Project Report on A STUDY ON FINANCIAL ANALYSIS SHARE KHAN, Bangalore Submitted in partial fulfillment of the requirement of the BACHELOR

OF BUSINESS MANAGEMENT Degree course of BANGALORE UNIVERSITY By Tanmoy Mondal Reg. No. 08AZCO8004

UNDER THE GUIDANCE OF Mrs. Malli Faculty, Academy of Business Management

K.L.E.SOCIETYS S.NIJALINGAPPA COLLEGE ACADEMY OF BUSINESS MANAGEMENT ND 2 BLOCK, RAJAJINAGAR, BANGLORE- 560010 2009-2010

TABLE OF CONTENTS

Chapter no.

Particulars

Page No

Executive summary 1.1 Industry Profile 1.2 Company Profile

2 3

Literature survey Research methodology General introduction 3.1 Statement of the problem 3.2 Objective of the study 3.3 Scope of the study 3.4 Methodology 3.5 Limitations of the study

4 5 6 7

Analysis and Interpretation of Data Findings and suggestions Conclusion Bibliography

LIST OF TABLES

SL. NO. TITLE

TABL E NO.

PAG E NO.

1 2 3 4 5 6 7 8 9 10 11

Share prices of Pharmaceutical companies Share prices of FMCG companies Share prices of Software companies Share prices of Banks Share prices of Cement companies Share prices of 5 different sectors Predicted share prices of Pharmaceutical companies Predicted share prices of FMCG companies Predicted share prices of Software companies Predicted share prices of Banks Predicted share prices of Cement companies

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11

EXECUTIVE SUMMARY

A stock market, or equity market, is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

The size of the world stock market is estimated at about $36.6 trillion US at the beginning of October 2008. The world derivatives market has been estimated at about $480 trillion face or nominal value, 12 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include the London Stock Exchange, the Deutsche Brse and the Paris Bourse, now part of Euro next.

The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.

In the stock market, practically the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders.

In this study of Analysis Of The Equity Share Value And Estimation Of Future Share Price For 5 Sectors movements of share prices of five companies of five different sectors, for the period of 10 years, we identify the movements of share prices with that of other external factors and the future value of these shares for the next three years is calculated. This purpose is accomplished by using the Future value formula as a measuring tool.

This project is undergone in the company SHAREKHAN LIMITED. The investigation reveals that since the future is not certain, the values calculated may not be accurate as these are interrelated to the other external factors.

In a nutshell the analysis of equity prices and the future estimation interprets that any amount of theoretical applications evolved to study the movement of equity share prices would be applicable only with a pinch of salt. As in the practical scenario is that there are more unseen factors and forces operating in the background, which end up influencing the share prices in stock market.

1.1 INDUSTRY PROFILE

A stock exchange is an organized place or market where listed securities are traded. The Securities Contracts Regulation Act, 1956 defines it as an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulation and controlling business in buying, selling and dealing in securities. The working of stock exchange in India is regulated by the Securities Contracts (Regulation) Rule 1957 & Exchange Board of India Act 1992 (SEBI Act). The main objective of the Acts is to establish unitary control over all the stock exchanges by the central government with a view to making them really helped for the economic development of the country.

The stock exchange is regulated by the following agencies1. Stock exchange division, development of economic affairs, ministry of finance. 2. Securities & Exchange Board Of India (SEBI)

Online trading is a new and upcoming phenomenon, which is now becoming a popular means of trading due to the convenience of use. Its a sea change that has been bought about in the equity markets. With E-trading sites now sprouting all over the place, even small retail investors with sums as low as Rs. 5000 to invest, now have the ability to buy stocks directly from the stock market even in odd lots at a fee that even larger brokers didnt match for their institutional clients until recently.

Thanks to Dematerialization of stocks, one can now buy even one share of any stock at a cost that can be as low as 0.05% of the trade3 value. E-trading also does away with the tedium of having to physically tender cheques for every purchase and deposit cheques received for every sale. The payments gateway lined up by these sites also ensures that the transfer of funds between the investors bank and the brokerage account is done online

INDIAN STOCK MARKET OVERVIEW

With over 21 million shareholders, India has a third largest investor base the world after USA and Japan. Over 9000 companies are listed on stock exchange, which are serviced by approximately 7500 stockbrokers. The Indian capital market is significant in terms of the degree of development, volume of trading and its tremendous growth. There are 23 recognized stock exchanges in Indian including the over the counter exchange of India (OTCEI), for small and new companies. The Bombay Stock Exchange (BSE) and National Stock Exchange of India Ltd., (NSE) are the two primary exchanges in India. However, the BSE and NSE have established themselves as the two leading exchanges and also for about 80% of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volumes. NSE was set up as a model exchange to provide national wide services to investors. NSE that in its recent past has accounted for the largest trading volumes has a fully automated based system that operates in the wholesale debt market segments as well as capital market segments. BSE, one of the oldest stock exchanges in the world, accounts for the largest number of listed companies and has started a screen based training system with the introduction of the Bombay Online Trading system.

Both the exchanges have a different settlement cycle. The primary index of BSE is BSE SENSEX comprising thirty stocks. NSE has the S and P NSE 50 Index (Nifty), which consist of fifty stocks. The markets are closed on Saturdays and Sundays, both the exchanges have switched over from the open outcry trading system to a full automated computerized mode of trading known as BOLT (BSE Online Trading) and NEAT (National Exchange Automated Trading) system. It facilities more those effective processing automated order matching, faster execution of traders and transparency.

The scripts traded on the BSE have been classified into A, B1, B2, C, F and Zgroups. The A group of shares represents those, which are highly liquid, market capitalization of greater than 200 Crore. The B1 group of shares represents Moderate liquidity, B2 group of shares represent Low liquidity, the C group of shares convey the odd lot securities in a, B1, B2 groups and rights renunciation. The F group of shares represents the debt market (Fixed income securities) segment. The Z group of shares represents Default or Blacklisted companies. The key regulator governing stock exchange, Broker, Depositors, Depository Participants, Mutual Funds, FIIs and other participants in Indian Primary and Secondary marker is the SEBI that has issued detailed guidelines for capital issue, disclosure by public companys and investor protection.

TRADING METHOD

Listed securities are traded on the floor of the recognized stock exchange where its members trade. An investor is not permitted to enter the floor of the exchange and he has to trust the broker to: 1. Negotiate the best price for the trade. 2. Settle the account, i.e. payment for securities sold due date. 3. Take delivery of securities purchased.

Trading in a stock exchange is conducted in two ways: 1. Ready delivery contracts. 2. Forward delivery contracts.

Ready delivery contracts or cash trading on cash transaction. These fulfill the following criterion: All listed securities can be traded. Settlement within seven days. Carryover facilities not permitted.

DEPOSITORY ACCOUNT A depository account is similar to the bank accounts. It gives a summary of an investors holding of securities in the companies traded in the Indian Stock Exchanges and records transaction details of securities bought and sold during the period. This information of securities holding is maintained in the electric form. The securities in the depository account do not have any numbers to distinguish them and are identified by the total number of securities held for each company by the depository on the investors account.

INTRODUCTION TO ONLINE TRADING

There is a world of difference in the way people trade these days. Gone are the days when traders and brokers jostled, screaming their lungs out in a crowded bullring to make various deals. With the advent of Internet trading there has come about a drastic change in trading. It is now rather quite on the stock market front.

After online banking, online trading is probably the biggest revolution unleashed by technological innovation. For the first time in a century and a half, trading power has shifted from stockbrokers to individual investors. This revolution has advanced significantly in the US and is being felt in Europe, Japan, Australia, China and South Korea.

Online trading has become quite popular in the last couple of years because of the convenience and ease of use. Online trading has basically replaced a phone call with the Internet. Instead of interacting with the brokers over the phone, consumers are now clicking the mouse. Online trading has given customers access to account information, stock quotes, elaborate market research and interacting.

Online trading is the perfect combination of the medium of the net catering to a real life concept. Given that trading is all about having access to multiple information sources, from the companys performance to the industrial and

economic scenarios as well as possessing the analytical tools to process this information, the net is the perfect solution to investor needs. Online trading is all about bringing together under one site all the relevant factors to enable an informed investment at cheaper rates.

Through online trading, the securities industry has, for the first time paved the way for implementation of direct order placement, directly onto the broking firms trading system via the Internet. Due to this price setting power for trading execution has shifted from the brokers and traditional stock exchanges to the Electronic Communication Networks (ECN).

ADVANTAGES

Internet trading has a variety of advantages, and below, a few of them are listed. They are: 1. Easy access to information and research: Internet brokerage houses offer easily accessible company information, investment advice, counseling on how to profitably invest and better manage an investors portfolio and verity the various portfolio and verify the various tips got from various sources. 2. Markets on the desktop: Investors do not have to go take the trouble of going to the stock exchange or to his/her brokers office, the investor has got all he/she requires on his/her desktop. 3. Portfolio management: Investors can track their portfolio performance, that is, it is faring in the market. If the portfolio is not performing well investors can get advice on restructuring it. 4. Best prices: Online trading has resulted in a phenomenal reduction in the transaction cost for the investor as online trading ensures a matching of buying and selling orders within an ENC without the intervention of market markets or traditional stock exchanges

5. Liquidity: The liquidity option available for investors has been considerably stretched as the online trading offers 24 hours trading facilities. 6. Audit trial: Online trading has imparted greater transparency which is subject to scrutiny, by providing an audit trial for an investor right at his desk, which earlier, used to stop at his brokers trading terminal. The integrated electronic chain, starting with the order-placement-clearing and settlement function and ending with the credit and settlement function and ending with the credit to the depositary an account of the investor is largely a transparent process. 7. Benefit of saving: Individual investors can save a lot more through online trading as the cost per trade while trading online is less. 8. Variety: Individual invests in a variety of products, unlike earlier when investors bought bonds, mutual funds and stocks for long-term basis and sat on term. Now individuals can invest in stocks, stick options, mutual funds, individual, government, corporate, municipal bonds, various types of IRA account mortgages and even insurance.

DISADVANTAGES

A few of the possible disadvantages of online trading can be noted as follows: 1. Speedy net connection: One the most important requirements for any investor while trading online is the need for fast internet connection as time is of essence while trading. This has not yet been well established in India.

2. Guidance: Individuals are restricted to first hand guidance; the individual is the one to make the own decision, online trading doesnt help investors while decision making as a broker can.

3. Crashes: If the network crashes, there will be problems and delays due to large influx of traffic and rapid online trading criteria.

4. Communication links: There is need for more effective communication links over the internet and the ability of the server to deal with the volume of visitors.

1.2 COMPANY PROFILE

Sharekhan is a retail broking arm of S.S Kantilal Ishwarlal Investors Services Pvt Ltd, an organization with more than 8 decades of trust and credibility in the stock market. Sharekhan Ltd (Formally SSKI Investors Services Pvt Ltd) was promoted by Mr.Shripal.S Morakhia and Mr.Shreyas.S Morakhia. It is currently Indias largest broking house. It is a member of the stock exchange, Mumbai. It is a depository participant of the NSDL and CDSL. Its business includes stock broking, depository services, portfolio management and derivatives.

The companys core specialty lies in its retail distribution with a large network of branches i.e. 640 share shops (retail shops) in 280 cities in India and subbrokers/authorized persons. Its strengths lies in its investment research capabilities. Its research division has several analysts continuously monitoring global, national and regional political, economic and social situations so as to assess their impact on the economy in general, the sectors and companies they research which helps them if offering quality research and advice to clients.

NATURE OF THE BUSINESS CARRIED

Sharekhan is a stock broking company. The company offers a complete range of pre trade, trade and post trade service on the BSE (Bombay stock exchange) and the NSE (National stock exchange). Whether the client come in to the companys conventionally located offices and trade in a dedicated environment or issue instructions over the phone, our highly trained team and sophisticated equipment ensure smooth transactions and prompt service. Investment Advisory service Facilitation services to Retail Investors, Corporate. Depository services Investment options includes: 1. Online trading(Includes equity, derivatives) 2. Commodities trading 3. Mutual funds 4. Portfolio management services Sharekhan Branches are conceptualized to be place where investors can come in contact with investment opportunities in an atmosphere of convenience and comfort. Our services are available through our network of 640 Share shops spanning 280 major towns and cities in the country. Professional seeks to educate clients & end their confusion by custom an Investment Plan according to the needs of clients and are also today a part of companies induction program advising employees on how to plan their investments.

VISION, MISSION AND OBJECTIVES

VISION To be the best retail broking brand in the Indian equities market

MISSION To educate and empower the individual investor to make better investment decisions through quality advice and superior service

OBJECTIVES
To ensure satisfaction through teamwork and professional management To provide good quality of services on a continuous basis to the satisfaction of clients. To attain specified level of performance every year and ensure compliance with statutorily requirements. To extend effective guidance to brokers, to clearing house Corporation, companies and investor in E-Stock Trading. To eliminate paper work and bring in front of electronic stock market in India.

MILESTONES OF SHAREKHAN
1922: The SSKI started its operation in stock broking 1922: The SSKI became the first member in the BSE as institutional broker 1984: Ventured into corporate finance 2002: The site was launched on February 8th in on-line trading 2002: The next generation technology product Speed trade was launched on April 17th 2002: The advanced technology in the online business Speed trade plus was launched on October 28th for derivative trading 2006: The Sharekhan crossed US $ 8 billion of private equity deals

ACHIEVEMENTS OF SHAREKHAN Rated among the top 20 wired companies along with Reliance, HLL, Infosys, etc by Business Today, January 2004 edition Awarded Top Domestic Brokerage House four times by Euro money a nd Asia money. Pioneers of online trading in India amongst the top 3 online trading websites from India. Most preferred financial destination amongst online broking customers Winners of Best Financial Website award Indias most preferred brokers within 5 years. Ahwaz Consumers Award 2005

FUTURE PLANS

2,00,000 plus retail customers being serviced through centralized call centers/web solutions branches/semi branches servicing affluent/ aggressive traders through high skill financial advisor 250 independent investment managers/franchisee servicing 50,000 highly valued clients New initiatives- Portfolio Management Services and Commodities trading

OWNERSHIP PATTERN
The Sharekhan is presently has 64% of its share by CITI CAPITAL VENTURES and only 12% is owned by its promoters and remaining 24% by others.

Ownership Pattern CITI CAPITAL VENTURES (64%)

SHAREKHAN (12%)

OTHERS (24%)

INFRASTRUCTURAL FACILITIES Sharekhan outlets are designed to be places where retail investors can come in touch with Investment opportunities in an atmosphere of convenience and comfort. The look and feel of the offices across India projects a consistent branch image for the company. The features that enable a unique facility for retailing financial service include among others.

Products and service offered by Sharekhan

The products offered by Sharekhan are as follows Online products 1. Classic Account 2. Trade tiger

1. Classic Account: This account allows the client to the trade throughout website and is suitable for the retail investors. Our online trading website also comes with the Daily Trade service that enables you to buy and sell shares by calling their dedicated toll free number. 2. Trade tiger TRADE TIGER is a next-generation online trading product that brings the power of your brokers terminal to your PC. It is ideal for active traders who transact frequently during days trading session capitalize on intra-day price movements. TRADE TIGER is an internet-based application available on a CD, which provides every-thing a trader needs on one screen, thereby, reducing the required to execute a trade. TRADE TIGER has all the above-mentioned features with the power to trade in cash and derivatives from a single screen.

SERVICES OFFERED BY SHAREKHAN

Following services are offered:

1. Trading facilities: Sharekhan as a member of NSE& BSE provides both offline and online trading facilities nationwide for trading the securities in secondary market to its clients. The companys wide network of outlets spread across the country facilities to executive the orders in secondary market.

2. Derivatives: (futures and options) The company also facilitates the trading system for trading in secondary market under future and options segment of NSE and BSE. The equity dealers in the company will be eager to give insights into the new sets introduction in the Indian Capital Market futures and options.

3. Depository services: Sharekhan is a Depository participant of National Securities Depository Limited and Central Depository and Securities Limited. Sharekhan will open De-mat accounts, which will investors to convert physical certificates of shares into electronic balances in an account maintained.

4. Margin financing: In the present rolling settlement scenario, Sharekhan understand investor need for additional capital availability for daily purchaser shares. It offers

unique facility avail finance, for purchasing shares at very competitive interest rates.

5. IPOs and mutual funds: Sharekhan offers the change of investing in the potentially lucrative IPO market. Sharekhan is a distribution house for all mutual funds. This is the news scheme introduced by the company and it also offers schemes catering to investors with varying risk return profiles. 6. Stock lending and borrowing: One can place an order of shares with Sharekhan. It is approved intermediary of the security or lending scheme. These would be sent out the borrowers, these earnings fees for all investors idle shares. Thus Sharekhan fulfill the investor need for borrowing and lending of shares.

7. Equity research: Sharekhan has a highly rated research using involved in macroeconomic studies, industry and company specific equity research. The research teams inputs will be available as daily trading calls, quarterly investment picks and long term investment picks, based on the fundamentals of particular company and the industry as a whole.

8. Internet trading: Investors can also trade their securities through this facility by logging into companys website. The virtual world that Sharekhan offers online trading services through.

9. Portfolio management services: Sharekhan securities are a registered portfolio manager with SEBI to manage portfolios on behalf of clients with a discretionary and non discretionary right. This service is a provision for those who may not have the time to manage their stock investments or require the service of companys highly specialized profession team.

10. Other services Free access to investment advice from Share khans research team Sharekhan Value line (A monthly publication with review of recommendations stocks to watch out) Daily research reports and market review ( high noon and eagle eye) Daily trading calls based technical analyses Cool trading products ( Daring derivatives and market strategy) Personalized advice Live management information Internet- Based online trading Online BSE & NSE executions through BOLT & NEAT terminals

LITERATURE SURVEY

INTRODUCTION TO EQUITY SHARES Equity means Equal. Equity share is a share that gives equal right to holders. Equity shareholders have to share the reward and risk associated with ownership of company. Equity shareholders are the owners of the company who have control over the working of the company. They are paid the dividend at the rate recommended by Board of Directors. The dividend rate depends on the profits, more profits more dividends and vice versa. If there are no profits, no dividend will be payable. But some companies pay dividends even if the company has no profits to maintain dividends stability. The amount required to pay dividends will be transferred from general reserve account. An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock also called equity or stock or corporate stock.

Features of Equity Stocks

Permanent capital: An equity source is the main long term or permanent source of finance. They can be redeemed of refunded only at the time of liquidation that too from the residue left after meeting the entire obligation. Residual claim to income: Residual claim means the income leftover after paying all outsider claims. The residual income is also known as earnings available to equity share holders, which is equal to profit after tax minus preference dividend. Residual claim to assets: Equity shareholders have a residual claim on assets. In the event of liquidation of a firm, the assets are used first to settle the claims of outside creditors and preference shareholders, if anything left that is equity shareholders residue. Voting right: Equity shareholders as real owners of the company they have voting right in appointing Directors and Auditors of the company participate and vote in annual general meeting. Limited liability: This is the prime feature of equity share. Although, equity shareholders are the owners of the company, their liability is limited to the extent of the investment in the share.

Types of Equity
Common stock or ordinary shares

Common stock, as it is known in the United States, or ordinary shares, according to British terminology, is the most important form of equity investment.

An owner of common stock is part owner of the enterprise and is entitled to vote on certain important matters, including the selection of Directors.

Common stock holders benefit most from improvement in the firm's business prospects. But they have a claim on the firm's income and assets only after all creditors and all preferred stock holders receive payment.

Some firms have more than one class of common stock, in which case the stock of one class may be entitled to greater voting rights, or to larger dividends, than stock of another class. This is often the case with family owned firms which sell stock to the public in a way that enables the family to maintain control through its ownership of stock with superior voting rights.

Warrants
Warrants offer the holder the opportunity to purchase a firm's common stock during a specified time period in future, at a predetermined price, known as the exercise price or strike price.

The tangible value of a warrant is the market price of the stock less the strike price. If the tangible value when the warrants are exercisable is zero or less the warrants have no value, as the stock can be acquired more cheaply in the open market.

A firm may sell warrants directly, but more often they are incorporated into other securities, such as preferred stock or bonds.

Warrants are created and sold by the firm that issues the underlying stock.

In a rights offering, warrants are allotted to existing stock holders in proportion to their current holdings. If all shareholders subscribe to the offering the firm's total capital will increase, but each stock holder's proportionate ownership will not change. The stock holder is free not to subscribe to the offering or to pass the rights to others.

Issuing shares

Few businesses begin with freely traded shares. Most are initially owned by an individual, a small group of investors (such as partners or venture capitalists) or an established firm which has created a new subsidiary. In most countries, a firm may not sell shares to the public until it has been in operation for a specified period.

Some countries bar firms from selling shares until their business is profitable, a requirement that can make it difficult for young firms to raise capital.

Flotation
Flotation, also known as an initial public offering (IPOs), is the process by which a firm sells its shares to the public. This may occur for a number of reasons. The firm may require additional capital to take advantage of new opportunities. Some of the firm's original investors may want it to buy them out so they can put their money to work elsewhere. The firm may also wish to use shares to compensate employees, and a public share listing makes this easier as the value of the shares is freely established in the market place. The flotation need not involve all or even the majority of the firm's shares. Some of the biggest flotation in recent years has involved the privatization of government owned enterprises, such as Deutsche Telekom in Germany and YPF, a petroleum company, in Argentina. Such large firms are often floated in a series of share issues rather than all at once, because of uncertainty about demand for the shares. Another source of large flotation is the spinoff of parts of existing firms. In such a case, the parent firm bundles certain assets, debt obligations and businesses into the new entity, which initially has the same shareholders as the parent. Among the largest spin offs in recent years have been Lucent Technologies, formerly part Of AT&T, and Delphi, the component manufacturing unit of General Motors Corp. A third source of large flotation has been decisions by the managers of established companies with privately traded shares to allow limited public ownership, as in the case of ups, an American package delivery company.

Private offering
Rather than selling its shares to the public, a firm may raise equity through a private offering. only sophisticated investors, such as money management firms and wealthy individuals, are normally allowed to purchase shares in a private offering, as disclosures about the risks involved are fewer than in a public offering. Shares purchased in a private offering are common equity and are therefore entitled to vote on corporate matters and to receive a dividend, but they usually cannot be resold in the public markets for a specified period of time.

Secondary offering
A secondary offering occurs when a firm whose shares are already traded publicly sells additional shares to the public called a follow on offering in the UK or when one or more investors holding a large proportion of a firm's shares offers those shares for sale to the public. Firms that already have publicly traded shares may float additional shares to increase their total capital. If this leaves existing shareholders owning smaller proportions of the firm than they owned previously, it is said to dilute their holdings. If the secondary offering involves shares owned by investors, the proceeds of a secondary offering go to the investors whose shares are sold, not to the issuer.

The flotation process

Before issuing shares to the public, a firm must engage accountants to prepare several years of financial statements according to the Generally Accepted Accounting Principles, Or GAAP, of the country where it wishes to issue.

In many countries, the offering must be registered with the securities regulator before it can be marketed to the public. The regulator does not judge whether the shares represent a sound investment, but only whether the firm has complied with the legal requirements for securities issuance.

The firm incorporates the mandatory financial reports into a document known as the listing particulars or prospectus, which is intended to provide prospective investors with detailed information about the firm's past performance and future prospects. In the United States, a prospectus circulated before completion of the registration period is called a red herring, as its front page bears a red border to highlight the fact that the regulator has not yet approved the issuance of the shares.