Understanding Stock Market Transactions and Valuation
What is a Paid Share Issuance?
A paid share issuance is a capital increase where existing shareholders can buy a portion of the new shares in exchange for a cash payment (subscription value). For example, if a shareholder owns 100 shares and the company issues new shares at a 1:1 ratio with a subscription value of $5 each, the shareholder can subscribe to 100 new shares for a total of $500. They would then own 200 shares.
What is the Subscription Value of a Share?
The subscription value is the price an individual pays to the company for each share during a paid share issuance.
What is the Official Closing Price?
The official closing price is the final price of a stock at the end of a trading day, determined by market supply and demand. This price can fluctuate daily.
What is a Downtrend?
A downtrend occurs when the prices of various financial instruments decrease over a period of time.
What is a Strong or Sustained Trend?
A strong or sustained trend occurs when the prices of various financial instruments increase over a period of time.
What is a Securities Transaction?
A securities transaction refers to the buying or selling of any publicly traded financial instrument.
What is the Stock Market Value of a Share?
The stock market value of a share is the price determined by supply and demand in the stock market.
What is the Price/Earnings Ratio?
The price-earnings (P/E) ratio measures the relationship between a company’s earnings and its stock price. It helps investors determine if a stock is a good investment.
Technically, the P/E ratio is calculated by dividing the current stock price by the earnings per share (EPS) over the past year. For example, if a company’s EPS is $5 and its stock price is $60, the P/E ratio is 12. This means the stock price is 12 times the earnings.
The P/E ratio can be interpreted as the number of years it would take to recoup the investment based on the company’s current earnings. In the example above, it would take 12 years to recover the $60 investment with a $5 annual profit per share. A lower P/E ratio is generally considered more attractive.
The inverse of the P/E ratio is the earnings/price ratio, which represents the return on investment relative to the stock price. In the example, the return is 8.3% ($5/$60). A higher earnings/price ratio is generally more attractive.
What are the Costs of a Stock Market Transaction?
- Broker Commission (variable)
- Exchange Fees (fixed by the exchange and vary by instrument)
- Value Added Tax (VAT) on the sum of the commission and fees
Monitoring Your Investment
Timely and accurate information is crucial for market transparency. Key factors affecting stock prices include corporate profits, interest rates, economic conditions (national and international), and political and social climate.
The stock market daily evaluates listed companies based on their future profit potential. Corporate profit reports and comparisons with past performance and other companies are essential for investors.