Dividend payout ratio

Investors have varying preferences in regards to the type of returns and gains expected from their investments. As postulated by Gibson (p 337), the choice between capital and revenue gains depends on the intrinsic characteristics of the investors. As a result, some investors will prefer cash dividends to stock dividends. As a result, the dividend payout ratio acts as a measure of attractiveness to the investors for any company. High payout ratios are attractive to investors who prefer revenue gains while a low payout ratio enables companies to retain earnings for expansion. Return on shareholders’ funds

Also known as the return on equity (ROE), this ratio portrays the performance of the company from the point of view of the shareholders (Wiehle, 102). Investors are interested in knowing the portion of the income which will accrue to the company. In spite of investor preference in relation to capital or revenue gains, this ratio displays the actual gain to their investment. According to Pepsico Inc: Key Records (web, 2010), the ROE for the year was 37. 3% compared to an industry average of 30. 2%. Owing to the considerable level of earnings accruing to investors PepsiCo emerges the most attractive investment.

Earnings per share Wiehle (p 190) outlined that the earnings per share (EPS) acts as a measure of attractiveness to investors owing to the fact that investors are concerned about knowing the amount of the earnings which will accrue to each unit of investment in the company. As a result, the earnings per share display the returns accruing to each unit of investment in the form of equity. This emanates from the fact that not all earnings accrue to shareholders. The EPS is displayed by the following formula, and PepsiCo’s EPS for the year was 16. 0 (Pepsico Inc: Key Records, web, 2010).

High earnings per share imply that the shareholders rewards for investing in the company are significantly high. As a result, most investors will prefer to invest in companies with high earnings per share. Conclusion The above outlined financial ratios affirm the notion that PepsiCo Inc. is a favorable investment for most rational investor who aims acquiring financial gains from their investment. In spite of the fact that financial ratios are not a conclusive indicator to the actual scenario of an organization owing to the substantial number of assumption made, it still remains the most appropriate way of gauging the performance of a company.

Works Cited Consolidated Statements. “Consolidated Statements of Income”. PepsiCo 2009 Annual Report . 6 February 2010. Web. 2 June 2010. http://www. pepsico. com/annual09/financialContent_Statements. html Gibson, Charles, H. “Financial reporting and analysis” California: Cengage Learning, 2009, p 297-335 Pepsico Inc: Key Records. “Money”. MSN. 2010 Web 2 June 2010 http://moneycentral. msn. com/investor/invsub/results/compare. asp? Page=FinancialCond ition&Symbol=US%3aPEP Wiehle, Urlich, et al. “100 US GAAP Financial Ratios”. Cometis AG, 2005, p99-210

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Stock Market and Disk Drive Operations

Question: – Why is Seagate undertaking this transaction? Is it necessary to divest the Veritas shares in a separate transaction? Who are the winners and losers resulting from the transaction? Solution: – Seagate is undertaking this transaction to generate significant wealth gains for Seagate shareholders. There is a value gap generates due to Seagate’s VERITAS stake. VERITAS stake value exceeds the entire market capitalization of the Seagate. Seagate faces two problems because of VERITAS stake. First, the company’s core disk drive operations were not receiving full value in the market.

Second, the company would incur a significant tax liability if the company attempt to monetize its VERITAS stake be selling the shares. Yes, it is necessary to divest the VERITAS shares in a separate transaction. It helps the company to save itself from tax liabilities and distributing the VERITAS stock tax free to its shareholders. The Seagate shareholders are definitely winner if the two-step transaction will happen. The shareholders of Seagate get higher value of disk drive operations and tax free shares of VERITAS. The Seagate Management is also winner.

They get rid of tax liabilities related to VERITAS stocks and get full value of disk drive operations. The VERITAS also feel like winner as they get higher number of stocks in exchange of lesser number of stocks. Question: – Does the negative value of Seagate’s operating assets imply markets are inefficient? Solution: – The negative value of Seagate’s operating assets implies that markets are inefficient. The core disk drive operations do not receive its full value in the market. Seagate’s Management thinks that disk drive operations value is larger than what the value is in market.

This shows that markets are inefficient. Question: – Why might a negative value exist? Solution: – Tax liabilities: – The negative value of the Seagate’s operating assets is due to tax liabilities which the company is facing because of VERITAS stocks. Other liabilities : – Fear that managers will destroy value: – The negative value of the Seagate’s operating assets is not due to fear that managers will destroy value. Moreover, the investors have trust in the managers of the Seagate that’s why they want to retain the top management of the Seagate in the newly build company.

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Stock Market and Stock Option Plan

Should the company implement the proposed employee stock option plan? In a typical stock option plan, the employee is offered a specific number of shares which he/she can exercise (buy) at some specified time in the future. The price at which the employee can buy the stock is equal to the market price at the time the stock option was granted (grant price). The employee’s gain is equal to the market value of the stock at the time it is exercised, less the grant price. If the market price of the stock remains the same or decreases relative to the grant price, then the stock option is worthless.

Stock options are typically offered to managers, most technical individual contributors and about half of the other professionals. Smaller organizations offer stock options more widely, in some cases to all employees In THTF case, stock options are offered to the former category. There are various factors that Tsinghua Tongfang should consider before implementing the proposed employee stock option plan. Future growth Stock options are appropriate for small companies where future growth is expected. Being a young company, THTF looks to be well posed for future growth.

Cultural differences In China, there is high importance attached to feeling valued and having a sense of belonging. This results in Chinese companies having to maintain a good reputation for treating their employees well or risk unwanted attention. In the current economic climate, competitions for key employees are extremely fierce. Options, to a certain extent, do inspire loyalty and commitment and provide employees with a sense of ownership which is a unique and potentially powerful compensation tool.

However, research (Economist’s article “False Options”) has shown that unlike the US counterparts, the Chinese rarely exercise vested stock options during their tenures at the firm. This may be due to the perceived notion in China where cashing out stock option may suggest disloyalty to the firm since once the options are cashed, the alignment of ownership and management no longer exists. Thus, options become an ineffective measure. Hence, there may a need for the company to consider the level of understanding among its Chinese employees with regard to options. An option may become an ineffective measure as seen from above.

Educating employees is one resolution but the cost and logistical burden of such undertaking may outweigh the potential benefits for company and its employee. In THTF’s case, as the key management are pushing for the implementation of the stock option, it can be inferred that they do understand the usefulness of stock options. Retention Retention of employees is of great interest especially in the high-tech industry THTF was based in. Key management were highly sought after. Stock options can serve as a retention mechanism as stocks options will motivate employees to remain with the firm as they can see their investment grow.

Stocks options will also encourage less risk-averse and optimistic employees or have employees that can increase value to work at the firm. This may be aligned with THTF interests. Therefore, stock options can help to retained and attract suitable people to work at the firm. However stock options can fall underwater due to bearish stock market conditions rather than poor firm performance and cause major morale and retention problems. This may lead to stock options not having their intended effects. Still, in this THTF’s case, they are currently in a robust and high-growth economy, thus stock prices are unlikely to fall.

From an incentive point of view, employees benefit when stock price goes up, so stock options motivate employees to increase their company’s price. This si aligned with the shareholders interest as when stock price goes up, presumably value has been created. The stock options may get the employees to think like shareholders. Nonetheless, this may not be the case. An option holder does not share the downside in holding the stock. If the stock loses value, the option holder will simply just fail to exercise the option and thus avoid the loss. Risk that would scare off a shareholder is a matter of indifference to an option holder.

This may lead management taking too much risk as the upside to taking the risk gives high paybacks whereas there is virtually no downside. In THTF, other measures need to be put into place to make sure of the interests’ alignment before implement stock options compensation. Employees From the employee’s point of view, receiving stock options is a huge benefit as the employee can reap financial success from the firm. But is it really so? The executives may suffer from the more volatility then the market as they are too under diversified with their stake too over concentrated in a irm. Employees should not put their eggs – instruments and salary – into one basket. Thus, this will lead to the undervaluing of options by the employees. This shows that options are wasted on employees. Market Paranoia Stock options compensation may also lead to the market being deeply suspicious of the corporation. When top executives are paid in stock options compensation, they get huge compensation packages which are hidden away from public scrutiny. Furthermore, stock options also dilute shareholders.

Management may also manipulate the market before the stock options grant date to get a better deal for themselves which would lead to excess volatility. Thus, having stock options compensation may lead to distrust from the market, having long term adverse effects on the stock prices. Conclusion Given the current restrictions and ambiguities of the Chinese laws and regulations applicable to options, THTF should take a conservative approach to such practice. If THTF determined that the use of options is immediately necessary for the recruitment and retention of employees, the options should be granted.

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Role and Functions of Stock Exchange in India

Table of contents

A Presentation Report on Role and Functions of Stock Exchange

Introduction

A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.

To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.

A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks (see stock valuation). There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities

Stock Exchange Definition

According to Husband and Dockerary “Stock exchanges are privately organized markets which are used to facilitate trading in securities. According to securities contract ( regulation ) act of 1956 “An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities”.

Features of Stock Exchange

  1. Market for securities: Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.
  2. Deals in second hand securities: It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market.
  3. Regulates trade in securities: Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade
  4. Allows dealings only in listed securities: In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.
  5. Transactions effected only through members: All the transactions in securities at the stock exchange are effected only through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only.
  6. Association of persons: A stock exchange is an association of persons or body of individuals which may be registered or unregistered.
  7. Recognition from Central Government: Stock exchange is an organised market. It requires recognition from the Central Government.
  8. Working as per rules: Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.
  9. Specific location: Stock exchange is a particular market place where authorised brokers come together daily (i. e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.
  10. Financial Barometers: Stock exchanges are the financial barometers and evelopment indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange.

The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as ‘The Native Share & Stock Brokers Association’. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE SENSEX in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading SENSEX futures contracts.

The development of SENSEX options along with equity derivatives followed in 2001 and 2002, expanding the BSE’s trading platform. Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition. This automated, screen-based trading platform called BSE On-line trading (BOLT) currently has a capacity of 8 million orders per day. The BSE has also introduced the world’s first centralized exchange-based internet trading system, BSEWEBx. o. in to enable investors anywhere in the world to trade on the BSE platform. The BSE is currently housed in Phiroze Jeejeebhoy Towers at Dalal Street, Fort area. NATIONAL STOCK EXCHANGE The National Stock Exchange (NSE) is stock exchange located at Mumbai, India. It is in the top 20 largest stock exchanges in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1 trillion and over 1,652 listings as of July 2012.

Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. The NSE’s key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization. NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities.

There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. In 2011, NSE was the third largest stock exchange in the world in terms of the number of contracts (1221 million) traded in equity derivatives. It is the second fastest growing stock exchange in the world with a recorded growth of 16. 6%.

Role of stock exchange

Effective Mobilisation Of Savings Stock exchanges provide organised market for an individual as well as institutional investors.

They regulate the trading transactions with proper rules and regulations in order to ensure investor’s protection. This helps to consolidate the confidence of investors and small savers. Thus, stock exchanges attract small savings especially of large number of investors in the capital market.

Promoting Capital formation

The funds mobilised through capital market are provided to the industries engaged in the production of various goods and services useful for the society. This leads to capital formation and development of national assets. The savings mobilised are channelised into appropriate avenues of investment. Wider Avenues of investment Stock exchanges provide a wider avenue for the investment to the people and organisations with investible surplus. Companies from diverse industries like Information Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers, etc. offer various kinds of equity and debt securities to the investors. Online trading facility has brought the stock exchange at the doorsteps of investors through computer network. Diverse type of securities is made available in the stock exchanges to suit the varying objectives and notions of different classes of investor.

Necessary information from stock exchanges available from different sources guides the investors in the effective management of their investment portfolios. * Liquidity of investment Stock exchanges provide liquidity of investment to the investors. Investors can sell out any of their investments in securities at any time during trading days and trading hours on stock exchanges. Thus, stock exchanges provide liquidity of investment. The on-line trading and online settlement of demat securities facilitates the investors to sellout their investments and realise the proceeds within a day or two.

Even investors can switch over their investment from one security to another according to the changing scenario of capital market. * Investment priorities Stock exchanges facilitate the investors to decide his investment priorities by providing him the basket of different kinds of securities of different industries and companies. He can sell stock of one company and buy a stock of another company through stock exchange whenever he wants. He can manage his investment portfolio to maximise his wealth. * Investment safety

Stock exchanges through their by-laws, Securities and Exchange Board of India (SEBI) guidelines, transparent procedures try to provide safety to the investment in industrial securities. Government has established the National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI) for investors’ safety. Exchange authorities try to curb speculative practices and minimise the risk for common investor to preserve his confidence. * Financial resources for public and private sectors Stock Exchanges make available the financial resources available to the industries in public and private sector through various kinds of securities.

Due to the assurance of liquidity, marketing support, investment safety assured through stock exchanges, the public issues of securities by these industries receive strong public response (resulting in oversubscription of issue). Funds for Development Purpose Stock exchanges enable the government to mobilise the funds for public utilities and public undertakings which take up the developmental activities like power projects, shipping, railways, telecommunication, dams & roads constructions, etc.

Stock exchanges provide liquidity, marketability, price continuity and constant evaluation of government securities. Indicator of Industrial Development Stock exchanges are the symbolic indicators of industrial development of a nation. Productivity, efficiency, economic-status, prospects of each industry and every unit in an industry is reflected through the price fluctuation of industrial securities on stock exchanges. Stock exchange sensex and price fluctuations of securities of various companies tell the entire story of changes in industrial sector. Barometer of National Economy Stock exchange is taken as a Barometer of the economy of a country. Each economy is economically symbolized (indicators) by its most significant stock exchange. New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and Bombay Stock Exchange are considered as barometers of U. S. A, United Kingdom, Japan and India respectively. At both national and international level these stock exchanges represent the progress and conditions of their economies.

Functions  of Stock Exchange:

Stock exchange provides a ready and continuous market for purchase and sale of securities. It provides ready outlet for buying and selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed securities. Facilitates evaluation of securities Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i. e price list). Encourages capital formation.

Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing and risk taking among the investing class and converts their savings into profitable investment. It acts as an instrument of capital formation. In addition, it also acts as a channel for right (safe and profitable) investment. Provides safety and security in dealings Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted as per well defined rules and regulations. The managing body of the exchange keeps control on the members.

Fraudulent practices are also checked effectively. Due to various rules and regulations, stock exchange functions as the custodian of funds of genuine investors. Regulates company management Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i. e supervision) of stock exchange authorities. Facilitates public borrowing Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly. Provides clearing house facility.

Stock exchange provides a clearing house facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility. Facilitates healthy speculation Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector. Serves as Economic Barometer

Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions. Facilitates Bank Lending Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities.

Thus, stock exchange serves the nation in several ways through its diversified economic services which include imparting liquidity to investments, providing marketability, enabling evaluation and ensuring price continuity of securities. Thus we can say that Stock exchange is the mirror of economy

References

  1. Financial Management – I. M Pandey
  2. Financial Management – Prasanna Chandra
  3. Business studies – B. S Raman
  4. Business studies – P. K Lasar
  5. http://moneycontrol. com
  6. http://investopedia. com
  7. http://wikipedia. com
  8. http://kalyan-city. blogspot. in

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The Help of Technology to the Stock Market

The purpose of this research paper is to prove that technology has been good for the stock market. Thanks to technology, there are now more traders than ever because of the ease of trading online with firms such as Auditrade and Ameritrade. There are also more stocks that are doing well because they are in the technology field. The New York Stock Exchange and NASDAQ have both benefitted from the recent technological movement.

The NYSE says they “are dedicated to maintaining the most efficient and technologically advanced marketplace in the world.” The key to that leadership has been the state-of-the-art technology and systems development. Technology serves to support and enhance the human judgement at point-of-sale.

NASDAQ, the world”s first fully electronic stock market, started trading on February 8th, 1971. Today, it is the fastest growing stock market in the United States. It alo ranks second among the world”s securities in terms of dollar value. By constantly evolving to meet the changing needs of investors and public companies, NASDAQ has achieved more than almost any other market, in a shorter period of time.

Technology has also helped investors buy stocks in other markets. Markets used to open at standard local times. This would cause an American trader to sleep through the majority of a Japanese trading day. With more online and afterhours trading, investors have more access to markets so that American traders can still trade Japanese stocks. This is also helped by an expansion of most market times. Afterhours trading is available from most online trading firms.

For investing specialists, technology provides operational capability for handling more stocks and greatly increased volumes of trading. Specialists can follow additional sources of market information, and multiple trading and post-trade functions, all on “one screen” at work or at home. They are also given interfaces to “upstairs” risk-management systems. They also have flexiblity to rearrange their physical workspaces, terminals and functional activities.

Floor brokers are helped with supports for an industry-wide effort to compare buy/sell contracts for accuracy shortly after the trade. They are also given flexibility in establishing working relationships using the new wireless voice headsets and hand-held data terminals. The ability to provide new and enhanced information services to their trading desks and institutional customers is provided. They have a comprehensive order-management system, that systematizes and tracks all outstanding orders.

Technology gives a market”s member organizations flexibility in determining how to staff their trading floor operations as well as flexiblity in using that market”s provided systems, networks and terminals or interfacing their own technology. They are given assurance that their market will have the systems capacity and trading floor operations to handle daily trading and in billions of shares. Member organizations get faster order handling and associated reports to their customers, along with speedier and enhanced market information. They also have a regulatory environment, which assures member organiztions that their customers, large and small, can trade with confidence. Technology also allows lower costs, despite increasing volumes and enhanced products.

Companies listed on the NYSE are provided with an electronic link so they may analyze daily trading in their stock, and compare market performance during various time periods. The technology also supports the visibility of operations and information, and regulated auction-market procedures, which listed companies expect from their “primary” market in support of their capital-raising activities and their shareholder services.

Institutions get enhanced information flow from the trading floor, using new wireless technologies, as to pre-opening situations, depth of market, and indications of buy/sell interest by other large traders. Also supported are the fair, orderly, and deeply liquid markets which institutions require in order to allocate the funds they have under management whether placing orders in size for individual stocks (block orders) or executing programs (a series of up to 500 orders usually related to an index).

For institutional investors, technology gives information on timely trades and quotes and makes them available through member firms, market data services, cable broadcasts and news media. They also are provided with a very effective way of handling “smaller” orders, giving them communications priority and full auction market participation for “price improvement” yet turning the average market order around in 22 seconds. Price continuitity and narrow quotation spreads, which are under constant market surveillence and a regulatory environment which enforces trading rules designed to protect “small investors” are also supported.

There are many different kinds of equipment used on the stock market. One of these machines is SuperDot, an electronic order-routing system through which member firms of the NYSE transmit market and limit orders directly to the trading post where the stock is traded. After the order has been completed in the auction market, a report of execution is returned directly to the member-firm office over the same electronic circuit that brought the order to the trading floor. SuperDot can currently process about 2.5 billion shares per day.

Another piece of machinery is the Broker Booth Support System. The BBSS is a state-of-the-art order-management system that enables firms to quickly and efficiently process and manage their orders. BBSS allows firms to selectively route orders electronically to either the trading post or the booths on the trading floor. BBSS supports the following broker functions: recieving orders, entering orders, rerouting orders, issuing reports, research, and viewing other services via terminal “windows”.

The overhead “crowd” display is America”s first commercial application of large-scale, high-definition, flat-screen plasma technology. It shows trades and quotes for each stock. The display also shows competing national market system quotes. Clear, legible information is displayed at wide viewing angles. Full color and video capabilities are also provided.

The “Hospital Arm” Monitor is suspended for convenient viewing by specialists. Multiple data sources that are displayed include point-of-sale books, overhead “crowd” displays, market montage and various vendor services. The list of information sources is going to continue expanding.

The Point-of-Sale Display Book is a tool that greatly increases the specialist”s volume handling and processing capabilities. Using powerful workstation technology, this database sysem maintains the limit order book for which the specialist has agency responsibility, assists in the recording and dissemination of trades and quotation changes, and facilitates the research of orders. All of this serves to eliminate paperwork and processing orders.

The Consolidated Tape System is an integrated, worldwide reporting system of price and volume data for trades in listed securities in all domestic markets in which the securities are traded. The Hand-Held is a mobile, hand-held device that enables brokers to recieve orders, disseminate reports, and send market “looks” in both data and image format, from anywhere on the trading floor.

Intermarket Trading System is a display that was installed in 1978 linking all major U.S. exchanges. ITS allows NYSE and NASDAQ specialists and brokers to compare the price of a security traded on multiple exchanges in order to get the best price for the investor.

These are the machines that have helped greatly increase the buying and selling of stocks over the past few years. There are great advantages to trading today over the situation that past traders had. The biggest beneficiaries of this new technology are investors themselves. They have all day to trade instead of trading only during market hours, they have more stocks to choose from, and the markets are very high so people are making a lot of money.

In conclusion, I have discovered that the research I have done on this project has revealed what I originally thought to be true. That is that the stock market has greatly benefitted from the recent advances in technologies.

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The United States in 1930s

The triggering event that led to the Wall Street stock market crash in October 1929 was the result of a steady decline in production, prices and income over the period of three months. Anxiety gave rise to panic thus resulting to the crash.  The stock market crash affected various countries and the effects were intense.  The depression affected greatly the United States because of the absence of welfare benefits for the laid off workers.  Between 1929 and 1933, money income fell by 53 percent and as a consequence, demand fell significantly, which in turn led to lower production and more lay-offs up to 25 percent rate of unemployment in 1933.

And yet despite the severity of the stock market crash, the Federal Reserve did not pursue a monetary expansion policy which would have stimulated the economy through lower interest rates and increased the stock of money in circulation. As part of the efforts of the United States to cope with the Depression, the Hawley Smoot Tariff of 1930 was enacted which made US more protectionist than ever thereby sending import duties to record highs.  As a result, other countries retaliated as the new tariff act hastened the downfall of American trade volume. Since President Hoover has been protective of the tariff act, he failed to see the results of the move.

Immediately thereafter, the Depression spread through out the world especially in Europe. Particularly affected was Germany whose economy was unable to cope with the slow disappearance of American capital. It is also worth discussing that Germany was still paying reparations for World War I which made its position even more delicate. Germany was then forced to borrow from Great Britain and France.  The country had to pursue deficienary policies in order to gain the confidence of investors and attract foreign funds.

The problem of devaluation further posed a major problem. Although the United Kingdom was not hit in the same way as Germany, it however experienced a notable decline in its export which was even greater than the decrease in its imports.  Latin America was also greatly affected as it depended heavily in selling raw materials in the US. It could not be surmised that the Wall Street crash was the immediate cause of the decline in world trade.  The decline in world trade was largely due to the protectionist legislation passed by major trading nations.

When Hoover was replaced by President Roosevelt in 1932 and brought with him the New Deal which was intended to provide direct relief, recovery and financial reform to the country suffering from the Great Depression. One of Roosevelt’s primary programs was to deal with the country’s banking catastrophe. Since one-fifth of all of the banks in the US were forced to close and many people were already starting to lose their life savings, Roosevelt asked Congress to legislate a law which will protect the saver’s investment in times of the same crisis. This eventually restored the people’s trust in the banking system. Perhaps one of the most important legislation and mark left by the New Deal is the Social Security Act which set up a national system of old-age pension and also coordinated relief for the unemployed.  Both agriculture and industry were also supported by policies to restrict output and increase input.

Perhaps the most durable  policy left by the New Deal was  the great public works project such as the Hoover Dam and the introduction by the Tennessee Valley Authority of flood control, electric power, fertilizer and education to a depressed agricultural region in the south. However, the New Deal was certainly not a perfect example of economic management as it did not lead to rapid economic recovery.  Income per capita was no higher in 1939 than in 1929, although the government’s welfare and public works policies did benefit many of the most needy people. The big growth in the US economy was, in fact, due to rearmament. (Modern American Poetry)

Despite the promises of the New Deal, it nevertheless reaped various criticisms as the programs were questioned.  For example, the National Industrial Recovery Act of 1933 which was originally intended to make possible “ a great cooperative movement throughout all the industry in order to obtain wider reemployment, to shorten the working week, to pay a decent wage for the shorter week and to prevent unfair competition and disastrous overproduction.” However, the NIRA was attacked because it gave stimulus to the industries that needed it least and ignored the industries that needed it the most. It also gave Roosevelt unprecedented powers over the economy and other businesses.

The increase of criticisms against Roosevelt and the New Deal, Roosevelt was forced to look for support elsewhere.  During the presidential campaign in 1936, he built the “Roosevelt Coalition” a political bloc that made modern politics.  While the Republicans were still relying on their traditional base of political support such as big businesses, farmers and conservatives, Roosevelt and the Democrats turned to small farmers in the Midwest, urban political bosses, even ethnic blue collar workers, the ethnic minorities, Jews and intellectuals.  As evidence by the support of African-Americans, Roosevelt was certainly changing American politics. Thus, it was no surprise that the Democrats won the race in 1936.

On the other hand, labor and labor unions played a great role during the 1930s.  In fact, many Americans became alarmed by the labor union’s power which they felt might be irresponsibly used under certain circumstances.  For the labor force, they are responsible in continuing industrialization although many of the workers are divided from each other ethnically, regionally and religiously.  Nevertheless, with mass unemployment and real distress among the workingmen, public opinion, which had long looked upon unions as “radical” outfits, came to sympathize with their purposes for the first time. Reflecting that public opinion, the new deal Congresses passed laws which favored organization and recognition of labor unions. Meanwhile, the courts, which had taken a restrictive view of the rights of labor when they seemed to conflict with those of private property, rendered more favorable decisions and upheld the new laws.

Reference

  1. Monique Ebell. (2006). Welfare Capitalism, Union Power and the Great Crash of 1929: Toward a Neoclassical Explanation of the Great Depression.”  XIV International Economic History Congress, Helinski 2006 Session 20.
  2. F. William Engdahl. “Some Conventional Reflections on the Great Depression and the New Deal.” GeoPolitics-GeoEconomics.  Online http://www.engdahl.oilgeopolitics.net/History/New_Deal/new_deal.html accessed October 1, 2006.
  3. Stanley Schultz. “Dr. New Deal Becomes Dr. Win-the-War.” American History 102: Civil War to the Present. Online http://us.history.wisc.edu/hist102/lectures/lecture20.html
  4. Labor and Labor_Management. Online https://www.netsafa.navy.mil/ipg/labor_and_labormanagement.htm  accessed October 1, 2006.
  5. “Legacy of the New Deal in Comparison with Other Deals” : http://www.bergen.org/AAST/Projects/depression/legacy.html

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Initial Public Offer

Initial public offer (IPO) as the name suggests refers to when a company goes public or issue shares of the company to the public in order to raise capital for the first time. After the IPO, the company gets listed and its shares are traded on stock exchange. Once it gets listed then the permission to trade these shares is granted by shareholders i. e. to whom the shares have been allotted in the IPO. There can be many reasons for bringing out an IPO. First, when the company issues new shares to the public, then the money raised from public goes to the company.

Second, when the Govt. Sell their stake in the company to the public, then the money raised goes to the Govt. (like the disinvestment of PSUs). However, one must be wondering why would individuals invest in a particular company? The answer is dividends. The shareholders expect the company will distribute the share of future profits among them as dividends. How an IPO is conducted IPOs generally involve book runners i. e. one or more investment banks known as underwriters. The underwriters retain a portion of the proceeds as their fee. This fee is called an underwriting spread.

Various methods of conducting an IPO are Dutch auction, Firm Commitment, Best Efforts, Bought Deal and Self Distribution of stock. IPOs can be made through the Fixed Price Method or Book Building Method. In the fixed price method, the price at which the securities are offered is fixed in advance. In the book building method, the investors have to bid for shares within a price band specified by the issuer and the final price is decided after observing the result of the bidding. The fixing of the band and the bidding process are done with the help of an investment bank or a group of several companies specializing in securities.

While most of the companies are eligible to make a public issue are free to decide the price band but infrastructure companies are subject to follow SEBI norms as well as banks are required to get RBI’s permission. The prices are decided by the company’s board of directors, which fixes the band after consulting the book runner (particularly an investment bank). In India, the issuer is allowed a price band of 20% (that is the cap of band should not be more than 20% above the floor price i. e. the lowest price that a seller will accept). After deciding the band, bids are invited on all prices of the band.

Once the book is closed, the seller fixes the price at which all of its shares will get sold. However, there can be a situation of Oversubscription of an IPO (i. e. if applications are received for more number of shares than the company is authorised to allot). In that case, the allocations would be done proportionately among all the successful bidders i. e. among those bidders who did bidding at the price determined by the company or at the price higher than that. After the price has been determined on the basis of bidding, the public advertisement containing the rice as well as table showing the number of securities and the amount payable by an investor is issued. Various Investors Involved ? ? ? Retail Investors Non-Institutional Investors Qualified Institutional Buyers If a company is making an issue through 100 % book building process then1) Minimum 35% shall be offered to Retail Investors 2) Minimum 15% shall be offered to Non-Institutional Investors 3) Maximum 50% shall be offered to Qualified Institutional Buyers. There can also be FPO (Follow on public offer) when company’s offer to the public is not for the first time. There are certain advantages attached with going public.

Capital can be used to pay off existing debt or to fund capital expenditure. Moreover, another advantage is an increased public awareness of a particular company as IPOs helps in attracting new potential customers which may ultimately leads to increase in the market share of a company. Before deciding whether to go public or not, a company must evaluate all the potential benefits or challenges that will arise. The book runners involved in the process (i. e. investment banks) are given the responsibility to find out the pros and cons of an IPO and determine whether it is favourable or not for the company.

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