Hello readers, we are happy to announce that our team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A for Stock Market Newbies”, to spread the basic stock market knowledge to the beginners.
This
is your go-to resource for demystifying the stock market from the scratch. Each
day, we will present 10 carefully curated questions with answers that will
cover essential concepts, strategies, and terminologies. Whether you have just
entered into the market, or trying to starting your stock market journey, or
looking to strengthen your foundation, our weekly post will guide you through
the basics and beyond, making investing accessible and understandable for
everyone. Happy reading.
Day 46: Basic Stock Market Concept
What is AUM Or Asset
under Management?
Asset Under Management (AUM) refers to the total market value of
investments (stocks, bonds, gold, etc.) managed by a financial institution
(mutual fund, hedge fund, portfolio manager) on behalf of investors.
What It
Includes:
All client money invested in the fund/portfolio.
Cash reserves held by the fund.
Dividends/interest earned but not yet reinvested.
How it’s calculated:
AUM = Current Value of All Investments + Cash
Holdings
Example: A mutual fund holds:
- ₹800 cr in stocks
- ₹150 cr in bonds
- ₹50 cr in cash
AUM = ₹1,000 cr.
What is an ARC Or Asset
Reconstruction Company?
An Asset Reconstruction Company (ARC) is a specialized financial
institution licensed by the Reserve Bank of India (RBI) to revive distressed
loans (Non-Performing Assets/NPAs) purchased from banks or financial
institutions. Think of ARCs as doctors for sick loans– they take over bad
debts, restructure them, and recover funds.
ARC companies are formed to help banks or financial
institutions to unloading the defaulted loans to maintain their balance
sheet.
They buy the bad loans then sell those assets in
the market to recover the loss as much as possible. These companies were first
introduced in India in 2021-22 financial years.
What is a
Preferential Allotment?
Preferential Allotment is a method where a listed
company issues new shares privately to a select group of investors (promoters,
institutions, or strategic partners) at a pre-negotiated price, bypassing
public markets.
It is done to raise funds quickly, as selling in
the market is time consuming process. For example, If AB company sells its
shares to another company for X amount of funds without going to the market, it
called a Preferential Allotment.
What
is Capital Expenditure Or Capex?
Capital Expenditure (Capex) is the money a company
spends to acquire, upgrade, or maintain long-term physical assets that boost
future growth or efficiency. Think of it as "big-ticket investments"
for lasting benefits.
It consists of expenses on buying land, factory
materials, equipment’s etc. Each year many companies fix a capex amount that
will be spent during the year. Higher capex means that the company is spending
more amounts in its increasing its long-term sales.
What
is Bonus Issue?
A bonus issue (or bonus share issue) occurs when a
company distributes free additional shares to its existing shareholders,
proportionate to their current holdings. This is funded by converting the
company’s accumulated profits or reserves (like retained earnings or share
premium accounts) into share capital, without any cost to shareholders.
For
example:
1:1 bonus ratio means you get 1 free share for
every 1 share you own.
If you hold 100 shares worth ₹1,000 each (total
value: ₹100,000), post-bonus you’ll have 200 shares priced at ~₹500 each (total
value remains ₹100,000).
What
is Self-Regulatory Organization (SRO)?
A Self-Regulatory Organization is a non-government
organization that makes necessary rules and regulations for sector specific
companies. These companies are basically membership based.
Some sectors consider it compulsory for the companies,
while others take it as optional.
For example:
The Association of Mutual Funds in India or AMFI.
All the mutual funds are the members of AMFI. It makes rules to make sure that
these companies can function smoothly and can protect the interests of the
investors.
Example: the Association of Mutual Funds in India
(AMFI). All mutual fund companies are members of AMFI. It sets rules to
ensure these companies operate smoothly and protect investors' interests.
SROs are controlled by SEBI, RBI or IRDAI relating
to the sector.
They also act on behalf of members and customers
resolving disputes, consumer complaints.
What is National
Company Law Tribunal Or NCLT?
NCLT or National Company Law Tribunal is a
government authority that resolves law related disputes. It acts as a only
decision maker in the matters of cases filed corporates against each other.
Cases filed the shareholders against the
company.
Mergers and acquisition disputes.
Mismanagement and law violations by a company, etc.
What is Capital
Gains Tax?
Capital gains tax is a levy on the profit earned from selling a capital
asset, such as stocks, real estate, or mutual funds. The tax applies only when
the asset is sold at a higher price than its purchase cost, resulting in a
"realized" gain. Unrealized gains—where the asset's value has
increased but hasn't been sold—are not taxed.
After selling stocks, real estate, gold, and other assets, the profit
earned through selling is known as capital gains tax.
The amount of tax to be paid depends on time duration of holding the
assets.
Based on the time duration of holding the assets, capital gains tax is
divided by two categories:
Short-term capital gains tax(STCG)
Long-term capital gains tax (LTCG)
For every asset time duration is different, and accordingly tax rates
are different.
For example:
If you sell your portfolio shares within 12 months, the capital gains
tax will be charged @ 20%(STCG).And if you sell the same share after 12 months,
your capital gains tax will be charged @12.5%(LTCG).
What is Index
Rebalancing?
Index Rebalancing is the method of adjusting and
balancing the stocks according to their orders in an index.
The stocks are rebalanced on the basis of criteria set
by the index provider. Criteria according to the market capitalization.
Example: An index like Nifty50 is consisted of 50
stocks according to their ranking. Overtime, some stocks of companies can
change in market size and performance. The index provider keeps changing the
order based on their market capital.
What is Interest
Coverage Ratio?
Interest Coverage Ratio is a metric to guess the
financial health of a company. It shows how smoothly and early the company
repays its interest.
ICR is calculated by dividing its earnings before interest and taxes (EBIT)
by the company's interest expenses.
A higher ICR means the company is comfortable enough to pay its
interest, while a lower ICR indicates the company faces challenges to repay its
interest payments.
If you have any other questions in your mind relating to stock market basics or need any clarification, please put your query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
