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Types of securities
Security – a certificate attesting credit, the ownership of stocks and bonds, or the right to ownership connected with tradable derivatives.
In Britain stock is used to refer to all kinds of securities, including government bonds. The word equity or equities is also used to describe stocks and shares. The places where the stocks and shares of listed or quoted companies are bought and sold are called stock markets or stock exchanges.
Shares are certificates representing part ownership of the company. Ownership in a company is divided among stakeholders or shareholders. The original shareholders are the people who started the business, but now they have sold shares of the profits to outsiders. By selling these entitlements to share in the profits, the business has been able to raise new funds.
For public companies the shares or stocks can be resold on the stock exchange to anyone prepared to pay the going price. Even the largest company occasionally needs to issue additional new shares to raise money for especially large projects.
To buy into the company, a shareholder must purchase shares on the stock exchange. As reward for this initial outlay, shareholders earn return in two ways. First, the company makes regular dividend payments, paying out to shareholders that part of the profit that the company does not willing to re-invest into business. Second, the shareholders may take capital gains (or losses). (For example, if you buy company X shares for 600 euro each and then everyone decides its profits and dividends will be unexpectedly high, you may be able to resell the shares for 650 euro, making a capital gain of 50 eur per share on the transaction.
If the company suffers a loss or goes bankrupt then the shareholders can lose only the money they originally spent buying shares.
There are common or ordinary shares, and preference shares or preferred stock. Holders of preference shares receive a fixed dividend that must be paid before holders of ordinary shares receive a dividend. Holders of preference shares have more chance of getting some of their capital back in the case of bankruptcy, they are repaid before other shareholders, but after owners of bonds and other debts.
Security indicates either an ownership position in a corporation (a stock), or a creditor relationship with a corporation or a governmental body (a bond), or rights to ownership, such as hose, represented by option, subscription right or warrant. Thus, bonds guarantee to repay their face value after a certain number of years and pay a fixed rate of interest to the bond-holder in the meantime.
The price written on the share, the nominal value, is hardly ever the same as the price it is currently being traded on the stock exchange. The market price depends on supply and demand and can change every minute during trading hours. Trades in stocks quote bid (buying) and offer (selling) prices. The spread or difference between these prices is their profit.
Another type of securities is option – actually, it’s a contract giving the holder a right to buy a designated security (this is a call option) or sell it (this is a put option) at or within a certain period of time at a specified price. In a number of companies apart from salary an executive’s compensation package can include share options, the right to buy the company’s share at an advantageous price. It’s a kind of benefits or perks.
16. Mergers, takeovers & acquisitions
If shareholders decide on a company’s policy by voting, then whoever owns the majority of shares in a company can take decisions.
A threat that the company can be taken over keeps the management on their toes. By the way, takeover battles are often fought through the pages of the press.
An attempt to get control of a public limited company may be carried out by purchasing, to offering to purchase, the whole or part of the ordinary shares. And the price is usually well in excess of their quoted price.
Besides takeovers, there are M&As, mergers (two companies join together to form a new one) and acquisitions (one company buys another one). The latter happens when a company offers to buy all the shareholder’s shares at a certain price (higher than the market price) during a limited period of time. This is called a takeover bid.
If a company tries to buy as many shares as possible on the stock market, hoping to gain a majority is called a raid. The raid practice has been under attack in the press, and some bids have been nothing more than attempts to make a great deal of money at the expense of the shareholders. But, usually, this is only possible when the company’s assets have been undervalued by the directors who have allowed them to be shown in the balance sheet at a figure that is far below their true value.
If a company’s Board of Directors agrees to a takeover, and the shareholder’s agree to sell then it becomes a friendly takeover. On the contrary, attempts to acquire companies in the face of opposition from existing management are called hostile takeovers. The number of hostile takeovers relative to friendly takeovers is small: however, drama surrounds them, and they usually capture the interest of the press and the public.
Opponents of hostile takeovers, including the management of the target company, claim these takeovers are not in the long-run interests of the stakeholders. The opponents claim that the “raiders” will sell off assets to pay the acquisition and severely cut back on research and development expenditures to converse cash and to generate immediate increases in reported earnings.
Companies have various ways of defending themselves against a hostile bid. For instance, they can try to find another company that they preferred to be bought by.
Sometimes the companies choose issuing new shares at a big discount, which reduces the holding of the company attempting the takeover, and makes the takeover much more costly.
It is legal and it is worse when proxy fights occurs. Prosy is the authority to represent someone else, especially in voting. If you do something by proxy, you arrange for someone else to do it for you. This is the situation when a group of outsiders try to gain control of a company by persuading existing shareholders to vote into office a new team of directors.
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