RISK AND RETURN ANALYSIS ON EQUITY SHARE

The Risk and return analysis is important to equity shares investors in the share market. The need of equity shares at the time of preliminary stage of company or bank to raising fund for establish company and starting a business. The equity share holder is an actual owner of company or bank. The risk and return analysis is main function of this project. The meaning risk and return as follows:Risk - risk refers to the possibility that the actual outcome of an investment will differ from expected outcome. More specifically, most investors are concerned about the actual outcome being less than the expected outcome. There are many sources of risk i.e. business risk, market risk, interest rate of risk.Return – return is representing the reward for undertaking investment. The returns of an investment consist of two components as under:- 1) Current return 2) Capital return.In this project risk and return calculated using various techniques. The return is calculate using net asset value, rate return, dividend, geographical mean and risk is calculate using co-variance, geometric mean, beta, standard deviation, correlation(using statistical methods).The rate of equity shares has not fixed. The rate of equity shares of particular company or bank is change at every time. The equity share holder either can earn profit or can take risk. This situation is not fixed and hence, here need of risk and return analysis project

INTRODUCTION

Shares that carry no preferential or special right in respect of annual dividend and in the repayment of capital at the time of liquidation of the company are called equity shares. These shares carry no preferential rights; therefore, these are also known as common stock or ordinary shares. Dividend on such shares is payable only when there are profit after the payment of preferences dividend. But, the rate of dividend of these shares is not fixed. Board of

directors, depending upon the dividend policy as well as the availability of profit after dividend on preference shares, declare dividend. No dividend will be paid on these shares, if there are no profits or insufficient profit in a particular year. The value of these shares in stock exchange fluctuates on the basis of rate of dividend declared.Similarly, these shares are redeemed only after the redemption of preference shares at the time of liquidation of the company. Equity share holders enjoy full voting rights in all market of the company. They have right to elect directors and participate in the management and control of the company. They also share residual profits.

Concept of equity shares:

What Is the Meaning of Equity Share Capital? Companies raise two types of capital to source money for their operations: debt capital and

equity capital. Debt capital is procured through lender loans where lenders are paid interest on the funds. Equity capital is issued to individuals who want ownership rights in the company. These investors are issued shares of the company stock. There are two broad categories in which shares are issued: preference shares and equity shares.

What Is Equity Share ?

Rights Issue/ Rights Shares Bonus Shares Preferred Stock/ Preference shares Cumulative Preference Shares

Types of equity shares

Risk, in traditional terms, is viewed as a ‘negative’. Webster’s dictionary, for instance, defines risk as “exposing to danger or hazard”. The Chinese symbols for risk, reproduced below, give a much better description of risk

The first symbol is the symbol for “danger”, while the second is the symbol for “opportunity”, making risk a mix of danger and opportunity.

 What is Risk?

Types of Risk

Systematic risk Interest Rate Risk 1. Price Risk 2.Reinvestment Rate Risk Market risk Inflation Risk (Purchasing Power Risk) Unsystematic risk Business risk Financial Risk Operational Risk

Types of Risk in finance

Systematic Risk

Interest Rate Risk

Price Risk

Reinvestment Risk

Market Risk

Inflationary Risk

Demand

inflation

riskCos

t inflatio

n risk

Unsystematic Risk

Business Risk

Financial Risk

Operational Risk

returns are greater than the rate of inflation. An investor will look forward to getting compensated by way of an expected return based on 3 factors - Risk involved Duration of investment [Time value of money] Expected price levels [Inflation]

Return Analysis

Investors make investment with the objective of earning some tangible benefit Low risk leads to low returns. For instance, incase of government securities, while the rate of return is low, the risk of defaulting is also low. High risks lead to higher potential returns, but may also lead to higher losses

Rate of return on an investment cal be calculated using the following formula- Return = (Amount received - Amount invested) / Amount invested

Risk and return trade off:

A direct correlation exists between risk and return and is illustrated in Figure. The greater the risk, the greater is the potential return. However, investing in securities with the greatest return and, therefore, the greatest risk can lead to financial ruin if everything does not go according to plan.

Understanding the risks pertaining to the different investments is of little consequence unless you’re aware of your attitude toward risk. How much risk you can tolerate depends on many factors, such as the type of person you are, your investment objectives, the dollar amount of your total assets, the size of your portfolio, and the time horizon for your investments.

Risk-Return relationship

In the recent past the market has reached great heights as a result of expansion of business and much more of globalization, the increased percentage of Foreign Direct Investment which has a direct affect on the demand and supply of the shares of a particular company. In this way the index of the stock market has reached to the maximum. With the boom in the market there are many investors who are willing to take more risk and so to cover the risk. Financial sector is booming and the need for Risk-Return Analysis is growing. Also because of the very tricky stock market behaviors it has become mandatory to manage portfolio so as to reduce the risk while maximizing the returns. Taking into consideration the investor’s

riskreturn requirements portfolio should be constructed and reviewed regularly.

CONCLUSIONS: