Equity Shares

TYPES OF SHARES

Equity shares Preference shares Deferred shares Bonus shares

What are Equity Shares?

Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares.

WHAT IS A DIVIDEND?

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FEATURES OF EQUITY SHARES:

(1)

Owned capital (2) Fixed value or nominal value (3) Distinctive number (4) Attached rights (5) Return on shares (6) Transfer of shares (7) Benefit of right issue (8) Benefit of Bonus shares (9) Irredeemable (10) Capital Appreciation

ADVANTAGES OF EQUITY SHARES FOR THE COMPANY:

I. Long-term and Permanent Capital : It is a good source of long-term finance. A
company is not required to pay-back the equity capital during its life-time and so, it is a permanent sources of capital.

II. No Fixed Burden : Unlike preference shares, equity shares suppose no fixed burden
on the company's resources, because the dividend on these shares are subject to availability of profits and the intention of the board of directors. They may not get the dividend even when company has profits. Thus they provide a cushion of safety against unfavorable development

III. Credit worthiness : Issuance of equity share capital creates no change on the assets of
the company. A company can raise further finance on the security of its fixed assets.

IV. Risk Capital : Equity capital is said to be the risk capital. A company can trade on
equity in bad periods on the risk of equity capital.

V. Dividend Policy : A company may follow an elastic and rational dividend policy and
may create huge reserves for its developmental programs.

ADVANTAGES OF EQUITY SHARES FOR THE INVESTOR

I More Income: Equity shareholders are the residual claimant of the profits after meeting all the fixed commitments. II. Right to Participate in the Control and Management: Equity shareholders have voting rights and elect competent persons as directors to control and manage the affairs of the company. III. Capital profits: The market value of equity shares fluctuates directly with the profits of the company and their real value based on the net worth of the assets of the company. IV. An Attraction of Persons having Limited Income: Equity shares are mostly of lower denomination and persons of limited recourses can purchase these shares. V. Other Advantages: It appeals most to the speculators. Their prices in security market are more fluctuating.

EQUITY SHARES HAVE THE FOLLOWING DISADVANTAGES TO THE COMPANY:

I. Dilution in control: Each sale of equity shares dilutes the voting power of the existing equity shareholders and extends the voting or controlling power to the new shareholders. Equity shares are transferable and may bring about centralization of power in few hands. Certain groups of equity shareholders may manipulate control and management of company by controlling the majority holdings which may be detrimental to the interest of the company. II. Trading on equity not possible: If equity shares alone are issued, the company cannot trade on equity. III. Over-capitalization: Excessive issue of equity shares may result in overcapitalization. Dividend per share is low in that condition which adversely affects the psychology of the investors. It is difficult to cure.

IV. No flexibility in capital structure: Equity shares cannot be paid back during the lifetime of the company. This characteristic creates inflexibility in capital structure of the company. V. High cost: It costs more to finance with equity shares than with other securities as the selling costs and underwriting commission are paid at a higher rate on the issue of these shares VI. Speculation: Equity shares of good companies are subject to hectic speculation in the stock market.

EQUITY SHARES HAVE THE FOLLOWING DISADVANTAGES TO THE INVESTOR

I.Uncertain and Irregular Income: The dividend on equity shares is subject to availability of profits and intention of the Board of Directors and hence the income is quite irregular and uncertain. They may get no dividend even three are sufficient profits. II. Capital loss During Depression Period: During recession or depression periods, the profits of the company come down and consequently the rate of dividend also comes down. III. Loss on Liquidation: In case, the company goes into liquidation, equity shareholders are the worst suffers. They are paid in the last only if any surplus is available after every other claim including the claim of preference shareholders is settled

WHAT IS AN ISSUE?

An issue is the process of offering securities as an attempt to raise funds. Companies may issue bonds or shares to investors as a method of financing the business.

WHAT IS AN IPO?

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PROCESS OF AN IPO

The basic steps include:

- to engage professional advisors - to organize corporate and financial books and records - to identify most appropriate legal and accounting resources - to complete financial audit - to identify investment banking firm - to complete registration statement - to file with Securities and Exchange Commission - to clear the SEC review and comment process - to complete the public offering - to file with the appropriate stock exchange

WHAT IS THE MAIN DIFFERENCE BETWEEN OFFER OF SHARES THROUGH BOOK BUILDING AND A FIXED PRICE ISSUE ?

Fixed Price: Wherein the price band of the issue is fixed. -- e.g LG Sugar Industries Limited Public Issue of 50,00,000 equity shares of Rs 10/- each at a premium of Rs 55/- per share aggregating Rs 3250 lacs. Book Building Issue: Book Building is a price discovery mechanism which is undertaken to ascertain and determine the price of the security proposed to be issued by a body corporate. There is a price band which gives the bidder the facility to bid within a price band at different price levels. -- e.g National Thermal Power Corporation Limited wherein the price band was fixed between Rs 52 to Rs 62/-

BOOK BUILDING PROCESS

Book building refers to the collection of bids from investors, based on a floor price, which is indicated before the opening of the bidding process. the issue price is fixed after the bid closing date.

WHAT IS THE ADVANTAGE OF TAKING THE BOOK-BUILDING ROUTE?

This process will help to discover the demand and the price of the shares. also, the costs of public issue are much reduced and the time taken for completion of the entire process is much less than the in the normal public issue.

STEPS INVOLVED IN THE BOOK BUILDING PROCESS

Nominate a Book Runner Form a Syndicate of Brokers, Arrangers , Underwriters, Financial Institutions, etc. Submit a Draft Offer Document to SEBI without mentioning Coupon Rate or Price Circulate the offer Document among the Syndicate Members Ask for Bids on Price and Quality of Securities Aggregate and forward all offers to Book Runner Run the Book to maintain a record of Subscribers and their Orders Consult with Issuer and Determine the issue Price as Weighted Average of the Offers Received Firm up Underwriting Commitments Allot Securities Among Syndicate Members Securities Issued and Listed Trading Commences on Exchanges

WHAT IS AN FPO...?

A Follow-On Offering Means An offering of additional shares after a company has had an initial public offering. This sometimes means the company is strapped for cash. So they need to issue more shares to pay bills or finance a new project.

WHAT IS A RIGHTS ISSUE?

Issuing rights to a company's existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period these Rights are often transferable, allowing the holder to sell them on the open market later on. A rights issue is usually priced below the current market price of the share listed on the stock exchange.

WHAT IS A BONUS ISSUE?

A Bonus issue is an issue of bonus shares by a company. 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. Bonus shares are usually issued in lieu of payment of dividend to the shareholders Companies announce bonus shares to : Increase the number of active shares to get the correct valuation of shares. Increase liquidity in the counter.

WHAT IS A SHARE CERTIFICATE?

A share certificate is a written document signed on behalf of a corporation, and serves as legal proof of ownership of the number of shares indicated. It can be in a physical form or DEMAT ( dematerialized) form. DEMAT Form of Share certificate: The move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

MARKET CAPITALIZATION

Market capitalization is calculated by multiplying a company's

shares outstanding by the current market price of one share. The investment community uses this figure to determining a company's size, as opposed to sales or total asset figures. Frequently referred to as "market cap Large Cap: $10 billion plus and include the companies with the largest market capitalization. Mid Cap: $2 billion to $10 billion Small Cap: Less than $2 billion

BUY BACK OF EQUITY SHARES

The Term literally refers to a company s move to repurchase its own shares. By doing so, the company reduces the number of its shares available in the open market. This will lead to the rise of earnings per share (EPS) and the return on assets of the company, indicators on the balance sheet of an improvement in the performance of the company. As an investor, it will mean an increase in his/her stake in the company. A stock buyback is also sometimes referred to as share purchase and it is generally considered to signal a potential increase in share price.

HOW IS THE BUYBACK PROCESS CARRIED OUT..?

A company can buy back shares either using tender offer or in an open market buyback. Under the first method, the company issues a tender offer with details regarding the number of shares that the company plans to repurchase and indicates their price range. An investor keen on accepting the offer needs to fill the form mentioning the number of shares that he/she wants to tender and the price desired and send it back to the company. In most cases, the price in a tender offer buyback is higher than the price in the open market. According to SEBI guidelines, if the company has decided to accept your shares, then it needs to intimate you in 15 days after the closure of the offer. The other route available for company is where they slowly buy back their shares from the open market.

WHAT ARE FUTURES CONTRACTS?

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STOCK FUTURES

What are Stock Futures ? Stock Futures are financial contracts where the underlying asset is an individual stock. Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contracts have standardized specifications like market lot, expiry day, and unit of price quotation, tick size and method of settlement.

STOCK OPTIONS

What Does Stock Option Mean? A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date. In the U.K., it is known as a "share option". American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date. Most exchangetraded stock options are American.

SPLITS

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STOCK SPLITS
A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.

REVERSE STOCK SPLIT

What Does Reverse Stock Split Mean? A reduction in the number of a corporation's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.

EARNINGS PER SHARE

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