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initial public offering

What Are Shares and Why Are They Issued?

May 8, 2009

in Money Management

Anyone can buy stocks. All you have to do is talk to an investment professional, and you can be a stockholder in short order. But those who have never invested in the stock market may be hesitant to do so.

One of the biggest reasons people are unwilling to invest in stocks is because they simply don’t understand them. After all, the ability to buy a certificate and be entitled to a portion of the issuing company’s profits does sound a little too good to be true. But there is plenty of logic behind the concept.

Shares are, quite simply, pieces of ownership in a company. It’s up to the company how the initial shares are distributed. They may be sold to a select group in an effort to maintain as much control as possible over the company. Or they may be sold on the stock market, making it possible for anyone to buy them.

But why would a business want to sell off pieces of its ownership? In most cases, it is done to raise capital quickly. When a business needs to obtain assets, it is usually faced with a choice of saving the money to get them, borrowing money, or selling stock. Borrowing requires repayment of principal plus interest. Saving the money needed may take a long time. Selling shares is quick, and there is no need to repay the money received.

The issuing of shares also offers other benefits for the company. It provides an avenue for founders to cash in on their investments and move on to other ones. It provides a way for the company to gain notoriety. And some companies issue shares as a way of providing incentives for employees.

Some businesses sell off all ownership in shares, but many retain some of the stock to keep some control of the company. They may issue only part of their stock in their initial public offering (IPO), then issue more shares at a later date. This gives them a means of gaining additional capital when it is needed. They could also issue new shares, but this dilutes the value of both new and existing ones.

There are also plenty of benefits for shareholders. Holders of common stock receive voting rights at shareholders meetings, allowing them to have a say in how the company is run. Stockholders are also entitled to dividends in consideration for their investment. Dividend amounts are determined by how much profit the company makes, and they are divided equally among shares.

The issuing of shares is a win-win situation for the company and its future shareholders. The company gets the capital it needs to grow, and shareholders get the opportunity to reap a portion of the profits.

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Understanding Securities

May 6, 2009

in Money Management

For the uninitiated, the stock market and all of the terms associated it can be as clear as mud. While most of us have a basic understanding of stocks themselves, our eyes tend to glaze over when presented with related concepts. So if you have no idea what securities are, you’re certainly not alone.

Actually, the concept of securities is not terribly complicated. In fact, a stock is a kind of security. In the financial sense, security is defined as a document that represents ownership of a given asset. In addition to stocks, securities assign ownership of bonds, treasury certificates and more.

Some securities are issued to people chosen by the issuer. This is called private placement, and an example is stock in a privately held corporation. Privately placed securities may not usually be publicly traded on the stock market.

Securities that may be traded publicly are called public offer securities. This is the type of security that is traded on Wall Street. The issuer makes a certain number of shares available in an initial public offering, or IPO. These shares may then be traded among investors. The issuer may later decide to issue more shares.

Securities may be registered, or they may be bearer instruments. Registered securities bear the name of the holder, and they are also registered by the issuer or his agent. Bearer securities may be freely traded without consulting the issuer. Bearer securities are uncommon in the United States, and are restricted in most countries.

Securities Law

Due to the nature of securities, fraud is a common occurrence. Criminals may alter legitimate securities or produce counterfeit ones. Another type of securities fraud that we often hear about is insider trading. This occurs when information about a security that is not available to the general public is used to make trading decisions.

To combat securities fraud, the federal government tightly regulates stocks, bonds and other investments. In fact, there is an entire agency dedicated to the regulation of securities. The Securities and Exchange Commission, or SEC, investigates fraud related to the sale, exchange and offering of securities.

States also play an important role in fighting securities fraud. They set licensing and registration requirements for securities professionals. In some cases, those who participate in securities fraud can find themselves in trouble at both the state and federal level.

Securities themselves are quite simple. They are merely documents that entitle someone to a specific investment. The practice of trading securities is also relatively simple. The hardest part is knowing which securities to purchase and trade. An investment professional can help you get started with securities, and once you know the ropes, trading them on your own can be lucrative.

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