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[Economy] Shares vs Stocks, Rights Issueof Shares, Bonus Shares, RSU

1. Share versus stock2. Dif ferent types of shares3. Rights issue of shares4. So, what s the point in doing rights issue?5. To reduce the debt: equity rat io6. Bonus shares7. Employee stock opt ion scheme8. Restricted stock unit (RSU)

Share versus stockSuppose the company has issued 1000 shares, worth Rs.10 eachYou purchased 50 shares of this company. So you have to pay 50 shares x 10 Rs. Each =Rs.500That means you own 50 Shares of this company andYou 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 you.But ult imately, both shares and stocks suggest the same thing: Equity. You alreadyknow what equity means, if not click me

Different types of sharesNormal sharesIt comes with vot ing rights. This is what you get f rom rout ine IPO>>Share thingPreferent ial sharesAlready discussed in the SBI capital infusion art icle

St ill There are some topics related to shares

Rights issue of sharesYou 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 toissue addit ional shares. But under the companies act , you can issue addit ional shares tothe exist ing shareholders only. This is called rights issue of sharesHere, you give not ice to the exist ing shareholders, of fer them to buy your new-shares,

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you cannot of fer any other outsider to purchase the shares.If you do not want rights issue of shares, you have to hold a general meet ing ofshareholders and pass a resolut ion that company does not need to offer new shares tothe existing shareholders, and these new shares are available for anybody to purchase

So, whats the point in doing rights issue?Well the direct ut ility of rights issue= obviously to gather more money to expand yourcompany.But it is also used for other purpose

To reduce the debt: equity ratioFrom the Debt VS Equity art icle: There are credit rat ing agencies S&P, CRISIL etc. theygive rat ing to your companys bonds. AAA,BBB etc.Lower the rat ing = higher the interest rate youve to of fer, to seduce the people intobuying your bonds. (Recall the Junk Bonds.)But before giving rat ing to your bonds, the credit rat ing agency will look into yourcompanys performance, assets, liability everything. And one of the thing theyreinterested in, is Debt to Equity Rat ioThe company with high debt to equity rat io = it has more debt = compulsory interestpayment = t rouble = lower rat ing.If such company issues more bonds to gather money, it ll have trouble; its new bonds willreceive even lower credit rat ing. So, what can they do?Another case: Youre kingf isher. Youre not doing good, nobody is helping you. So youwant some foreign investor to come and help you. But hell also look into debt:equity rat iobefore f inalizing the terms of deal. What can you do to appear good in f ront of him?Obviously: reduce the Debt to Equity rat io. But how?Simple: of fer new equity (shares) to exist ing shareholders @ a discounted rate. (=Rightsissues of shares). Youve of fer it at a discounted rate, else no one would buy it . Youredoing this whole exercise, because youre in t rouble in the f irst place.

For example: Here is my offer of Rights issue:1:1, Face value Rs.100, @ Discount of Rs.50Meaning, if you already have 10 shares of my company, you can buy 10 more shares fromme (1:1), Each of these shares will have Worth Rs.100 printed on it but Ill give it to youfor Rs.50 only.What good does it do to me? Well in the legal record, for the calculat ion of Debt VsEquity =theyll calculate using Rs.100 face value. Thus my Debt:Equity rat io will go down,and Ill look good when credit rat ing agency / FDI investor starts evaluat ing me.

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Bonus sharesIn the debt versus equity art icle, you saw that a company can collect money from peopleby issuing shares (IPO/Equity/Stock whatever you want to call it ), but every year, companyreports the prof it to the board of directors. The board of directors will decide how muchprof it is to be re-invested in the company and how much prof it is to be shared with theshareholders.The prof it , thus shared with the shareholders is called dividend. Generally dividend issent to the shareholders via cheques.But somet imes,company also gives you extra shares.It means company paid the money to purchase shares on your behalf and gives it to you.So you got f ree shares and next year when company distributes the dividends (cash), youwill get more dividend, because now you are holding more shares. Alternat ively, you cansell away these bonus shares to someone else and take out the money.These are called bonus sharesWhat is the dif ference between Bonus shares and rights issuesWell, as a shareholder, you get shares for f ree under bonus shares.But youll have to pay money for buying new shares under rights issue

Employee stock option schemeHere the company issues shares its employee at a discount price.This is done to make the employees commit ted to the success of company because ifthe company makes more prof it , they can walk away with higher dividends.Such shares have minimum lock in period: for example if your boss gives it today, youcannot sell it for one or two years.

Restricted stock unit (RSU)This is also a form of Employee Stock Opt ion but here the company promises to delivershares to its employee in future date.For example, Apples new CEO Tim Cook: hell get $900,000 of cash salary and a $377million in RSU.Apple will deliver him 500,000 shares of Apple stock in 2016, and 500,000 more shares in2021 as long as he stays employed at the company.

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[Economy] Shares vs Stocks, Rights Issue of Shares, Bonus Shares, RSUShare versus stockDifferent types of sharesRights issue of sharesSo, whats the point in doing rights issue?To reduce the debt: equity ratioFor example: Here is my offer of Rights issue:

Bonus sharesEmployee stock option schemeRestricted stock unit (RSU)Previous Posts