shares of stock

8/3/2019 Shares of Stock

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Shares of stock

Imagine that you make a decision to start a business. You decide that you need$50.000 to get the business off the ground. This money represents original capital

you will invest into a business and its called the stock or capital stock.

You establish a company and divide it into 1000 pieces or shares of stock. Thenyou price each share at $50 ($50 x 1000 = $50.000). If you manage to sell all of the

shares, you get $50.000 you need.

Those, who buy shares of your company (shareholders), get a share of theownership of the business. They get the right to vote in shareholder meetings and

are entitled for a part of companys profits.

If a business performs well and earns $25.000 after taxation for the first year, eachshare is entitled to a thousandth part of the profit, or $25 earnings per share (or

briefly EPS). You may call a shareholder meeting and decide how to deal withcompanys profits. It may be used to pay cash dividends to shareholders, to reducecompanys debt or to expand the business.

Note. The term stocks (in the plural form) is often used as a synonym to shares.Similarly, the term stockholders is a synonym to shareholders.

Floating a company

Process of issuing shares for the first time is called floating a company. Act ofselling stock by a private company to the public for the first time is called an initial

public offering (IPO).

Stocks vs. Bonds (Equity vs. Debt)

Bond (reference)

Stocks are equity, whereas bonds are debt. When buying equity (shares of stock),one becomes a partial owner of a business, which comes with voting rights and ashare in companys profits. By purchasing debt (bonds), one becomes a creditor.Bondholders are entitled only to a principal plus interest (generally fixed), but they

have a higher claim on companys assets, than stockholders. It means that ifcompany goes bankrupt, creditors will get paid before shareholders

There are different types of shares. I have mentioned about the most popular shares which are as

follows:-

Equity shares: These shares are also known as ordinary shares. They are the shares which do

not enjoy any preference regarding payment ofdividend and repayment of capital. They are given

dividend at a fluctuating rate. The dividend on equity shares depends on the profits made by a

company. Higher the profits, higher will be the dividend, where as lower the profits, lower will be

the dividend.


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Preference shares: These shares are those shares which are given preference as regards to

payment of dividend and repayment of capital. They do not enjoy normal voting rights. Preference

shareholders have some preference over the equity shareholders, as in the case of winding up of

the company, they are paid their capital first. They can vote only on the matters affecting their

own interest. These shares are best suited to investors who want to have security of fixed rate of

dividend and refund of capital in case of winding up of the company.

Bonus shares: The word bonus means a gift given free of charge. Bonus shares are those shares

which are issued by the company free of charge as bonus to the shareholders. They are issued to

the existing shareholders in proportion to their existing share holdings. It is a kind of gift to the

shareholders from the company. It is bonus in the form of shares instead of cash. It is given out of

accumulated profits and reserves. These shares have all types of preferences which are available

to the existing shares. For example. two bonus shares for five equity shares. The issue of bonus

shares is also termed as capitalization of undistributed profits.

Bonus shares is a type of windfall gain to the equity shareholders. They are advantageous to the

equity shareholders as they get additional shares free of cost and also they earn dividend on them

in future.

Common stock is a form of corporate equity ownership, a type ofsecurity. The terms "voting share"

or "ordinary share" are also used in other parts of the world; common stock being primarily used in theUnited States.

It is called "common" to distinguish it from preferred stock. If both types of stock exist, common stock

holders cannot be paid dividends until all preferred stock dividends (including payments in arrears)

are paid in full.

In the event ofbankruptcy, common stock investors receive any remaining funds after bondholders,

creditors (including employees), and preferred stock holders are paid. As such, such investors often

receive nothing after a bankruptcy.

On the other hand, common shares on average perform better than preferred shares or bonds over

time.[1]

Common stock usually carries with it the right to vote on certain matters, such as electing the board ofdirectors. However, a company can have both a "voting" and "non-voting" class of common stock.

Holders of common stock are able to influence the corporation through votes on establishing

corporate objectives and policy, stock splits, and electing the company's board of directors. Some

holders of common stock also receive preemptive rights, which enable them to retain their

proportional ownership in a company should it issue another stock offering. There is no fixed dividend

paid out to common stock holders and so their returns are uncertain, contingent on earnings,

company reinvestment, efficiency of the market to value and sell stock.[2]

Additional benefits from common stock include earning dividends and capital appreciation.

Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a

special equity security that has properties of both an equity and a debt instrument and is generallyconsidered a hybrid instrument. Preferreds are senior (i.e., higher ranking) to common stock, but are

subordinate to bonds in terms of claim or rights to their share of the assets of the company

Features

Preferred stock is a special class of shares that may have any combination of features not possessed

by common stock.

The following features are usually associated with preferred stock:[4]


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Preference in dividends.

Preference in assets in the event ofliquidation. In law, liquidation is the process by which

a company (or part of a company) is brought to an end, and the assets and property of the

company redistributed. Liquidation is also sometimes referred to as winding-up ordissolution,

although dissolution technically refers to the last stage of liquidation.

Convertible into common stock.

Callable at the option of the corporation.

Nonvoting.

Preferred stock may or may not have a fixed liquidation value, orpar value, associated with it.

This represents the amount of capital that was contributed to the corporation when the shares

were first issued.[7]

Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its

par or liquidation value unless otherwise negotiated. This claim is senior to that of common

stock, which has only a residual claim.

Any market in which securities are traded. Capital markets include the stock and bond markets.

Companies and governments use capital markets to raise funds for their operations; for example, a

company may issue an IPO while a government may issue a bond in order to conduct new or expand

ongoing activities. Investors purchase securities in the capital markets in order to extract a return andearn profit on the securities. Capital markets include primary markets, such as IPOs that are placed

with investors through underwriters, and secondary markets, in which all subsequent trading takes

place. Government agencies in different countries regulate local capital markets, though some,

especially exchanges, play some role in regulating themselves.

The market where investment funds like bonds, equities and mortgages are

traded is known as the capital market. The primal role of the capital market

is to channelize investments from investors who have surplus funds to the

ones who are running a deficit. The capital market offers both long term

and overnight funds. The financial instruments that have short or medium

term maturity periods are dealt in the money market whereas the financial

instruments that have long maturity periods are dealt in the capital market.

The different types of financial instruments that are traded in the capital

markets are equity instruments, credit market instruments, insurance

instruments, foreign exchange instruments, hybrid instruments and

derivative instruments.

Capital Market Resources

A capital market is simply any market where a government or a company (usually a corporation) can raise money (capital) to

fund their operations and long term investment. Selling bonds and selling stock are two ways to generate capital, thusbond

markets andstock markets (such as the Dow Jones) are considered capital markets.

Capital market investment takes place through the bond market and

the stock market . The capital marke t is basically the financial pool in

which different companies as well as the government can raise long term

funds.


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Capital market investment that takes place through the bond and the stock market may be

elucidated in the following heads.

Capital market investments in the stock market

The stock market is basically the trading ground capital market investment in the following:

y company stocks

y derivatives

y other securities

The capital market investments in the stock market take place by

y small individual stock investors

y large hedge fund traders.

The capital market investments can occur either in

y The physical market by a method known as the open outcry. The New York Stock

Exchangeis a physical market or

y Trading can also occur in the virtual exchange where trading is done in the computer

network.NASDAQ is a virtual exchange.

Investments in the stock market helps the large companies to raise their long term capital . The

investors in the stock market have the liberty to buy or sell the stock that they are holding at their

own discretion unlike the case ofgovernment securities , bonds or real estate . The stock

exchanges basically function as the clearing house for such liquid transactions. The capital

market investments in the stock market are also done through the derivative instruments like

thestock options and the stock futures. The derivatives are the financial instruments whose

value is determined by the price of the underlying asset.

Capital Market Investments in the Bond Market

The bond market is a financial marketwhere the participants buy and sell debt securities . The

bond market is also differently known as the debt, credit or fixed income market. There are

different types of bond markets based on the different types of bonds that are traded. They are :

y corporate

y government and agency >y municipal

y bonds backed by mortgages , assets

y Collateralized Debt Obligation .

The bonds , except for the corporate bonds do not have formal exchanges but are traded over-

the- counter . Individual investors are attracted to the bond market and make investments

through the bond funds, closed-end-funds or the unit investment trusts . The net inflows of


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total bond funds increased by 97% in 2006 than that in 2005. Another way of investing directly in

the bond issue is the Exchange-traded-funds .

The capital market investment in the bond market is done by

y institutional investors

y governments, traders and

y individuals.

For more details on the capital market investment the relevant websites that can be viewed are

stockhifi.com, sharesdaily.in, capitalmarket.com, capital-invest.com etc.

Capital Market Investment

Role of the Capital Market

The main function of the capital market is to channelize investments from the investors who have

surplus funds to the investors who have deficit funds. The different types of financial instruments

that are traded in the capital markets areequity instruments, credit market instruments,

insurance instruments, foreign exchange instruments, hybrid instruments and derivative

instruments. The money market instruments that are traded in the capital market are Treasury

Bills, federal agency securities, federal funds, negotiable certificates of deposits, commercial

paper, bankers' acceptance, repurchase agreements, Eurocurrency deposits, Eurocurrency loans,

futures and options.

A security is essentially a contract that can be assigneda value and traded.When referring to a capital market, it is important to note that the term can refer to a rather broad

range of products and services that are associated with finances and investments. To that end,

a capital market will include such components as the stock market, commodities exchanges,

the bond market, and just about any physical or virtual facility or medium where debt and equity

securities can be bought or sold.

As a market for securities with a very broad reach, the capital market is an ideal environment for

the creation of strategies that can result in raising long-term funds for bond issues or even

mortgages. At the same time, the capital market provides the medium for short-term fund

strategies as well. Essentially, any type of financial transaction that is meant to result in the

buying and selling of securities and commodities for profit can rightly be considered part of

thecapital market

Institutions are also part of the framework of the capital market. Stock exchanges are one of the

more visible examples of established operations that give form and function to the capitalmarket.

Along with the stock exchanges, support organizations such as brokerage firms also form part of

the capital market. Over the counter markets are also included in the working definition for

a capital market. By providing the mechanisms that make trading possible, these outward

expressions of the capital market make it possible to keep the process ethical and more easily

governed according to local laws and customs.

Because of the broad structure of the capital market, investors of all types have the opportunity

to participate in financial strategies that can strengthen the general economy as well create

financial security. Persons who wish to focus on investment opportunities that are very stable

and more or less ensure a modest return can find plenty of different offerings to choose from. At


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the same time, investors who tend to be more adventurous can also find a wide array of

investment types that will allow them to take some additional risk and possibly realize larger

returns on their investments. While the overall structure of the capital marketmay be broad, there

are a number of checks and balances that help to keep the market on an even keel, ensuring

that the capital market functions in a manner that is both ethical and legal.

Equity capital markets are those markets that raise equity capital for companies by issuing stock.

The participants in equity capital markets are the financial institutions that underwrite initial publicofferings and other equity offerings, and the corporations for whom they raise the equity.

Warrants, options, and futures are also managed through equity capital markets.

Investment banks are the financial institutions that underwrite and execute initial public offerings

(IPOs) and other offerings on the capital markets. When a company is floating an IPO,

the investment bank will assist the company by structuring the offering, advertising it, syndicating

it (arranging for a group of investors to take part), and distributing it. If the offering is syndicated,

each member of the syndicate will be responsible for selling a portion of the offering.

The investment bank or banks that underwrite a securities issue make their money from the

underwriting spread. This fee represents the difference between the price at which the stock is

offered to shareholders and the amount of money the issuing company receives for the stock.

The spread is agreed upon in advance between the company and the underwriter. If a company

is offering shares of stock to the public for $10.50 U.S. dollars (USD) per share, and thecompany receives $10.00 (USD) per share, the underwriting spread is $0.50 (USD) per share.

The underwriters will often guarantee a certain price or number of shares that it will sell.

As a participant in equity capital markets, an investment bank may be best known for

underwriting initial public offerings for private companies that wish to go public and raise a

significant amount of capital. But there are many other types of offerings that are provided

through equity capital markets. For example, an accelerated bookbuild is an equity offeringwith a

very short time horizon that provides equity to a company that is usually trying to purchase

another company. Futures contracts, swaps, and other derivative investments are also handled

on equity capital markets.

Equity capital markets are one component of the stock market. The stock market is made up of

both primary and secondary markets. The primary market is the market in which new issues are

offered. The secondary market is the market where stock that has already been issued is traded,or changes hands. By contrast, the bond market is considered a debt capital market, because it

raises capital for companies through the use ofdebt instruments.

Debt capital markets are markets that are established for buying and selling various types ofdebt

securities. Businesses and governments make use of these markets to generate revenue by

either selling or investing in the securities offered for sale on a debt capital market. Typically, the

securities traded in this environment are considered long-term, in that the maturity date for the

securities is more than one calendar year.

The overall capital market is composed of a union between debt capital markets and equity

capital markets. This arrangement makes it possible to purchase debt securities such as bonds

that are issued by companies orgovernment agencies, as well as to offer those bonds for sale

within a controlled environment. Most nations utilize some type of regulatory agency to monitor

the activity that occurs within the markets, making sure all activities are within the scope ofcurrent laws and regulations. In the United Kingdom, this task is assigned to the Financial

Services Authority or FSA. The Securities and Exchange Commission or SEC in the United

States also oversees the function of debt capital markets as a means of protecting participants

from fraud or other unlawful activities.

The use of debt capital markets to generate revenue for specific projects is very common. For

example, a company may create and sell a bond issue that is structured to make interest

payments to investors quarterly or semi-annually, with the total purchase price of the bond

redeemed once the issue reaches maturity several years down the road. Alternatively, the issue


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may be structured to sell the bond at lower than face value, but allow the owner to redeem the

bond at face value after the bond matures. In either scenario, the issuer has the use of the funds

generated by the issue for the entire life of the bond, a move that allows the company or

government to complete projects that ultimately begin to generate revenue on their own before

the bond matures. This in turn supplies the funds to manage the bond redemption and leaves the

issuer with a new source of income that is likely to remain viable for many years to come.

Debt capital markets also provide benefits to investors. Since the types of investments traded inthese markets tend to be relatively low in terms of risk, investors are much more likely to

generate some type of return. While that return may be somewhat modest in comparison to the

potential of riskier ventures, investments in bond issues and similar debt capital instruments is

often a good way to anchor a financial portfolio. This is because the debt capital instruments

provide some stability that serves as the platform for taking on a few investments that are more

volatile in nature. In addition, the rate ofreturn on debt instruments traded in debt capital markets

is higher than the interest earned on savings accounts and similar plans, making them more

attractive in terms of a money-making investment.

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