Investing in Stocks (NISM XXI-A): formula sheet

Key formulas

Market capitalisation

Market cap = Market price per share × Number of shares outstanding

Used to classify stocks as large, mid or small cap.

Indian cap classification

Large cap: rank 1-100 | Mid cap: rank 101-250 | Small cap: rank 251 onwards

Ranking is by full market capitalisation, as per the list published by AMFI under SEBI's categorisation.

Order of claim on winding up

Creditors → Preference shareholders → Equity shareholders

Equity is the residual claimant and gets paid last.

Dividend yield

Dividend yield = Dividend per share ÷ Market price per share × 100

Value and income stocks usually show higher yield than growth stocks.

IPO vs FPO

IPO = first public offer by an unlisted company; FPO = further public offer by an already listed company

The deciding test is whether the company is already listed.

Fresh issue vs OFS

Fresh issue: money goes to the company; OFS: money goes to the selling shareholders

Only a fresh issue increases the company's share capital.

Rights issue vs bonus issue

Rights: existing shareholders pay and the company raises money; Bonus: free shares, no money raised

Both go only to existing shareholders.

Rights entitlement

New shares entitled = existing shares × (rights ratio new ÷ old)

For a 2:5 ratio, you get 2 new shares for every 5 held.

Application amount

Application amount = number of shares × price per share

In book building, bids are valid within the price band. The final cut-off price is the issue price.

Funds raised in a fresh issue

Funds raised = fresh shares issued × issue price

OFS shares are excluded from this.

Settlement date (T+1)

Settlement day = Trade day (T) + 1 working day

Weekends and exchange holidays are not counted. A Friday trade settles on Monday if Monday is a working day.

Free-float market capitalisation

Free-float market cap = Share price × Number of free-float shares

Free-float shares exclude promoter and other locked-in or strategic holdings.

Free-float index value

Index value = (Current total free-float market cap ÷ Base market cap) × Base index value

Sensex and Nifty use this idea. A divisor or base value adjusts for corporate actions so the index is not distorted.

Trade value

Trade value = Price × Quantity

Used to find the money paid or received at settlement, before charges and taxes.

Order matching priority

Price first, then time

Highest bid and lowest offer get priority. Equal prices are matched in order of arrival.

Earnings per share (EPS)

EPS = (Net profit after tax − Preference dividend) ÷ Number of equity shares outstanding

Use profit available to equity shareholders. Without preference shares, it is just net profit ÷ shares.

Price-to-earnings ratio (P/E)

P/E = Market price per share ÷ EPS

Shows how many rupees investors pay for each ₹1 of earnings. Compare within the same industry.

Earnings yield

Earnings yield = EPS ÷ Market price × 100 = 1 ÷ P/E × 100

The inverse of P/E, shown as a percentage.

Book value per share

Book value per share = Net worth (shareholders' funds) ÷ Number of equity shares

Net worth is equity share capital plus reserves.

Price-to-book ratio (P/B)

P/B = Market price per share ÷ Book value per share

Often used for banks and asset-heavy companies.

Return on equity (ROE)

ROE = Net profit after tax ÷ Shareholders' equity × 100

Measures profit earned on shareholders' money. Higher is generally better, but check debt levels.

Dividend yield

Dividend yield = Dividend per share ÷ Market price per share × 100

Uses the annual dividend per share and the current price.

Dividend payout ratio

Payout ratio = Dividend per share ÷ EPS × 100

The share of earnings paid out as dividends. The rest is retained.

Simple moving average (SMA)

SMA = (sum of closing prices over n periods) ÷ n

Lagging indicator. A shorter n reacts faster; a longer n is smoother.

Uptrend and downtrend

Uptrend: higher highs and higher lows. Downtrend: lower highs and lower lows

Sideways means price stays in a range between support and resistance.

Support and resistance

Support = floor where buying emerges. Resistance = ceiling where selling emerges

Broken support often becomes resistance, and broken resistance often becomes support.

RSI convention

RSI above 70: overbought. RSI below 30: oversold. Scale 0 to 100

Common convention, not a rule that price must reverse.

Style summary

Value: price below intrinsic value. Growth: above-average earnings growth. Momentum: follows recent price strength

Link each style to its main test.

Holding period return

Return % = [(Ending price − Beginning price + Dividend) ÷ Beginning price] × 100

Include dividends received during the period. Price change alone understates the total return.

Expected return

E(R) = Σ (Probability × Return)

Multiply each scenario's return by its probability and add. Probabilities must total 1.

Variance and standard deviation

Variance = Σ (R − mean)² ÷ n for a full set of returns; Standard deviation = √Variance

For a sample, divide by (n − 1). Read the question to see which one applies. For scenario data use Σ P × (R − E(R))².

Total risk

Total risk = Systematic risk + Unsystematic risk

Diversification removes only the unsystematic part.

Beta

Beta = Covariance (stock, market) ÷ Variance (market)

Market beta = 1. Beta above 1 is aggressive. Beta below 1 is defensive.

Expected stock move using beta

Expected stock change ≈ Beta × Market change

A simple approximation that holds only for the systematic part of the move.

Portfolio beta

Portfolio beta = Σ (Weight × Beta of each stock)

Weights are shares of portfolio value and add to 1.

Quick revision

• An equity share represents part ownership in a company; equity holders are paid after creditors and preference shareholders.
• Know the difference between equity and preference shares in terms of dividend and claim on assets.
• The primary market is where new securities are issued; the secondary market is where existing securities are traded.
• An IPO is the first public offer of shares by an unlisted company; a later offer by a listed company is a further public offer.
• P/E ratio = Market price per share ÷ Earnings per share.
• Earnings per share = Net profit available to equity shareholders ÷ Number of equity shares.
• Dividend yield = Dividend per share ÷ Market price per share.
• Fundamental analysis studies business and financial data; technical analysis studies price and volume patterns.
• Growth and value are different investment styles: growth looks for faster earnings expansion, value looks for shares priced low relative to worth.
• Higher expected equity return comes with higher risk; diversification reduces company-specific risk but not market risk.
• Return on a share over a period = (Price gain + Dividend) ÷ Opening price.

Common mistakes

• Saying equity shareholders are entitled to a fixed dividend. Fix: Remember dividends on equity are declared at the board's discretion. Fixed rates belong to preference shares and bonds.
• Treating shareholders as lenders who must be repaid first. Fix: Equity holders are owners with a residual claim. They are paid after creditors and preference holders.
• Treating an FPO as the first offer to the public Fix: Remember that FPO means follow-on. The company is already listed.
• Saying a bonus issue raises funds Fix: Bonus is free and comes from reserves. Rights needs payment.
• Thinking the company receives money when shares trade in the secondary market. Fix: Remember that secondary trades are between investors. Only primary issues raise fresh money for the company.
• Counting weekends and holidays when finding the settlement date. Fix: Count only working days. A Friday trade under T+1 settles on the next working day, normally Monday.
• Confusing top-down with bottom-up Fix: Top-down starts at the economy and ends at the company. Bottom-up starts at the company. Link top to the biggest picture.
• Inverting P/E or dividing earnings by price and calling it P/E Fix: P/E has price on top. Earnings divided by price is earnings yield.
• Treating support as a ceiling and resistance as a floor. Fix: Support holds price up from below, like a floor. Resistance stops price from rising, like a ceiling.
• Saying RSI above 70 guarantees a fall. Fix: They are conventions that suggest overbought conditions. Price can stay high for long.

Exam tips

• Expect direct definition and match questions. Learn each term in one line.
• Memorise the 100 and 250 rank cut-offs and the AMFI role in publishing the list.
• Watch for words like 'guaranteed' or 'fixed' with equity. They usually signal a wrong option.
• XXI-A has negative marking of 10% of the marks for each question, so avoid blind guesses but eliminate and answer when you can narrow to two options.
• Do not mix size, style and quality labels in one answer.
• Expect comparison questions: IPO vs FPO, rights vs bonus, fresh issue vs OFS. Build a one-line difference for each.
• Watch for the words listed, existing shareholders and fresh funds. They usually decide the answer.
• For XXI-A there is negative marking of 10% of each question's marks, so eliminate wrong options first and guess only when two are left.