Section – 1 : Stock and Stock Market Basics
1)Owners Equity = Net Assets
2) Net Asset = Total Assets – Total Liabilities
3) Lenders expect Interest + Capital.
4) Share = Partner’s percentage interest in owner’s equity
5) Stock = Fixed percentage of ownership in a company or business.
6) Stock Market = Marketplace for stocks, where willing buyers and sellers of stock come together to trade with each other.
7) Trading can happen on a Stock Exchange or as a private exchange between two people.
8) Stock Market is nothing but a platform for network of computers where buyers and sellers transact in any security.
9) Trading of stock happens in Primary Market or Secondary Market.
10) Primary Market is the market where debt or equity securities can be issued by the businesses. The business is known as the issuer of the security. The issuer receives funds from the investors, which may be individuals or institutions. Since the investor buys security directly from the issuer, this market is called Primary market or new issue market.
11) Going Public means allowing Public to buy securities for the first time, in a business.
13) Primary Market Issues –
> Public Issue : Issued to members of public. May be IPO of FPO ( Follow-on PO)
> Private Placement : Qualified Institutional Placement ( Involves bidding from Qualified investors ), Preferential Issue( To identified investors )
> Rights and Bonus Issue : Securities are issued to existing investors. Rights is when Investors pay for new Securities, bonus is when shares are issued without payment.
12) All the securities issued in the Primary Market get traded in the Secondary Market.
13) A Stock’s price reflects this continuous evaluation by Investors and also their expectation of performance of the business.
14) Stock Market Participants
– Retail Investor ( Individual investor with surplus money. Basic knowledge, and usually acts on his knowledge or financial advisor. Simple Investment strategy. Less Quantum.
— Institutional Investor ( e.g. Banks, Mutual funds, etc). Specialized knowledge and skills in investing. Complex investment strategy, and achieve results using derivatives. Quantum is large, and have fund mangers to manage the corpus.
15) IPO stands for Initial Public Offering. Its first public offer, and Post IPO – Shares become widely available for investment, and new types of investors become shareholders.
16) IPO -> Fresh Issue ( Company issues new shares, Capital goes up, % share goes down), Offer for Sale( No new shares, No Capital impact, Offered % shareholding goes down, not offered shares percentage stays)
17) FPO -> Follow-on Public Offer is made by companies that are already listed on the exchange, when they require additional capital for growth, or restructure capital by retiring debt.
18) Primary market is where securities are issued for the first time. Once that process is complete, these securities become available to be traded on stock exchanges. The universe of securities that you can trade on stock exchanges actually constitute a secondary market.
19) The main functions of a secondary market are liquidity and price discovery. Liquidity means the ability to buy and sell shares, as per the shareholder’s wishes. Price discovery means, the price at which the business can raise more funds, because Secondary market performs constant evaluation of the future progress of the company.
20) Data from Secondary Market is also used to generate benchmark indices. e.g. Sensex and Nifty in India.
21) In Secondary market, the stock prices are the result of continuous buying and selling of various types of participants in the market. This includes retail investors, institutional investors, short term and long term traders and market makers. It is set by the collective wisdom of all the participants.
22) There are two ways in which an IPO may be priced – Fixed Price or Dutch. In fixed price issue, company decides the price, in consultation with Lead Manager. The price is decided based on the expected performance and price of shares of comparable companies. In Dutch or Book Built Issue, price is decided by Auction. The company and the lead managers set a floor price or a price band, and finally decide on a cut-off price.