Making Corporate Finance Easy to Understand
Chapter 4 | Financial Planning
Imagine you want to build a massive Pizza Factory. It costs ₹100 Crore to build.
You only have ₹10 Crore. How do you get the remaining ₹90 Crore? You ask the public!
You break the ₹100 Crore into tiny, affordable pieces called Shares (e.g., each share costs ₹10).
Anyone who buys a share gives you money, and in return, they become a Shareholder (a part-owner) of your factory!
This is the biggest confusion for beginners. Let's break it down using real life:
The "Birth Certificate" price. It is the original, nominal price printed on the share when the company was first formed.
The "Live Ticker" price. It is the price at which the share is trading right now on the stock exchange.
If we compare the Live Price (MV) to the Original Price (FV), we can easily see how the company is performing in the real world.
Company is highly successful! Demand is huge, pushing the price way up above its birth price.
The market price is exactly the same as its original birth price. It is neutral.
Company is in heavy losses. People are selling, dropping the price below its birth value.
If your Pizza Factory makes a massive ₹5 Crore profit at the end of the year, the owners don't just keep it all. Because you own shares, they give you a "slice" of that profit as a reward!
🍕 This cash reward is called a Dividend.
Dividend percentage is ALWAYS calculated on the
Face Value (FV)Never, ever calculate it on the Market Value!
Example: A company declares a 50% dividend. The FV is ₹10. The MV is ₹200.
Dividend Amount = 50% of ₹10 (FV) = ₹5 per share. (We completely ignore the ₹200 MV!)
The Dividend tells you the cash amount you received. But to know if your investment was actually profitable compared to a Bank FD, you must calculate the Rate of Return (RoR).
Where do people actually buy and sell these shares? In a highly regulated, secure marketplace called a Stock Exchange.
Bombay Stock Exchange
The oldest exchange in Asia.
The Sensex is an index that tracks the performance of the Top 30 companies.
National Stock Exchange
India's largest exchange.
The Nifty tracks the performance of the Top 50 outperforming companies.
You cannot just walk into the BSE building in Mumbai, hand them ₹500, and ask for a share. You must go through a registered intermediary known as a Share Broker.
Brokers don't work for free! Every time they execute a buy or sell order for you, they charge a small commission called Brokerage.
Brokerage is ALWAYS calculated as a percentage of the Market Value (MV) of the traded shares.
Because the broker is providing you a Service, the government charges 18% GST on the transaction.
Crucial Detail: GST is charged ONLY on the Brokerage Fee amount, NOT on the value of the share!
To operate in the stock market, you are legally required to open two specific accounts through your broker.
Stands for "Dematerialized" account. In the old days, shares were physical paper certificates. Now, they are electronic.
While the Demat holds the shares, the Trading account is the active interface connected to the stock exchange.
A share has a Face Value of ₹10 and a Market Value of ₹150. The company declares a 50% dividend. What is the dividend amount you get per share?
Answer: ₹5.
(Because 50% of the Face Value ₹10 = ₹5. You completely ignore the ₹150 MV for dividends!).
If you are SELLING a share, does the broker ADD their fee to your final payout, or DEDUCT it?
Answer: Deduct!
(They take their cut out of your profit before handing you the money).