Basics of stock market
New stock shares are issued everyday by many companies. But the main question is what is a stock, and why does a company issue it? There are some important aspects to know the basis of this concept, so we consider all the issues one by one.
Capital
The money invested by any company or individual to start a business is called a capital. It is contributed by the total no. of assets that are able to creation of wealth.
Equity and Debt
There are two ways of raising money-by selling all the savings to get the required resources,and the other way is borrow money and pay it back later on with interest. The first way is called an equity and second way is called the debt.
Reasons behind the issuing of stocks
The main motive is to raise capital. The other benefit is that the company does not have to make interest payments to creditors.
But there are some disadvantages-the company owners have to share their ownership, and secondly in every decision there is a voice of shareholders that must be included with the opinions of the company owners.
Advantages of Stockholders
The benefit is that shareholders are eligible to share in the profits of the company. If the price of the stock rises then there is also very much benefits for the stockholders, i.e. in the economic success of company there is huge opportunities for shareholders.
Initial Public Offerings
The first sale of stocks that is provided to the public is called Initial Public Offerings.
A corporation has to file registration statements with the securities and exchange commission. Some information like how many shares are being offered, name of the brokerage companies etc. is also provided .A final prospectus is presented at the time of issuing the stock and it includes it’s offering price. This is known as the red herring and it is made public by the organization.
Underwriting Basics
In this process the corporation hires an investment banker for the help in selling of it’s stock. The investment banker works as an intermediate between the corporation and the public. Mostly the banker purchases the stocks from the company and later resale them to the public. The investment banker also forms an underwriting syndicate of other investment bankers to reduce the risk and thus, they co-purchase the shares. In the process the underwriting syndicate forms it’s own selling group to sell specified allotments. The price of the offering is then marked by underwriting syndicate. This occurs as the fee of the syndicate’s service. The underwriter pays the difference between the price and the price paid by the public is known as underwriting spread.
The underwriter plays the part of an agent, and it tries to sell as much of the issue as it can at market prices.
New stocks are also issued by issuing company with the condition that all of it is sold. If this condition is not fulfilled, then issue will be withdrawn by the company. This is also called all-or-none arrangement. When the issuer and the corporation negotiate the terms of the issue, it is called a negotiated underwriting.
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