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

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 | 6 Comments

Stock split corporate action

In this corporate action the number of shares outstanding is increased by splitting the face value. For example, if a company has 100 crore (1 billion) outstanding shares of Rs10 and announced a face split from Rs 10 to Rs2 per share. One share of face value Rs10 will become 5 shares of Rs2 face value. A person holding 1000 shares of the company will have 5000 shares after the stock split. The price also comes down proportionately on Ex-date i.e. in the above example the price will be 1/5th of the price before the split. The reason is Earnings Per Share (EPS) comes down as the Total profit remains same but number of shares are increased.

Companies split the stock when the price is too high for small investors to buy the shares. As the price comes down proportionately the liquidity increases in the counter as the small investors will start trading at the affordable price. Because of this reason the share price will move up after the split (i.e. the price will be little more than 1/5th of the price before the split in the above example). Read more

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

Bonus issue truths revealed

Companies give bonus shares to the existing share holders by converting their reserves and surplus into shares. In a 2:1 bonus issue a share holder gets 2 free shares for every one share he holds (Don’t get confused. It’s correct). The additional shares come at free of cost but the price gets reduced proportionately.

For example, if you hold 100 shares of company XYZ whose market value is Rs 3000 per share and assume company XYZ has announced 2:1 bonus issue. On ex-date the price of XYZ comes around Rs1000 (It will be slightly greater than Rs 1000 usually. This price is called ex-bonus or post bonus price) and the additional 200 shares or bonus shares get credited to your account after few days. This is because the total number of outstanding shares increased 3 times but the earnings of the company is same. So the new EPS (Earnings Per Share) will be 1/3 rd of previous EPS and share price comes down proportionately.

One can observe that the total equity base of a company doesn’t get much affected with the bonus issue (Market price per share comes down and number of shares goes up keeping the product i.e. Market Capitalization same). In the above example the price may go over Rs 1000 because the liquidity increases because of lower price.

Companies announce bonus shares to Read more

October 12, 2008 | Filed Under Stocks | Leave a Comment

What is Rights issue ?

Rights issue is a method used by companies to raise funds by issuing additional stocks to the existing share holders of the company. Share holders may or may not exercise their right of acquiring new shares issued by the company. Companies fix up a price for rights issue, usually less than the market price to make sure entire issue will be subscribed. The share holders can apply for more number of shares than they are entitled to. If some of the share holders don’t exercise their right the shareholders who have applied for additional shares are allotted the same.

It’s important for a shareholder to know the reason behind the rights issue i.e. whether the company is raising funds to acquire another company or to expand the existing business or to meet the obligations of the existing business.

Usually the share price comes down proportionately. This is because the company’s equity base goes up with the additional shares and hence the EPS (Earnings Per Share, Total Net Profit / No of shares outstanding; As the denominator increases keeping numerator at the same value the ratio comes down) comes down. Considering the same market conditions, to maintain the same P/E ratio before and after the issue, price comes down. Read more

October 12, 2008 | Filed Under Stocks | 3 Comments