.png)
Hello Investors,
'This Articles' aims to keep investors informed about demat and various aspects of financial markets in general. New demat accounts opened in FY 2020-21 have shown an interesting trend of increased participation of retail investors in the capital market. The upward journey of stock market indices has resulted in many companies launching their IPOs during FY 2020-21. Many of you would be aware of the recent spate of IPOs that have made a debut on the Indian stock markets. This includes several trusted and legacy companies as well as new-age internet companies.
And the trend of new IPO looks like continuing for the rest of the year. This fact is corroborated by the pipeline of upcoming IPOs. Growing adaption of technology along with the curiosity of new investors has led to many people asking us some fundamental questions.
So, in this issue of this article, we will cover some of the basics related to shares. They are listed on a stock exchange, fundamentals that govern the price movement, the dividend, bonus and rights issue, delisting of shares, and what it means for investors.
Equity shares are an essential part of an investor’s strategy for creating long-term wealth. It is essentially like owning a part of the company in proportion to the shares bought. However, before investors can buy or sell shares on the exchange, the company has to qualify and fulfil certain regulatory criteria and follow certain processes laid out by the Securities and Exchange Board of India (SEBI). After getting requisite permission, the company launches its IPO and on successful subscription, the shares are listed on the exchange on the given date. This entire exercise is known as ‘listing’ on the stock exchange after which shares can be traded publicly.
To an extent, a company can meet its fund requirements without getting listed on a stock exchange. However, when the company needs large funds for various business needs, tapping the public funds remains the option without increasing the debt burden.
Listing on a stock exchange enables the company to approach a wide section of society and realise its true value.
The process of listing on the stock exchange is a fairly detailed and time-taking activity for any issuer company. Broadly, it includes the following activities or steps -
Dhani free cashback card and you should also try this card it is lifetime free and simply amazing. Get flat 2% cashback on all your spending, every time, every day. There are no conditions and no limits probably that’s why more than 2.5 crore people use Dhani. Download the Dhani app from here.
Nowadays, issuer companies decide a price band to submit a bid to purchase the given number of shares. This price band is decided by the company in consultation with merchant bankers taking into consideration many factors. It is important to note that while SEBI and exchanges (NSE / BSE) allows a company to come out with a public offer, they are not involved in price determined by the company.
After listing on the stock exchanges, share prices are largely determined by supply and demand factors of the market.
At its core, stock prices follow the laws of supply and demand like in any marketplace. And given the dynamics of how interconnected our economy is, the prices fluctuate through the day based on what different people think and feel may happen to a specific company.
If more people have faith in a company’s performance and future, there will be an increase in demand which will drive up a share price. And if the outlook or sentiment around it is unfavourable, people would likely want to cut their losses and sell out. This would increase the supply of shares which would pull down the price. Some of the common factors affecting the demand are expected and unexpected company news, financial outlook, industry outlook, market sentiment, etc.
The price trend is the general direction in which a stock is moving. Apart from showing past performance, it is a window to the future and hence important for investors who want to purchase that share. Historical price trends also reveal patterns of highs and lows which are useful in gauging the timing for entry (buying at lows) and exits (selling at highs).
A picture, it is said, is worth a thousand words. This is quite true for price trends of shares, also known as price charts. Using a combination of data points such as date, price, and volume of shares traded, different types of price charts allow investors to look at the performance of a company to make trading decisions. And while technical analysis is a specialized field in itself, understanding the basics of analysis and the ability to read a few common types of price charts can vastly improve your investment strategy.
The circuit breaker is a mechanism that is used by the stock exchanges to curb excessive volatility in markets. It is the maximum fluctuation allowed in share price after which trading gets suspended. The circuit limit gets fixed for individual stocks as well as indices. Known as the upper limit and lower limit, it is based on the closing prices of the previous trading day. Circuit breakers are set and governed by stock exchanges.
The purpose for circuit breakers is rooted in the fact that although indices and stock prices fluctuate constantly and react to several external factors. Any extreme movement may put retail investors at a huge risk. Circuit breakers ensure that any rise or fall does not continue indefinitely and speculation remains within an acceptable limit. This is a very important mechanism particularly for small investors who may get caught in the crossfire and incur massive losses.
In very simple words, a Rights Issue means a right given by a company to its existing shareholders to buy additional shares of the company. To be meaningful, this right is given to buy shares at a price lesser than the prevailing market price. It is always optional for shareholders to participate in the rights issue. Rights are offered to shareholders in the proportion of their existing holdings in the company as on the record date decided for this purpose.
Until recently, the right to buy shares of a company has economic value only when exercised by the shareholder. In case the shareholder decides not to exercise his / her option to buy, it had no value.
Now such a shareholder can sell this right to other investors who are willing to get it to be able to buy shares at a price lesser than the market. This has been made possible by converting the simple ‘Right to buy shares or Rights Entitlement’ into a marketable instrument. Now stock exchanges allow trading of Rights Entitlements in their trading platform. The shareholders who are given such right by their company can now sell through their stockbroker.
The ability to sell Right Entitlement gives a monetary value to those shareholders who are unable to or not willing to exercise their right to buy shares (even though offered at a lesser price). On the other side, buying the Right Entitlement makes economic sense only when you want to exercise it after buying it. In case, Rights Entitlement purchased from the market are not actually used to buy shares, they have no value left and the money spent for buying them becomes a waste.
Another important point here is what should be the price one can pay for Rights Entitlement? Let’s understand this with an example.
(Transaction costs are ignored here for simplicity. Actually, the cost of the transaction will reduce the price that can be paid).
Bonus shares are like rights shares, except that the shareholders are allotted these shares by the company without any consideration. Like rights shares, bonus shares are also allocated proportionately based on the number of shares held by them on the record date decided for this purpose.
For example, if you hold 100 shares of a company, and the company declares a bonus of 2:1 (meaning 1 bonus share for every two shares held). In this case, you would get 50 bonus shares without paying any price for them.
The dividend is reward shareholders receive from a company in cash form. It is a portion of profits made by the company which it distributes to its shareholders. Companies don't need to pay a dividend every year. But companies who pay a regular dividend are loved by the investors as it gives them some regular income.
Like Rights and Bonus shares, the dividend is also paid to those who hold shares on record date decided for this purpose. It is paid in proportion to the number of shares held. The amount of dividend is credited to the bank account which is recorded in the demat account of the concerned investor. In case, shares are held in physical form, the company arranges the credit of dividend amount to the bank account of the investor which is available in the company’s record.
The investor must remember to approach their DP to update the bank account information in their demat account whenever there is any change. Refer to your demat account statement to find out what bank details are recorded in the demat account. If you are holding shares in physical form, then you need to send a request for a change in bank details to the respective company or its Registrar and Transfer Agent.
As the name suggests, illiquid stocks are those in which you cannot liquidate your investments easily. These stocks cannot be easily sold as they see limited trading. They pose higher risks to investors because it is difficult to find buyers for them as compared to frequently traded stocks. Illiquid stocks usually have lower volatility accompanied by lower trading volumes and limited speculators & investors. Even if these shares are sold quickly, they may happen with a substantial loss in value.
GET YOUR FREE DEMAT A/C NOW.
Upstox 3-in-1 (Trading, Demat, Savings) account.
Delisting is the process when a listed company leaves the stock exchange or withdraws its shares from being traded in the stock exchange platform. It can happen for multiple reasons. For example - if the company is merging with another company or has some other restructuring plan then it can delist voluntarily. Or sometimes, a company can be forced to delist by the stock exchange for failing to meet the listing standards. Sometimes, successful and profit-making companies also delist their shares if their promoters want to keep tight control on the company. A company needs to comply with delisting requirements before actually effecting the delisting plan.
ALSO, READ What are Bitcoin Alternatives? | Ethereum, Ripple, Litecoin Cryptocurrency Explained.
Once a company delists, its shares (or other securities) are no more available for buy and sell on the stock exchange platform. So no person can buy shares in the market nor can any person sell the shares in the market.
Generally, before the delisting is effected, shareholders are given prior notice and an option by the company to liquidate their investment in the company. The company is required to send ‘Letter of Offer’ and Tender form’ to all those who were holding shares on the record date decided by the company for this purpose. Shareholders can either choose to continue to hold their shares in the company (if that company continues to exist as an unlisted company) or sell the shares to the company through a buyback offer extended to them. They may also sell or transfer their holdings to those who are willing to buy those shares.
Voluntary delisting on most occasions works in favour of shareholders, as the company is likely to offer a premium over the market price to encourage them to sell. Involuntary delisting on the other hand is almost always triggered by bad news or financial difficulties, and shareholders are more likely to lose money.
Shareholders can opt not to tender their shares, and they even continue to reap the benefits like bonuses and dividends, however the inability to trade it makes it a relatively illiquid asset. So, for practical purposes, it may be better to participate in a tendering process and exit from the investment.
When a company decides to delist and offers to buy back its shares, it informs the holders of the existing shares about the procedure to be followed by them for participation in the buyback process. Typically, it opens a new demat account and expects shareholder to transfer their shares to that account if they wish to tender their shares for buyback within a prescribed time frame.
The price at which shares can be tendered is decided by the company as per the stock exchange approved computation methodology.
Alternatively, the buyback can be undertaken through a stock exchange mechanism. In this, shareholders are required to offer their share at their preferred price (within the given band). Those who wish to tender their shares need to deliver the shares in the pool account of their broker under a specified market type and settlement number.
If more people are offering the shares than what the company had decided to buy back, then it accepts the bids on a proportionate basis, similar to an oversubscribed IPO.
Dhani free cashback card and you should also try this card it is lifetime free and simply amazing. Get flat 2% cashback on all your spending, every time, every day. There are no conditions and no limits probably that’s why more than 2.5 crore people use Dhani. Download the Dhani app from here.
Eligible Shareholders who are holding physical shares and intend to participate in the buyback should approach their broker along following documents -
Based on these documents, the broker shall place a bid on behalf of the shareholders in the stock exchange platform. The documents collected as above shall be dispatched by the broker to the registrar appointed by the company for the buyback.
Listing is any company's journey that decides to expand the business that requires capital to fulfil growth or expansion plan. This capital requirement can be fulfilled via debt, bonds, or going public (selling the current ownership).
Going public is a strategic decision and could be a transformational event for the next leg of growth. Companies can go public through the sale of shares to the general public. This entire process is known as Initial Public Offer (IPO). A company appoints a merchant banker to prepare a DRHP (Draft Red Herring Prospectus) document. It is an important document that comprises detailed information about promoters, company financials, business growth drivers and much more. After getting the requisite permission from SEBI, the company launches its IPO in the primary market and on successful subscription; the shares are listed on the exchange on the given date. After listing, the company’s shares can be traded on a day to day basis on the stock exchanges (secondary market). The entire journey from the primary to the secondary market is known as listing.
IPO pricing is decided by the merchant bankers and the company. This pricing is a part of the book-building process in which a price band is provided to the investors and every applicant needs to bid for the pre-defined numbers of shares from the given price range. On a listing day, the company’s share gets listed on the exchange. The listing price is based on the subscription in different categories like Institutional, High Network Individual (HNI) and Public, and based on the prevailing market conditions. If a public issue got oversubscribed, then the chances of a listing gain on a listing day could be higher, but again it depends on the existing market conditions on a listing day.
Here, the important question is – Why do companies go for public issues? The answer is simple - To access the capital for growth or an expansion plan. Further, it would provide an exit to some of the existing shareholders, like private equity or provide a partial exit opportunity for the strategic shareholder. Listing enhances the liquidity of the stocks and provides an opportunity for the shareholders to realize the value of the investments. It also brings more transparency and efficiency to company management.
New investors need to keep the following points in mind before investing in IPOs:
With the introduction of the UPI payment option for participation in IPO, the whole subscription process has become a lot easier for retail investors. Retail investors must participate in good quality IPOs to create enough wealth for themselves. Remember some good issues are happening in the Small and Medium Enterprises (SME) segment also. So keep an eye on the forthcoming issues and invest according to your needs and goals.
Well I hope you have enjoyed this article don't forget to share this article with your friends, let them also understand how to invest in Infrastructure shares in the most simplified way.
THANK YOU
Comments
Post a Comment