In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after

all liabilitiesare paid. If liability exceeds assets, negative equity exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock. At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered, for accountingpurposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for the positive remainder is deemed the owner's interest in the business. This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital or liable capital.

Equity investments
An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends andcapital gains, as the value of the stock rises. Typically equity holders receive voting rights, meaning that they can vote on candidates for the board of directors (shown on aproxy statement received by the investor) as well as certain major transactions, and residual rights, meaning that they share the company's profits, as well as recover some of the company's assets in the event that it folds, although they generally have the lowest priority in recovering their investment. It may also refer to the acquisition of equity (ownership) participation in a private (unlisted) company or a startup company. When the investment is in infant companies, it is referred to as venture capital investing and is generally regarded as a higher risk than investment in listed going-concern situations. The equities held by private individuals are often held as mutual funds or as other forms of collective investment scheme, many of which have quoted prices that are listed in financial newspapers or magazines; the mutual funds are typically managed by prominent fund management firms, such as Schroders, Fidelity Investments or The Vanguard Group. Such holdings allow individual investors to obtain the diversification of the fund(s) and to obtain the skill of the professional fund managers in charge of the fund(s). An alternative, which is usually employed by large private investors and pension funds, is to hold shares directly; in the institutional environment many clients who own portfolioshave what are called segregated funds, as opposed to or in addition to the pooled mutual fund alternatives.

A calculation can be made to assess whether an equity is over or underpriced, compared with a long-term government bond. This is called the Yield Gap or Yield Ratio. It is the ratio of the dividend yield of an equity and that of the long-term bond.
[edit]Accounting

In financial accounting, equity capital is the owners' interest on the assets of the enterprise after deducting all its liabilities.[1] It appears on the balance sheet / statement of financial position,[2] one of the four primary financial statements. Ownership equity includes both tangible and intangible items (such as brand names and reputation / goodwill). Accounts listed under ownership equity include (example):

Share capital (common stock) Preferred stock Capital surplus Retained earnings Treasury stock Stock options Reserve

[edit]Book

value

The book value of equity will change in the case of the following events:

Changes in the firm's assets relative to its liabilities. For example, a profitable firm receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit, it is increasing its assets. Depreciation - Equity will decrease, for example, when machinery depreciates, which is registered as a decline in the value of the asset, and on the liabilities side of the firm's balance sheet as a decrease in shareholders' equity. Issue of new equity in which the firm obtains new capital increases the total shareholders' equity. Share repurchases, in which a firm gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholders' equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares (increases the size of each share) in future income and distributions.

Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income[citation needed](from the point of view of the common share owners). Other reasons - Assets and liabilities can change without any effect being measured in the Income Statement under certain circumstances; for example, changes in accounting rules may be applied retroactively. Sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value.

[edit]Shareholders'

equity

When the owners are shareholders, the interest can be called shareholders' equity; the accounting remains the same, and it is ownership equity spread out among shareholders. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives. However, shareholders may allow different priority ranking among themselves by the use of share classes and options. This complicates both analysis for stock valuation and accounting. The individual investor is interested not only in the total changes to equity, but also in the increase / decrease in the value of his own personal share of the equity. This reconciliation of equity should be done both in total and on a per share basis.

Equity (beginning of year) + net income inter net money you gained dividends how much money you gained or lost so far +/ gain/loss from changes to the number of shares outstanding. = Equity (end of year) if you get more money during the year or less or not anything

Market value of shares

In the stock market, market price per share does not correspond to the equity per share calculated in the accounting statements. Stock valuations, which are often much higher, are based on other considerations related to the business' operating cash flow, profits and future prospects; some factors are derived from the accounting statements.

What is Technical Analysis ? The Technical analysis is a methodology to assist you in deciding the timing of investments, which is very vital to make wise investment decisions. The technical analysis is based on the assumption that history tends to repeat itself in the stock exchange. If a certain pattern of activity has in the past produced certain results nine out of ten, one can assume a strong likelihood of the same outcome whenever this pattern appears in the future. However technical analysis lacks a strictly logical explanation. Technical Analysis is the study of the internal stock exchange information and not of those external factors which are reflected in the stock market. All the relevant factors, whatever they may be can be reduced to the volume of the stock exchange transactions and the level of share price or more generally, the sum of the statistical information produced by the market. Few of the most

commonly used technical analysis methods for share market Trading are Japanese Candlestick (most powerful stock charting method), Price Curves, Trend Lines, High Low Charts and Moving averages. Our Technical Analysis Software StocktechTM will help you to become technical analyst on your own.

MERITS AND DEMERITS OF EQUITY SHARES

Equity shares or ordinary shares are those shares which are not preference shares. Dividend on these shares is paid after the fixed rate of dividend has been paid on preference shares. The rate of dividend on equity shares is not fixed and depends upon the profits available and the intention of the board. In case of winding up of the available and the intention of the board. In case of winding up of the company, equity capital can be paid back only after every other claim including the claim of preference shareholders has been settled. The most outstanding feature of equity capital is that its holders control the affairs of the company and have an unlimited interest in the company's profits and assets. They enjoy voting right on all matters relating to the business of the company. They may earn dividend at a higher rate and have the risk of getting nothing. the importance of issuing ordinary shares is that no organisation for profit can exist without equity share capital. This is also known as risk capital. Advantages of equity shares: Advantages of company: The advantages of issuing equity shares may be summarized as below: I. Long-term and Permanent Capital: It is a good source of long-term finance. A company is not required to pay-back the equity capital during its life-time and so, it is a permanent sources of capital. II. No Fixed Burden: Unlike preference shares, equity shares suppose no fixed burden on the company's resources, because the dividend on these shares is subject to availability of profits and the intention of the board of directors. They may not get the dividend even when company has profits. Thus they provide a cushion of safety against unfavourable development III. Credit worthiness: Issuance of equity share capital creates no change on the assets of the company. A company can raise further finance on the security of its fixed assets. IV. Risk Capital: Equity capital is said to be the risk capital. A company can trade on equity in bad periods on the risk of equity capital. V. Dividend Policy: A company may follow an elastic and rational dividend policy and may create huge reserves for its developmental programmes. Advantages to Investors: Investors or equity shareholders may enjoy the following advantages: I. More Income: Equity shareholders are the residual claimant of the profits after meeting all the fixed commitments. The company may add to the profits by trading on equity. Thus equity capital may get dividend at high in boom period.

II. Right to Participate in the Control and Management:Equity shareholders have voting rights and elect competent persons as directors to control and manage the affairs of the company. III. Capital profits: The market value of equity shares fluctuates directly with the profits of the company and their real value based on the net worth of the assets of the company. an appreciation in the net worth of the company's assets will increase the market value of equity shares. It brings capital appreciation in their investments. IV. An Attraction of Persons having Limited Income:Equity shares are mostly of lower denomination and persons of limited recourses can purchase these shares. V. Other Advantages: It appeals most to the speculators. Their prices in security market are more fluctuating. Disadvantages of equity shares: Disadvantages to company: Equity shares have the following disadvantages to the company: I. Dilution in control: Each sale of equity shares dilutes the voting power of the existing equity shareholders and extends the voting or controlling power to the new shareholders. Equity shares are transferable and may bring about centralization of power in few hands. Certain groups of equity shareholders may manipulate control and management of company by controlling the majority holdings which may be detrimental to the interest of the company. II. Trading on equity not possible: If equity shares alone are issued, the company cannot trade on equity. III. Over-capitalization: Excessive issue of equity shares may result in over-capitalization. Dividend per share is low in that condition which adversely affects the psychology of the investors. It is difficult to cure. IV. No flexibility in capital structure: Equity shares cannot be paid back during the lifetime of the company. This characteristic creates inflexibility in capital structure of the company. V. High cost: It costs more to finance with equity shares than with other securities as the selling costs and underwriting commission are paid at a higher rate on the issue of these shares. VI. Speculation: Equity shares of good companies are subject to hectic speculation in the stock market. Their prices fluctuate frequently which are not in the interest of the company. Disadvantages to investors: Equity shares have the following disadvantages to the investors: I. Uncertain and Irregular Income: The dividend on equity shares is subject to availability of profits and intention of the Board of Directors and hence the income is quite irregular and uncertain. They may get no dividend even three are sufficient profits. II. Capital loss During Depression Period: During recession or depression periods, the profits of the company come down and consequently the rate of dividend also comes down. Due to low rate of dividend and certain other factors the market value of equity shares goes down

resulting in a capital loss to the investors. III. Loss on Liquidation: In case, the company goes into liquidation, equity shareholders are the worst suffers. They are paid in the last only if any surplus is available after every other claim including the claim of preference shareholders is settled. It is evident from the advantages and disadvantages of equity share capital discussed above that the issue of equity share capital is a must for a company, yet it should not solely depend on it. In order to make its capital structure flexible, it should raise funds from other sources also.

Equity shares have a number of features which distinguish it from other securities. Its important features are : (i) Right to Income: As you know, equity shareholders have a claim to the residual income, that is, the income left after paying expenses, interest charges, taxes, preference dividend, if any. Usually, a part of the residual income is distributed in the form of dividend to the shareholders and other part called retained earnings is reinvested in the business. Retained earnings are ultimately benefit the shareholders in the form of firm's enhanced value and earning power and ultimately increase dividend and capital gain of the shareholders. Thus, dividends benefit the shareholders in the form of immediate cash flows whereas the retained earnings give them benefit in the form of capita] gains but not immediately. (ii) Claim on Assets: In case of liquidation of the company, equity shares are the last ones to be paid. They are paid after the claim of debt-holders and preference shareholders have been satisfied. In case of liquidation due to bad financial state of affairs, the equity shareholders generally remains unpaid (iii) Right to Control: Right to control here means the power to take decisions, frame major policies and power to appoint directors. Equity shareholders have the legal power to elect directors on the board and also to replace them if the board fails to protect interest of the shareholders. (iv) Voting Rights: Each equity share carries one vote. Directors are elected in the annual general meeting by the majority votes. Thus, every shareholder can participate in the vital affair of election of directors and cast his vote depending on the number of shares held by him. Shareholders are entitled to vote in person or by proxy, (v) Limited Liability: In a company limited by shares, an equity shareholder's liability is limited to the amount of investment in his respective share. If his shares are fully paid up, he doesn't have to contribute anything in the event of financial stress or winding up of his company. Whereas in case of a soletrader concern or a partnership firm, the liability of owner/owners is unlimited which requires

them to sell their personal assets and satisfy the claims of creditors in the event of insolvency of these firms

TYPES
Equity Shares An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc. The various kinds of equity shares are as follows Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held. Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years. Preferred Stock/ Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the companys creditors, bondholders / debenture holders. Cumulative Preference Shares. A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level. Security Receipts: Security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation. Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (upto twenty years). Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures.

Debentures are normally secured/ charged against the asset of the company in favour of debenture holders.

MODELS FOR THE VALUATION OF SHARES.

2.1 The concept of a cost of equity
The cost of equity is the cost to the company of providing equity holders with the return they require on their investment. The primary financial objective is to maximize the return to equity shareholders. This return is as the future dividend yield and capital growth. Until new shareholders become members of the company, the objective above is concerned with existing shareholders. Company management will need to offer new shareholders the minimum acceptable future return on the funds they put into the company, thereby retaining as much benefit as possible for existing shareholders. In practice, this return will be such as to provide new shareholders with the same future returns as existing shareholders expect to obtain on their investment at market values. For example if the future return on ABC plc's shares is 15% and future return on new issue is 20% if this is viewed quite simplistically, investors would sell their existing sha res and take up the new offer. The price of existing shares would fall, and as a result the percentage return would increase, until it matched the 20% of new shares. This would mean existing shareholders would suffer a capital loss as the price of t heir shares declined. Thus, the object of management must be to offer the shares so as to provide a return identical to that of existing shares (in this case 15%). They could not offer less than 15% as it might then be difficult to find investors for the new issue. Note: in all cases the relevant return is the future return anticipated by shareholders. Thus, the problem of determining the cost of new equity becomes the problem of establishing the anticipated market return on existing equity.

The cost of equity ,equals the rate of return which investors expect to achieve on their equity holdings.

2.2 Anticipated rate of return on existing equity

The anticipated rate of return on a share acquired in the market consists of two components: Component I - Dividends paid until share sold Component 2 - Price when sold In this sense, the returns are directly analogous to those on a debenture, with dividends replacing interest and sale price replacing redemption price. Applying the concept of compound interest, in making a purchase decision it is assumed that the investor discounts future receipts at a personal discount rate (or personal rate of time preference). For the illustration below I will define this rate as 'i'. In order to make a purchase decision, the shareholder must believe the price is below the value of the receipts, i.e, Current price, Po < Dividends to sale + Sale price Discounted at rate i Algebraically, if the share is held for n years then sold at a price Pn and annual dividends to year n are D1, D2, D3, ... Dn Then:

Po < D1/(1+i) + D2/(1+i) + D3/(1+i) + (Dn + Pn)/(1+i) By similar logic, the seller of the share must believe that Po > D1/(1+i) + D2/(1+i) + D3/(1+i) + (Dn + Pn)/(1+i) These different views will occur for two reasons. (a) Different forecasts for D1, D2 etc and for Pn by the different investors. (b) Different discount rates being applied by different investors.

However, since the price of shares is normally in equilibrium, for the majority of investors who are not actively trading in that security: Po = D1/(1+i) + D2/(1+i) + D3/(1+i) + (Dn + Pn)/(1+i)

2.3 Limitations of the above valuation model

It is important to appreciate that there are a number of problems and specific assumptions in this model. (a) Anticipated values for dividends and prices - all of the dividends and prices used in the model are the investor's estimates of the future. (b) Assumption of investor rationality - the model assumes investors act rationally and make their decisions about share transactions on the basis of financial evaluation. (c) Application of discounting - it assumes that the conventional compound interest approach equates cash flows at different points in time. (d) Share prices are ex div (e) Dividends are paid annually with the next dividend payable in one year.

2.4 The dividend valuation model

The dividend valuation model is a development of the share valuation model described above. The important feature of the dividend valuation model is the recognition of the fact that shares are in themselves perpetuities. Individual investors may buy or sell them, but only very exceptionally are they actually redeemed.

2.5 One Period Valuation Model

To value a stock, you first find the present discounted value of the expected cash flows. P0 = Div1/(1 + ke) + P1/(1 + ke) where P0 = the current price of the stock Div = the dividend paid at the end of year 1 ke = required return on equity investments

P1 = the price at the end of period one P0 = Div1/(1 + ke) + P1/(1 + ke) Let ke = 0.12, Div = 0.16, and P1 = $60. P0 = 0.16/1.12 + $60/1.12 P0 = $0.14285 + $53.57 P0 = $53.71

If the stock was selling for $53.71 or less, you would purchase it based on this analysis.

2.6 Generalized Dividend Valuation Model

The one period model can be extended to any number of periods. P0 = D1/(1+ke)1 + D2/(1+ke)2 ++ Dn/(1+ke)n + Pn/(1+ke)n If Pn is far in the future, it will not affect P0. Therefore, the model can be rewritten as: P0 = S Dt/(1 + ke)t The model says that the price of a stock is determined only by the present value of the dividends. If a stock does not currently pay dividends, it is assumed that it will someday after the rapid growth phase of its life cycle is over. Computing the present value of an infinite stream of dividends can be difficult. Simplified models have been developed to make the calculations easier.

2.7 The Gordon Growth Model

P0 = D0(1+g)1 + D0(1+g)2 +..+ D0(1+g) (1+ke)1 (1+ke)2 Where D0 = the most recent dividend paid g = the expected growth rate in dividends (1+ke)

ke = the required return on equity investments The model can be simplified algebraically to read: P0 = D0(1 + g) (ke - g) D1 (ke g)

2.7.1 Assumptions: Dividends continue to grow at a constant rate for an extended period of time. The growth rate is assumed to be less than the required return on equity, ke. Gordon demonstrated that if this were not so, in the long run the firm would grow impossibly large. 2.7.2 Gordon Model: Example Find the current price of Coca Cola stock assuming dividends grow at a constant rate of 10.95%, D0 = $1.00, and ke is 13%. P0 = D0(1 + g)/ke g P0 = $1.00(1.1095)/0.13 - 0.1095 = P0 = $1.1095/0.0205 = $54.12

2.7.3 Gordon Model: Conclusions Theoretically, the best method of stock valuation is the dividend valuation approach. But, if a firm is not paying dividends or has an erratic growth rate, the approach will not work. Consequently, other methods are required.

2.8 Price Earnings Valuation Method

The price earnings ratio (PE) is a widely watched measure of how much the market is willing to pay for $1 of earnings from a firm. A high PE has two interpretations:

 A higher than average PE may mean that the market expects earnings to rise in the future. A high PE may indicate that the market thinks the firm's earnings are very low risk and is therefore willing to pay a premium for them.

2.9 Setting Security Prices

Stock prices are set by the buyer willing to pay the highest price. The price is not necessarily the highest price that the stock could get, but it is incrementally greater than what any other buyer is willing to pay. The market price is set by the buyer who can take best advantage of the asset. Superior information about an asset can increase its value by reducing its risk. The buyer who has the best information about future cash flows will discount them at a lower interest rate than a buyer who is uncertain

2.10 Cost of preference shares

By definition preference shares have a constant dividend kp = D/MV(ex div) Where D = constant annual dividend If you have cumulative preference shares, the MV is increased by the outstanding amount to be paid. Preference dividends are normally quoted as a percentage, eg 10% preference shares. This means that the annual dividend will be 10% of the nominal value, not the market value.. Share prices change, often dramatically, on a daily basis. The dividend valuation model will not predict this, but will give an estimate of the underlying value of the shares.