1. Share versus stock2. Dierent types of shares3. Rights issue
of shares4. So, what's the point in doing rights issue?5. To reduce
the debt: equity ratio6. Bonus shares7. Employee stock option
scheme8. Restricted stock unit (RSU)Share versus stockSuppose the
company has issued 1000 shares, worth Rs.10 eachYou purchased 50
shares of this company. So you have to pay 50 shares x 10 Rs. Each
= Rs.500That means you own 50 Shares of this company andYou own
stock of Rs.500 in this company.In short, when we talk about shares
we refer to the number of papers held by you.When we talk about
stocks, we refer to the money value of those papers held by you.But
ultimately, both shares and stocks suggest the same thing:
Equity.Different types of sharesNormal sharesIt comes with voting
rights. This is what you get from routine IPO>>Share
thingPreferential sharesAlready discussed in the SBI capital
infusion articleStill There are some topics related to sharesRights
issue of sharesYou launch IPO, get funds from the public, and start
a company. (Equity)After some years you want some more money to
expand the company, so you want to issueadditional shares. But
under the companies act, you can issue additional shares to the
existingshareholders only. This is called rights issue of
sharesHere, you give notice to the existing shareholders, oer them
to buy your new-shares, youcannot oer any other outsider to
purchase the shares.If you do not want rights issue of shares, you
have to hold a general meeting of shareholdersand pass a resolution
that company does not need to oer new shares to the
existingshareholders, and these new shares are available for
anybody to purchase [Economy] Shares vs Stocks, Rights Issue of
Shares, Bonus Shares, RSU[Economy] Shares vs Stocks, Rights Issue
of Shares, Bonus Shares, R...
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of 3 1/8/2015 7:11 PMSo, what's the point in doing rights
issue?Well the direct utility of rights issue= obviously to gather
more money to expand your company.But it is also used for other
purposeTo reduce the debt: equity ratioFrom Debt VS Equity article:
There are `credit rating agencies' S&P, CRISIL etc. they give
rating toyour company's bonds. AAA,BBB etc.Lower the rating =
higher the interest rate you've to oer, to seduce the people into
buying yourbonds. (Recall the Junk Bonds.)But before giving rating
to your bonds, the credit rating agency will look into your
company'sperformance, assets, liability everything. And one of the
thing they're interested in, is Debt toEquity RatioThe company with
high debt to equity ratio = it has more debt = compulsory interest
payment =trouble = lower rating.If such company issues more bonds
to gather money, it'll have trouble; its new bonds willreceive even
lower credit rating. So, what can they do?Another case: You're
kingsher. You're not doing good, nobody is helping you. So you
wantsome foreign investor to come and help you. But he'll also look
into debt:equity ratio beforenalizing the terms of deal. What can
you do to appear `good' in front of him?Obviously: reduce the Debt
to Equity ratio. But how?Simple: oer new equity (shares) to
existing shareholders @ a discounted rate. (=Rights issues
ofshares). You've oer it at a discounted rate, else no one would
buy it. You're doing this wholeexercise, because you're in trouble
in the rst place.For example: Here is my offer of Rights issue:1:1,
Face value Rs.100, @ Discount of Rs.50Meaning, if you already have
10 shares of my company, you can buy 10 more shares from me(1:1),
Each of these shares will have Worth Rs.100 printed on it but I'll
give it to you for Rs.50only.What good does it do to me? Well in
the legal record, for the calculation of Debt Vs Equity=they'll
calculate using Rs.100 face value. Thus my Debt:Equity ratio will
go down, and I'll lookgood when credit rating agency / FDI investor
starts evaluating me.Bonus sharesIn the debt versus equity article,
you saw that a company can collect money from people byissuing
shares (IPO/Equity/Stock whatever you want to call it), but every
year, company reportsthe prot to the board of directors. The board
of directors will decide how much prot is to be [Economy] Shares vs
Stocks, Rights Issue of Shares, Bonus Shares, R...
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of 3 1/8/2015 7:11 PMre-invested in the company and how much prot
is to be shared with the shareholders.The prot, thus shared with
the shareholders is called dividend. Generally dividend is sent
tothe shareholders via cheques.But sometimes,company also gives you
extra shares.It means company paid the money to purchase shares on
your behalf and gives it to you. So yougot free shares and next
year when company distributes the dividends (cash), you will get
moredividend, because now you are holding more shares.
Alternatively, you can sell away thesebonus shares to someone else
and take out the money.These are called bonus sharesWhat is the
dierence between Bonus shares and rights issuesWell, as a
shareholder, you get shares for free under bonus shares.But you'll
have to pay money for buying new shares under rights issueEmployee
stock option schemeHere the company issues shares its employee at a
discount price.This is done to make the employees committed to the
success of company because if thecompany makes more prot, they can
walk away with higher dividends.Such shares have minimum lock in
period: for example if your boss gives it today, you cannotsell it
for one or two years.Restricted stock unit (RSU)This is also a form
of Employee Stock Option but here the company promises to deliver
sharesto its employee in future date.For example, Apple's new CEO
Tim Cook: he'll get $900,000 of cash salary and a $377 million
inRSU.Apple will deliver him 500,000 shares of Apple stock in 2016,
and 500,000 more shares in 2021 as long as he stays employed at the
company. [Economy] Shares vs Stocks, Rights Issue of Shares, Bonus
Shares, R...
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