STOCK SPLIT

A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included.

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.

Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares.

It is often claimed that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split. In any case, stock splits do increase the liquidity of a stock; there are more buyers and sellers for 10 shares at $10 than 1 share at $100.

Other effects could be psychological. If many investors believe that a stock split will result in an increased share price and purchase the stock the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly signaling its confidence in the future prospects of the company.

In a market where there is a high minimum number of shares, or a penalty for trading in so-called odd lots (a non multiple of some arbitrary number of shares), a reduced share price may attract more attention from small investors. Small investors such as these, however, will have negligible impact on the overall price.

Reverse stock split

A reverse stock split, or reverse split, is just the same, but in reverse: a reduction in number of shares and an accompanying increase in the share price. The ratio is also reversed: 1-for-2, 1-for-3 and so on.

There is a stigma attached to doing this so it is not initiated without very good reason. Many institutional investors and mutual funds, for example, have rules against purchasing a stock whose price is below some minimum, perhaps $5. An extreme case would be when a share price has dropped so low that it is in danger of being delisted from its stock exchange.

It is also possible that a reverse stock split could be used as a tactic to reduce the number of shareholders. In a hypothetical 1-for-100 reverse split any investor holding less than 100 shares would simply receive a cash payment and no shares of stock. If the resulting number of shareholders has then dropped below some threshold, it may be placed into a different regulatory category.

Typically, the stock will temporarily add a "D" to the end of its ticker during a reverse stock split.

Effect on historical charts

When a stock splits it is shown on many charts similar to a dividend payout. But when a stock splits it does not show the dramatic dip in price. Taking the same example as above, a company with 100 shares of stock priced at $50 per share. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. Based on this example you would expect that you would see the stock dropping 1 day from $50 to $25. This would cause chaos in the market as investors would panic if they did not take time to realize that there was a stock split. So what is done is something called adjusted close price. This adjusted close price will take all the closing prices before the split and divide them by the split ratio. So when you look at the charts it will seem as if the price was always $25. Both the Yahoo! historical price charts and the Google historical price charts show the adjusted close prices.

SOURCE : WIKIPEDIA

VOTING SHARE

A voting share (also called common stock or ordinary share) is a stock giving a stockholder the right to vote on matters of corporate policy and the composition of the members of the board of directors.

Voting shares are in contrast to preferred shares, which may have different voting, dividend, or other rights.

SOURCE : WIKIPEDIA

REGISTERED SHARE

A Registered share is a stock that is registered on the name of the exact owner. If the owner of such a share sells his share, the new owner must register with name and address.

Registered shares offer issuers the advantage, enabling them to always know exactly who their shareholders are. Unexpected surprises with active investors could be prohibited with that stock-vehicle.

SOURCE: WIKIPEDIA

TREASURY STOCK

A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings).

Stock repurchases are often used as a tax-efficient method to put cash into shareholders' hands, rather than pay dividends. Sometimes, companies do this when they feel that their stock is undervalued on the open market. Other times, companies do this to provide a "bonus" to incentive compensation plans for employees. Rather than receive cash, recipients receive an asset that might appreciate in value faster than cash saved in a bank account. Another motive for stock repurchase is to protect the company against a takeover threat.

The United Kingdom equivalent of treasury stock as used in the United States is treasury share. Treasury stocks in the UK refers to government bonds or gilts.

Limitations of treasury stock

• Treasury stock does not pay a dividend
• Treasury stock has no voting rights
• Total treasury stock can not exceed the maximum proportion of total capitalization specified by law in the relevant country

Buying back shares

Benefits

If efficient market theory is correct, a company buying back its stock should have no effect at all on its stock price. If the market fairly prices a company's shares at $50/share, if a company buys back 100 shares for $5000, it now has $5000 less cash but there are 100 fewer shares outstanding; the net effect should be that the value per share is unchanged. However, buying back shares does improve certain per-share ratios, such as price/earnings (earnings per share is increased due to fewer shares outstanding), but that is only because valuing a company's shares according to those ratios is not accurate when a company is holding a lot of cash. If a company's shares are underpriced, then a company can benefit its other shareholders by buying back shares. If a company's shares are overpriced, then a company is actually hurting its remaining shareholders by buying back stock.

Incentives

One other reason for a company to buy back its own stock is to reward holders of stock options. Option holders are hurt by dividend payments, since, typically, they are not eligible to receive them. A share buyback program may increase the value of remaining shares (if the buyback is executed when shares are underpriced); if so, option holders benefit. A dividend payment short term always decreases the value of shares after the payment, so, on the day shares go ex-dividend, option holders always lose. Finally, if the sellers into a corporate buyback are actually the option holders themselves, they may directly benefit from temporarily unrealistically favorable pricing.

After buyback

The company can either retire the shares (however, retired shares are not listed as treasury stock on the company's financial statements) or hold the shares for later resale. Buying back stocks reduces the number of outstanding shares. To see this, note that accompanying the decrease in the number of shares outstanding is a reduction in company assets, in particular, cash assets, which are used to buy back shares.

Accounting for treasury stock

On the balance sheet, treasury stock is listed under shareholder equity as a negative number.

One way of accounting for treasury stock is with the cost method. In this method, the paid-in capital account is reduced in the balance sheet when the treasury stock is bought. When the treasury stock is sold back on the open market, the paid-in capital is either debited or credited if it is sold for more or less than the initial cost respectively.

Another common way for accounting for treasury stock is the par value method. In the par value method, when the stock is purchased back from the market, the books will reflect the action as a retirement of the shares. Therefore, common stock is debited and treasury stock is credited. However, when the treasury stock is resold back to the market the entry in the books will be the same as the cost method.

In either method, any transaction involving treasury stock cannot increase the amount of retained earnings. If the treasury stock is sold for more than cost, then the paid-in capital treasury stock is the account that is increased not retained earnings. In auditing financial statements, it is a common practice to check for this error to detect possible attempts to "cook the books".

SOURCE : WIKIPEDIA

APO (ALTERNATIVE PUBLIC OFFERING)

An Alternative Public Offering (APO) is the combination of a reverse merger with a simultaneous Private Investment of Public Equity (PIPE). It allows companies an alternative to the IPO as a means of going public while raising capital.

Overview

There are two parts that comprise an APO; the reverse merger and the PIPE. In the reverse merger, the private company becomes public by merging with or being acquired by a public “shell” company. The shell company is a public company that has no assets or liabilities. When the private company and public shell merge together, the combined entity thereafter trades under the previously private company’s name rather than the shell company’s name as it did before.

What differentiates an APO from a reverse merger is the simultaneous PIPE raise. A PIPE is when a publicly traded company sells its stock to investors in a privately negotiated transaction. The stock is normally sold at a discount to current market value and investors are normally acquiring unregistered “restricted” stock. The typical PIPE investor is institutional investors such as hedge funds or mutual funds. PIPEs are usually completed by investment banks who act as “Placement Agent” in the transaction.

It is believed that the first APO to be completed was China BAK Battery on January 20, 2005 by Halter Financial Group.

Process

An APO is a quick transaction when compared to an Initial Public Offering (IPO). At the closing of an APO, the public shell and private company sign merger documents to complete the reverse merger; file a Super 8K with the Securities and Exchange Commission (SEC), which is the required public disclosure of transaction; file a registration statement with the SEC to register the PIPE shares; release PIPE funds from escrow; and issue a press release announcing the completion of the transaction. The company’s stock now begins trading on the OTCBB, reflecting the new valuation. A company can close an APO in as little as 30 – 45 days. After the close of an APO, the company is funded and has the exact same SEC disclosure requirements as an IPO. Approximately 3 to 4 months after the completion of the APO, the company’s registration statement should clear comments and “go effective” with the SEC. When this is accomplished the company can then submit its application to obtain a listing on NASDAQ, AMEX, or NYSE. Listing approval for the exchanges typically takes about one month. At this point analyst research coverage begins and the company focuses on IR efforts, non-deal roadshow, conferences etc.

At the conclusion of a successful APO transaction, a company has received equity funding and has a base of institutional investors. The company has the sponsorship of an investment bank and is exchange listed with analyst coverage. There is now a true market value for the company and the company is positioned to raise additional capital in PIPE transactions.

Benefits

Companies want to become public through an APO for several reasons. The public shell company already has shareholders, so after the APO is complete, the formerly private company typically already meets the shareholder requirements for NASDAQ and AMEX; 400 and 300 respectively. A company that goes public through an IPO must sell its stock to a large number of shareholders in order to meet these requirements necessitating a broad marketing and roadshow process. Unlike with an IPO, there is no public disclosure required until the transaction closes. Customers, suppliers, employees, and press are unaware until closing. Therefore, a private company can pursue going public through an APO and understand what kind of investor response and valuation they will receive without having to make the “leap of faith” requirement of an IPO. With an IPO a company must publicly announce its intentions and file with the SEC at the beginning of the process. It is only after clearing comments with the SEC and after going on the roadshow that a company learns what kind of investor response and valuation it will receive.

The APO model owes much of its success to the involvement of the Investment Bank as the gatekeeper that standalone reverse mergers never had. In a traditional reverse merger, anyone could simply buy a shell and go public whether or not they had sufficient financial performance to justify being a public company. With an APO, the investment bank would not raise capital for a company that it did not believe would be successful in the marketplace. This is why the APO has such a high success rate. The investment bank also brings research, trading and liquidity to the company’s stock after the transaction closes. Investment banks find the APO process appealing because they can receive the same fees and beakage for raising the capital as they do in an IPO in a much condensed period of time and to a significantly smaller number of investors.

PIPE investors are attracted to the APO because they get to buy stock at a negotiated discount to the projected public market value of a company. In addition, because the company completed a reverse merger and is now public, there is a guaranteed exit defined upfront if they wish to get out. After a company completes an APO, potential investors will be inclined to invest in additional PIPE raises for the company because the public company has had SEC disclosures from day one including audited financial statements, Sarbanes-Oxley, 10Qs, 8Ks, etc. Many tier 1 hedge funds are active investors in APO and many investment banks support the process. There are many tier 2 and tier 3 banks that are active in APO business.

Disadvantages

Investors expect a discount on stock since they are selling restricted securities and thus this is a more expensive cost of capital to the company. The aftermarket of an APO typically takes 6 – 12 months to develop and thus there is minimal stock liquidity immediately at closing.

SOURCE : WIKIPEDIA

IPO, THE NEXT ONE

Reasons for listing

When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order to raise extra capital at the same time. The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company.

The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms.

In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list

Procedure

IPOs generally involve one or more investment banks as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include:

• Dutch auction
• Firm commitment
• Best efforts
• Bought deal
• Self Distribution of Stock

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold. Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions—up to 8% in some cases.

Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups.

Because of the wide array of legal requirements, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City.

Usually, the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of existing shares. However, certain regulatory restrictions and restrictions imposed by the lead underwriter are often placed on the sale of existing shares.

Public offerings are primarily sold to institutional investors, but some shares are also allocated to the underwriters' retail investors. A broker selling shares of a public offering to his clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering, the purchase price simply includes the built-in sales credit.

The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option.

SOURCE : WIKIPEDIA

DEVIDEND

A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders. also called payout.

SOURCE : investorwords.com

STOCK PRICES CHANGE

Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1 million shares outstanding has a lesser value than a company that trades at $50 that has 5 million shares outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further complicate things, the price of a stock doesn't only reflect a company's current value, it also reflects the growth that investors expect in the future.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It would be a rather simple world if this were the case! During the dotcom bubble, for example, dozens of internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the price/earnings ratio, while others are extremely complicated and obscure with names like Chaikin oscillator or moving average convergence divergence.

SOURCE: www.investopedia.com

IPO

initial public offering (IPO), also referred to simply as a "public offering," is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

SOURCE : WIKIPEDIA

SHAREHOLDER

Individual, group, or organization that holds one or more shares in a firm, and in whose name the share certificate is issued. It is legal for a firm to have only one shareholder. Also called stockholder.

SOURCE : /www.businessdictionary.com/