Price of a stock doesn’t depend on the size of the company!

Most of you know this fact but I recently came across some people who were asking me why the stock price of such a big company is less compared to that of smaller companies. The fact is that share price doesn’t depend on the size of the company but on the profitability per share of the company and future growth of the company.

If a big company share price is less; that means the number of equity shares are very high and the profits are not up to the mark. In short, fundamentally EPS (Earnings Per Share) is the deciding factor.

EPS = Total Earnings for the year/ number of equity shares ( Including promoter’s Holding)

In the above example the company’s annual profits may be high but if the equity is also very high then the ratio comes down and hence the price. Companies should maintain profitability according to its equity size. A good example is Ispat Industries. Read more

October 25, 2008 | Filed Under Stocks | Leave a Comment

Different types of Preferential Shares

We can classify preferential shares as

Cumulative preferential shares — Non - Cumulative preferential shares
Redeemable preferential shares – Irredeemable preferential shares
Convertible preferential shares – non-convertible preferential shares

Cumulative preferential shares: If a company doesn’t earn profits this year the dividend that is due on these shares are carried forward to the next year. If it won’t make profits next year dividend for both the years will be carried further. This continues until the company posts profits and pays the dividends.

Non - Cumulative preferential shares: If a company doesn’t earn profits this year the dividend that is due for this year will be lapsed.

Redeemable preferential shares: You can sell back the shares to the company after a period of time.

Irredeemable preferential shares: They are not redeemable but the holders continue to get dividends as long as the business of the company is in progress. Read more

October 20, 2008 | Filed Under Stocks | Leave a Comment

What are Preferential Shares

Preferential shares are different from ordinary shares in many ways. They are similar to fixed income (bond) instruments. The following are the characteristics of preferential shares.

•    Not traded on stock exchanges
•    Fixed rate of dividend per share
•    Precedence in paying dividends
•    Precedence in repayment
•    No voting rights
•    Bonus and face splits are not applicable

Let’s examine one by one.

Companies may issue preferential shares to raise money when they are not able to get loans. The investors or financial institutions who are interested to invest in the company but don’t want to take risk of price movements prefer preferential shares. Companies can issue preferential shares to any one whom they want to. Unlike ordinary shares preferential shares are not traded in the stock exchanges. So they are not liquid assets. Read more

October 19, 2008 | Filed Under Stocks | Leave a Comment

Why Companies Buy Back Shares

A company can buy back a part of its shares held with public. In US it’s called Stock repurchase. A company buys back shares if it feels the shares are undervalued. Company uses surplus cash to buy back the shares. This reduces number of shares outstanding in the market. Company may take this step to prevent other companies/individuals try to get the controlling stake (hostile acquisition).

Usually company offers a premium to the current market price so that share holders will come forward to sell their shares. Recently DLF bought back some shares from the public.

If a company wants to get de-listed from an exchange it will have to buy back all the shares outstanding in the market. On a specific date (declared in advance) the exchange stops the trading in the counter and all the share holders who are in the books of the company will get paid the price that is announced earlier.

October 18, 2008 | Filed Under Stocks | Leave a Comment

What is FPO (Follow on Public Offer)?

The basic difference between Initial Public Offer (IPO) and Follow on Public Offer (FPO) is as the names suggest IPO is for the companies which have not listed on an exchange and FPO is for the companies which have already listed on exchange but want to raise funds by issuing some more equity shares.

Companies usually go to debt market for raising their short term needs. Either they issue bonds or get loans. But if they have massive expansion plans they may not raise sufficient funds in the debt market and even if they could it costs more. Companies come with follow on offer to restructure the business or to raise funds for new business or to expand the existing business.

Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the issue and interested investors can apply for it. Unlike the corporate actions (such as bonus, rights issue; they are applicable only to the existing stake holders) FPO is open to all investors. The price band for the FPO depends on the market value of the existing company shares and the reason for raising funds.

October 18, 2008 | Filed Under Stocks | Leave a Comment