Purpose of Stock Markets

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Main purpose of stock Markets :The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). Just imagine how difficult it would be to sell shares (and what a disadvantage you would be at with respect to the buyer) if you had to call around trying to locate a buyer, as when selling a house. Really, a stock exchange is nothing more than a super-sophisticated farmers' market providing a meeting place for buyers and sellers.

-Shares :A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on the board of directors and corporate policy. Whether this right exists often affects the value of the share

-Initial Public Offering :An initial public offering (IPO) is the first sale of a corporation's common shares to public investors. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, they also impose heavy regulatory compliance and reporting requirements. The term only refers to the first public issuance of a company's shares; any later public issuance of shares is referred to as a Secondary Market Offering. A shareholder selling its existing (rather than shares newly issued to raise capital) shares to public on the Primary Market is an Offer for Sale.

-Registrar :A person employed to keep a record of the owners of stocks and bonds issued by the company

-Red Herring Prospectus :This is an initial prospectus to be submitted by a company which is planning to have an IPO. This prospectus has to be filed with SEC. It contains all the information about the company except for the offer price and the effective date, which aren't known at that time. There are several additions and edits to this document before the final prospectus is released.The reason it is called a Red herring is due to a section of the document colored in red which explicitly states that the issuing company is not attempting to sell its shares before it has been given official approval by the SEC.
"Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case the price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later. An RHP form and FPO can be filed with the RoC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior t the opening of the issue.
In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed.
Hence, such details are not shown in the Red Herring prospectus filed with the RoC in terms of the provisions of the Companies Act.

-Book Building :It is the process of issuing shares without specifying the exact value of the shares that is being sold but however the share issuer gives a price band for the shares (that is a higher price limit and a lower price limit) and the subscribers are given the option to apply for the number of shares that they want at a price they want but from the given price band only. After examining all the bids the company selects the price at which a majority of the people have applied and fixes as the issue price of the shares .A book runner invites major institutional investors to suggest how many shares they would
be interested in purchasing and at what price in a new issue or secondary issue of shares. This helps to establish the price and allocate shares.

-Discounted value of shares : Usually in a public offering the shares are issued at a lower than exact value so that the issue might attract more participants on the hopes that they can book profits on the shares after they are listed .

-Types of investors :

--Retail shareholders :An individual who purchases securities for his/her own personal account rather than for an organization. Retail investors typically trade in much smaller amounts than institutional investors such as mutual funds, pensions, or university endowments

--Financial Institutions : these include bank ,Insurance companies, Mutual funds, Hedge funds and Private equity firms.

--High Net worth Individuals :Individuals with a high net worth. (i.e;The value in dollars of all assets less all liabilities. Net worth may be expressed as a dollar amount, or as a percentage of either assets or liabilities, calculated by ubtracting liabilities from assets and dividing the remainder by assets or liabilities) .
For example :individuals with a net worth of at least U.S. $1 million, excluding their primary residence

-Private Placement :A private placement is a direct private offering of securities to a limited number of sophisticated institutional investors. It is the opposite of a public offering. Investors in privately placed securities include insurance companies, pension funds, mezzanine funds, stock funds and trusts. Securities issued as private placements include debt, equity, and hybrid securities.

-Preferential Issue : The issuing of preference shares is called Preferential issue.A preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock

-Preference shares :Unlike common stock, preferred stock usually has several rights attached to it:
The core right is that of preference in dividends. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied. The dividend rights are often cumulative, such that if the dividend is not paid it accumulates in
arrears.
Preferred stock has a par value or liquidation value associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued. Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value. This claim is senior to that of common stock, which has only a residual claim.
Almost all preferred shares have a fixed dividend amount. The dividend is usually specified as a
percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6% Series A preferred.
Unlike debt securities, however, a company is not legally required to pay preferred dividends
and will not be in default for missing a preferred dividend payment.
Variable preferreds are rare exceptions; their changing dividends depend on prevailing interest rates, or varying as a percentage of net income.
Some preferred shares have special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights associated with them. Some preferred shares only gain voting rights when the preferred dividends are in arrears.
Usually preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim.
Individual series of preferred shares may have a senior, pari-passu or junior relationship with other series issued by the same corporation.
The above list, although including several customary rights, is far from comprehensive. Preferred shares, like other legal arrangements, may specify nearly any right conceivable. Preferred shares normally carry a call provision, enabling the issuing corporation to repurchase the share at its (usually limited) discretion. Some corporations contain provisions in their charters authorising the issuance of preferred stock whose terms and conditions may be determined by the board of directors when issued. These "blank check" preferred shares are often used as takeover defense. These shares may be assigned very high liquidation value that must be redeemed in the event of a change of control or may have enormous super voting powers.

Types of Stocks :

-Class A Shares :Typically, the most preferred tier of classified stock, offering more voting rights than Class B shares. Class A shares are designed to insulate management from the short-term swings of Wall Street, by allowing those in management to control a small amount of the equity of the company but still maintain voting power. These types of shares are not sold to the public and cannot be traded, which supporters of the dual-share system say allows management to focus on long-term goals.

-Class B Shares :A classification of common stock that may be accompanied by more or less voting rights than Class A shares. Although Class A shares are often thought to carry more voting rights than Class B shares, this is not always the case. Companies will often try to disguise the disadvantages associated with owning shares with less voting rights by naming those shares "Class A", and those with more voting rights "Class B".
For example, one Class A share may be accompanied by five voting rights, while one Class B share may be accompanied by only one right to vote, or vice versa. A detailed description of a company's different classes of stock is included in the company's bylaws and charter

-Class F Shares :These are e shares of very low value.

-Share certificates :a stock certificate (also known as certificate of stock or share certificate) is a legal document that certifies ownership of a specific number of stock shares (or fractions thereof) in a corporation. In large corporations, buying shares does not always lead to a stock certificate (in a case of a small number of shares purchased by a private individual, for instance).
Usually only shareholders with stock certificates can vote in a shareholders' general meeting. Sometimes a shareholder with a stock certificate can give a proxy to another person to allow them to vote the shares in question. Voting rights are defined by the corporation's charter and corporate law.
Stock certificates are generally divided into two forms: registered stock certificates and bearer stock certificates.
A registered stock certificate is normally only evidence of title, and a record of the true
holders of the shares will appear in the stockholder's register of the corporation.
A bearer stock certificate, as its name implies is a bearer instrument, and possession of the certificate entitles the holder to exercise all legal rights associated with the stock.
Bearer stock certificates are becoming uncommon:
they were popular in offshore jurisdictions for their perceived confidentiality, and as a
useful way to transfer beneficial title to assets (held by the corporation) without payment of stamp duty. International initiatives have curbed the use of bearer stock certificates in offshore jurisdictions, and tend to be available only in onshore financial centers, although they are rarely seen in practice.

-Demat account : Demat account, short term for dematerialised account is a type of banking account which dematerialize the paper-based physical shares.
The idea of dematerialised account is to avoid the need to hold physical shares--the shares are virtually being bought and sold through the banking account.
This account is popular in India and also the SEBI mandates demat account for share trading above 500 shares.

-Stock split :Stock split refers to a corporate action that increases the shares in a public company. The price of the shares are adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included.
For example, a company has 100 shares of stock each with a price of $50.
The market capitalization is 100 × $50 = $5000.
The company splits its stock "2-for-1". There are now 200 shares of stock and each
shareholder holds twice as many shares.
The price of each share has been adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.
Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are not unheard of. Sometimes investors will receive cash payments in lieu of fractional shares.
It is often claimed that stock splits, in and of themselves, lead to higher stock prices; however, research does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split.
Other effects could be psychological. If many investors think that a stock split will result in an
increased share price and therefore purchase the stock, the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly conveying its confidence in the future prospects of the company.
In a market where there is a high minimum number of shares, or a penalty for trading in so-called odd lots (a non multiple of some arbitrary number of shares), a reduced share price may attract more attention from small investors. Small investors such as these, however, will have negligible impact on the overall price.

-Reverse Stock Split : Reverse stock split, or reverse split, is just the same but in reverse: a reduction in number of shares and an accompanying increase in the share price. The ratio is also reversed: 1-for-2, or 1-for-3.There is a stigma attached to doing this so it is not initiated without very good reason.
For example, many institutional investors or mutual funds have rules against purchasing a stock whose price is below some minimum, perhaps $5. An extreme case would be when a share price has dropped so low that it is in danger of being delisted from its stock exchange.
It is also possible that a reverse stock split could be used as a tactic to reduce the number of
shareholders.
In a hypothetical 1-for-100 reverse split any investor holding less than 100 shares would simply receive a cash payment and no shares of stock. If the resulting number of shareholders has then
dropped below some threshold, it may be placed into a different regulatory category.Typically, the stock will temporarily add a "D" to the end of its ticker during a reverse stock split

-Share Dividends :Dividends are payments made by a company to its shareholdersWhen a company earns a profit, some of it is reinvested in the business and called retained earnings,
and some of it can be paid to its shareholders as a dividend. The frequency of these varies by country.
In the United States dividends are usually declared quarterly by the board of directors. In some other countries dividends are paid biannually, as an interim dividend shortly after the company announces its interim results and a final dividend typically following its annual general meeting. In other countries, the board of directors will propose the payment of a dividend to shareholders at the annual meeting who will then vote on the proposal.In the United States, decisions regarding the amount and frequency of dividends is solely at the discretion of the board of directors. Shareholders are explicitly forbidden from introducing shareholder
resolutions involving specific amounts of dividends.
Where a company makes a loss during a year, it may opt to continue paying dividends from the retained earnings from previous years or to suspend the dividend. Where a company receives a one-off gain, e.g. from the sale of some assets, and has no plans to reinvest the proceeds, the money is often returned to shareholders in the form of a special dividend.

-American depository receipts : An American Depositary Receipt (ADR) is how the stock of most foreign companies trades in United States stock markets.
Each ADR is issued by a U.S. depositary bank and represents one or more shares of a foreign stock or a fraction of a share. If investors own an ADR they have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.Depositary banks have numerous responsibilities to the holders of ADRs and to the non-U.S. company the ADRs represent. The largest depositary bank is The Bank of New York.Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS).