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Newsletter of Finance Cell, Masters of International Business
VOL I |Issue II
April 1,2010

YOUR FINANCE VOCAB


Initial public stock offering (IPO)- is simply known as an "offering" or "flotation".
When a company issues common stock or shares to the public for the first time it is
referred as an IPO. A Book building process is used in order to determine the market
price for an IPO.

Editorial Team Ex-Rights- Shares of stock that are trading but no longer have rights attached
because they have either expired, been transferred to another investor or been
exercised. The rights originally assigned to the stockholder are, for whatever
Chanchal Agarwal reason, no longer valid or no longer applicable to the stock.
Kamal Girdhar Ex-rights shares are worth less than shares which are not yet ex-rights - the ex-
Nikhil Kant rights shares do not give a shareholder access to a rights offering.
Prashant mehta
Saurabh Bansal Right Issue- Right Issue is basically done under a secondary market to raise
Saurabh Chhabra money in a company. Under the issued rights, the existing shareholders have the
option to buy a specified number of new shares from the firm at a specified price
within a specified time. A rights issue is in contrast to an IPO (primary market
offering), where shares are issued to the general public through market exchanges.

Follow on Public Issue (FPO)- When the company raises capital, after an IPO has
already been made and shares of company are held by public and are already
listed on the stock exchange, is called FPO. A company has an authorized capital
limit. At the time of an IPO the company doesn't go for full authorized capital issue.
The subscribed/issued capital by the company is less than the authorized capital.
The company can avail the rest of the limit in future to raise more funds. This is done
by issuing new shares in the market again by the process of FPO.
Bonus share- is a free share of stock given to current/existing shareholders in a
company, based upon the number of shares that the shareholder already owns at
the time of announcement of the bonus. While the issue of bonus shares increases
the total number of shares issued and owned, it does not increase the value of the
company. A company may decide to distribute further shares as an alternative to
increasing the dividend payout. Although the total number of issued shares
increases, the ratio of number of shares held by each shareholder remains
constant.

-Saurabh Chhabra
MIB 2nd sem

For any enquiry or suggestions email at financecell.mib.dse@gmail.com


Growth stocks & Value stocks
Should the title be changed to Growth stocks vs. Value stocks? So many dichotomies
have become part of our everyday lives - like Good vs. Evil, Black vs. White, East vs.
West, Fundamental analysis vs. Technical analysis - that we have come to believe
them as truths.
The reality is different. By creating compartments through our dogma, we get into
behavioural patterns that are detrimental to our emotional and financial well-being.

What is a Growth stock?


These are stocks belonging to companies that have shown a consistent above-
average growth in sales or earnings in the past, and are expected to maintain the rate
of growth in future. One measure of growth is RoE (Return on Equity) above 15%.
To fuel such growth, cash is a major requirement. So companies often forego
dividend payments to plow the earnings back into the business. When the earnings
are inadequate to fund the growth, companies resort to share issues and debt.
Typically, these are high P/E stocks with volatile price movements that make them
risky to own. Investors expect to make large capital gains and often get trapped by the
'greater fool theory'.

What is a Value stock?


These are stocks belonging to companies that are considered to be trading at a level
lower than their intrinsic values, as determined by fundamental analysis of sales,
earnings, dividend payments.
These stocks have low P/E or P/BV ratios and high dividend yields. Hence they have
lower risk and a bigger 'Margin of Safety'. Value stocks tend to out-perform growth
stocks during bear markets and under-perform in the later stages of bull markets. Like
in life, which has more shades of gray than black or white, there is no distinct dividing
line between a Growth stock and a Value stock.
No company can have a high growth rate forever. Sooner or later, as its size
increases, growth rate will begin to slow down. If it survives, it will become a stalwart
and pay regular dividends and grow steadily. The key phrase is: 'if it survives'.
Taking on too much debt, or issuing too many shares in the singular pursuit of growth
can weaken the balance sheet so badly that the company can collapse under the
weight of its interest payments. Stocks from the retail and realty sectors come to mind.

Should investors choose Growth stocks or Value Stocks for their portfolios?
It need not be an either/or situation. Why not choose Growth stocks and Value
stocks? How about using the 80-20 rule? Keep 80% of your portfolio in Value stocks,
and 20% in Growth stocks. Remember that the best time to look for Value stocks is
when the stock market is down, not when it is up 70% from its recent low. That doesn't
mean that Value stocks are not available in bull markets.

-Chanchal Agarwal
MIB 2nd sem

2
Following own rule while investing in equities
'suicidal'
A couple of years ago, hopes were high that a large chunk of household savings,
which account for nearly two-third of all domestic savings in India, will find its way to
the stock market through mutual funds, insurance companies and banks.
Investments in shares and debentures by households grew at a rate of 149% a year
during FY 2005-07 as mutual funds and unit-linked insurance policies made rapid
inroads in urban India. In FY08 the stock market absorbed nearly 12% of all
household savings in India, up from less than 1% in FY04.
Yet, today it looks extremely unlikely that household savings will become a backbone
for the stock market just like foreign institutional investors (FIIs). That is because
individual investors in India follow their own rule of investment sell when the market is
falling and buy when it is rising which is like shooting oneself in the foot.
The basic rule for investment in equities is to buy securities when the equity market is
falling. But every time the market crashes, retail investors rush out of the market,
creating a stampede and hurting themselves so badly that many wouldn't want to
return ever. This gives equities a bad name and restricts the upside potential for retail
investors.
Take the case of the market turmoil in Jan' 08 and the free fall since then, this induced
individual investors to flee to the safety of traditional investment avenues like bank
deposits, insurance polices and cash and household savings in shares and
debentures declined by 78% in FY09 against the average growth of 71.5% in
previous three years. But actually they had missed a golden opportunity.

The signs of recovery and improved global liquidity reversed the trend in equity
market to northward since mid-March '09. The Sensex nearly doubled in less than six
months. And guess what, retail investors are back in Dalal Street. The rising retail
participation is evident from the rising assets under management of the equity mutual
funds, which have grown from Rs 1,01,000 crore in Feb '09 to Rs 1,81,000 crore by
the end of Aug '09.

Obviously, with each rise in the market, the chances of making a loss is higher than
making a gain. In contrast, during the 2008 meltdown, the chances of a bottoming out
was greater than a further fall. At the beginning of 2009, the price-earning ratio (P/E)
were at record low level for almost all stocks. However, people kept waiting for the
valuations to fall further, but the market just not recovered but zoomed.

So, if one decides to enter the equity market now, the returns are likely to be at best
modest given the fact that most stocks are near their year highs while some have
touched all time highs. Then there are concerns on account of underlying inflationary
pressure and a strong likelihood of a monetary tightening by the central bank. This
may drag the equity markets down. If this happens, retail investors may book a loss
and equities will again get a bad name.

Investors should not forget that booms and busts cycles are an integral part of equity
markets and if one plays these cycles smartly, he can generate long-term wealth and
prosperity.

-Chanchal Agarwal
MIB 2nd sem
3
CROSSWORD

ACROSS DOWN

1. Aspect of the business that effects a 1. Sell off stocks.(4)


change on another aspect of the 3. Guaranteed investment contract, abbr.(3)
business.(6) 4. Off-exchange trading.(3)
2. Employee who makes a significant 7. Bank's house takeover.(11)
contribution to a company's sales.(9) 8. Premium paid to a raider to terminate a
4. Rights to buy or sell a specific amount of a takeover attempt.(9)
given stock at a specified price for a 10. It was Black in 1869.(5)
specified period of time.(7) 14. Statistical indicator providing a
5. The sub-prime variety became a representation of the value of securities in a
disaster.(8) certain field.(5)
6. Curve which supposed that for a given 16. Uncovered put.(8)
economy there is an optimal tax level to 17. Paid up, or due for payment.(7)
optimize tax revenues.(6) 18. Continuing period where stock prices fall

4
9. Period during which a right, privilege, or and there is overall pessimism.(4,6)
insurance policy is not in effect due to failure 19. Used to be the standard for the
to act.(5) dollar.(4)
11. Real estate, securities, cash.(6) 28. A stock's price/earnings ratio divided by
12. Right, warrant or other feature added to its year-over-year earnings growth rate.(6)
debt obligation to make it more desirable to 29. A party that mediates between a buyer
potential investors.(6) and a seller.(7)
13. The 'R' word.(9)
15. Retirement savings.(7)
20. Credit rating agency.(6)
21. Income after deducting for operating
expenses but before deducting for income
taxes and interest, abbr.(6)
22. __ the money.(2)
23. Balance sheet section.(6)
24. Dotcom in 1999 and housing in 2007.(6)
25. Index that tracks the activities of
experienced and inexperienced investors.(3)
26. Investment made in order to reduce risk
of adverse price movements in a security, by
taking an offsetting position in a related
security.(5)
30. Money spent to upgrade physical assets
such as buildings and machinery.(5)
31. Rate that most commercial banks
charge their creditors.(5)
32. Place money in, expecting to get more
money back.(6)
33. Difference between the bid and ask.(6)
34. Hedge fund that crashed on natural gas
in 2006.(8)
35. Ended a stock position due to an
execution of a market order to buy or sell a
security if a specific price is reached.(10)
36. ____ lynch.(6)

Rearrange the words in pink and green to get the name of a


famous investor and an investment strategy.

5
-Chanchal Agarwal
Saurabh Bansal
nd
MIB 2 sem

6
WEEKLY NEWS

Zain to earn $3.3 bn from Bharti deal


Zain Telecom on Wednesday(31st MAR) said it would earn $3.3 billion from sale of
its African assets to Bharti Airtel for $10.7 billion even as the Indian operator said
the deal is well-priced.

SBI commits $1.5 bn loan to Bharti for Zain buy


Country's largest lender State Bank of India has committed $1.5 billion (around Rs
6,900 crore) to telecom giant Bharti to part-finance its acquisition of Kuwait-based
Zain's African assets.

Oil hovers above $82 after mixed US supply report


Oil prices hovered above $82 a barrel Wednesday in Asia after a report gave
mixed indications about the strength of US crude demand.

Sensex slips 62 pts; ends FY'10 with 80% returns


Indian equity markets ended the fiscal 2009-10 on a negative note with benchmark
Sensex falling 62 points on Wednesday but the full fiscal saw investors reaping
the highest return in five years at over 80 per cent.

India's exports surge by 34.8% in Feb


Expanding for the fourth straight month, exports surged by 34.8 per cent in
February to $16.09 billion against $11.94 billion in the year-ago period on the back
of revival in the Western economies.

Food inflation eases marginally to 16.22%


The food inflation declined marginally for the week ended March 13 to 16.22 per
cent from 16.3 per cent in the previous week.

Obama's Health Bill to boost Indian firms


Obama's plan to lower prices of branded drugs in a bid to lower healthcare cost for
Americans may be a double edged sword for Indian generic pharma companies.

Exit from easy money policy to continue: Subbarao


Days after surprising the market by hiking its key policy rates, Reserve Bank
governor D Subbarao on Wednesday said the apex bank will continue its exit from
monetary stimulus policy.

Omaxe plans to raise Rs 800 cr via QIP


Real estate developer Omaxe on Wednesday said it is planning to raise Rs 800
crore through private placement of shares and stake sale at projects level, mainly
to repay part of its debt.

EU bans airlines from Philippines, Sudan on safety


The European Union has banned all airlines based in the Philippines and Sudan
from flying into the bloc for failing to comply with international flight safety.
standards.

-Kamal Girdhar
MIB 2nd sem 7