Sunday, July 1, 2012

HOW STOCKS ARE CREATED

WHAT IS A STOCK? 

A stock is an ownership interest in a company. A business or company is started by a person or small group of people who put their money in, as seed capital investment.

How much of the business each founder owns is a function of how much money each invested. At this point, the company is considered "private." Once a business reaches a certain size, the company may decide to "go public" and sell a chunk of itself to the investing public. This is how stocks are created, and how you can participate.

When you buy a stock, you become a business owner, for that period. Over the long term, the value of that ownership stake will rise and fall according to the success of the underlying business. The better the business does, the more your ownership stake will be worth.

Perhaps the most common misperception among new investors is that stocks ( only on request paper stocks can be availed ) are simply pieces of paper to be traded. This is simply not the case. In stock investing, trading is a means, not an end.

Most commonly in several countries including India, the Distinctive features of a company can be classified as

1) INDIVIDUAL PARTNERSHIP,
An Individual with his Investment, starting Business is called “Sole Proprietorship”. Probably very rare possibilities are found with single Ownership now-a-days.

2) PARTNERSHIP, AND
Since a Huge Amount of Investment can’t be afforded by a Single person, More than two persons starting with United Dream and Principle, involvement is termed as “Partnership”. Either in “Sole Proprietorship” or neither “Partnership” the Principal own Investment, or arranged by Borrowing, need be cleared ,when a Huge Loss occurs, indulging even their own, other Financial assets also,for the Debts being Cleared. Profit or Loss need be Bared by the Partner (or) Partners. Simply saying in both the cases the Partner or their Business can’t be Differentiated.

For Example you are a Businessman owning a “ Provision Store” with 5 Branches located in moderate Town. For the past several years functioning with better profits. Future Growth prospects are found maintaining Better Quality, Customer satisfaction, Low cost which are the key roles needed for successful Business.

Moreover, At the Present Stage expecting Expansion of Business may flourish to a Greater Level. A Huge amount of money is required. Un-available in Hand. Not interested to Borrow Money. What can be done at this moment ! Either one or several number of peoples can be involved as Partners. Involving large number of shareholders can reduce the Risk by a Major share holder.

3) THE COMPANY.
From the above example, known peoples involvement with some other peoples conjointly Creating an Organization, can be called as “ Company”. An Organization Earning Profits, gathering and holding Assets, and several all other things, the Owner may be holding all Rights.

The company can without in any way involving its shareholders, enter into contracts, buy, sell and own property, engage in litigation and incur debts and legal obligations.

If supposing a Loss occurs and the Debts are at the Utmost Limit say Company sinking, the Owner is responsible for his Initial Investment Only. In Limited Companies “Owner” and “Company” are Separate Parts. Even though, the Debts are Large, upto a Certain Limit the Owner holds responsibility. Being a certain value or Limit these are known as “Limited Company ”

" Limited by shares " means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company.

A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.

A limited company may be " Private " or " Public ". A private limited company 's disclosure requirements are lighter, but for this reason its shares may not be offered to the general public (and therefore cannot be traded on a public stock exchange). This is the major distinguishing feature between a private limited company and a public limited company.

Most companies, particularly small companies, are private.

A private company limited by shares, usually called a private limited company ( Ltd ) ( though this can theoretically also refer to a private company limited by guarantee), is a type of company incorporated under the laws of England and Wales, Scotland, that of certain Commonwealth countries and the Republic of Ireland.

It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company ( plc ).

Private companies limited by shares are usually required to have the suffix " Limited " ( often written " Ltd " or " Ltd ") or " Incorporated " (" Inc ") as part of their name, though the latter cannot be used in the UK or the Republic of Ireland; companies set up by Act of Parliament may not have Limited in their name.

A public limited company (legally abbreviated to plc with or without full stops) is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions.

It can be either an unlisted or listed company on the stock exchanges. In the United Kingdom, a public limited company usually must include the words "public limited company" or its abbreviation "plc" at the end and as part of its legal company name.

However, some public limited companies (mostly nationalized concerns) incorporated under special legislation are exempted from bearing any of the identifying suffixes.

Those Companies should be registered at “Registrar of Companies”. These companies are also meant as “Limited Liability Company”. Limited Company sinking due to Debts the Loss is Limited, whereas getting Monetary Gains are Un-limited to the Owner. It is of two types, namely

1. PRIVATE LIMITED COMPANY


Section 3(1) (iii) of the Companies Act, 1956 defines a private company as one which:-


(a) has a minimum paid-up share capital of Rs.1 Lakh or such higher capital as may be
      prescribed; and
(b) by its Articles Association: 


1. restricts the right of transfer of its share;
2. limits the number of its members to 50 which will not include:-
    A. members who are employees of the company; and
    B. members who are ex-employees of the company and were members while in such 
    employment and who have continued to be members after ceasing to be employees; 

3. prohibits any invitation to the public to subscribe for any shares or debentures of the
    company; and

4. Prohibits any invitation or acceptance of deposits from persons other than its
    members, directors or their relatives.

This goes to say that a private company, in addition to the earlier conditions, shall have a minimum paid-up share capital of Rupees One Lakh or such higher capital as may be prescribed and its Articles shall prohibit invitation or acceptance of deposits from persons other than its members, directors or their relatives. In case of such companies, public interest is not involved.

The basic characteristics of a private company in terms of section 3(1)(iii) of the Act do not get altered just because it is a subsidiary of a public company in view of the fiction in terms of section 3(1)(iv)(c) of the Act that it is a public company.

May be it is a public company in relation to other provisions of the Act but not with reference to its basic characteristics. In terms of that section, a company is a private company when its articles restrict the right of transfer of shares, restrict its membership to 50 (other than employees shareholders) and prohibits invitation to public to subscribe to its shares.

Therefore, all the provisions in the articles to maintain the basic characteristics of a private company in terms of that section is restriction on the right to transfer and the same will apply even if a private company is a subsidiary of a public company.

2. PUBLIC LIMITED COMPANY.


A public limited company (PLC only) is a type of limited company in the United Kingdom which is permitted to offer its shares to the public. All public limited companies' names end in "PLC"
While it is not compulsory for a PLC to offer its shares to the public (some PLC’s are privately owned, maintaining the PLC designation for the extra financial status), many do so, and their shares are usually traded on either the London Stock Exchange or the Alternative Investments Market (AIM).
Formation of a public company requires a minimum of two directors. In general terms anyone can be a company director, provided they are not disqualified on one of the following grounds:
1. If the person is under 16 years old.

2. The person is over 70 years of age or reaches 70 years of age while in office, unless they are appointed or re-appointed by resolution of the company in general meeting of which special notice has been given.
3. The secretary (or each joint secretary) of a public limited company must also be a person who appears to the directors to have the necessary knowledge and ability to fulfill the functions.

4. Some people who are not British or European Union citizens are restricted as to what work they may do while in the UK, which may exclude them from being a director.

5. The person is disqualified by a Court from holding a directorship. 
There is a minimum share capital for public limited companies: Before it can start business, it must have allotted shares to the value of at least £50,000. A quarter of them, £12,500, must be paid up. Each allotted share must be paid up to at least one quarter of its nominal value together with the whole of any premium.
The Company defined under section 3(1)(iv) of the Companies Act, 1956 is a public company which consists such as -
1. Is not a private company;

2. Is a private company but subsidiary of a public company.
3. has a minimum paid-up capital of Rs. 5 lakhs or such higher capital as may be prescribed;
Private Companies deemed to be Public Companies
Certain private companies are deemed to be public companies by virtue of section 43 A, viz.-
1. when 25% or more of its paid-up share capital is held by one or more body corporate;
2. when its average annual turnover (during the last 3 years) exceeds Rs. 25 crores;
3. when it holds 25% or more of the paid-up share capital of Public Company; or

4. when it accepts or renews deposits from the public after making an invitation by an advertisement.
However, as per the Companies (Amendment) Act, 2000 effective from 13th December 2000 such deemed public limited companies are required to intimate to the Registrar to revert back to their original status as a private limited company.

Let us see the difference between both, 
Sl.No
PRIVATE LIMITED
PUBLIC LIMITED
1
Ends its name with Private Limited
Ends simply with name Limited or Ltd.
2
Not listed in the Stock Exchanges.
Can be listed in the Stock Exchanges.
3
Can have a minimum of 2 and a maximum of 50 stake holders.
Can have a minimum of 7 members on the Board.
4
Prices are not quoted and are not freely available for sale
Large percentage of shares for sale to the public.
5
Closely held Companies.
Widely disposed among the General public.
6
Permitted to impose restrictions on the right to transfer shares.
No restrictions on the transfer of shares.
7
Low Turn over
More turn over.
8
Not much
More rigorous government supervision and control.

Due to Law Abiding Procedures and some other Practical Reasons they are Differentiated and known as Private and Public Limited Companies. Private Limited Company shares (or) stocks can’t be transacted in “STOCK MARKET ”.

Public Limited Company Stocks ( Rights / Shares / Stocks ) can be purchased or sold directly, by all Common people, if listed in the Stock Market.

Public Limited Company to be listed in the Stock Market can’t be said as necessary. But Entering the Stock Market a Company need to be Public Limited Company.

HOW COMPANIES ARE FORMED :-
Promoters jointly draft 2 documents namely,


1) Memorandum of Association and
It sets out , among other things , the aims and objectives of the company, the total amount of share capital to be raised from the public, the value of each share and the different types of shares.

2) Articles of Association.
It contains the detailed rules and regulations for managing the companies affairs. and submit to the registrar of Companies for obtaining his approval for the incorporation of the company.

The Registrar gives approval in the form of a certificate known as the “Certificate of Incorporation”. With the issue of this certificate the company formally comes into existence.

Thereafter the company is required to raise funds before it can commence business. It requires funds for purchase of land, construction of building, procurement of Machinery, Hiring of Managers and Workers.

Public limited companies usually raise funds by the issue of shares for sale to the general public. After the Allotment of shares has been completed, the company is required to obtain from the Registrar of companies a “ Certificate of Commencement of Business” before it can actively start its business Operations.

The Memorandum of Association of the company fixes the total amount of Share capital that is authorized to raise. This amount is called the Authorized capital of the company and constitutes a ceiling on the amount of the capital that can be raised through the sale of shares.

Companies do not normally offer their entire authorized capital for subscription to the public. The amount actually offered depends upon the current financial requirements of the company and is usually far below the ceiling represented by the authorized capital.

The authorized capital is generally fixed at a very high level in order to allow for growth in the capital requirements of the company in the event of its future expansion. The total share capital that is actually offered for sale is called “Issued capital”.

Sometimes the capital issued for sale is not fully taken up for subscription to the public. In such cases the amount actually subscribed is called the “Subscribed capital”.

The amount actually collected from the shareholders is called the “Paid up capital” of the company. In the event of a failure to collect the full subscription amount a gap is created between “Subscribed capital” and “Paid up capital”. Shareholders who default in the payment of the full subscribed amount are liable to have their shares forfeited by the company.

All the Partners ( Promoters) Capital meant as “Equity Capital” and the Other People’s money borrowed with Interest is meant as “Debt Capital”. While collecting Share Investment, as an authority to investment given to the Share holders is called Share / Stock.

Each and Every Business contains their own Instability ( also called as Risk ) Due to Horrible effects, none is ready to bear the issues. Even a Business when seems to be Gainful none is ready to Invest Completely / Partially, later on by borrowing money.

Industries Un-stable / Debt pressure and the various effects pushes everyone to collect money through “Public Issues”. In Limited Companies “Owner” and “Company” are Separate Parts. By saying this it is not meant that the Owner holds no right. On which occasion, what manner the investor can exercise their rights are Drawn.

Investors directly can’t exercise their Rights. Instead several number of investors conjointly can select “ Directors”. Majority Share holders on behalf of them can elect and select their Representatives as “Directors” by voting.

Minority Share holders can also vote for their rights. “Directors” form the “Bridge” between the investors and Top Level Administrative People. Those Directors Team may also be called as “Board ”. Routine Official movements may be performed by Executives appointed and controlled by the “Board” on behalf of the Investors.

For Example a Team of 10 persons are Interested to Open a “Provision Store” in the heart of a moderate city. All of them depending upon their Ability interested to invest for the Newly forming Store. Now they are termed as “Partners” depending upon their own Initial Investment, Gains obtained, Loss, Growth, all may be shared by them. So that they became “Shareholders”.

Their names may be called as,
Mr. A,
Mr. B,
Mr. C,
Mr. D,
Mr. E,
Mr. F,
Mr. G,
Mr. H,
Mr. I,
Mr. J.

Being Zero Knowledge to the Provision Store Field, among the 10 persons 1 ( namely Mr. F ) is having the Ability to maintain the Business. Now all other 9 are left free from routine responsibility and Headaches.

The One among the Team ( Mr. F ) is holding the responsibility such as:-
1) Purchasing of Provisional Items,
2) Cleaning of those Purchased items if required,
3) Segregating of those Items depending upon their (Nature) Field, Variety, Usage, Brand,   

     Requirement etc…,
4) Required Staffs to be recruited for each Field
5) Interior Decoration of Office Premises as required
6) To maintain and to Develop the Customer Satisfaction etc..

Apart from Partner, Mr. F may also be called as “Manager”. Like other Staffs of the Company he is also provided Salary. Apart from Salary given, and other Expenses, the Tax paid for Gain obtained, balance amount ( Gain – After Tax) may be Divided for all the “Partners” including  Mr. F depending upon their ratio of Initial Investment.

Owners or Partners are forwarding Certain Issues to the Administration are as follows:-
1) Since we are Unable to watch everyday, all the Expenses and Income must be  
    accounted properly.
2) Quarterly Inspection may be Conducted by the Owners or Partners in regard to
     the Performance of the Management. All the Queries including Doubts must be
     clarified by the Management.
3) Any Crisis occurring between 3 months may be reported immediately to the
    Owners, not until waiting for Quarterly Meeting. If necessary an Emergency
    meeting need be conducted.
4) Gains occurred in the Business by volume, period may get finalized in the
     Shareholders discussion Meeting.

By the above described manner, an Organization starts its milestone. While noticing a fact those 10 people all were Educated youths in a certain company. But here they all were “Shareholders” as “Relatives”. Ownership base starts here. Right from a newly forming Tiny Company to “RELIANCE” share and shareholders Criteria are formed like this.

For Example :- You have planned to expand your Business by collecting Share capital. At present you are holding 10 Crores stocks ( Rs.10 /- face value of 100 lacks stocks ). Further more to open New Branches in some cities an addition of Rs.50 /- Crores are required. Apart keeping your 100 lakhs stocks separately, 50 Lakhs stocks are sold in the stock market.

Being popular in your field of Business, Rs.10 /- with added premium of Rs.90 /- ( i.e. for Rs.100 /- ) stocks are sold.

Here a doubt may arise for everyone? How a stock with face value of Rs.10 /- be sold for Rs.100 /- ?

Before entering the above subject, let us see a routine live example happening in our life frequently. Usually we drink a cup of coffee for Rs. 10 /- in small villages or some cities. But in hotels we drink the same coffee for Rs. 20 /- or Rs. 25 / -. What is the difference between both? Nothing special. In the second instance Rs.20 /- is the cost of that specific place. Each and everyone if coffee is required need to bear the price. Because of their Goodwill !

Now previous100 Lakh stocks + newly sold 50 lakh stocks leading to a total of 150 Lakh stocks are present in your company. Being sold to the Public through ( I.P.O.) INITIAL PUBLIC OFFER or through ( F.P.O.) FOLLOW ON PUBLIC OFFER it has to be listed in the Stock Market. In India the 2 popular Exchanges are,

1.NATIONAL STOCK EXCHANGE ( N.S.E.)
2.BOMBAY STOCK EXCHANGE ( B.S.E.)


Some middle and small cap ( Market Capitalization )Organizations are listed only in B.S.E. More companies listed, Pride goes to B.S.E. Daily, business transactions largely taking place, pride goes to N.S.E.

FOR ORGANIZATIONS TO ENTER STOCK MARKET ?

1) An Organization should perform for at least 5 years continuously to be listed in the Stock  

     market.
2) At least for 3 years profits must be obtained.
3) Asset value need be more than Rs.10 Crores.
4) Present market value, percentage of stocks to be published, the actual plan after getting the 

    amount, shall be furnished to SEBI.
5) On approval of SEBI, the stocks can be Listed in the Stock market.

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