NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1)

Investing in Stocks: formula sheet

Full chapter guide

Key formulas

Order of claim on company assets: Creditors/lenders → Preference shareholders → Equity shareholders; Equity is the residual claim. It is paid last, so it carries the highest risk among these.
Total return on a share: Total return = Dividend + Capital gain, where Capital gain = Selling price − Purchase price; Express as a percentage by dividing by the purchase price.
Dividend yield: Dividend yield = Dividend per share ÷ Market price per share × 100; Uses the current market price, not the face value.
Dividend on face value: Dividend per share = Dividend rate (%) × Face value; A dividend declared as a percentage is applied on face value, not market price.
Limited liability: Maximum loss = Amount invested (plus any unpaid amount on partly paid shares); A shareholder is not personally liable for company debts beyond this.
Primary vs secondary market: Primary: money goes to issuer | Secondary: money goes to selling investor; The most tested distinction. Listing and later trading belong to the secondary market.
Rights issue entitlement: Rights shares = existing shares × rights ratio; Example: ratio 1:5 means 1 new share for every 5 held. Offered only to existing shareholders.
Equity settlement cycle: Settlement day = trade day (T) + 1 working day; Rolling T+1 for equity in India. Shares are credited and debited in demat form.
Money raised in a fresh issue: Amount raised = number of new shares × issue price; Offer for sale proceeds go to selling shareholders, not the company.
Securities in demat: Demat account holds securities; bank account holds money; trading account places orders; Three linked accounts are used to trade equity.
Market capitalisation: Market cap = Share price × Number of shares outstanding; Full market cap. SEBI's large, mid and small cap ranking uses this.
Free-float market cap: Free-float market cap = Share price × Shares outstanding × Free-float factor; Free-float factor is between 0 and 1. Used for index weights.
Index value: Index value = (Current total free-float market cap ÷ Base market cap) × Base value; Base market cap is adjusted for corporate actions through the divisor.
Weight of a stock: Weight = Stock's free-float market cap ÷ Total free-float market cap of the index; Higher free-float market cap means higher weight and more influence on the index.
SEBI cap classification: Large cap: rank 1-100; Mid cap: rank 101-250; Small cap: rank 251 onwards; Ranked by full market capitalisation. The list is updated half-yearly by AMFI.
Accounting equation: Assets = Liabilities + Shareholders' equity; The balance sheet always balances. Equity is also called net worth.
Net profit margin: Net profit margin = Net profit ÷ Revenue × 100; Shows how much of each rupee of sales is left as profit.
Return on equity (ROE): ROE = Net profit ÷ Shareholders' equity × 100; Profit earned on owners' funds. Use average equity if the question gives it.
Debt-equity ratio: Debt-equity ratio = Total debt ÷ Shareholders' equity; Higher means more leverage and more financial risk.
Current ratio: Current ratio = Current assets ÷ Current liabilities; Measures short-term liquidity.
Earnings per share (EPS): EPS = Net profit available to equity shareholders ÷ Number of equity shares; Basis for the P/E ratio.
P/E ratio: P/E = Market price per share ÷ EPS; Compare with peers and the company's own history, not in isolation.
Interest coverage: Interest coverage = EBIT ÷ Interest expense; Shows how comfortably profits cover interest.
Earnings per share (EPS): EPS = (Net profit after tax − Preference dividend) ÷ Weighted average number of equity shares; Only profit belonging to equity holders is used.
Price-earnings ratio: P/E = Market price per share ÷ EPS; Earnings yield = EPS ÷ Price, the inverse of P/E.
Price-to-book ratio: P/B = Market price per share ÷ Book value per share; Book value per share = Net worth ÷ Number of equity shares.
Return on equity: ROE = Net profit ÷ Average shareholders' equity × 100; Some questions use closing equity. Follow the data given.
DuPont identity: ROE = Net profit margin × Asset turnover × Equity multiplier; Margin = Net profit ÷ Sales. Turnover = Sales ÷ Total assets. Multiplier = Total assets ÷ Equity.
Dividend yield: Dividend yield = Annual dividend per share ÷ Market price × 100; Uses dividend per share, not EPS.
Dividend payout and retention: Payout = DPS ÷ EPS; Retention = 1 − Payout; Sustainable growth g = ROE × Retention.
Zero-growth DDM: V = D ÷ r; A perpetuity of a constant dividend.
Constant-growth DDM (Gordon): V₀ = D₁ ÷ (r − g), where D₁ = D₀ × (1 + g); Valid only if r > g. Value is today's price from next year's dividend.
DCF value: Value = Σ CFₜ ÷ (1 + r)ᵗ; Includes a terminal value at the end of the forecast period.
Simple moving average (SMA): SMA = (sum of closing prices over N periods) ÷ N; Each new period drops the oldest price and adds the newest. It lags price.
Uptrend and downtrend: Uptrend: higher highs and higher lows. Downtrend: lower highs and lower lows; Both highs and lows must follow the pattern.
Moving average crossover: Short-term MA crosses above long-term MA = bullish; crosses below = bearish; Often called golden cross (bullish) and death cross (bearish) for the 50-day and 200-day averages.
Support and resistance: Support = floor where buying emerges; Resistance = ceiling where selling emerges; A decisive break reverses the role of the level.
RSI: RSI ranges from 0 to 100; above 70 = overbought, below 30 = oversold (common convention); A 14-period setting is the usual default. The 70 and 30 levels are conventions.
Candlestick body: Close above open = bullish candle; close below open = bearish candle; Wicks show the high and low of the period.
Total risk: Total risk = Systematic risk + Unsystematic risk; Diversification cuts unsystematic risk only. Systematic risk remains.
Price-to-earnings ratio: P/E = Market price per share ÷ Earnings per share; High P/E is usually linked to growth stocks, low P/E to value stocks. This is a tendency, not a rule.
Dividend yield: Dividend yield = Dividend per share ÷ Market price per share × 100; Value stocks tend to have higher yield than growth stocks.
Active return: Active return = Portfolio return − Benchmark return; Active managers aim for a positive value. Passive funds aim for close to zero before costs.
Capital gain: Capital gain = Sale price − Cost of acquisition − Transfer expenses; Brokerage and similar transfer costs are deductible. STT is not deductible.
Short-term holding period (listed equity): Held ≤ 12 months → STCG; held > 12 months → LTCG; Exactly 12 months is still short-term.
STCG rate (Section 111A, STT paid): 20% (transfers on or after 23 July 2024); Earlier rate was 15%. No ₹1,25,000 exemption applies to STCG.
LTCG rate (Section 112A, STT paid): 12.5% on LTCG above ₹1,25,000 in a financial year; Earlier rate was 10% above ₹1,00,000. No indexation.
Taxable LTCG: Taxable LTCG = Total LTCG in the year − ₹1,25,000; If total LTCG is ₹1,25,000 or less, no LTCG tax is payable.
Grandfathered cost (bought on or before 31 Jan 2018): Cost = Higher of [Actual cost, Lower of (FMV on 31 Jan 2018, Sale price)]; Only protects gains up to 31 January 2018. It cannot create a loss.
Dividend tax: Taxed at the recipient's slab rate; TDS 10% for resident individuals above the threshold; Threshold is ₹10,000 per year from FY 2025-26.
STT on delivery-based equity: 0.1% on buy value and 0.1% on sell value; Intraday equity: 0.025% on the sell side only. STT is not deductible.
Loss set-off and carry forward: STCL set off against STCG or LTCG; LTCL set off only against LTCG; carry forward 8 years; Carry forward needs the return to be filed by the due date.

Quick revision

Equity shareholders are owners with residual claim after creditors and preference shareholders.
Shareholder liability is limited to the amount unpaid on their shares.
Primary market issues new securities; secondary market trades existing ones.
Market capitalisation = share price × number of shares outstanding.
Free-float methods count only shares available for public trading.
P/E = market price per share ÷ earnings per share.
Dividend yield = dividend per share ÷ market price per share.
P/B = market price per share ÷ book value per share.
ROE = net profit ÷ shareholders' equity.
Technical analysis studies price and volume; fundamental analysis studies business value.
Systematic risk cannot be removed by diversification; unsystematic risk can.
Check current tax rates and holding periods from the latest workbook before the exam.

Common mistakes

Applying the dividend percentage to the market price. Fix: A declared dividend rate applies to face value. Only dividend yield uses market price.
Believing equity dividends are guaranteed. Fix: Dividends are declared at the company's discretion and depend on profits. Only preference shares carry a stated fixed rate, and even that is paid from profits.
Saying the company receives money when shares trade on the exchange. Fix: Remember that only primary issues bring money to the company.
Treating a rights issue as open to all investors. Fix: Rights issue is only for existing shareholders in proportion to holding.
Using full market cap to compute index weights Fix: Whenever the word index appears with weights, multiply by the free-float factor first.
Treating free-float factor as the promoter holding Fix: Free-float factor = 1 − non-tradable holdings. If promoters hold 60% and nothing else is locked, the factor is 0.40.
Mixing up top-down and bottom-up Fix: Top-down starts at the top of the EIC chain, the economy. Bottom-up starts at the company.
Treating the balance sheet as a record of a period Fix: The balance sheet is a snapshot on one date. The P&L and cash flow statement cover a period.
Using D₀ instead of D₁ in the Gordon formula. Fix: If the dividend is 'just paid' or 'last', multiply by (1 + g) first. If 'expected next year', use it as given.
Using total profit instead of profit to equity holders for EPS. Fix: Subtract the preference dividend before dividing by equity shares.

Exam tips

Expect direct questions on rights of equity shareholders and on equity versus preference differences. Learn the comparison in one line each.
Watch for absolute words like 'guaranteed' or 'fixed' attached to equity returns. They usually signal a wrong option.
For dividend problems, check whether the question gives a percentage (face value) or rupees and a market price (yield).
In caselet questions, a client's risk tolerance and time horizon decide whether equity suits them, so link the risk-return profile to suitability.
With negative marking, skip only if you cannot eliminate at least two options.
Expect definition-style MCQs on IPO, FPO, rights issue and offer for sale. Learn the one-line difference for each.
Questions often ask who gets the money. Link it to fresh issue versus offer for sale.
Remember T+1 for equity and that settlement happens in demat form.