Investment Management

In fact, any company trying to price its public issue higher than its market price is being silly.   For that matter any company trying to price any of its products higher than the market price is being silly.   It should be obvious, that in such a case the investor (or the customer) will eject the offered share (or the product) outright, unless the higher price is qualitatively justified or he is ill informed.   True, there have been many instances following the free pricing policy where companies have priced their issues higher than the market price.   But these are errors of judgment, which a company soon comes to learn and learns to correct.   However, one important reason for the propensity of companies to price their shares unduly high may be attributed to their mistaken notion that the higher the price at which a company issues its Continue reading

The answer depends upon whom we mean by “investors”?   Is investor the one who is already holding a share, that is, an existing shareholder, or one who is going to become a shareholder?   Unfortunately there has been some confusion in this regard.   To any reasonable person, it should be clear that is the existing shareholder who is the true investor since he has already invested. Whenever a company makes a public issue of shares at a price, which is lower than the market value of the share, some part of the wealth gets transferred from the existing shareholder to the new shareholder.   It happens like this.   Consider a company with 1lakh shares outstanding, quoted in the market at Rs.50 each.   The total wealth of the existing shareholders can be said to be Rs.50 lakh.   If this company raises another Rs.10 lakh by issuing Continue reading

Stocks or securities are generic terms that stand for instruments of ownership like shares, as well as instruments of lending like debentures, which are issued publicly.   Just as a share represents the smallest unit of ownership, a debenture or a bond represents the smallest unit of lending.   Shares and debentures may be of various kinds. An ordinary share represents the form of fractional ownership in which a shareholder (one who holds ordinary shares), as a fractional owner, undertakes maximum entrepreneurial risk associated with a business venture.   This risk has several dimensions.   During the life of a business, in general, an ordinary shareholder receives dividends out of operating surplus.   This surplus is the residual from the revenue, after subtracting all the operating expenses, the interest charges on all kinds of borrowing, various taxes, and dividends due to the non-ordinary shareholders.   Now, various economic factors, government Continue reading

In general, an ordinary share in India is said to have a par value (face value) of Rs.10, though some shares issued earlier still carry a par value of Rs.100.   Par value implies the value at which a share is originally recorded in the balance sheet as equity capital. Equity capital is the same as ordinary share capital. The SEBI guidelines for public issues by new companies established by individual promoters and entrepreneurs, require all new companies to offer their shares to the public at par, i.e. at Rs.10.   However, a new company set up by existing companies (and of course existing companies themselves) with a track record of at least five years of consistent profitability are allowed by the SEBI guidelines to issue shares at a premium. It should be noted that when a company issues shares at a premium, it is able to raise the required Continue reading