BONUS ISSUE OF SHARES When we invest the share capital in a business, we do so with the expectation of getting back not only our invested capital, but also a proportionate share of the surplus generated from operations, after all the other stakeholders have been paid their dues.  Thus, collectively the business owes its shareholders, their invested capital as well as the surplus generated from operations.  But in reality, while the business may pay us annual dividends, seldom is this surplus fully distributed away as dividends.  Thus, the surplus which is retained in the business is still owed to us.  This retained surplus is also reflected as retained earnings or reserves in the Balance sheet of Continue reading
Stock Investments
Why should a company try to price it’s public issue of shares as high as possible?
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 Continue reading
Is free pricing of pubic issues are good or bad for investors
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 Continue reading
Introduction to stocks and shares
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 Continue reading
Issue of a share at par and at a premium
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 Continue reading
Risk and Return in Investments
There are different motives for investment. The most prominent among all is to earn a return on investment. However, selecting investments on the basis of return in not enough. The fact is that most investors invest their funds in more than one security suggest that there are other factors, besides return, and they must be considered. The investors not only like return but also dislike risk. So, what is required is: Clear understanding of what risk and return are, What creates them, and How can they be measured? Return: The return is the basic motivating force and the principal reward in the investment process. The return may be defined in terms of (i) realized return, i.e., the return which has Continue reading