Liabilities and Types of Liabilities

A balance sheet is nothing but a representation of assets and liabilities of a company at a particular point of time. In India liabilities are shown on left side of the balance sheet and assets are shown on right side.

Liabilities are anything that a company owes. In normal course of business debt and obligations arise for a company because of involvement in lots of transactions and interaction with people and other business firms.

Liabilities can be classified into the following 2 categories.

Current Liabilities
Long term Liabilities

Current Liabilities

These are the obligations that a company needs to meet within 1 year. Accounts payable, short term loans taken from banks and financial institutions, Accrued debt, Advances taken etc are the current liabilities. Read more

May 14, 2009 | Filed Under Fundamental Analysis | Leave a Comment

Rights to Shareholders

As an owner of a company, an equity shareholder enjoys the following rights

Right on Income: Equity investors have a residual claim to the income of the firm. The profit [Profit After Tax – Dividends to be paid out on Preferential Shares] that arises from the business operations can either be distributed to the investors as dividend or reinvested to expand the business or can be kept aside as reserves; but promoters can’t take away the profit because it belongs to all shareholders [including promoters]. The decision of distributing dividends is taken by the Board of Directors of the company and shareholders can’t challenge the decision.

Right to Control: The management of the company is supposed to increase the value of the firm for shareholders. If this doesn’t happen, the shareholders can vote against the existing management to have it replaced. As owners, shareholders elect the Board of Directors who can act on their behalf. The right to vote is in proportion to number of shares held by an investor.

In most of the cases, retail investors don’t have enough shares to have an influence on the affairs of the company. Big investors like institutional investors, mutual funds and high net worth investors are in a better position to influence the management. But ultimately a company follows the course decided by the group of shareholders who control the Board of Directors and appoint the management team. Read more

November 22, 2008 | Filed Under Stocks | Leave a Comment

Characteristics of Equity

The following are the main features of equity

Limited liability: The liability of a shareholder is limited to the amount he invested in a company. In case the company goes bankrupt his personal assets can’t be claimed against the losses made by the company.

Profit sharing: Investors enjoy unlimited participation in the earnings of the firm. Theoretically there is no limit to the returns, which an equity investor can get i.e. if the company earns multifold profit and wants to distribute it as dividend. Of course certainly there is a risk of non-functioning/ less (or no) profitability of the company in which case the share price goes down and dividend may not be paid out.

Highly liquid: Equity stocks are generally highly liquid instruments, which can be bought and sold easily in the equity markets. Ownership stake in the company changes with every buy and sell. An investor can acquire ownership and sell off his ownership quite easily whenever he wishes to do so. Read more

November 22, 2008 | Filed Under Stocks | Leave a Comment

Stock Basics - Primary and Secondary Equity Markets

Capital is required to run any business. To run a small business owner’s or promoter’s capital is sufficient; but to carry out large and heavy businesses it may not be sufficient. There are two major sources of capital; borrowed capital and ownership capital. Borrowed capital is raised by issuing bonds to individuals, corporates and financial institutes. We have already covered many topics on borrowed capital i.e. fixed income market, bonds etc.

Stocks, Shares and equity are interchangeably used words and all represent the ownership stake in a company. Higher the number of shares of a company one hold higher is one’s ownership stake in the company’s assets and earnings.

How can one acquire partial ownership of a company?

There are two types of markets where one can buy stocks; Primary equity market and secondary equity market. Primary equity market is one in which companies offer shares to retail and institutional investors directly through initial public offer (IPO).