Monday, June 29, 2009

Stocks, Securities, Shares- Tutorial 1

Raj, with his small family (wife and two kids) was living in a small village somewhere in the Indian vastlands. He managed his family with the meagre salary he earned as a government employee. His wife supported him by rearing a few hens and a cow. By the end of each month (and more frequently in between) she used to sell a few eggs to her neighbours and help Raj in meeting the day to day expenses.
Once , after resolving one such crisis Raj thanked his wife for the timley help and started cursing his low paying job. That’s when a thought stuck him. “Why not get some more chicken and sell more eggs to earn a better living, instead of wasting life clearing the sarkar cobwebs?”
His wife too fancied the idea. She, the true Indian house wife chipped in by offering her minimal ornaments for sale. Together they drummed up enough money to buy a few dozen chicken, a proper pen and quality fodder.
With the reliable experience of his wife, Raj seized the Business Opportunity and developed his farm within the next few months. Raj left his government job and plunged full time in poultry farming. The early days were a bit tough on the family, but they took in their stride by cutting a few more edges in their day to day expenses.
Soon, they had more eggs than they could sell among their neighbours. Raj took the excess output to the nearby town and sold it to the small groceries. Regular timely supply, quality product and the good nature of Raj earned the good will of the shop owners.
Sometime later, the shop owners enquired Raj if he could supply other products to them , like milk and dairy products. Raj was happy to take up a chance for Business Diversification and promised them to start supplying milk from his farm soon. But he had only one cow from the olden days and it was not enough to meet the demand of the market. He wanted to buy a few more cows and establish associated infrastructure so as to deliver the promise he made to his clients.
By this time, income, cash flow and profit have all increased. So did their standard of living- and associated cost of living. Increased production meant increased cost of maintenance and other raw materials. Hence he was not able to find enough money to buy cows. He decided to avail a loan from the local bank. He started weighing different options from different banks. He consulted many people . Just when he was about to finalise the loan deal, he happened to meet the Business consultant in the waiting room of a local bank. A brief excerpt of their conversation as follows:
Business Consultant: You came for a loan?
Raj: Yes Sir.
BC: I believe you want to use this money for developing your existing business?
Raj: Yes Sir.
BC: So you will have to pay hefty interest?
Raj:Of course I have to pay.
BC: And you have to pay the principal money back to the bank too?
Raj: Of course, Sir.
BC: And you have to pledge your assets to the bank too?
Raj: Yes Sir.
BC: And you have to do all these irrespective of the profit or loss your business gets?
Raj: That’s the way, it should be , Isnt it?
BC: No. You have other options too !
Raj was pleasantly surprised to hear that he could get some easy money without having to pay interests or worry about collateral.
And thus the business consultant led Raj out from the world of Debts and introduced him to the wider world of Equity (Share) .
BC: As of today, all your assets can be quantified and your net value can be assessed to be worth Rs.700
And it is estimated that you need an additional amount of Rs.300 to
diversify into dairy business
Combining the above two, your revised assett would be as follows:

We will have the answers to your doubts of “why” and “how” later on but, for now, lets divide the combined amount of Rs.1000 into a number of equal parts.
For example, lets divide the total asset of Rs.1000 into 100 equal parts.

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