Why invest in shares? Are shares profitable? If so, how profitable are they? Can they act as a hedge against inflation? Is it safe to invest in shares? Isn’t investment in shares akin to horse racing and gambling? What is the nature and extent of risk involved in such investments? How do shares compare with other forms of investment like fixed deposits in banks, company deposits, provident funds, gold, jewellery, and real estate?
Profits from shares: Profits from shares come in two forms–capital appreciation and dividends. Capital appreciation takes place when a share is sold at a price higher than its purchase price. Dividend is the amount that a company distributes every year to its shareholders out of the profits earned by it. Dividends are usually expressed as a percentage of the face value of the share, or in rupees per share.
The difference between capital appreciation and dividends is best illustrated in the following example. Suppose A purchases 100 shares (face value of Rs. 10 each) of XYZ company at a price of Rs. 12 per share. His total investment would be Rs. 1,200. If he then sells these shares after a period of one year at Rs. 18 per share, he would realise a sum of Rs. 1,800. A thus gets a profit of Rs. 600 on his original investment of Rs. 1,200. Rs. 600 represents the profit earned by A through capital appreciation. Capital appreciation can also be expressed in the form of a percentage. In this case A gets a capital appreciation of 50% (Rs. 600/Rs. 1,200)X 100. Further, suppose that in the course of this one year XYZ Company declares a dividend of 15% or Rs. 1.50 per share, A, with a shareholding of 100 shares would get a total dividend of Rs. 150 (1.50×100). Therefore, the total profit earned by A on his investment of Rs. 1,200 would be Rs. 750–a capital appreciation of Rs. 600 plus a dividend of Rs. 150.
How profitable are shares?
How much money can one make out of investments in shares? To answer this question let us take a look at some concrete facts.
The year 31st March, 1980 to 31st March, 1981 was a relatively good year for the Indian stock markets. The shares of 83 companies, out of a total of 655 quoted on the Bombay Stock Exchange, recorded an appreciation of more than 100% in their prices during the course of the year. The shares of 25 companies appreciated by more than 200% and 10 companies by more than 300%. The shares of Saroj Alloys rose by 867.7% and those of Indian Bright Steel by 700%. These figures are no doubt very impressive, but they are not really unknown or extraordinary by stock market standards. In 1985, the Bombay stock markets performed even better with 157 companies, recording an appreciation of more than 100% in the course of the year. The shares of 32 companies rose by more than 200%, 14 companies by more than 300% and 5 companies by more than 400%. The list is headed by Bombay Silk Mills whose shares recorded a phenomenal price rise of 1.260% followed by Blue Blends whose shares rose by 900%.
The above figures are not truly representative as both 1985 and 1980-81 were boom years for the Indian stock markets. However, they help to give an idea of the kind of money that one can expect to make from shares under favourable conditions and within a relatively short span of one year. But the average investor’s main interest is in knowing how much money he can expect to make in the long run under normal conditions. For this purpose let us take a representative sample of 8 well known companies and assess their performance over the fifteen-year period from 1971 to 1986. This period is long enough to cover both favourable and unfavourable conditions, cyclical flluctuations in share prices, and the other periodic ups and downs of the stock markets. The period 1971-1986 can be taken as truly representative since it covers the aftermath of the Indo-Pakistan War, the Companies (Temporary Restriction on Dividends) Act 1974, the steep hike in the price of petroleum products by OPEC in the early 1970s and the equally sharp fall in their prices witnessed during 1985 and early 1986, prolonged periods of labour unrest, political uncertainty, disturbed law and order conditions over large parts of the country, droughts, floods, good monsoons, enforcement of FERA provisions on dilution of foreign holdings in the mid-1970s, the recent liberalisation of FERA, MRTP and the Industrial licencing laws, lowering of corporate and personal tax rates, switch in laws, lowering of corporate and personal tax rates, switch in emphasis from the public sector to the private sector, and periods of high inflation interspersed with those of relative price stability.
Article Source: http://www.articlesbase.com/wealth-building-articles/investment-in-shares-pros-and-cons-4660067.html
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