Chapter 3: Equity and Debt Market Terminology

Introduction

• Chapter focuses on various terminologies used in equity and debt markets.
• Essential for students new to finance, but those with prior experience can proceed faster.
• Divided into Equity Market Terminology and Debt Market Terminology.

Equity Market Terminology (NISM curriculum)

1. Face Value

• Commonly heard as the nominal or par value of shares.
• Face Value is the basic value of a share set by the issuing company (e.g., ₹10).
• During an IPO, shares might be offered at a market price with a specific face value (e.g., ₹280 with a face value of ₹10).
• Calculation example:
  • Initial setup: Promoters invest 1 lakh (₹1,00,000) in shares of face value ₹10.
  • They receive 10,000 shares.
  • 10 years later, company issues new shares worth ₹1 crore (₹1,00,00,000) at ₹50 each, face value remaining ₹10.
  • Face value is a nominal value for stamp duty purposes, while the additional amount is termed as Security Premium or just Premium.

2. Market Value

• This is the last traded price of a listed share.
• Calculated by multiplying the market price by the total number of issued shares.
• Example: If share price = ₹50, and there are 100 shares, the total market value is ₹5000.
• Total market value is also referred to as Market Capitalization (Large Cap, Mid Cap, Small Cap).

3. Book Value

• Represents the net value of the company's assets minus liabilities.
• Calculated as Total Assets - Total Liabilities (excluding equity).
• Useful for understanding the company's worth if sold today.
• Example explained using Tata Consultancy Services (TCS): Book value includes share capital and accumulated profits.

4. Enterprise Value (EV)

• Indicates the total value of the business including both assets and liabilities.
• Calculation: Total Equity + Total Debt - Cash on hand
• Analogy: Buying a house including the money kept in a safe deposit.
• EV provides a better measure of the business value compared to market cap.

5. Intrinsic Value

• Represents the present value of a company's future earnings.
• Often determined using the Discounted Cash Flow (DCF) method.

6. Replacement Value

• The cost to replace an asset at current market prices.
• Example: Value of a new JCB machine vs. a 10-year-old one.

7. Earnings

• Represents the net profit of the company after all expenses and taxes.
• Types of earnings:
  • Historical: Past earnings
  • Trailing (TTM): Earnings over the last 12 months
  • Forward: Forecasted future earnings

8. Earnings Per Share (EPS)

• Calculated by dividing the net earnings by total number of shares.
• Dividend Per Share: Portion of earnings distributed to shareholders
• Retention Ratio: Portion of earnings retained in the company.
• Dividend Payout Ratio: Dividend given out/net earnings.

9. Price to Earnings Ratio (P/E Ratio)

• Calculated as Market Price per Share / Earnings per Share
• Indicates how much market is willing to pay for a company’s earning.
• Variants include Historical P/E, Trailing P/E, Forward P/E.

10. Other Ratios

• Price to Sales Ratio: Market Cap / Net Sales.
• Price to Book Value Ratio (P/BV): Market Cap / Book Value.

11. Differential Voting Rights (DVR)

• Shares with varying voting rights and usually different prices compared to ordinary shares.
• Example: Tata Motors Differential Voting Right shares offer fewer voting rights and thus, are priced lower.

Miscellaneous Information

• NISM exams can be scheduled at personal convenience.
• Passing these exams is a stepping stone for a research career, not a guaranteed job.
• The Equity Research Cohort offers in-depth business analysis skills.

Next Steps

• For further interest, students can join the equity research cohort through provided links in the description.