a report on stock

7/23/2019 A Report on stock

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A Report on

Stock Oferings and Investor Monitoring

Dr. M. Farid Ahmed

ProfessorFinancial Markets and Institutions

Course no: F-304Department of Finance

Faculty of Business Studiesni!ersity of D"aka

Atia Tahira

Section B

ID:19-056Department of Finance


Date of Submiion

SUBMITTED TO

SUBMITTED By


2/28

#ckno$led%ementFirst o a!! I e"press o#r gratit#de ro$ %eart to t%e Bene&cent' t%e Merci#! (A!$ig%ty A!!a% or giving #s t%e strengt% and patience to prepare t%is ter$ paper

)it%in t%e progra$$ed ti$e*

I a$ deep!y inde+ted to o#r co#rse teac%er Dr& M& Farid #"medProfessorDepart$ento Finance' Fac#!ty o B#siness St#dies' University o D%aka' or %is co,operation andprecio#s contri+#tion in preparing t%e report*

I %ave taken %e!p ro$ internet ( vario#s +ooks* I a$ t%ank#! to t%ose a#t%ors ort%e %e!p i %ave gat%ered ro$ t%eir reso#rce#! )ork*


3/28

!etter of Tranmitta"

# $015

Dr& M& Farid #"med

Professor

Department of Finance


Subject: Submission of Term Paper

Dear Sir-

It is an i$$ense p!eas#re or #s to s#+$it t%e Ter$ .aper on "stock oerings andinvestor Monitoring)%ic% is prepared as a partia! re/#ire$ent o t%e co#rsena$ed Financial Markets and institution F!#$% o BBA progra$ #nderDepart$ent o Finance o t%e Fac#!ty o B#siness St#dies' University o D%aka* T%est#dy is $ain!y oc#sed on process o stock oferings in stock $arket and stock$arket is #sed to contro! and $onitor &r$s* T%e e"perience t%at i gat%ered t%ro#g%t%is st#dy )i!! %e!p $e in o#r career indeed* It )as an opport#nity o rediscoveringpotentia!s* It )as o e"cite$ents too*

I )o#!d !ike to convey o#r specia! t%anks and gratit#de to yo# or patroni0ing $yefort ( or giving $e proper g#idance and va!#a+!e advice* I %ave tried o#r +est tocover a!! t%e re!evant &e!ds*

I t%ank yo# and !ook or)ard to receive yo#r cordia! approva! o $y s#+$ission*


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%&ecuti'e Summar(

Stock offerin%s and monitorin% 'y in!estors are !ery critical issues $it" respect to financial

market and institutions& Stock offerin% is t"e prime function of a corporation and later it ismonitored 'y in!estors to make sure t"at t"eir capital is $ell protected and 'ein% taken care of&

("is report is prepared in t$o parts& First part descri'es stock offerin% and t"e later part talks

a'out monitorin% 'y in!estors and financial mana%ers& ("e first portion of t"e report is a'out

"o$ firms raise t"eir capital) "o$ stock markets facilitate secondary market tradin% )in!estors

participation in t"e stock markets) process of initial pu'lic offerin% and secondary market

offerin%s and t"e second portion of t"e report "o$ t"e stock market is used to monitor and

control firms&


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Tab"e of )ontent

)ha*ter no. )ontent of )ha*ter +a,e number

0* Introduction *

0+ ,'ecti!es +

03 Met"odolo%y and .imitations 3

04 Stock offerin%s 4

0/ Initial pu'lic offerin% /-4+

0 Secondary Market 43-/*

01 In!estor Monitorin% /+

02 Conclusion and Bi'lio%rap"y /3


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)ha*-1

Introduction

Stock offerin%s and monitorin% 'y in!estors are !ery critical issues $it" respect to financial

market and institutions& Stock offerin% is t"e prime function of a corporation and later it is

monitored 'y in!estors to make sure t"at t"eir capital is $ell protected and 'ein% taken care of&("is is $"y I "a!e c"osen t"e topic Stock offerin% and in!estor monitorin% as my topic for t"e

report of t"e course Financial Markets and Institutions 5F-3046& ("is report is prepared in t$o

parts& First part descri'es stock offerin% and t"e later part talks a'out monitorin% 'y in!estors and

financial mana%ers&

Firms raise funds so t"at t"ey can e7pand t"eir operations smoot"ly& ("is fund can 'e raised

pu'lically or pri!ately& If t"e corporation is pri!ately mana%ed) it can raise funds from pu'lic& It

cannot issue its stock it market& It $ill "a!e to %o for pri!ate e8uity funds or !enture capital& But

pu'lic limited corporations can raise fund from pu'lic 'y sellin% t"eir s"ares to t"em& If t"e

corporation %oes pu'lic for t"e first time) t"e process is called Initial Pu'lic ,fferin% 5IP,6& It$ill "a!e to sell its s"ares in t"e primary market& #fter$ards it can sell t"ose in t"e secondary

market like DS9) CS9 $it" t"e "elp of t"e 'rokers& ("e second part of t"e report comprises

monitorin% 'y in!estors and financial mana%ers& In!estors are t"e o$ners of t"e corporations 'ut

t"ey do not mana%e its operations& ("is responsi'ility is !ested on t"e mana%ement& But

in!estors and mana%ement often "a!e conflictin% interests $"ic" results in a%ency y pro'lems&

("is creates t"e need for monitorin% 'y in!estors& ("ey take different initiati!es like

s"are"olders acti!ism) s"are"older la$suits) pro7y contest etc&

("e operation of a corporation is also monitored 'y ot"er corporations of t"e same nature& ("is is

'ecause t"ey $ant to capitalie on t"at& If t"ey feel t"ey can 'etter mana%e t"at corporation) t"eytake it o!er& But takeo!ers are no piece of cakes& It in!ol!es a difficult process& Many people are

laid off as a result of it& So) t"ere are 'arriers to t"e market of corporate control like antitakeo!er

amendments) poison pills) %olden parac"ute $"ic" makes t"e process muc" more difficult to

"andle and e7pensi!e& ;o$e!er) markets for corporate control are important 'ecause t"ey make

sure t"at e!ery corporation is 'ein% mana%ed $ell& If t"ere $ere no suc" mec"anism)

mana%ement $ould feel free to operate accordin% to t"eir o$n interest $"ic" could "arm t"e


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in!estors& But corporate control keeps mana%ers on track since t"ey "a!e t"e fear to lose t"eir o'

and po$er&


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)ha*-$becti'e

T%e o+1ective o t%is report is to #nderstand-

23 %o) stock $arket aci!itates secondary $arket trading43 t%e process o initia! p#+!ic ofering and secondary ofering

53%o) stock $arket is #sed to $onitor and contro! &r$


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)ha*-/

Met%odo!ogy

#t first) I tried to understand "o$ stock market actually $orks from our te7t 'ook& Secondary

sources of data "a!e 'een used in preparin% t"is report& #nd $e "a!e collected t"e data from !arious

'ooks) $e' sites and ournals

&imitation

.ack of 97perience

.ack of


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)ha*ter-

+art neStoc fferin,

Stock offerin% is t"e process of raisin% capital t"rou%" t"e sale of s"ares in an enterprise& It

essentially refers to t"e sale of an o$ners"ip interest to raise funds for 'usiness purposes& 98uity

financin% spans a $ide ran%e of acti!ities in scale and scope) from a fe$ t"ousand dollars raised'y an entrepreneur from friends and family) to %iant initial pu'lic offerin%s 5IP,s6 runnin% into

t"e 'illions 'y "ouse"old names suc" as =oo%le and Face'ook& >"ile t"e term is %enerally

associated $it" financin%s 'y pu'lic companies listed on an e7c"an%e) it includes financin%s 'y

pri!ate companies as $ell& 98uity financin% is distinct from de't financin%) $"ic" refers to funds

'orro$ed 'y a 'usiness&

Stock can 'e offered in t$o $ays to raise e8uity:

+ri'ate %2uit(

+ub"ic %2uit(

+ri'ate %2uit(

>"en a firm is created) if founders typically in!est t"eir o$n money in t"e 'usiness) it is called

to 'e financed 'y pri!ate e8uity& ("e founders also in!ite t"eir friends and family to in!est e8uity

in t"e 'usiness& ("is is referred to as pri!ate e8uity as it is pri!ately "eld& ?oun% 'usinesses use

de't financin% from financial institutions and are 'etter a'le to o'tain loans if t"ey "a!e

su'stantial e8uity in!ested& ,!er time) 'usinesses commonly retain a lar%e portion of t"eir

earnin%s and rein!est it to support e7pansion& ("is ser!es as anot"er means of 'uildin% e8uity in

t"e firm&

("e ultimate aim of pri!ate e8uity in!estors is to create !alue& #s suc") t"ey look for

"i%" 8uality mana%ement teams $it" a credi'le plan to %ro$ t"eir 'usiness& Pri!ate e8uity

in!estors are lon%-term in!estors and $ork $it" t"e company@s mana%ement to impro!e t"e

company@s performance and strate%ic direction 'y ali%nin% incenti!es) impro!in% 'usiness plans)

makin% operational impro!ements and stren%t"enin% corporate %o!ernance& >it" t"is mentality

to 'uy and "elp 'uild) coupled $it" a disciplined approac" to or%aniational %o!ernance) pri!ate


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e8uity in!estors display a nim'leness and adapta'ility t"at raises t"e !alue of t"eir in!estment

and ensures t"at !alue can 'e realied in t"e future&

Pri!ate e8uity can 'e financed 'y:

3enture )a*ita" +ri'ate %2uit( Fund

3enture )a*ita"

Aenture capital is a source of financin% for ne$ 'usinesses& Aenture capital funds pool in!estors

cas" and loan it to startup firms and small 'usinesses $it" percei!ed) lon%-term %ro$t" potential&

("is is a !ery important source of fundin% startups t"at do not "a!e access to ot"er capital&

Most !enture capital comes from %roups of $ealt"y in!estors) in!estment 'anks and ot"er

financial institutions t"at pool suc" in!estments or partners"ips& ("is form of raisin% capital is

popular amon% ne$ companies) or !entures) $it" a limited operatin% "istory t"at cannot raise

capital t"ou%" a de't issue or e8uity offerin%& ,ften) !enture firms $ill also pro!ide start-ups

$it" mana%erial or tec"nical e7pertise& For entrepreneurs) !enture capitalists are a !ital source of

financin%) 'ut t"e cas" infusion often comes at a "i%" price& Aenture firms often take lar%e e8uity

positions in e7c"an%e for fundin% and may also re8uire representation on t"e start-ups 'oard&

Term of a 3enture )a*ita" Dea"

>"en a AC fund decides to in!est in a 'usiness) it $ill ne%otiate t"e terms of its in!estment)

includin% t"e amount of funds it is $illin% to in!est& It $ill also set out clear re8uirements t"at

t"e firm must meet) suc" as pro!idin% detailed periodic pro%ress reports& >"en a AC fundin!ests in a firm) t"e fund@s mana%ers "a!e an incenti!e to ensure t"at t"e 'usiness performs

$ell& ("us) t"e AC fund mana%ers may ser!e as ad!isors to 'usiness& ("ey may also insist on

"a!in% a seat on t"e 'oard of directors so t"at t"ey can influence t"e firm@s future pro%ress&

,ften) t"e AC fund pro!ides its fundin% in sta%es) 'ased on !arious conditions t"at t"e firm must

satisfy& In t"is $ay) t"e AC fund@s total in!estment is ali%ned $it" t"e firm@s a'ility to meet

specified financial %oals&

%&it Strate,( of 3enture )a*ita" Dea"

#n important aspect of !enture capital in!estin% is t"e e7it strate%ies& Aenture capital funds

primarily in!est $it" an e7it in mind after a fe$ years& #fter successfully fundin% at seed) pre-

production) production and e7pansion sta%es) a !enture capitalist $ill start assessin% e7it

strate%ies& ("e e7it in t"e form of disin!estment or li8uidation is t"e last and final sta%e of t"e

!enture capital fundin%& ("e key types of li8uidationdisin!estment are trade sales) sale of 8uoted

e8uity post initial pu'lic offerin% 5IP,6) and $rite-offs& .et@s look at eac" of t"ese in detail:


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Trade Sa"e: In t"is type of strate%y t"e pri!ate company is sold or mer%ed $it" an ac8uirer for

stocks) cas") or a com'ination of 'ot"&

I+: If t"e company "as done $ell) t"e !enture capital in!estors $ill take t"e IP, route) 'y

issuin% s"ares re%istered for pu'lic offerin%& #n e7ample is t"e upcomin% Face'ook IP,) $"ic"

is e7pectin% to raise a'out */ 'illion t"rou%" IP, and is !alued at appro7& *00 'illion& ("e!enture capital in!estors and ot"er pri!ate in!estors $ill %et t"eir portion of s"ares $"o can put

t"em in t"e open marketplace for tradin% after an initial lock-in period&

4rite-off: ("ese are !oluntary li8uidations t"at may or may not result in any proceeds&

#part from t"e a'o!e t"ree types of disin!estment) t"ere are a fe$ ot"er options:

Banru*tc(: ("e Company may ust %o 'ankrupt&

Bu(-bac: In t"is met"od t"e entrepreneur 'uys-'ack t"e in!estment s"are from t"e !enture

capitalists and takes it 'ack to 'ein% a pri!ately "eld company&

In!estors $"o in!est in a !enture capital fund %et distri'utions of pu'lic stock or cas" from

realied !enture capital in!estments& Sometimes t"e fund may re8uire furt"er in!estments from

limited partners& #t ot"er times) t"ey may make cas" or s"are distri'utions at random times

durin% t"e lifetime of t"e fund& In!estors can sell t"eir interests to anot"er 'uyer if t"ey find one&

In a 'ad case scenario) some funds find t"emsel!es $it" "i%"ly illi8uid) 'arely t"ere companies&

In a %ood scenario) t"ey "a!e %ood in!estments) $"ic" t"ey disin!est from at a sta%e and find

ne$ in!estments to fund&

+ri'ate %2uit( Fund

Pri!ate e8uity funds pool money pro!ided 'y institutional in!estors and in!est in 'usiness& ("ey

also rely "ea!ily on de't to finance t"eir in!estments& nlike AC funds) pri!ate e8uity funds

commonly take o!er 'usiness and mana%e t"em& ("eir mana%ers typically take a percenta%e of

t"e profit t"ey earn from t"eir in!estments in return for mana%in% t"eir fund& ("ey also c"ar%e an

annual fee for mana%in% t"e fund& Since t"ey commonly purc"ase a maority stake or all of a

'usiness) t"ey "a!e control to restructure t"e 'usiness as t"ey $is"& ("ey sell t"eir stake in t"e

'usiness after se!eral years& If t"ey $ere a'le to impro!e t"e 'usiness su'stantially $"ile t"ey

mana%ed it) t"ey s"ould 'e a'le to sell t"eir stake to anot"er firm for a muc" "i%"er price t"an

t"ey paid for it& #lternati!ely) t"ey may 'e a'le to take t"e 'usiness pu'lic t"rou%" an initialpu'lic offerin% 5IP,6 and cas" out at t"at time&

+ub"ic %2uit(

>"en a firm is financed 'y issuin% its s"ares in stock market and raisin% fund from pu'lic) it is

called to "a!e a pu'lic e8uity& =oin% pu'lic "as t$o effects on firm& First) it c"an%es t"e firm@s

o$ners"ip structure 'y increasin% t"e num'er of o$ners& Second) it c"an%es t"e firm@s capital


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structure 'y increasin% t"e e8uity in!estment in t"e firm) $"ic" allo$s t"e firm to eit"er pay off

some of its de't or e7pand its operations or 'ot"&

4h( o +ub"ic

Most companies %o pu'lic to:

7aie ca*ita"for e7pansion efforts or to pay 'ack de't&

+ro'ide an e&itfor e7istin% in!estors E $"et"er t"e company is P9-o$ned) AC-'acked)

or o$ned 'y a small %roup of indi!iduals or a sin%le person&

7e8ard em*"o(eeE Makin% employees $ork cray "ours for /-*0 years is tou%" to pull

off) 'ut t"e lure of an IP, t"at $ill make t"em all $ealt"y is a %reat incenti!e for t"em to

stick around&

Maret theme"'eE 9specially for lesser-kno$n companies in 'orin% industries) an

IP, is a %reat $ay to increase presti%e and attract ne$ in!estors) partners) and customers&


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)ha*ter -5

Initia" +ub"ic fferin,T%e &rst sa!e o stock +y a private co$pany to t%e p#+!ic* I.Os are oten iss#ed +y

s$a!!er' yo#nger co$panies seeking t%e capita! to e"pand' +#t can a!so +e done +y

!arge private!y o)ned co$panies !ooking to +eco$e p#+!ic!y traded* In an I.O' t%e

iss#er o+tains t%e assistance o an #nder)riting &r$' )%ic% %e!ps it deter$ine )%at

type o sec#rity to iss#e 6co$$on or preerred3' t%e +est ofering price and t%e ti$e

to +ring it to $arket*

o8 to +re*are an Initia" +ub"ic fferin, I+;

>"en a corporation decides to %o pu'lic) a portion of it $ill 'e put up for sale to t"e pu'lic

t"rou%" t"e sale of stock& #n Initial Pu'lic ,fferin% 5IP,6 is t"e first offerin% of s"ares of a

pri!ately "eld corporation to t"e pu'lic& ("e main reason to "a!e an IP, is to 'rin% money into

t"e 'usiness& It is often t"e main $ay t"at a start-up company $ill 'e a'le to make t"e money it

needs to succeed in t"e market&

Determine if (our com*an( i e"i,ib"e to ,o *ub"ic. In order to 8ualify for an IP,) %enerally

t"e 'usiness must 'e pro!en to 'e profita'le and "a!e a si%nificant amount of assets& Since t"ere

are no set re8uirements to define eli%i'ility) consider sc"edulin% a meetin% $it" an in!estment

'anker or outside consultant to determine $"et"er your company is of t"e type t"at t"e pu'lic

$ould $ant to in!est in&

)ontract 8ith an in'etment baner.#n in!estment 'anker $ill "elp determine "o$ muc"

money you s"ould raise) at $"at price t"e s"ares s"ould 'e sold) and $"at portion of t"e

company s"ould 'e offered in t"e IP,& ("e in!estment 'anker ser!es as an under$riter in t"at it

$ill a%ree to purc"ase all of t"e s"ares t"at t"e company decides to offer&

Draft a *ro*ectu and fi"e it 8ith the Securitie %&chan,e )ommiion S%);. ("e S9C

calls t"is document S-*& Its purpose is to disclose t"e details of t"e company& In t"e initialprospectus -- t"e first document filed -- t"e terms of t"e IP, 5t"e num'er of s"ares and t"e price

per s"are6 $ill likely not 'e finalied) 'ut t"ey are included as an estimate of $"at t"e final terms

$ill 'e& ("e initial prospectus is filed early on in t"e IP, process& In t"e final prospectus) filed

s"ortly 'efore t"e IP,) t"e amount of s"ares and s"are price of t"e offerin% are fi7ed&


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+reent the o**ortunit( to *otentia" hareho"der.Before t"e actual IP,) t"e 'anker and t"e

corporation@s top officials $ill %i!e presentations to indi!iduals and ot"er or%aniations to entice

t"em to purc"ase t"e s"ares of t"e IP,& ("e in!estment 'anker selects t"e potential in!estors

'ased on t"e type of 'usiness t"at $is"es to %o pu'lic and t"e interest t"at t"e potential in!estor

may "a!e in t"e corporation& ("is process results in non-'indin% commitments) called

su'scriptions) to purc"ase s"ares& It is lar%ely used as a tool to determine $"et"er t"e pu'lic

$ill 'e interested in in!estin% in t"e company) as discussed in t"e first step) as $ell as to

determine t"e price of t"e s"ares&

Se"" the hare to the in'etment baner.,n t"e day of t"e IP,) t"e in!estment 'anker $ill

purc"ase t"e s"ares and simultaneously sell t"em to in!estors& ("e 'anker@s purc"ase price is t"e

IP, price minus t"e commission) $"ic" usually "o!ers around 1 percent& ("e s"ares can no$ 'e

pu'licly traded&


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)ha*ter-6

Secondar( Maret

# market $"ere in!estors purc"ase securities or assets from ot"er in!estors) rat"er t"an from issuin%

companies t"emsel!es& ("e e$ ?ork Stock 97c"an%e and t"e #SD#G are secondary markets&

Secondary markets e7ist for ot"er securities as $ell) suc" as $"en funds) in!estment 'anks) or entities

suc" as purc"ase mort%a%es from issuin% lenders& In any secondary market trade) t"e cas" proceeds %o to

an in!estor rat"er t"an to t"e underlyin% companyentity directly& # ne$ly issued IP, $ill 'e considered a

primary market trade $"en t"e s"ares are first purc"ased 'y in!estors directly from t"e under$ritin%

in!estment 'ankH after t"at any s"ares traded $ill 'e on t"e secondary market) 'et$een in!estors

t"emsel!es& In t"e primary market prices are often set 'efore"and) $"ereas in t"e secondary market only

'asic forces like supply and demand determine t"e price of t"e security&

'bligations of Stock!brokers to T(eir )ustomers

#cceptin% a customer to open a customer account for tradin%


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97ecutin% t"e customer@s order for 'uy or sell as per t"eir $ritten or telep"onic order

Pro!idin% trade confirmation report on t"e e7ecuted order $it" details $it"in +4 "ours

of tradin%

(o replace t"e defecti!e script or refund t"e money to t"e customer $it" interest +&/Jper mont" from t"e date of settlement of transaction to date of refund) alon% $it" t"e

'enefit accrued) if any) pro!ided complaint is lod%ed $it"in *0 days of 'ook closure or

mont"s of settlement date) $"ic"e!er is earlier) for t"e defecti!e script as per t"e

settlement of transaction re%ulations of stock e7c"an%es

(o settle t"e customer@s complaint) if any) a%ainst t"e stock-'roker concerned

(o keep separately t"e customer@s securities from ot"ers@ securities

(o keep separately t"e customers@ money t"rou%" consolidated customer@s 'ank account

from t"e 'roker@s money

*esponsibilities of investors to t(eir stock!brokers

Si%nature of t"e in!estorclient in t"e Customer account information to form an

contractual a%reement

(o kno$ t"e client code num'er for tradin%

Introducer@s information

(erms K condition attac"ed in t"e form for mar%in facilities

(o set rate of Commission for tradin% 'y ne%otiation

(o take ackno$led%ement receipt for s"are deposit $it" t"e si%nature of t"e aut"oried

person of stock-'roker

(o take money receipt for fund deposit $it" t"e si%nature of t"e aut"oried person of

stock-'roker

Declaration %i!en in respect of s"ares tradin% 'y director or sponsor etc&

b"i,ationof t(e investors for t(e market

In!estors s"ould not 'e in!ol!ed to Create artificial price t"rou%" Syndication and

Manipulation 'y in!ol!in% $it" issuer companies


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ot to Influence issuer companies to inflate financial report and declarin% artificial

di!idend

ot to Influence Mis%uide ot"ers in!estors for tradin%

ot to open more t"an one account in different 'rokers and merc"ant 'anks for illmoti!es

ot to in!ol!e for spreadin% rumor or p"ony information in t"e market

+o, to Trade in t(e Stock -.c(ange

(radin% of securities on t"e stock e7c"an%es can only 'e done t"rou%" 'rokers of t"e

concerned e7c"an%es

#n in!estor is re8uired to open an account $it" a 'roker 'y fillin%-in a prescri'ed

Customers #ccount Information Form

For tradin% in t"e demoted securities@ it is re8uired to "a!e a Beneficiary ,$ners 5B,6

account $it" a Depository Participant 5DP6 in addition to t"e aforesaid account

#n in!estor can trade t"rou%" a 'roker eit"er in cas" or credit

("e credit transaction) "o$e!er) is su'ect to t"e pro!isions of Mar%in Lules) *

(radin% in t"e securities can 'e e7ecuted t"rou%" $ritten orders su'mitted to t"e

concerned 'roker

(elep"onic orders can also 'e su'mitted pro!ided t"at suc" orders s"all 'e confirmed in

$ritin% $it"in +4 "ours

("e price of t"e securities cannot %o 'eyond specified circuit 'reaker ran%e and an

in!estor can 8uote at t"e tick price of t"e securities as specified 'y t"e e7c"an%es&

S"ort-sellin% of t"e securities are pro"i'ited if it is not done under D"aka Stock 97c"an%e

5S"ort Sale6 Le%ulations +00

Baed on *rice# order ma( be of the fo""o8in, cate,orie# name"(:-

.imit orderH and

Market order

!imit order: .imit order must "a!e a price limit $"ic" ensures t"at t"e order s"all 'e

traded at t"e price e8ual to or 'etter t"an t"e limit price&


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Maret order: Market order is t"e order to 'e e7ecuted at t"e touc"line price& # market

order is matc"ed immediately on arri!al in to t"e tradin% en%ine at t"e touc"line price&

#ll orders $ill matc" automatically&

,rders $"ic" are at t"e most fa!ora'le price) t"at is) at t"e lo$est sellin% or "i%"est'uyin% price) s"all 'e e7ecuted first& If t$o or more orders are listed in t"e order 'ook at

t"e same price) t"e oldest order s"all 'e e7ecuted first&

,rders t"at cannot immediately 'e e7ecuted s"all 'e 8ueued for future e7ecution in a

specific order of priority mainly 'ased on price and time of entry&

If an order is e7ecuted partly) t"e remainin% part of suc" order s"all not lose its priority&

("e 8ueue priority is determined 'y t"e system t"rou%" an interacti!e process&

Trade )onfirmation

(rade confirmation note is a proof of t"e transaction issued 'y 'rokerH

("e 'roker s"all issue a trade confirmation note to "is client $it"in t$enty four "ours of

t"e e7ecution of order and it s"ould 'e num'ered and time stampedH

("e trade confirmation note s"all s"o$:

Date of t"e tradeH

ame and 8uantity of t"e security 'ou%"t or soldH

Price of t"e security) 'rokera%e and ot"er c"ar%esH

("e order and "o$la or contract note num'er and dateH etc&

Some /asic points for making 0nvestment in t(e

secondar1 market

In!estments in capital market are primarily made eit"er for capital %ain or for %ettin%

re%ular income as di!idendH

Before makin% in!estment decision one s"ould determine "is o$n o'ecti!e for

in!estment&

Common o'ecti!e of in!estment in secondary market is to ma7imie profit from 'ullis"

market and or minimie loss from 'earis" market&


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#fter determinin% t"e o'ecti!e) t"e in!estor s"ould analye t"e financial statements of t"e

company and decide to in!est in t"e s"ares of t"at company&

Industry of t"e company and t"eir a!era%e return for last fe$ yearsH

Mana%ement of t"e company

9arnin%s per s"are 59PS6) Price 9arnin%s ratio 5P96) Di!idend) Di!idend payout ratio)

et asset !alue per s"are) o& of s"ares outstandin%) Market price and its fluctuation)

%ro$t" rate) market position etc& of t"e companyH

Product) tec"nolo%y) market position of t"e product etc& of t"e companyH

(urno!er rate of t"e s"ares or li8uidity position etc&


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)ha*ter-"en t"e stock price declines or does not rise as e7pected)

s"are"olders may 'lame t"e $eak performance on t"e firm@s mana%ers&

Shareho"der Acti'im

S"are"older acti!ism is t"e $ay in $"ic" s"are"olders can assert t"eir po$er as o$ners of t"e

company to influence its 'e"a!ior& #cti!ism co!ers a 'road spectrum of acti!ities& #cti!ism

includes !otin% $it" ones feet 5e7it6) pri!ate discussion or pu'lic communication $it"

corporate 'oards and mana%ement) press campai%ns) openly talkin% to ot"er s"are"olders)

puttin% for$ard s"are"older resolutions) callin% s"are"older meetin%s and E ultimately - seekin%

to replace indi!idual directors or t"e entire 'oard&

In some cases s"are"older acti!ism is directed a%ainst ot"er lar%e s"are"olders) not a%ainst

directors& S"are"older acti!ism can 'e colla'orati!e) in particular $"en it is conducted in pri!ate&

S"are"older acti!ism is contro!ersial& Proponents ar%ue t"at companies $it" acti!e and en%a%ed

s"are"olders are more likely to 'e successful in t"e lon% term t"an t"ose t"at are left to do $"at

t"ey c"oose& Ai%ilant s"are"olders are said to play t"e role of fire alarms and t"eir mere presence

can alle!iate mana%erial or 'oardroom complacency& >"en companies perform poorly)

s"are"olders acti!ists are said to play t"e role of fire 'ri%ades t"at 'rin% a'out c"an%e and more

8uickly t"an $ould "a!e 'een t"e case "ad t"e fire 'ri%ade 'een on strike&

,pponents say t"at Ns"are"older acti!ismN is a eup"emism for disrupti!e) uninformed) populist

rantin% or Ntake t"e money and runN& In its e7treme forms acti!ism is said to 'e an e7tortion


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sc"eme t"at $eakens stron% companies& More fundamentally) t"ere is disa%reement a'out "o$

muc" po$er s"are"olders s"ould dele%ate to corporate 'oards and $"en direct s"are"older action

'ecomes necessary and on $"at terms&

+ro&( )ontet

# strate%y applied a %roup of s"are"olders are persuaded to oin forces and %at"er enou%"

s"are"older pro7ies to $in a corporate !ote& # pro7y contest occurs $"en t"e ac8uirin% company

attempts to con!ince s"are"olders to use t"e pro7y !otes to install ne$ mana%ement t"at is open

to t"e takeo!er& ("e tec"ni8ue allo$s t"e ac8uired to a!oid payin% a premium for t"e tar%et& It is

also called pro7y fi%"t&

Shareho"der !a8uit

In!estors may sue t"e 'oard if t"ey 'elie!e t"at t"e directors are not fulfillin% t"eirresponsi'ilities to s"are"olders& ("is action is intended to force t"e 'oard to make decisions t"at

are ali%ned $it" s"are"olders interests& Many la$suits "a!e 'een filed $"en corporations pre!ent

takeo!ers) pursue ac8uisitions) or make ot"er restructurin% decisions t"at some s"are"olders

'elie!e $ill reduce t"e stock@s !alue&

Monitorin, b( Financia" Mana,er

Financial mana%ers of firms closely monitor t"eir o$n firm@s stock price and t"e stock price of

related companies& If t"ey 'elie!e t"at t"e stock is under!alued) t"ey may attempt to capitalie

on t"is discrepancy) as e7plained 'elo$:

Stoc 7e*urchae

Stock repurc"ase is usually an indication t"at t"e companys mana%ement t"inks t"e s"ares areunder!alued& ("e company can 'uy s"ares directly from t"e market or offer its s"are"older t"eoption to tender t"eir s"ares directly to t"e company at a fi7ed price& In %eneral studies "a!efound t"at stock prices respond fa!ora'ly to stock repurc"ase announcements& It implies t"at t"eannouncement si%nals mana%ement@s perception t"at t"e s"are price is under!alued& ("e marketresponds fa!ora'ly to t"is si%nal&

Benefit of Stoc 7e*urchae

*& Si,na" to the maret that the board thin the com*an( i tron,. >"en a company is'uyin% 'ack s"ares) it sends a messa%e to t"e market& Since t"e company 'oard kno$st"e 'est a'out t"e company) t"e markets often t"ink t"at t"e company is %ettin% "ealt"ierand puts lesser pressure on t"e 'oard from acti!ist in!estors&

+& )om*enate for toc o*tion = bonue. Companies %i!e out stocks to t"eiremployees in t"e form of options K %rants& ("is increases t"e num'er of outstandin%s"ares& Many companies $ant to keep t"eir outstandin% s"ares sta'le& So) t"ey


23/28

compensate from t"e issue of ne$ s"ares 'y 'uyin% 'ack some of t"e old s"ares frompu'lic&

3& +uh u* the toc *rice. ("e stock repurc"ase reduces t"e float 5num'er of stocks "eld'y t"e pu'lic6 t"ere'y causin% a scarcity of t"e companys s"ares in t"e market& ("ecompany could t"en use a fa!ora'le market condition to reissue t"ese stocks to pu'licand make a %ain 5t"ese %ains $ill not 'e reflected in t"e profits) as a tradin% %ain on oneso$n s"ares is not allo$ed to 'e reported in income statement6&

4& Su**ort the *rice. >"en a company is pummeled 'y t"e market) key institutionals"are"olders $ould press t"e company to support a priceN& ("is is 'ecause t"e poorperformance of t"e company $ould reflect 'adly on t"e institutions 5portfolio mana%ers)pension funds6 $"en t"ey send out t"eir periodic statements to t"eir in!estors&

+otentia" Dan,er of Stoc 7e*urchae

("ere are some real dan%ers $it" stock repurc"ase pro%rams& ("ese include:

If mana%ement spends too muc" cas" as part of t"e stock repurc"ase) li8uidity could 'e"urt& >"en t"e economy %oes off a cliff) its possi'le t"e firm $ould "a!e to declare'ankruptcy 'ecause t"ey didnt "a!e enou%" current assets to make it t"rou%" t"e crisis&

If t"e price paid for eac" s"are as part of t"e stock repurc"ase is too "i%") a stock

repurc"ase can literally destroy !alue& It $ould 'e like purc"asin% * 'ills for +& Despiteo$nin% more of t"e company) lon%-term s"are"olders $ould 'e poorer follo$in% t"etransaction&

If an ac8uisition comes alon% t"at mana%ement really $ants) it may do stupid t"in%s to

close t"e deal) suc" as issuin% ne$ s"ares at a lo$er price t"an it paid as part of t"e stockrepurc"ase plan&

Stock 'uy'ack pro%rams take ad!anta%e of supply and demand 'y reducin% t"e num'er of s"aresoutstandin%) increasin% 9PS s"are"older !alue) float and ultimately t"e price of stock& Inaddition) t"ey are often a $ise use of e7cess cas" and can create ta7 opportunities for t"ein!estor& ;o$e!er) not all 'uy'acks are actually implemented so caution and researc" isad!isa'le&

Maret for )or*orate )ontro"

Market for corporate control) sometimes called e7ternal corporate control) usually comes intoplay $"en a firm@s internal %o!ernance 5'oard of directors6 fails& It often refers to a takeo!er

market $"ere underperformin% or under!alued firms 'ecome attracti!e takeo!er tar%ets 'ypotential ac8uirers& >"en firms perform poorly it often reflects poor internal %o!ernance andt"erefore e7ternal %o!ernance control $ill kick in& Potential ac8uirers mi%"t 'uy up a lar%eamount of a tar%et firm@s e8uity in order to take control of t"e 'oard and su'se8uently replace t"etop mana%ement team 'ecause poor performance often reflects poor mana%ement& ("e aim of atakeo!er is to re!italie a poorly run company and ac"ie!e "i%"er profita'ility after restructurin%&Potential ac8uirers 'elie!e t"at t"ey can mana%e t"e tar%et firm more effecti!ely t"an t"e currentset of t"e top mana%ement team& ("e t"reat of takeo!er can ser!e as a last %o!ernance


24/28

mec"anism 'y ali%nin% t"e interests and %oals 'et$een e7ecuti!es and s"are"olders and t"us putadditional pressure on mana%ers to perform more efficiently&

Barrier to Maret for )or*orate )ontro"

("e po$er of corporate control to eliminate a%ency pro'lems is limited due to 'arriers t"at canmake it more costly for a potential ac8uirin% firm to ac8uire anot"er firm $"ose mana%ers arenot ser!in% t"e firm@s s"are"olders& Some of t"e most common 'arriers to corporate control areindentified ne7t:

Anti taeo'er Amendment

Some companies use formal met"ods t"at are put into place prior to an actual takeo!erattempt&


25/28

announcement of a cas" tender offer or t"e ac8uisition 'y an outsider of a specified percenta%e of

t"e tar%ets s"ares& ("us) a poison pill is effecti!e 'ecause it dilutes t"e economic interest of t"e

"ostile suitor in t"e tar%et) makin% t"e transaction 'ot" economically unattracti!e and impractical

if pursued on a "ostile 'asis&

How it works/Example:

("ere are many poison pill strate%ies t"at "a!e 'een used 'y companies a%ainst "ostile takeo!ersand corporate raiders& For e7ample) offerin% a preferred stock option to current s"are"oldersallo$s t"em to e7ercise t"eir purc"ase ri%"ts at a "u%e premium to t"e company) makin% t"e costof t"e ac8uisition suddenly unattracti!e& #not"er met"od is to take on a de't t"at $ould lea!et"e company o!erle!era%ed and potentially unprofita'le&

Some companies "a!e created employee stock o$ners"ip plans t"at !est only $"en t"e takeo!eris finalied& In addition to a dilution of t"e stock !alue) suc" employee 'enefits may result in anemployee e7odus from t"e company lea!in% it $it"out its talented $orkforce 5$"ic" is often oneof t"e dri!ers of t"e ac8uisition6&

#not"er e7ample is to offer a series of %olden parac"utes for company e7ecuti!es& ("is couldalso make t"e takeo!er of t"e company pro"i'iti!ely e7pensi!e t"e 'uyer "ad planned to replacet"e top mana%ement&

Finally) one non-financial met"od of a poison pill is to sta%%er t"e election of t"e 'oard of acompany) causin% t"e ac8uirin% company to face a "ostile 'oard for a prolon%ed period of time&In some cases) t"is delay in %ainin% control of t"e 'oard 5and t"erefore t"e !otes necessary toappro!e certain key actions6 is a sufficient deterrent for a takeo!er attempt&

#n e7treme implementation of a poison pill is called a suicide pill&

o"den +arachute

=olden parac"ute is t"e name %i!es to t"e 'enefit pro!ided) usually to top e7ecuti!es) t"at

pro!ides income $"en t"e person is terminated or forced out of t"e company 'efore t"e end of a

specific period of time&

Many employees "a!e a se!erance pro!ision as part of t"eir employment contract& ,ften it is

somet"in% like a $eeks pay for e!ery year you $orked for t"e company if you are laid off& Some

e7ecuti!es $ill "a!e lar%er se!erance %uarantees) like si7 to t$el!e mont"s salary) if t"ey are let%o& =enerally) t"ese are ust called se!erance packa%es and not %olden parac"utes&

("e term %olden parac"ute usually is reser!ed for t"e lar%e se!erance arran%ement paid to a top

e7ecuti!e& In an attempt to make a o' offer more attracti!e to a top candidate t"e company may

offer t"at e7ecuti!e a lar%e salary) a 'i% 'enefit packa%e and a num'er of ot"er incenti!es& ,ne of

t"ose incenti!es often is a packa%e of cas") stock) continuation of insurance and clu'


26/28

mem'ers"ips) and anyt"in% t"e e7ecuti!e re8uests t"at $ill 'e paid if t"e e7ecuti!e is terminated&

("is packa%e is called a %olden parac"ute&

("e %olden parac"ute is called t"at 'ecause it pro!ides a Nsoft landin%N for a terminated

e7ecuti!e& =olden refers to t"e fact t"at its money or ot"er income&

Sometimes t"ere is a le%itimate concern t"at t"e e7ecuti!e mi%"t 'e forced out& For e7ample) if

t"e company is 'ou%"t 'y anot"er company t"e C9, $ill lea!e 'ecause t"e com'ined company

doesnt need t$o C9,s& In suc" cases) t"e %olden parac"ute makes sense& ("e sie of t"e %olden

parac"ute may 'e out of proportion to t"e se!erance packa%es of employees or ot"er e7ecuti!es)

'ut t"ere is ustification for it to e7ist&

In ot"er cases) t"e C9, is forced out 'ecause of poor performance of t"e company under "is

direction& In t"ese cases) t"e %olden parac"ute is still paid 'ecause it $as part of t"e contract t"at

$as ne%otiated as part of t"e deal to "ire t"at person& 97ecuti!es lo!e %olden parac"utes& Boards

of Directors comprised mostly of ot"er e7ecuti!es) like t"em too& S"are"olders %enerally dont

like t"em 'ecause t"ey can re$ard poor performance&

#s a rule) re%ular employees "a!e a pro!ision in t"eir contract t"at t"eir se!erance $ont 'e paid

if t"ey are fired for cause& ("at same pro!ision s"ould 'e in all %olden parac"ute a%reements) 'ut

it eit"er isnt t"ere or is i%nored&


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7onc!#sion-


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Bib"io,ra*h(

Financial Markets and Institutions E Oeff Madura

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