About Stocks and Shares
This topic rests on one distinction that catches almost everybody: the money you pay for stock is not the face value of that stock, and the dividend is paid on the face value. Everything else in the topic follows from keeping those two figures apart.
What you need to understand
- The face value of a share is fixed, conventionally Rs. 100 in examination questions.
- The market value is what the share actually costs, and it moves above or below the face value.
- The dividend, also called the rate of stock, is paid on the face value and not on the money invested.
- The return on the money invested is therefore different from the rate of dividend whenever the market value differs from the face value.
- Buying below face value raises the effective return, and buying above face value lowers it.
- A gain or loss on selling stock comes from the change in market value and has nothing to do with the dividend.
Formulas to remember
How to work through these questions
- Find the number of shares first, because every other quantity follows from it.
- Apply the dividend rate to the face value, never to the money paid.
- When a question asks for the cost, the dividend rate is often irrelevant, which is a useful signal that you have the right idea.
- For a gain or loss, compare the buying price with the selling price and multiply by the number of shares.
- Check that a stock bought below face value gives a return higher than its stated rate.
Mistakes that cost marks
- Applying the dividend rate to the money invested instead of to the face value.
- Confusing the market value with the face value when working out the number of shares.
- Reporting the face value when the question asked for the money required to buy the stock.
- Including the dividend in a gain or loss calculation, which is about the change in price only.
- Inverting the market price, so that a stock at 80 is treated as costing 125.
Worked example
Find the cost of Rs. 1200 of 4% stock at Rs. 80.
- A face value of Rs. 100 costs Rs. 80 in the market.
- So the cost is the face value required multiplied by the market price, divided by 100.
- Cost = 1200 x 80 / 100 = 960.
- Check: buying below face value means paying less than the face value, and 960 is less than 1200.
Answer: Rs. 960
Practice questions with answers
A few Stocks and Shares questions with the full solution shown, so you can see
how the method is applied before you attempt the timed set.
Question 1
How much annual income is earned by investing Rs. 1500 in 15% stock at Rs. 100?
Answer: Option A — with explanation
Each share has a face value of Rs. 100, and 100 rupees buys one share, so Rs. 1500 buys 1500 / 100 = 15 shares.
The dividend is paid on the face value: 15 x 100 x 15/100 = 225.
Notice that the dividend depends on the face value of the stock, not on what was paid for it.
Common mistakes
- gave the total face value of the stock held: 1500
- gave the rate of dividend as the income: 15
- reported three times the correct value: 675
Question 2
How much must be paid for Rs. 1000 of 12% stock at Rs. 125?
-
A
800
-
B
120
-
C
1250
-
D
1000
Answer: Option C — with explanation
Face value of Rs. 100 costs Rs. 125 in the market, so each rupee of face value costs 125/100.
Cost = 1000 x 125/100 = 1250.
The rate of dividend does not enter the cost at all.
Common mistakes
- gave the face value instead of the money required: 1000
- gave the yearly dividend instead of the cost: 120
- inverted the market price: 800
Question 3
A man invests Rs. 560 in stock at Rs. 80 and sells it at Rs. 115. Find his gain.
Answer: Option D — with explanation
The number of shares is 560 / 80 = 7.
Each share gains 115 - 80 = 35 rupees, so the total gain is 7 x 35 = 245.
The dividend is irrelevant here because the stock is held only for the change in price.
Common mistakes
- gave the selling price of the whole holding instead of the gain: 805
- took the price difference as a percentage instead of a sum: 196
- repeated the money originally invested: 560
Question 4
Find the income from Rs. 2040 invested in 6% stock at Rs. 120.
Answer: Option C — with explanation
Each share has a face value of Rs. 100, and 120 rupees buys one share, so Rs. 2040 buys 2040 / 120 = 17 shares.
The dividend is paid on the face value: 17 x 100 x 6/100 = 102.
Notice that the dividend depends on the face value of the stock, not on what was paid for it.
Common mistakes
- gave the rate of dividend as the income: 6
- gave the total face value of the stock held: 1700
- took the rate on the money invested instead of on the face value: 122.4
Question 5
What is the cost of buying Rs. 200 worth of 12% stock quoted at Rs. 120?
-
A
166.67
-
B
24
-
C
200
-
D
240
Answer: Option D — with explanation
Face value of Rs. 100 costs Rs. 120 in the market, so each rupee of face value costs 120/100.
Cost = 200 x 120/100 = 240.
The rate of dividend does not enter the cost at all.
Common mistakes
- gave the face value instead of the money required: 200
- gave the yearly dividend instead of the cost: 24
- inverted the market price: 166.67
Frequently asked questions
What is the difference between face value and market value?
Face value is the nominal value printed on the share, normally Rs. 100, and it is the figure the dividend is calculated on. Market value is what you actually pay or receive for it.
Why is the dividend not calculated on the money invested?
Because the dividend is declared as a percentage of the face value. A 4% stock pays Rs. 4 a year on each share of Rs. 100 of face value, whether you paid 80 or 120 for it.
How do I find the return on my money?
Divide the annual income by the money invested and multiply by 100. Buying at 80 a 4% stock gives a return of 4 divided by 80, which is 5 per cent.
Does the dividend affect the gain when stock is sold?
No. The gain or loss comes only from the difference between the buying price and the selling price. The dividend is a separate return earned while the stock is held.
