popular stocks and than blame to his luck and blame to stock market it is not fair investment strategy.
In my trading strategy I treat my self as a shopkeeper of stocks .. i invest 2500 to 5000 rupee in a single stock so my portfolio is like a shop of stocks where many varieties of stocks is available for sell. i Never put stop loss and never worry if a stock traded below my buying price because I knew one day I book my share with 15 %+ profit and if my share not achieves his target , i enjoy dividends in my holding period.
EXAMPLE OF SHOPKEEPER DALIP BHAI MALI:- about 3 year ago I go to a kirana shop ( kirana means a general store) and ask 4 questions to shopkeeper dalip bhai mali and his answer touch my heart to make my trading policy and find it very successful.
First question I ask him “ in your kirana shop are you have some item which demand is nil and these item not sell in last 2-3 year? He replies “sir I have many item which I not sell in last 3 year .”
I ask him “ are you ready to book loss in this item if I give you just ½ prices ? He replies “ no sir I sell these items only in profit because one day these item demands may occur again. It happen so many time in past and if I book loss of these type of item then I never make profits ( remember his kirana item not give him dividends and my share give me dividends if I buy dividend paying strong companies) Third question “ are you ready to buy some more quantity of items which not performing? ( In market language average out)? He reply this question “NO” and see me as I AM A BIG FOOL IN WORD
last question I ask him “ what profit you make in each item you sell ?
He replies near about 15 % in an item.
I think a shopkeeper understand much better about market because they never put stop losses in good items, they never average out a non performing item, they sell a item in 15% return and rotate there money they are not greedy with a item like us. ( then i adopt this policy and found it good )
so i think invest only 2500 to 5000 in a particular stock if you have more money than try to More diversified your portfolio because market have so many good listed companies.
.jpg)