Unit 8 Securities Management

Shares - An introduction

DEFINITION

A share represents a participation in the capital of a company. A shareholder is in theory a partner in the company. It gives him the rights, proportionally to his holdings,  to participate in the management of the company, to receive the profits and to dispose of the net assets of the company.

The above definition describes only the general principles and the effective rights of the shareholder depends of share's type.

The shareholder exercises his rights through the general meetings of the company by appointing or revoking the management, the supervisory board, and/or other bodies.

OBJECTIVES

In recent years, a lot of individual investors have become disillusioned with the stock market. They often fear its increased volatility, the influences of corporate raiders and insider trading, and the overwhelming presence of mammoth investment institutions.

For many the stock market has become a place where common sense has been supplanted by irrational price movements.

But behind this smokescreen, we strongly believe that the stock market is still a market of stocks and that quality companies that are undervalued can still by bought and held to produce above average profits.

By presenting some techniques, we will try to prove you that success in the stock market is much more of common sense and discipline than of guru's insight

The Path to the Big Board

The New York Stock Exchange is often referred to as "The Big Board", possibly due to the huge chalk boards once used to display the prices and number of shares traded.

The Discovery Café doesn't start by trading its shares on the Big Board, but as the company grows we follow a path that may lead there, and will involve us in the continuing battle over which will be the dominant exchange for the next hundred years: The New York Stock Exchange, NASDAQ, or some other exchange that does not now even exist.

Common Shares

Every time some one buys or sells shares of a company the pattern of ownership of that company changes. As a publicly traded company, the Discovery Café must now keep track of this changing pattern of ownership. We must issue shares and keep records of the buying and selling that occurs every day so that we know exactly who owns the company. We get a Corporate Trustee to do this for us.

Common Shares - Share Certificates

In the United States we still issue share certificates registered to the name of the owner. The Discovery Café certificate might look like this.

Common Shares - Book Entry

Companies that trade on other exchanges like Toronto and Tokyo use a book entry system. Share ownership is kept on record with the Corporate Trustee or Registrar. When shares are bought and sold the registrar changes his records but no share certificates actually change hands. This makes the mechanics of buying and selling much less expensive.

In the United States book entry is used for Government Debt - Department of the Treasury Bills and Bonds and Municipal Bonds - but the stock market still supports a huge industry in paper share certificates.

Settlement

Whenever you buy or sell shares there is a three day settlement period in which the paper work catches up with reality. When you buy shares you must pay your broker in full for shares you buy within these three days. When you sell shares you have three days in which to surrender the share certificates.

Settlement - Example

The settlement period does not adjust itself for people who buy shares and then sell them again within three days.

In this example the investor cannot simply ask for his $500 profit; he must pay for the purchased shares, in full, before the broker can give him the proceeds of the sale. This regulation is designed to prevent investors from speculating in shares for which they cannot pay.

Share Registration

When you buy shares the Corporate Trustee cancels the seller抯 stock certificate and prints a new share certificate for the buyer. The share certificate can be issued in

• Customer Name or
• Street Name.

Share Registration - Customer Name

If the shares are issued in Customer Name then the Corporate Trustee prints your name on the certificate and sends it to you to put in your top drawer. This can take two or three weeks. Some brokers also charge extra for the handling of Customer Name certificates. If you intend your investment to last twenty years then this might be the preferred form of share registration for you.

Share Registration - Street Name

If the shares are issued in Street Name then the Corporate Trustee prints your broker抯 name of the certificate and sends it to your broker for safekeeping. The corporate records show your brokerage firm as the holder of record and you as the beneficial holder. The beneficial owners has the same rights and legal protection as the owner whose share certificates are in customer name. The broker must promptly credit all dividends and forward corporate communications - including proxies - to the beneficial holder.

The big advantage of using your broker’s street name is that when you sell the shares you avoid the scramble of finding the certificates in your bottom drawer, signing them, and overnight mailing them to your broker before the sale can go through.