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Stocks

saradha.balakrishnan@wipro.com — Fri, 30 Jul 2004 23:46:00 GMT

Stock Basics: Introduction

Wouldn't you love to be a business owner without ever having to show up at work? Imagine if you could sit back, watch your company grow, and collect the dividend checks as the money rolls in! This situation might sound like a dream, but it's closer to reality than you might think.

As you've probably guessed, we're talking about owning stocks. This fabulous category of financial instruments is, without a doubt, one of the greatest tools ever invented for building wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks and how they trade on the stock market.

Over the last few decades, the average person's interest in the stock market has grown exponentially. What was once a toy of the rich has now turned into the vehicle of choice for growing wealth. This demand coupled with advances in trading technology has opened up the markets so that nowadays nearly anybody can own stocks.

Despite their popularity, however, most people don't fully understand stocks. Much is learned from conversations around the water cooler with others who also don't know what they're talking about. Chances are you've already heard people say things like, "Bob's cousin made a killing in XYZ company, and now he's got another hot tip..." or "Watch out with stocks--you can lose your shirt in a matter of days!" So much of this misinformation is based on a get-rich-quick mentality, which was especially prevalent during the amazing dotcom market in the late 90s. People thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom crash proved that this is not the case. Stocks can (and do) create massive amounts of wealth, but they aren't without risks. The only solution to this is education. The key to protecting yourself in the stock market is to understand where you are putting your money.

The Definition of a Stock
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares,equity or stock, it all means the same thing.

Being an Owner
Holding a company's stock means that you are one of the many owners (shareholders) of a company, and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run. In the same line of thinking, being a shareholder of Anheuser Busch doesn't mean you can walk into the factory and grab a free case of Bud Light!

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed--well, this is the theory anyway. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.

Shareholders not being able to manage the company isn't too big a deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt.In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on.

Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.

Debt vs. Equity
Why does a company issue stock? Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of "debt financing” On the other hand, issuing stock is called "equity financing." Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will some day be worth more. The first sale of a stock, which is issued by the private company itself, is called the initial public offering.

It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful. Just as a small business owner isn't guaranteed a return, neither is a shareholder. As an owner your claim on assets is lesser than that of creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.

Although risk might sound all negative, there is also a bright side. Taking-on greater risk demands a greater return on your investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10%-12%. A great proof of the power of owning equities is General Electric.

News Update

saradha.balakrishnan@wipro.com — Fri, 30 Jul 2004 23:31:00 GMT

Stay Updated:

Stocks:

TISCO has planned to provide 1:2 bonus

“The board of directors of the company, at its meeting held today, has decided to issue bonus shares in the ratio of 1:2 i.e. one bonus share for every two existing ordinary shares held by the members of the company, on a record date to be fixed later for this purpose. The issue of bonus shares is subject to the approval of the shareholders to be obtained at the annual general meeting of the company on July 22, 2004. “

http://www.tata.com/tata_steel/releases/20040607.htm

TCS IPO now open

TCS to issue 55,452,600 equity shares of Rs 1 each for cash at a premium through a 100% book building process.
The indicative price band has been fixed at Rs 775 and Rs 900 per equity share of Rs.1 each.
The books will open to accept offers/bids on 29 July 2004 and close on 5 August 2004.
The shares are to be listed on the National Stock Exchange and The Stock Exchange, Mumbai.
The Book Running Lead Managers for the issue are JM Morgan Stanley Pvt. Ltd., DSP Merrill Lynch Ltd. and JP Morgan India Pvt. Ltd.

Current on Market:

TITAN With its FLIP watch :costs 7995

Titan’s latest offering, takes sophistication to a higher level with the introduction of ‘FLIP’, India’s first dual face watch with dual functionality and styling. FLIP, once again underscores the excellent collaborative work undertaken between Titan’s Design Studio, the Production Department and the R&D team.

Watches in the FLIP collection incorporate two watch movements embedded in a single case. The dual faced watch allows wearers to switch between international time zones and alternative lifestyles – be it formal or casual, with the mere ‘flip’ of the dial.

.Net HTTP Response

saradha.balakrishnan@wipro.com — Thu, 29 Jul 2004 21:23:00 GMT

.Net has made a lot of things easier for us developers. One of these things is the way we do HTTP Post and HTTP Get. In classic ASP 3 you were forced to use 3rd party controls.but in .NET we can use as below

Response.Write(EasyHTTP.Send("http://yahoo.com"))
Response.Write(EasyHTTP.Send("http://search.yahoo.com/bin/search", "p=test"))

' EasyHTTP.vb class file
Public Class EasyHTTP
    Public Enum HTTPMethod As Short
        HTTP_GET = 0
        HTTP_POST = 1
    End Enum

    Public Shared Function Send(ByVal URL As String, _
        Optional ByVal PostData As String = "", _
        Optional ByVal Method As HTTPMethod = HTTPMethod.HTTP_GET, _
        Optional ByVal ContentType As String = "")

        Dim Request As HttpWebRequest = WebRequest.Create(URL)
        Dim Response As HttpWebResponse
        Dim SW As StreamWriter
        Dim SR As StreamReader
        Dim ResponseData As String

        ' Prepare Request Object
        Request.Method = Method.ToString().Substring(5)

        ' Set form/post content-type if necessary
        If (Method = HTTPMethod.HTTP_POST AndAlso PostData >< "" AndAlso ContentType = "") Then
            ContentType = "application/x-www-form-urlencoded"
        End If

        ' Set Content-Type
        If (ContentType >< "") Then
            Request.ContentType = ContentType
            Request.ContentLength = PostData.Length
        End If

        ' Send Request, If Request
        If (Method = HTTPMethod.HTTP_POST) Then
            Try
                SW = New StreamWriter(Request.GetRequestStream())
                SW.Write(PostData)
            Catch Ex As Exception
                Throw Ex
            Finally
                SW.Close()
            End Try
        End If

        ' Receive Response
        Try
            Response = Request.GetResponse()
            SR = New StreamReader(Response.GetResponseStream())
            ResponseData = SR.ReadToEnd()
        Catch Wex As System.Net.WebException
            SR = New StreamReader(Wex.Response.GetResponseStream())
            ResponseData = SR.ReadToEnd()
            Throw New Exception(ResponseData)
        Finally
            SR.Close()
        End Try

        Return ResponseData
    End Function
End Class