Question

What is a stock split? Why do companies sometimes split their stock? What does buying stock on margin mean? What are mutual funds and what is their chief benefit?

Answer 1

1. Stock split means splitting the face value of the stock into more than 1 part.
it increases the number of outstanding shares.

For example:
Face value of stock = $1000

The stock is split into 10 parts.

New Face Value =$100.

Use:
The major benefit of the stock split is to maintain the liquidity of the stock in the secondary market.
It becomes more easy to buy or sell a stock of low denomination.
It also creates a psychological effect the stock is cheap & it is a good investment. Thus increasing its demand.

2. Buying on Margin means taking leverage (loan) to buy stock.
Leverage is generally provided by the brokers.

3. A mutual fund is a professional Asset Management Company that collects money from many investors to buy securities.

The investors can be
1. retail eg: Individual/Hindu Undivided Family.
2. institutional in nature.
eg: Pension funds.

Their chief benefit is professional management and discipline investing.

Mutual can actively select stocks and invest in them. Here the main goal is to beat the market's return. It is called active investing.
Ex: SBI Midcap Mutual Fund.

it can invest the same stocks which are composite of an index in the same weights. Here fund duplicates the Index. It's a passive investing. Here the main goal is to get the markets to return.
Such funds are called Index Funds.
For example SBI Nifty50 Fund. This fund duplicates the Nifty Index.

(Nifty of the stock market index of National Stock exchange of India. SBI is State Bank of India)