1.

Share versus stock

2. Dierent types of shares
3. Rights issue of shares
4. So, whats the point in doing rights issue?
5. To reduce the debt: equity ratio
6. Bonus shares
7. Employee stock option scheme
8. Restricted stock unit (RSU)
Share versus stock
Suppose the company has issued 1000 shares, worth Rs.10 each
You purchased 50 shares of this company. So you have to pay 50 shares x 10 Rs. E
ach = Rs.500
That means you own 50 Shares of this company and
You 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 y
ou.
But ultimately, both shares and stocks suggest the same thing: Equity.
Different types of shares
Normal shares
It comes with voting rights. This is what you get from routine IPO>>Share thing
Preferential shares
Already discussed in the SBI capital infusion article
Still There are some topics related to shares
Rights issue of shares
You 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
issue
additional shares. But under the companies act, you can issue additional shares
to the existing
shareholders only. This is called rights issue of shares
Here, you give notice to the existing shareholders, oer them to buy your new-shar
es, you
cannot 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 s
hareholders
and pass a resolution that company does not need to oer new shares to the existing
shareholders, and these new shares are available for anybody to purchase
[Economy] Shares vs Stocks, Rights Issue of Shares, Bonus Shares, RSU
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So, whats the point in doing rights issue?
Well the direct utility of rights issue= obviously to gather more money to expan
d your company.
But it is also used for other purpose
To reduce the debt: equity ratio
From Debt VS Equity article: There are credit rating agencies S&P, CRISIL etc. the
y give rating to
your companys bonds. AAA,BBB etc.
Lower the rating = higher the interest rate youve to oer, to seduce the people int
o buying your
bonds. (Recall the Junk Bonds.)
But before giving rating to your bonds, the credit rating agency will look into
your companys
performance, assets, liability everything. And one of the thing theyre interested
in, is Debt to
Equity Ratio
The company with high debt to equity ratio = it has more debt = compulsory inter

est payment =
trouble = lower rating.
If such company issues more bonds to gather money, itll have trouble; its new bon
ds will
receive even lower credit rating. So, what can they do?
Another case: Youre kingsher. Youre not doing good, nobody is helping you. So you w
ant
some foreign investor to come and help you. But hell also look into debt:equity r
atio before
nalizing 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. (=R
ights issues of
shares). Youve oer it at a discounted rate, else no one would buy it. Youre doing t
his whole
exercise, because youre in trouble in the rst place.
For example: Here is my offer of Rights issue:
1:1, Face value Rs.100, @ Discount of Rs.50
Meaning, 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 Ill give it to
you for Rs.50
only.
What good does it do to me? Well in the legal record, for the calculation of Deb
t Vs Equity
=theyll calculate using Rs.100 face value. Thus my Debt:Equity ratio will go down
, and Ill look
good when credit rating agency / FDI investor starts evaluating me.
Bonus shares
In the debt versus equity article, you saw that a company can collect money from
people by
issuing shares (IPO/Equity/Stock whatever you want to call it), but every year,
company reports
the prot to the board of directors. The board of directors will decide how much p
rot is to be
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re-invested in the company and how much prot is to be shared with the shareholder
s.
The prot, thus shared with the shareholders is called dividend. Generally dividend
is sent to
the 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 t
o you. So you
got free shares and next year when company distributes the dividends (cash), you
will get more
dividend, because now you are holding more shares. Alternatively, you can sell a
way these
bonus shares to someone else and take out the money.
These are called bonus shares
What is the dierence between Bonus shares and rights issues
Well, as a shareholder, you get shares for free under bonus shares.
But youll have to pay money for buying new shares under rights issue
Employee stock option scheme
Here the company issues shares its employee at a discount price.
This is done to make the employees committed to the success of company because i
f the
company makes more prot, they can walk away with higher dividends.

Such shares have minimum lock in period: for example if your boss
, you cannot
sell it for one or two years.
Restricted stock unit (RSU)
This is also a form of Employee Stock Option but here the company
liver shares
to its employee in future date.
For example, Apples new CEO Tim Cook: hell get $900,000 of cash
million in
RSU.
Apple will deliver him 500,000 shares of Apple stock in 2016, and
hares in 2021
as long as he stays employed at the company.

gives it today

promises to de
salary and a $377
500,000 more s

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