Nifty Today – April 17th

Nifty today closed on a strong note today at 6779.40 up by 104.10 points (1.56%) . Let us analyse the daily charts and see where we stand at the moment. Nifty is forming a bullish flag on the daily chart indicating consolidation after the big upmove. The bullish flag has been marked on the chart below. A similar bullish flag that was formed several weeks ago has also been marked.Fresh long positions are recommended only after it breaks out of the flag at around 6820. However risky traders can attempt longs with a stop loss slightly below 6650.Most of the oscillators are in the overbought zone, indicating further consolidation before the trend resumes.

Nifty Daily chart Analysis

On analysing the weekly charts, it can be seen that Nifty had broken out of weekly channel. This has been marked in the chart below. The oscillators are in the overbought zone indicating some consolidation/correction before the trend resumes. Any dips towards 6500 is a great buying opportunity. The medium term target for this weekly channel breakout comes to around 7600.

Nifty Weekly chart Analysis

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Nifty Today – March 27th

NIFTY Today..

• NIFTY closed today (March 27, 2014) at 6,641.75 which is 40.35 or 0.61% higher than previous close
• There were 35 advances as well as 15 declines
• The value of NIFTY VWAP is 6,643.90
• The NIFTY Open Interest for the day is 1,29,24,700
• The NIFTY change in Open Interest is -24,97,900
• The NIFTY Percentage change in Open Interest is -16.20
• NIFTY P/E for today is 18.71
• NIFTY P/B for today is 3.14
• NIFTY Dividend Yield for today is 1.41

NIFTY CHART ANALYSIS

NIFTY OPTION TABLE ANALYSIS

NIFTY MOVERS AND SHAKERS

NIFTY Gainers
Symbol LTP %Change
IDFC 121.75 5.78
SBIN 1843.00 4.27
PNB 705 3.75
BHARTIARTL 309 3.5
ULTRACEMCO 2059.00 3.5
Nifty Losers
Symbol LTP % Change
IDFC 121.75 5.78
SBIN 1843.00 4.27
PNB 705 3.75
BHARTIARTL 309 3.5
ULTRACEMCO 2059.00 3.5

NIFTY SECTOR BUZZ

Sector Gainers
Sector Name Percentage
Finance – Term Lending Institutions 5.26%
Telecommunications – Service 4.07%
Banks – Public Sector 3.75%
Cement – Major 2.81%
Auto – 2 & 3 Wheelers 2.14%

Sector Losers
Sector Name Percentage
Finance – Term Lending Institutions 5.26%
Telecommunications – Service 4.07%
Banks – Public Sector 3.75%
Cement – Major 2.81%
Auto – 2 & 3 Wheelers 2.14%

NIFTY Upcoming Events for Tomorrow
Key Events : No events scheduled for the day.
Earnings(1): RECLTD
Corporate Actions: KOTHARIPRO: Bonus 2:1 | MAURUNIQ: Bonus 1:1 | Dividends(1)

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Option Strategies -Neutral

Here are a few neutral strategies.

1) Long Straddle

Buy one put option and one call option at the same strike price. This can be used when there is a lot of volatility expected but one is not sure about the direction. Maximum loss is limited to the premium paid for the options .Maximum gain is unlimited even if market moves in either direction .This strategy is self explanatory and does not need an example.

2) Short Straddle

Sell one put option and one call option at the same strike price. This is to be used when not much volatility is expected i.e. when the market is expected to trade sideways. Maximum loss is unlimited here if the market makes a sharp move up or down. Maximum gain is the premium received for selling the options. This again is self explanatory and does not need an example. Please drop us an email if you have any questions on this strategy.

3) Long Strangle
Buy one put option with a lower strike price and buy one call option at a higher strike price. Maximum loss is limited to the premium paid for the options .Maximum gain is unlimited even if market moves in either direction. This can be used when there is a lot of volatility expected but one is not sure about the direction. It is very similar to Long Straddle , the only difference being that strike prices are wide apart which lowers the premium and also the market needs to make a big move in either direction to get a good profit. This strategy is self explanatory and does not need an example.

4) Short Strangle

Sell one put option with a lower strike price and sell one call option at a higher strike price.
This is to be used when not much volatility is expected i.e. when the market is expected to trade sideways. Maximum loss is unlimited here if the market makes a sharp move up or down. Maximum gain is the premium received for selling the options. It is very similar to Short Straddle expect for the fact t that the strike prices are far apart thus reducing the premium received but also increases the chance of a profitable trade.

5) Long Call Butterfly.
Sell two ATM call options, long one ITM call option and long one OTM call option. ATM is ‘At the Money’ when the Current Market Price is very close or the same as the strike price. Let’s try to understand this with an example. Current Market Price of stock ABC is 78 Rs.So
Sell two ATM call option; so sell two 80 call option .Buy 70 call (ITM) and Buy 90 call (OTM)
First of all let’s understand that if the stock price goes above 80, then the loss from selling the 2 ATM and the gain from buying 1 OTM and 1 ITM cancels out each other. So the maximum loss is in this case and is limited to the premium paid for buying the calls.
So this is to be used when one is neutral on market direction and bearish on volatility. So the maximum gain here would be if the stock trades sideways for example at the end of the expiry if the stock trades at 76, the gain would be the premium received while selling the 2 ATM call options plus the 6 Rs gained from the 70 Call.

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Option Strategies- Bearish

Here are a few option strategies that can be used in a bear market

1) Short Synthetic

Sell one call option and buy one put option at the same strike price.
Here the maximum gain and loss is unlimited. This strategy is used when one is extremely bearish on the market. It is basically the reverse of the long synthetic

2) Put Backspread

Buy two ‘Out of the money’ put options and sell one’ In the money’ put option
Maximum Loss: Limited to the difference between the two strikes less the premium received for the spread
Maximum Gain: Limited on the upside to the net premium received for the spread. Unlimited on the downside
This can be used generally when one is bearish on the market but also believes in volatility.
Let’s try to understand this with an example.
Stock ABC is currently trading at 100 Rs.I am bearish on this stock but also I fear that there might be volatility and a possible rally on the upside. So here is what I would do. I buy 2 put options of strike price 90 and sell one put option of strike price 95. So let’s consider a scenario where the stock rallies, we don’t stand to lose anything as the premium got from selling a ITM put would option would have been greater than buying 2 OTM put options. So we get a small profit here.
Now in the other case if the stock crashes, and goes to 80. Net Profit = (10*2) – 15 = 5 Rs per share. Where 10*2 is 10 Rs profit for 2 long put and 5 Rs is the loss got by selling one put option.

3) Call Bear Spread
Sell one call option with a low strike price and long one call option with a higher strike price. This strategy can be followed when one is mildly bearish on the market. Let’s understand this with an example.
The stock ABC is currently trading at 100 Rs.Sell a call option with strike price of 90 and buy a call option with a strike price of 105. Now let’s consider a few scenarios. The stock goes down to 70, so the profit gained would be the premium received while selling the call option and this is the maximum gain possible for this strategy. Now let’s assume the stock went up to 110, the loss in this case would be Limited to the difference between the two strikes minus the net premium.

4) Put Bear Spread
Sell one put option at a lower strike price and buy one put option at a higher strike price. Let’s understand this with an example.
The stock ABC is currently trading at 100 Rs.Sell the put option of strike price 90. Buy put option of strike price 105. Now let’s consider a few scenarios. Inspite of me being bearish the market zooms and so does our stock to 110. Since we have sold one put option we gain the premium from that. So net loss is limited to the premium paid for the long position less the premium received for the short position. Now suppose our assumption turns right and the market crashes, and out stock falls to say 85. Now the maximum gain is limited to the difference between the two strike prices minus the net paid for the position i.e. in this case we gain from the 105 put till it reaches 90, a gain of 15 Rs per share. Below 90 the gain from 105 put and the loss from the sale of the 90 put cancel each other out.

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Option strategies – Bullish

A few option strategies to be used when one is bullish on the stock market.

1) Long Synthetic:
This can be used when one is very bullish on the market.
Buy one call option and sell one put option at the same strike price.
Maximum gain: unlimited
Maximum loss: unlimited
This is a risky strategy and should be used only if one is very bullish on the market.

2) Call Bull Spread
Buy one call option with a low strike price and sell one call option with a higher strike price
Maximum Loss: Limited to premium paid for the long option minus the premium received for the short option.
Maximum Gain: Limited to the difference between the two strike prices minus the net premium paid for the spread
This can be used when one is mildly bullish on market price and/or volatility.
Let’s consider this with an example. I buy the call option of stock ABC with a strike price of 160. At the same time I sell the call option of stock ABC (strike price of 180).
Now let’s consider a few scenarios.

The price of the stock closes on expiry at 179.The profit is maximum in this case. Profit = Premium received while selling the call option + profit received from the 160 call.

The price of the stock goes to 190 by expiry: Profit = Difference between the 2 strike prices so 20 Rs. As anything above 180 would incur loss because of the call option sell, however this would get cancelled out by the profit made from the 160 call above 180.

The third case would be that the market falls and the stock crashes to 145. However in this case we get to keep the premium from the selling of the 180 call. So the maximum loss incurred would be the premium paid for the long option (160 call) minus the premium received for the short option (180 call sell)
This type of strategy is suited to investors who want to go long on market direction and also have an upside target in mind.

3) Covered Call
Let’s understand covered call with an example. People use covered calls for generating monthly income from stock that they already have a position in. Let’s say I have 100 shares of company XYZ which I bought at 50 Rs. Currently it is trading at 75 Rs. So instead of selling the stocks I decided to generate some monthly profit for myself by selling a call option with strike price of 80 Rs.
Now let’s consider a few scenarios. The market crashes in the month and the stock price moves down to 45 Rs. So I decide not to sell the stocks and keep it for long term since I believe in the future of the company. But I have gained from the premium that I received while I sold the call option. So I have generated some profit for the month in a falling market.
Now in another case the market gains and the stock move to 95. I stand to lose 15 Rs for each stock because I had sold the call option with a strike of 80 Rs. But at the same time I sell my stock holding at 95 making a gain of 45 Rs per stock (95-50) .So my overall gain is 45-15 = 30 Rs per stock. So in this case selling the call option has limited my profit, but I am still in profit.
A “protected” covered call involves buying a downside (out-of-the-money) put together with the covered call i.e.: Buy Stock, Sell Call Option and Buy Put Option. The profile of a protected covered call looks like call spread and has the benefit of limiting your downside risk in the event of a large sell off in the underlying stock/future

4) Protective Put.
Let’s understand this with an example. Let’s say I have 100 shares of company XYZ which I bought at 50 Rs. Currently it is trading at 75 Rs. So to be safe or to hedge I buy a put with a strike price of 70 .So if the market rallies , I gain from my underlying stocks and the profit would be that gain minus the premium that I have paid for buying the put. And if the market crashes, I could still keep the stocks in my portfolio for the future and I could cash in on the profits made from the put. This strategy is basically used for hedging ones portfolio.

In the next article we will see a few option strategies in a bearish market.

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The Profit and Loss statement or the Income statement

The balance sheet in the previous article is changed by the transaction (e.g. sales and expenses) in the business. Therefore a separate summary of the profit making transactions (limited to sales and expenses) that records the profit of the period is prepared and it is called Income statement also called the Profit and Loss Statement. The transactions include inflow (sales revenue) and outflow (expenses).Profit is the net inflow.
Let’s try to understand the main parts of a P&L statement with the help of an example.

Income Statement example

Sales Revenue : 40000
Cost of goods sold expense : – 20000
Gross Margin : 20000
Sales Admin and General : – 5000
EBIT : 15000
Interest Expense : – 5000
Earnings before Income Tax : 10000
Income Tax : – 2500
Net Income: 7500

Let’s see the various components in detail
1) Cost of goods sold expense: The cost of the goods sold to the customer for which the sales revenue was received .Deducting his from the sales revenue we get the Gross Margin. Please note that service oriented companies would not have this

2) Sales Administration and general expenses: This includes the legal fees, the salary of the CEO, advertising cost, travel cost etc. Deducting this expense from the Gross Margin would give the EBIT i.e. Earnings before Interest and Tax.

3) Interest: This includes the interest paid on loans. Deducting this from the EBIT would give Earnings before Income Tax.

4) Income Tax: Income tax paid by the business not inclusive of the property and the employer payroll taxes which are included in section 2. Deducting income tax from Section 3 would give you the Net Income.

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Balance Sheet:

Balance Sheet:
The below statement summarizes the assets owned by business on one side and the sources of assets on the other side.

Source of Assets = Liability + Owner’s Equity.

Some Examples
Assets : Cash Deposits, Inventory, Buildings.
Liabilities : Borrowed Money, Buying on Credit
Owner’s Equity (or Net Worth) : Money Invested by the owner + Profit earned by the business and retained.

Therefore, for every increase in assets, you would be adding either to your liabilities or your owner’s equity.
To record debits and credits
1. Increase in assets: Record as debit in the appropriate column.
2. Decrease in assets: Record as credit in the appropriate column.
3. Increase in liabilities and owner’s equity: Record as credit in the appropriate column.
4. Decrease in liabilities and owner’s equity: Record as debit in the appropriate column.

Let us try to understand the concept of Balance sheet with an example and some scenarios of that example.

Balance sheet example , balance sheet format

Assume that Mr.K’s business ABC Inc made a profit of Rs.10,000 in year 2010.
(Sales = Rs.30,000 . Expenditure = Rs. 20,000.)

Scenario 1: Everything was paid for in cash.

Hence,
Assets = Liability + Owner’s Equity
Translates to
10,000 = 0 + 10,000
Note: Liability is zero since everything is paid in cash.

Scenario 2: There are some ‘Accounts Receivable’.
Basically, Accounts Receivable refers to the total amount owed by the customer to the business since the customer had made payment in credit.

Hence,
Assets = Liability + Owner’s Equity
Now translates to
Cash ( 2000)+ = Liability (0) + Owner’s Equity (10,000)
Accounts Receivable (8000)

i.e 10,000 = 0 + 10,000

This is because although total asset is 10,000; out of that 8000 was paid in credit (ie, Accounts Receivable) and the business would not receive this money before year end.

Scenario 3: Depreciation
Spreading the cost of a fixed asset (building, machinery) instead of charging the entire cost to the year of purchase, so each year bear a share of the total cost.
Let the cost of machinery be 10,000 and the span of years be 4. i.e., 2500 per year.

Hence,
Assets = Liability + Owner’s Equity
Now translates to
Cash ( 2000+2500*)+
Accounts Receivable (8000)+ = Liability (0) + Owner’s Equity (10,000)
Fixed asset (-2500**)

i.e, 10,000 = 0 + 10,000

*Since we did not actually purchase the fixed asset (machinery) this year, cash balance increases by 2500.
** This is the cost of machinery per year.

Scenario 4: Unpaid Expenses
A business, many a times may pay many of its expenses sometime after the period benefitted by the expenses. Like unpaid bills for telephone, electricity etc.
We can use 3 liability accounts to record unpaid expenses.
1. Accounts Payable: Items bought on credit and for which it receives an invoice. When the invoice is paid, they are subtracted from the accounts payable and the cash flow goes down by the same amount.
2. Accrued Expenses: Unpaid expenses that the business generally has to estimate because it doesn’t receive an invoice for them. Eg: Accrued Vacation/sick leaves that your employees carry to the next year; Daily accumulation of interest on borrowed money. These are generally paid in the coming year.
3. Income Tax Owed to the government

Example
Adding the unpaid expenses to the balance sheet causes the cash increase to go up just like adding depreciation.
Lets say, Accounts payable is 1000, Accrued expenses is 1000 and Income Tax is 500 -> Totals to 2,500

Following the same example, the cash flow is now increased by 2500, but at same time; liabilities would also be 2500 now.

Hence,
Assets = Liability + Owner’s Equity
Now translates to
Cash ( 2000+2500+2500***)+
Accounts Receivable (8000)+ = Liability (2500) + Owner’s Equity (10,000)
Fixed asset (-2500)

i.e., 12,500 = 2500 + 10,000

*** Refers to accrued expenses.

In short, the business did not pay 2500 (liabilities) by the end of the year, so its cash balance is higher by 2500.

Scenario 5: Prepaid Expenses
This is just the opposite of unpaid expenses. Eg: Insurance Premium of 1000 was paid ahead of time. But you charge that expense to the actual period benefited (the premium was paid last year, but the actual benefited period is this year). So the amount is subtracted from the account and hence the cashflow reduces.

Hence,
Assets = Liability + Owner’s Equity
Now translates to
Cash (2000+2500+2500 – 1000****)
Accounts Receivable (8000) +
Fixed asset (-2500) + = Liability (2500) + Owner’s Equity (10,000)
Prepaid Expenses (1000)

i.e., 12,500 = 2500 + 10,000

**** Refers to reduction in cashflow due to the prepaid expense.

Scenario 6: Inventory Increase
Cost of goods sold is one of the primary expenses of a business. Inventories for the current year are generally bought in the previous year. But during the current year, we would have to replace the sold inventory (for next year). Assuming we bought an inventory worth 3000, the cashflow reduces by the same amount

Hence,
Assets = Liability + Owner’s Equity
Now translates to
Cash (2000+2500+2500 – 1000 – 3000*****)
Accounts Receivable (8000) +
Fixed asset (-2500) +
Prepaid Expenses (1000)+ = Liability (2500) + Owner’s Equity (10,000)
Inventory (3000)

i.e., 12,500 = 2500 + 10,000

***** Refers to reduction in cashflow due to Inventory purchase
The cost of the inventory can also go to the accounts receivable if bought on credit.

CONCLUSION: Even though the profit for the year was 10,000; the cash in hand turned out to be 3000 and the profit ended in many different places. So, to know more about where the profit went, we will have to look into profit and loss statements which would be discussed in a future article.

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Stocks to buy

Finding the right stock to invest in all your hard earned money is no easy job but not an impossible one too. Some people get it right while others don’t. Since it’s your hard earned money we would suggest that you do your own research before you put your money into any stock.
There are thousands of the so called stock market analysts\experts who would provide those hot stock market tips that would bring you instant richness. Atleast according to them! But in reality you might end up losing more money than gaining following those hot tips.
We would always recommend investing atleast for a horizon of 2-3 years in mind. So always try to invest that money which you would not need for the 2-3 years time period. Stock Market is definitely not something that would bring you instant richness and it’s not advisable to put all your money into stocks. While investing in stocks, don’t expect a return of 100% for the investment that you make, rather aim for something like 20%. So the question remains on how to find the right stock to invest in.
Here are a few suggestions on finding the right stocks to buy.

1) Look for fundamentally strong companies:
Companies can be said as fundamentally strong if they have a strong earnings growth over the last few years, very low or no debt and a reasonable P/E ratio. The P/E factor can be somewhat relative. This is where estimations of future growth potential start to come in. Small, young companies with lots of future growth potential can sometimes justify a higher P/E ratio, but not too high. Simply put P/E ratio is nothing but the Current Market Price of the Share/Earning per share.

This ratio would give you a fair idea of whether a stock is overpriced or underpriced. On way to go about with it is to check the industry P/E for the sector in which your stock of interest is in. If your stocks P/E is lower than the industry P/E then it may suggest that your stock is underpriced and there is further chance of the share price increasing. But it does not necessarily always mean that a stock with a low P/E would always appreciate in value in the future. There are other factors to consider as well. You would need to know how to read the Balance sheet,PL statement and the cash flow statement before you can make a judgment on the fundamentals of a company. We would be discussing further on these in the coming days.

2) Good Business model:
It’s good to invest in companies that have a sound, stable management. But its always good to look for company’s that have a good business model. Like Warren Buffet said “You should always invest in a business that a fool can run as one day a fool will run it”.

3) Look into the share holding pattern of the company:
Look for companies where the promoter holding is high. When the promoter holding is low it might suggest a lack of confidence in the promoters in their own company. You could get this information from sites like rediff money, money control etc.

4) Book value:
Investopedia says that the book value of a company is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated. So comparing the book value to the current market would give you a fair indicator as on whether a stock is underpriced or overpriced.

5) Positive Cash flow:
Look for companies with a positive operational cash flow as it is very important for a business to convert the profits into cash. More on Cash Flow will be updated later.

6) Scope for future growth:
Try to determine if the company has scope for future growth or has reached its peak. Always try to invest in companies that have scope for further future growth. To determine this you could check the company’s projects in pipeline, its competitors etc. You could also check on whether the sector itself has future growth. For example a company might be in debts or might show a poor cash flow, but say if it’s in a niche sector with great scope for future growth it might be worth a gamble investing in it.

7) Products that you could relate to:
Many a time a good stock might not get noticed by the stock market and as a result might remain undervalued. Imagine if you could find such a stock it could easily give returns of more than 50% plus. But the question remains on how you will find them. Well all you have to do is keep your eyes open. Simple isn’t it! For example you might see a new retail chain opening in your neighborhood and you find their products quite good. Since you have personally tested their products who would be a better judge than you. Do remember that all the big companies started small, so if you could find small, growing company with good products, then isn’t it worth investing in it way before the market finds it!

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Fundamental Analysis

Fundamental analysis

1. Earnings per share:

This is nothing but the total earnings for the quarter divided by the number of outstanding shares. Eg: The quarterly earnings of ABC is 1,00,000 and there are 10,000 outstanding shares. Then
EPS = 1,00,000/10,000 = 10

2. P/E Ratio:

The price of a stock divided by its earnings per share gives the P/E ratio. From the previous example, if the share of ABC is trading at 100, then the P/E ratio would be 100/10 = Rs 10. This basically says that the stock is trading 10 times more than what it is actually worth. So lower the P/E ratio, the better.

3. Cashflow per share:

A good business should have a good positive cashflow. In some case the company might sell its goods in credit, so even though the profit would be shown in the financials, the actual cash would come in only later and is not considered as cashflow. Cashflow per share = cashflow/ outstanding shares.

4. Current Ratio:

It shows the ability of a company to pay short term bills. It is calculated by dividing the current assets by the current liabilities. Eg; of current assets are – cash, inventory and accounts receivable. Eg: of current liability are – loans, bills etc. The higher the current ratio, the better.

5. Dividend Yield:

This is the annual cash dividend divided by the current price. This gives us an idea on the dividend paid by the company with respect to its stock price

6. Net Profit Margin:

This is determined by dividing the money left after paying all its expenses by the money it had before paying expenses. So if two companies A and B have the same profit, but if the net profit margin of A is more, then A obviously is a better company. A higher net profit margin would mean that the company’s management is good at controlling costs and is able to make most of the profits made.

7. Price/ Book Ratio:

Book value per share is what a share of the company is liquidated and its assets sold. So Price/ Book value gives this ratio. So if the ratio is 1, then the stock is undervalued and is a good buy. We would say that a value below 2 is quite good.

8. Price/ Sales Ratio:

This is the (Price of the shares * Outstanding shares)/ Sales revenue of 4 quarters.

9. Quick Ratio:

This is very similar to current ratio. i.e., current assets/current liabilities. But here in the current assets only cash is considered. So this basically shows how quickly a company can respond to a sudden liability or need.

10. Return on equity (ROE):

This is the ratio of return to the share holders. i.e, net income divided by the total share holder’s equity. Bigger the better, and anything over 20% is good.

These parameters can be used for company analysis.

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Posted in Stocks

Good investment stocks?

Good investment stocks?

The answer is a resounding Yes! Here is Why

1) They allow you to own successful companies
2) They have been proved the best investment over time
3) By owning stocks – you can have an equity in a company. So when the company prospers, so do you.
4) The stock market has returned 10.5% for the past 75 years, corporate bonds 4.5% and inflation grew at 3.3%. Thus proved that investing in stocks is the best long term bet

So how do we make money using stocks?

1) Through capital appreciation:
Also called as capital gains, this is the profit after you buy a stock and sell it at a higher price. Your capital appreciates as the company prospers.

2) Through dividends:
The company can pay you a share of the company profit in the form of dividend. The payment of dividend by the company is not mandatory and often dividend is the first thing to get cut off when the company earnings reduce. To receive the dividend, you must own the stock by the ex-dividend date which is four business days before the company looks at the list of stakeholders who gets the dividend. That day is called the record date.
Total Return:
Eg: You bought 1000 shares of the company XYZ at Rs 100 and sold it at Rs 140 a year later. The annual dividend was Rs 10.
So rise in stock price = 140 -100 = Rs 40
Total dividend = Rs 10
So total return = 10 +40 = 50/ 100 (purchase price) *100 = 50%
That is, 50% return

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