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Advantages to Shareholders

Anthony Green

March 04, 2008

When you buy stock in a corporation, you own part of that company. So as a part of a corporation, shareholder will be entitled to share the profits of the company.

Now all the shareholders can be benefited by 2 ways:

When a company pays out profits to the shareholder, the money received is called a "dividend". The corporation's board of directors chooses when to declare a dividend and how much to pay.

Or when performs well, the stock price will go up and shareholders can sell their stocks at a profit. This will happen when more investors want to buy stock in a company than wish to sell.

So if someone sees a good future of your pizza shop and they can expect that their money is going to grow with the company, they won't mind investing in your pizza shop. Example : If you have invested $1000 to buy 100 shares of a company at $10 each and the share price rose to $13 each, you would gain $300. That is equivalent to 30% return.

Why People Sell Stocks

There can be so many reasons behind that. A person may just need the money. He or she may have watched the stock price go up, and have a feeling that this is the right time to get out of the trade and lock in some profit.

Any bad news about the company or the industry, or a disappointing company's earning report can also motivate him to sell the stock. He may also sell stocks because he sees a better opportunity in some company.

For example, one may sell IBM shares, which is not moving, because he thinks he can make better profit in Microsoft. Most of time, investors sell the stocks because they have watched the price fall and in panic, they just want to get out of the trade before they lose even more.

The Process of Issuing Stocks

Corporations sell stock to public as one way to raise capital. They are not allowed to sell shares of stock on the open market without the approval of the Securities and Exchange Commission (SEC).

A 20 days wait is required before it can sell the stock.

Companies may make their statement public with a preliminary prospect called "Red Hearing". Basic information about the new offering is provided including how many shares are being offered, which brokerage company will distribute the stocks to the public.

Now the company cannot sell the stock directly to the company. So they hire an investment banker to help it sell its stocks. The process is called "Underwriting". The investment banker works as a intermediary between the company and the public.

In most cases, underwriter purchases the stocks from the company for resale to the public at higher price.

The difference between the price the underwriter pays and the price the public pays is called as "Underwriting Spread".

A stock issue can be underwritten by several methods.

The underwriter can act as an agent, in which it tries to sell as much of the issue as it can at market prices. This is a best effort arrangement.

The issuing company can also agree to issue new stock on the condition that all of it is sold. If all of the stock is not sold, then it will withdraw the issue. This is an all-or-none arrangement.

A negotiated underwriting is when the issuer and the corporation negotiate the terms of the issue, the price, the size and other details.

The issue may be subject to competitive bids from investment bankers. The top bidder underwrites the issue and resells it to the public.

When a public company issues more of its stock, it must first offer that stock to existing shareholders; that is their preemptive right. A standby is the public sale of whatever stock the existing shareholders have not yet purchased.

A firm commitment arrangement is when an investment banker buys all of the stock from the corporation and then resells it to the public at a higher price.

A private placement is an offering in which the company sells to private investors and not to the public. Private placements do not have registration fees.

The Prospectus

Prospectuses are legal documents that explain the financial facts important to an offering. They must precede or accompany the sale of a primary offering.

The law requires companies selling primary offerings to send prospectuses to anyone who wants to buy a primary offering. Customers should read a prospectus carefully before purchasing any primary offering.

Prospectus must include but are not limited to the following:

Offering Price

Legal Opinion about the issue

Underwriting Method

The history of the company

Other costs related to the investing in the stock

The management Team

The handling of proceeds

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