Showing posts with label Stocks. Show all posts
Showing posts with label Stocks. Show all posts

Sunday, July 29, 2012

TYPES OF SHARES ( or ) STOCKS

TYPES OF SHARES :-
The capital of a company can be divided into different units with definite value called shares. Holders of these shares are called shareholders or members of the company. The Indian Companies Act prescribes that a public Ltd company can issue only 2 classes of shares :-

(a) Equity or Common shares or stocks
(b) Preference shares or stocks

(A) COMMON SHARES AS OWNERSHIP SHARES :-
Common stocks also known as Equity securities or Equities, represent ownership shares in a corporation. Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to a vote at the corporations Annual meeting and to a share in the financial benefits of ownership. ( A corporation sometimes issue two classes of common stock, one bearing the right to vote, the other not. Because of its restricted rights, the non-voting stock might sell for a lower price )

Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure.

Equity shares will get dividend and repayment of capital after meeting the claims of preference shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and this rate may vary from year to year.

This rate of dividend is determined by directors and in case of larger profits, it may even be more than the rate attached to preference shares. Such shareholders may go without any dividend if no profit is made.

In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debt holders have been paid in full.

If the company goes bankrupt, the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets.

This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run.

Either it may be in the secondary market, ( previously functioning shares ) or a new issue such as ( IPO, FPO, ) Initial public offer, Follow on Public Offer, etc. The number of Share holders may be varying daily., for a Specified Stock. The same condition for Other Stocks Also.

The common stock of most large corporations can be bought or sold freely on one or more stock Exchanges.

CHARACTERISTICS OF COMMON STOCK :-
The two most important characteristics of common stock as an investment are its residual claim and Limited Liability features :-

1) Residual claim means that stock holder are the last in line of all these who have a claim on the Assets and income of the Corporation. In a liquidation of the firm’s assets the shareholders have a claim to what is left after all other claimants such as the Tax activities, Employees, Suppliers, Bondholders, and other creditors have been paid. For a firm not in liquidation, shareholders have claim to the part of operating income left over after interest and taxes have been paid. Management can either pay this residual as cash dividends to shareholders or re-invest it in the business to increase the value of the shares.

2 ) Limited Liability means that the most shareholders can lose in the event of failure of the corporation is their Original Investment. Unlike owners of Un- incorporated business , whose creditors can lay claim to the personal assets of the owner ( House, Car, Furniture ) corporate shareholders may at worst have worthless stock. They are not personally liable for the firm’s obligations.

(B) PREFERRED SHARES :-
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders.

Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders.

Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders.

In general, there are four different types of preferred stock:

a) Cumulative preferred stock,
b) Non-cumulative preferred stock,
c) Participating preferred stock, and
d) Convertible preferred stock.

Preferred stock has features similar to both equity and debt. Like a bond it promises to pay its holder a fixed amount of income each year. Suppose profitable gains are obtained then a Higher rate of Dividend will be given for Equity share holders, whereas only a limited previously given dividend may be given.

In this sense preferred stock is similar to an Infinite-maturity bond that is a perpetuity. It also resembles a bond in that it does not convey voting power regarding the Management of the firm. Preferred stock is an equity investment however.

The firm retains discretion to make the dividend payments to the preferred stock holders. It has not contractual obligation to pay these dividends. Instead preferred dividends are usually cumulative. That is unpaid dividend cumulative and must be paid in full before any Dividend may be paid to holders of common stock.

In Contrast, the firm does have a contractual obligation to make the interest payments on the Debt. Failure to make these payments sets off Corporate Bankruptcy proceedings.

Preferred stock payments are treated as dividend rather than interest, they are not tax deductible expenses for the firm. This disadvantage is somewhat offset by the fact that corporations may exclude 70 % of dividends received from Domestic Corporations in the Computation of their taxable income. Preferred stocks therefore make desirable fixed income investments for some corporations.

Even though preferred stock ranks after bonds in terms of the priority of its claims to the Assets of the firm in the event of Corporate Bankruptcy, preferred stock often sells at lower yields than do Corporate Bonds.

Presumably this reflects the value of the dividend exclusion, because the higher risk of preferred would tend to result in higher yield than those offered by Bonds. Individual Investors, who cannot use the 70 % tax exclusion, generally will find preferred stock yields unattractive relative to these on other available assets.

Preferred stock is issued in variations similar to those of Corporate Bonds. It may be callable by the issuing firm, in which case it is said to be redeemable. Due to an uncertain condition if the company is under a loss, being de-listed, then first a major portion of assets belonging to the company, would be divided to the preference share holders and the debts may be cleared , later the balance amount if any may be divided for the common share holders. It also may be convertible into common stock at some specified conversion ratio. Adjustable rate preferred stock is another variation that, like Adjustable-rate bonds, ties the dividend to current market interest rates.

a) Cumulative Preference Share
If the company does no earn adequate profit in any year, dividends on preference shares may not be paid for that year. But if the preference shares are cumulative such unpaid dividends on these shares go on accumulating and become payable out of the profits of the company, in subsequent years.

Only after such arrears have been paid off, any dividend can be paid to the holder of Equity shares. Thus a cumulative preference shareholder is sure to receive dividend on his shares for all the years our of the earnings of the company.

If the dividend is not paid, it will accumulate for future payment.
b) Non-cumulative Preference Shares
The holders of non-cumulative preference shares no doubt will get a preferential right in getting a fixed dividend it is distributed to quality shareholders. The fixed dividend is to be paid only out of the divisible profits but if in a particular year there is no profit as to distribute it among the shareholders, the non-cumulative preference shareholders, will not get any dividend for that year and they cannot claim it in the next year during which period there might be profits.

If it is not paid, it cannot be carried forward. These shares will be treated on the same footing as other preference shareholders as regards payment of capital in concerned.

Dividend for this type of preferred stock will not accumulate if it is unpaid. Very common in TRuPS and bank preferred stock, since under BIS rules, preferred stock must be non-cumulative if it is to be included in Tier 1 capital.


c) Redeemable Preference Shares
Capital raised by issuing shares, is not to be repaid to the shareholders (except buy back of shares in certain conditions) but capital raised through the issue of redeemable preference shares is to be paid back by the raised thought the issue of redeemable preference shares is to be paid back to the company to such shareholders after the expiry of a stipulated period, whether the company is wound up or not.

As per section (80) 5a, a company after the commencement of the Companies (Amendment) Act, 1988 cannot issue any preference shares which are irredeemable or redeemable after the expiry of a period of 10 years from the date of its issue. It means a company can issue redeemable preference share which are redeemable within 10 years from the date of their issue.

d) Participating or Non-participating Preference Shares
Participating Preferred Stock

These preferred issues offer the holders the opportunity to receive extra dividends if the company achieves some predetermined financial goals. The investors who purchased these stocks receive their regular dividend regardless of how well or how poorly the company performs, assuming the company does well enough to make the annual dividend payments. If the company achieves predetermined sales, earnings or profitability goals, the investors receive an additional dividend.

The preference shares which are entitled to a share in the surplus profit of the company in addition to the fixed rate of preference dividend are known as participating preference shares.

After the payment of the dividend a part of surplus is distributed as dividend among the quality shareholders at a particulate rate. The balance may be shared both by equity and participating preference shareholders at a particular rate.

Thus participating preference shareholders obtain return on their capital in two forms
a) fixed dividend
b) share in excess of profits.

Those preference shares which do not carry the right of share in excess profits are known as non-participating preference shares.

Apart from the above some other preference stocks are also present namely as,
A) CONVERTIBLE PREFERRED STOCK :
Preferred stock (preference shares) that can be converted into common stock (ordinary shares) at the option of the stockholder (shareholder) or as provided in the agreement under which it was issued, at a specified conversion rate.

Holders of this type of security have the right to convert their preferred stock into shares of common stock. This allows the investor to lock in the dividend income and potentially profit from a rise in the common stock while being protected from a fall in the same.


Convertible preferred stock that may be exchanged, at the issuer's option, into convertible bonds that have the same conversion features as the convertible preferred stock.

These are preferred issues that the holders can exchange for a predetermined number of the company's common stock. This exchange can occur at any time the investor chooses regardless of the current market price of the common stock. It is a one-way deal so one cannot convert the common stock back to preferred stock.

B) PRIOR PREFERRED STOCK
Many companies have different issues of preferred stock outstanding at the same time and one of them is usually designated to be the one with the highest priority. If the company has only enough money to meet the dividend schedule on one of the preferred issues, it makes the dividend payments on the prior preferred. Therefore, prior preferred have less credit risk than the other preferred stocks but it usually offers a lower yield than the others.

C) PREFERENCE PREFERRED STOCK
Ranked behind the company's prior preferred stock (on a seniority basis), are the company's preference preferred issues. These issues receive preference over all other classes of the company's preferred except for the prior preferred. If the company issues more than one issue of preference preferred, then the various issues are ranked by their relative seniority. One issue is designated first preference, the next senior issue is the second and so on.

D) EXCHANGEABLE PREFERRED STOCK
This type of preferred stock carries an embedded option to be exchanged for some other security upon certain conditions.

E) PERPETUAL PREFERRED STOCK
This type of preferred stock has no fixed date on which invested capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation. Most preferred stock is issued without a set redemption date.

F) PUTABLE PREFERRED STOCK
These issues have a "put" privilege whereby the holder may, upon certain conditions, force the issuer to redeem shares.

G) MONTHLY INCOME PREFERRED STOCK
A combination of preferred stock and subordinated debt.

( II ) DEPOSITORY RECEIPTS
A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange.

Depositary receipts make it easier to buy shares in foreign companies because the shares of the company don't have to leave the home state.

When the depositary bank is in the U.S., the instruments are known as American Depositary Receipts (ADRs). European banks issue European depositary receipts, and other banks issue global depositary receipts (GDRs).

( III ) AMERICAN DEPOSITARY RECEIPT (ADR)
American Depository Receipts, or ADR’s are negotiable security ( certificates ) that represents the underlying securities of a non-US company that are traded in U.S. financial Markets that represent ownership in shares of a Foreign Company. Individual shares of the securities of the foreign company represented by an ADR are called American depositary shares (ADSs).

Each ADR may correspond to ownership of a fraction of a foreign share, one share or several shares of the foreign corporation. ADR’s were created to make it easier for foreign firms to satisfy U.S Security registration requirements. They are the most common way for U.S investors to invest in and trade the shares of foreign corporation.

The stock of many non-US companies trades on US stock exchanges through the use of ADRs. ADRs are denominated, and pay dividends, in US dollars, and may be traded like shares of stock of US-domiciled companies.

The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges. There are currently four major commercial banks that provide depositary bank services: BNY Mellon, J.P. Morgan, Citi Bank, andDeutsche Bank.

( IV ) EMPLOYEES STOCK OPTION PLAN OR SWEAT EQUITY
An Organization to provide an offer to their serving Employees, may allow for a Specified Amount lesser than the Market value, termed as Employees Stock Option Plan.

An ESOP is nothing but an option to buy the company's share at a certain price. This could either be at the market price (price of the share currently listed on the stock exchange), or at a preferential price (price lower than the current market price).

If the firm has not yet gone public (shares are not listed on any stock exchange), it could be at whatever price the management fixes it at.

WHY WOULD A COMPANY OFFER AN ESOP?
Let's first explain what owning a share entails.
When you invest in shares, you do not invest in the market. You invest in the equity shares of a company. That makes you a shareholder or part owner in the company.

Owning an equity share means owning a share in the company business. Companies offer their employees shares because it is considered that having a stake in the company would increase loyalty and motivation substantially.

WHEN ARE THEY GIVEN?
It depends on company policy and your designation. There are time limits for availing this scheme. For instance, you can acquire the shares after you complete a particular period of employment. This could be a year, even longer.

This is known as the vesting period, and generally ranges from one to five years. If you quit your job before this period is complete, the stock options lapse.

Sometimes, the ESOPs are given in a phased out fashion -- 20% in the second year, another 20% in the third year, etc.

WHEN ARE THEY TAXED? The ESOP is not taxed on acquiring the shares. You are taxed on the profit you make when you sell the shares or transfer them.

Transfer here refers to when you gift it to someone or transfer it to someone else under an irrevocable deed (they now own it, not you).

HOW ARE THEY TAXED?
When you sell any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds), and you make a profit on the sale, it is known as capital gain.
The tax you pay on this profit is called the capital gains tax. Capital gains tax is computed on the difference between the sale price and the issue price (the price at which shares are offered to you).

If you sell the shares within a year of allotment (within 12 months of acquiring them), then it is a short-term capital gain. If you sell the shares after a year of allotment (after 12 months of acquiring them), then it is a long -term capital gain.

WHAT MAY HAPPEN IF THEY ARE LISTED ABROAD AND SOLD ABROAD?
This depends on whether you are a resident or non-resident Indian. If you are a non-resident, it will not be taxable, as the gains occur outside India unless the money is received in India.

If you are a resident in India, then you will be taxed on the gains.
Long-term capital gain is taxed at 20%.
Short-term capital gain is added to your overall income and taxed according to your slab rate.

WHAT MAY HAPPEN IF THEY ARE LISTED AND SOLD IN INDIA? The taxability depends on the nature of gain at the time of sale.
If you have a short-term capital gain, you have to pay tax at the rate of 10% (plus surcharge if applicable).
Long-term gains are exempt from tax. 

DO I HAVE TO PAY A SECURITY TRANSACTION TAX IF SOLD IN INDIA OR ABROAD?
If you sell your shares on or after October 1, 2004, you need to pay the Securities Transaction Tax in India. Also the STT is leviable in abroad as per their rules.

CAN I AVAIL OF INDEXATION?
You use indexation when you calculate tax taking into account the inflation. This is good because it reduces the amount of capital gain and the amount you end up paying as tax.

Indexation is available only for long-term capital gains. Since the long-term capital gains on shares and options are not taxable now, it is not required.

CAN I INVEST THE PROFIT TO AVOID TAX?
Long-term capital gain on shares are exempt, so this does not arise.
There is no provision to invest the short-term capital gains to avoid tax.

( E ) DIFFERENT VALUE RIGHTS ( DVR ) STOCKS
A DVR share is like an ordinary equity share, but it provides fewer voting rights to the shareholder. So, for instance, while a normal Gujarat NRE Coke shareholder can vote as many times as the number of company shares heshe holds, someone who holds the company’s DVR shares will need to hold 100 DVR shares to cast one vote. The number of DVR shares required to be held will differ from one company to another.

Why are these issued by companies?
Companies issue DVR shares for prevention of a hostile takeover and dilution of voting rights. It also helps strategic investors who do not want control, but are looking at a reasonably big investment in a company. At times, companies issue DVR shares to fund new large projects, due to fewer voting rights, even a big issue does not trigger an open offer.

The Companies Act permits a company to issue DVR shares when, among other conditions, the company has distributable profits and has not defaulted in filing annual accounts and returns for at least three financial years. 

However, the issue of such shares cannot exceed 25 per cent of the total issued share capital. Some companies that have issued DVR shares on our bourses include Tata Motors, Pantaloons and Gujarat NRE Coke. According to reports, Tata Steel has plans to raise $1 billion through various instruments, including DVR shares.

Who should invest in DVR shares?
It offers both retail and institutional investors a variation, especially for those who may not be as particular about voting rights, but may see economic value in the form of higher discount offer that is being made and also for the incremental dividend.

Why should retail investors invest?
These are, ideally, good instruments for long-term investors, typically small investors, who seek higher dividend and are not necessarily interested in taking a voting position. Although DVR shares are listed in the same way as ordinary equity shares, these trade at a discount, as these provide fewer voting rights to the holder. Investors can also take advantage of the price differential of DVR and normal shares. 

When Tata Motors had declared its dividend in 2006, it gave the DVR holders a divided of six per cent and the ordinary shareholders one per cent. For example, the Tata Motors DVR shares were trading at Rs 689.80 on the National Stock Exchange (NSE) and the ordinary ones at Rs 1,255.75 on Wednesday.

What are the disadvantages?
DVR shares are thinly traded scrips, which means these are highly illiquid stocks. On Wednesday, a total of 2,67,000 ordinary shares of Pantaloons were traded on NSE and only 1,154 DVR ones. A total of 44,214 DVR shares of Gujarat NRE Coke were traded on Wednesday and 5,90,000 of the ordinary ones.

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.

Saturday, June 30, 2012

SHARES (OR) STOCKS

We could have heard the common word Share Auto, being shared by many people, known to all. Likewise in school days we could have shared between friends like food, bicycle, writing articles etc...

Shares is a plural word meant as more than one. It can be of, from thousands, to even some millions. The meaning of share is fair and impartial to all. All are commonly considered as Equity shares. Equal to all.

It provides no interest like fixed deposits in banks and some other related items. But it can yield some Dividend. Also it can produce bonus shares.

An existing corporation listed in the share market may release public issues, to expand its operations locally or even wider i.e. out of the province etc.. After having obtained approval from the concerned authority ( SEBI in India, SEC in USA) depending upon the ( amount required in millions ) Market capitalization, the number of share holders to be involved, the face value of the share depending upon the performance of the company, either it can be offered in face value or added with some premium ( A Higher value than the face value for example if it is Rs.100 /- then Rs.10 is its face value with added premium of Rs.90/-) Generally the face value is Rs.10, but Rs 100, Rs.5, Rs.2, Rs.1., face values are also seen.

WHAT IS A STOCK ?
A share is simply a divided-up unit of the value of a company. If a company is worth £100 million, and there are 50 million shares in issue, then each share is worth £2. As the overall value of the company fluctuates so does the share price. Shares can, and do, go up and down in value for various reasons. However, such movements are not usually for the most obvious of reasons.

It would be very simple if a share were priced solely on what the company in question owned - its buildings, cars, computers, value of contracts in the pipeline etc.

The total value minus company borrowings would be divided by the number of shares in issue and there would be the value of each individual share.

WHY MARKET SENTIMENT MATTERS ?
In general, share prices rise on the expectation (rather than the publication) of increased future profits and fall on published facts.

If this sounds entirely mad, bear in mind that if an analyst predicts that ABC company will double its profits then the price will rise at the time of the prediction.

When the results come through, revealing that profits have gone up "only" 75%, the price will probably fall because the current facts are less exciting than the earlier prediction.

Understanding this apparent nonsense is key to appreciating the behavior of markets in general, and individual shares in particular.

WHY COMPANIES WANT TO PLEASE SHAREHOLDERS ?
Professional investors buy shares in the hope of benefiting from a rising stream of income over the long term.

When profits are distributed to the shareholders the payments are known as "dividends". The capital value of a share - its quoted price - moves mostly in line with expectations of long term dividend payment.

There are myriad reasons why the expectation may become better or worse. A reduction in alcohol duty would guarantee a rise in distilling companies making whisky. An increase in VAT would hit retailers. More technically, a positive or negative assessment of a company's management ability could change investor sentiment enormously.

So why do companies go through all this daily public examination and give shareholders votes to - in extremis - remove directors from their positions of power?

The simple answer is that " floating " - selling shares in their companies to anonymous investors - raises millions of pounds to allow those same companies to expand into bigger and hopefully better businesses. Companies and shareholders alike have a responsibility to each other.

Group’s of Stocks :-
A Group 
Most largely transacted stocks. Easy to buy / sell. Daily people can be found for both. Only active stocks will be in this Criteria. Even though the Organizations performance is better and the transactions getting reduced, those stocks will be exited from that group. Some other active stocks may be allowed.

B1 Group 
Next to A Group.

B2 Group 
Next to B1 Group.

Z Group 
Investors complaints must be cleared by the Organizations. At least a reply must be given. If both occurs BSE may question those organizations. If nothing response from the Organization, then all those stocks may be transferred to this group.

CERTIFICATE NUMBER :-
Now-a-days we can’t see the stocks visibly. Only monthly statements, E-mail and letters remind us about the quantity and names of stocks renewed in our De-Mat account. Previously like currency notes, like plot, land and house documents were in bonded form, bought / sold frequently.

Even today they can be seen rarely. Likewise sl. no will be given for those bond certificates. 100 stocks in one Bond is the common rule. Some may contain 5, even 1 or 2 are also found.

A Company’s stocks 100 nos were purchased by you. For those 100 stocks its certificate number is ( for example ) 5004. If I am purchasing the same 100 stocks a new folio will be opened. That number will be mentioned in the certificate.

All the same 100 stocks if sold and bought by another person, then in the same certificate his name (owner) and his new folio number will be recorded.

Being the base document the certificate remains stable. Until the certificate is existing the number will remain the same. Stock owners may be varying.

DISTINCTIVE NUMBERS :- A Bond contains 100 stocks is the common rule. Which 100 stocks? Any Identification to trace easily? Why not? Supposing an Organization releases 10 Lakh (Rs.10 /- face value ) stocks. Each and every stock may be provided individual number. For example 1 to 100 stocks in first bond, and
101 to 200 stocks in second bond and so on….. The Individual number assigned for each stock is called Distinctive numbers.

FOLIO :-
An investor while purchasing a company’s stocks for the first time, the owner name shall be changed in his name. An identification number may be given like a bank account number.

The dividends, free shares, bonus shares, announcements, all those things will be sent in connection with this number called Folio number.

FACE VALUE ;- A stock most probably contains the face value of Rs.10 /-. But in practice many organizations are issuing stocks in different values. Some of the organizations due to the lesser transactions and less value of stocks in the market, to increase the number of stocks reducing the face values are also found.

The term Share and Stock have the same meaning whereas the latter is an American Usage. Share is a kind of Right. It can be sold for money or Gifted. Purchasing of Stocks is meant as buying a part segment of the Company. According to Indian Act ,The faithful rights necessarily offered to the Investor, being rejected can be trusted by Law. By having shares they are Entitled for the following Rights :-

#   Voting Rights in Important Decisions.

#   Getting Profits like “ Dividend ”.

#   Depending upon the Number of Shares, feeling and holding their necessary
     Rights, etc.