Are we the Owners of Multiple Firms

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We learned about what are investments in the last post. Where I gave an overview about types of investments in different schemes/ asset classes. I also talked about how the investment works further. 

This post is about a very fascinating topic which had change the lives of many people throughout the world. The name of the post is self explanatory, about which I mentioned in the last blog. There 2 main asset classes Equity and Debt. 

As I gave a short mention about Equity that it is basically a part or an ownership of a firm or a company. You can buy Equity in many ways like for example from your friend's company then being an angel investor to investing in new startups, then the whole share market is working on the company's equity, well shares is another world for equity.



I mentioned about some key terms related to Equity:-

  • Earnings Per Share
  • Share Price
  • Market Cap
  • Shares Outstanding
  • Price to Earnings Ratio
Let's Understand all these terms from an example-

For example, I am a businessman, I sell sarees and dupattas at a price range of 400-500. My monthly revenue comes to 3,00,000 rupees. After a month I was hoping to sell my business. 3 buyers were interested

  • the first buyer wanted to buy my company at 20 lakhs
  • the second buyer wanted to buy at 25 lakhs
  • the third one at 15 lakhs
, but I changed my mind. I thought let’s wait and I will sell my company after a good amount of revenue. After a year I again thought about selling my company and now I was earning 20 lakhs per month and now the buyers were paying as follows: 1cr, 1.5cr and 1.25cr.

But I thought that I should not sell my full 100% shares. And instead give 25% of my share in public so that I have my presence in my company.


The price of a share is determined by this factor. Value of the company and the other one is the willingness of the buyers. Taking an average rate my company is valued at rupees 1.25 cr. The stocks outstanding are 400, which means I have released 400 stocks, because I only want my 25% of the company to be sold so the total 100 stocks value will be 31,25,000 rupees and the value of one stock will be 31,250 rupees.


EPS from this example :-

Well by this data we can actually calculate how much I earn by selling these stocks. I had issued a total of 400 stocks and my market value/market price is 1.25 cr. So I earn 31,250 rupees per stock, which in technical terms we tell as EPS known as Earnings per share.


P/E ratio from this example :-

But now after these all things we should know the willingness of the investors to buy the stocks, basically I am talking about the P/E ratio(Price to earnings ratio), which tells us about how much does the investors wants to invest for a stock on basis of its earning by a stock and the stock price, the P/E ratio also tells that if the market is overvalued or undervalued.

It is calculated by the formula:-


Well now we know about what equity is, if you are confused, equity and stocks are the same and shares too, these 3 terms do not have any bigger difference so if I use any word don’t get worried or confused. At a broader area now you know what equity is but you don't know why to invest in equity. Umm equity is named as the safest and also the most risky one. Gives the most amount of returns in the long run. Investing in a secured company will surely give you good and nonvolatile returns. If an investor invests 1,00,000 rupees in sensex in the year 1979, he will have 350x right now in 2022.




Biblography:-

https://www.investopedia.com/terms/e/equity.asp

https://scholarsclasses.com/blog/wp-content/uploads/2021/09/Features-of-Equity-Shares.jpg



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