Topic 8.pptx - Stock Market Stocks Definition Stock or...

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Stock Market
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Stocks Definition: Stock or capital stock is the capital raised by a company or corporation through issue and subscription of shares Types Common stocks Characteristics – discretionary dividend payments, residual claim, limited liability and voting rights Preference or preferred stocks – they are senior to common stocks but junior to bonds Characteristics – no voting rights, typically nonparticipating and cumulative; but they can be participating and non- cumulative as well Convertible preferred stocks
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Stock Market It is the place where stocks are traded Those who hold stocks of corporations are called stockholders Stock holders are the residual claimant A corporation has three alternative ways to sell stocks or issues to raise capital from the market
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Classification of Issues Issues Public Rights Preferential Initial Public Offering Further Public Offering Fresh Issue Offer for Sale Fresh Issue Offer for Sale
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Public Issue A public issue is an offer to the public to subscribe to the share capital of a company Public issue could be Initial Public Offering (IPO) –an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public, which paves way for listing and trading of the issuer’s securities Follow on Public Offering or Further Public Offering or Further Issue - an already listed company makes either a fresh issue of securities to the public or an offer for sale of its existing securities to the public, through an offer document. BACK
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Rights Issue Rights Issue - a listed company proposes to issue fresh securities to its existing shareholders as on a record date The rights are normally offered in a particular ratio to the number of securities held prior to the issue to maintain their proportional ownership/not to dilute the stake of current shareholders Best suited to companies that fail to have retained earnings Generally allow the shareholders to pay a price slightly lower than the market price and then sell those shares in the market to make profit It is a low cost distribution of new shares
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An Example Suppose A owns 1000 shares of firm B. Outstanding shares of B is 1 million and it plans to issue 0.5 million new issues. A’s current ownership interest is 0.1% and therefore, he is offered 500 new issues. So, the ownership interest remains the same. If the market value of common stock is RS 100 per share and the new shares are offered at a 10% discount, then A purchases them at Rs 90 per share and B receives a total of Rs 45 million. After the rights offering the market value of the firm is Rs96.67 per share and A’s total investment is Rs 145000
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Preferential Issue/Private Placements/ Preferential Allotments Preferential issue is issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956
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