The specifics of the issue of stocks

In the issue of certain types of securities the company makes its image as a reliable creditworthy enterprise, since this solution is very important from the viewpoint of long term corporate development.

There are the following major advantages of the issue of stocks:

- The stock price allows the company to determine the market value of the company.
- Access to long term capital without necessity to repay.
- Increasing transparency of the company’s operation and strengthening the reputation and prestige of the company.

The investors, acquiring stocks, become the co-owners of the company and all its assets after deduction of the creditors’ claims. The shareholders jointly share risks, related to the company’s operation, and have rights to get certain part of the company’s profit in the form of a dividend.

The stocks vest their owners the right to vote at the general shareholders meeting. The shareholder is the entity that holds the stocks. Unlike the bondholders, considered as the creditors of the company, the shareholders are its owners. There are two major types of shares – common and preference stocks.

The number of preference shares of the company shall not exceed 25% of the total number of authorized shares.

Ordinarily, preference shares have fixed dividends, but this type of shares, unlike common shares, does not provide for the voting right at the shareholders meeting in the company. The amount of dividends on the common shares is not set preliminary and depends on the company’s profit in the given year. The net profit of the joint stock company is distributed annually between the shareholders proportionally to the number of shares they hold and paid as part of profit, called a dividend. The dividend is the income of the shareholder on the stocks he/she holds, which is paid by the joint stock company.

The preference stocks can be more profitable for the joint stock company in comparison with bonds, since the payments on the preference stocks are fixed in the amount, but not in the term, as it is the case with bonds, i.e. they can be postponed to "better times" of the joint stock company.

The raising of capital through public offering of stocks (i.e. for a wide circle of investors) has the following advantages:

1) The enterprise has easier access to capital in the future
2) Public offering of stocks is a source of long term financing
3) In accordance with the general rule, the management of the enterprise retains independency and control over the company
4) Public issue does not assume mandatory annual payment of dividends, depending on the financial results.

The following may be viewed as disadvantages of the public offering of stocks:

1) The performance of a number of strict requirements in the offering of stocks, including the disclosure of information about the company’s operation
2) There are certain expenses on running the securities issue
3) The value of the company and its securities will significantly depend on the market situation, not only the operation of the company.

The amount, indicated on the stock, is the face value. The face value of the stock is the price at which the share is sold to the founders; it is the single price for all common and preference shares, to be set in the constituent agreement. However, the issued shares are sold/bought not at the face value, but the price, spontaneously emerging in the securities market. The price at which the stock is offered and purchased is called the stock price.

It has to be mentioned that the stock price always fluctuates around its face value, depending on the change in proportion between the demand for certain stocks and their supply. During an upturn in production, when profits and, therefore, dividends, grow, the stock price goes up. During an economic recession the dividends shrink and the stock price sharply goes down. The stock market reflects the general "health" of the economy through such barometrical fluctuation. At the same time, inflation always impacts on the stock price.