Rcom unable to sustain momentum

India's wireless subscriber growth is easing sequentially from 15.63 million additions in March 2009 to 11.92 million in April 2009, which has further inched down to 11.58 million subscriber additions in May 2009. Viewed differently, still the wireless net adds are higher than FY 2009 monthly average net adds of 10.89 million.

Reliance Communication (Rcom), which has been adding more than 3 million subscribers per month till March 2009, after launching its GSM services in January 2009 when it added 4.95 million net subscribers (GSM + CDMA), could add just 2.387 million subscribers (still a recovery from 2.18 million subscribers in April 2009).

Among other Bharti Airtel has sustained its net adds at 2.81 million while that of Vodafone has slipped further with 2.54 million in May 2009 against 2.85 million in Mar'09 and 2.77 million in Apr'09. Subscriber addition by BSNL and MTNL were also down while Idea Cellular and Tata Teleservices could increase its net adds on M-o-M basis. Net adds by Aircel were also consistent and it added 1.1 million subscribers.

As per TRAI, Total 11.44 million telephone connections (Wireline and Wireless) have been added during May 2009 (11.75 million in April 2009). The total number of telephone connections reaches 452.91 million at the end of May 2009 (441.47 million in April 2009). With this growth, the overall tele-density has reached 38.88 at the end of May 2009 as against 37.94 in April 2009.

The Indian telecom sector is at a critical point as net adds are approaching peak while the competition is intensifying. The competition is to be intensified further with many new entrants waiting in line to launch their services. The tariffs in the industry are at their historical lows and also lowest in the world while the minutes of usage not increasing at that pace at which the tariffs are coming down and as a result the average revenue per user (ARPUs) for the incumbents is coming down on an ongoing basis.

Tata Teleservices (TTSL) has announced the launch of its GSM services, Tata DoCoMo by end-June, starting with South India and then in West and North. MTS (earlier Shyam-Sistema) launched its CDMA services in Tamil Nadu and Kerala in April'09 and in Chennai in May'09.

The DoT in its notification has announced that MNP (Mobile Number Portability) is to be implemented in 9 circles (Metro + Category A) by Sep'09 and in remaining circles by Apr'10. MNP is not expected to have a major impact on wireless pricing, since tariffs are already quite low. However, the new operators may try to attract customers of other operators by offering very low call rates from their existing service providers.

The incumbents are less likely to indulge themselves in price war because it will ultimately dent their profitability. MNP may tend to induce some churn in high-value prepaid and postpaid customers, who are more likely to churn for reasons of quality (network coverage and Quality of Service, billing and customer care) and brand image, not tariffs. As such, industry's SG&A cost may increase post MNP, because of the pressure to retain high value subscribers. This could lead to incremental pressure on wireless EBITDA margin.

So far, the Indian telecom operators have driven growth largely through metros and A-circle urban areas, but the challenge is to reach to the rural area. While the growth drivers for mobility are intact in terms of lower tariffs, increasing coverage and rising per capita spend, the low density of rural population spread will make it challenging to expand coverage.

Also, the Telecom minister A Raja has already indicated that he is expecting the tariffs to come down at significantly lower level and specifically targeted to bring down STD tariffs to 25 paise/minute and local call rates to 10 paise/minute in the span of next two years. Thus in the time to come the price competition will be a serious cause of concern for all the players.

Telecom Services: Subscriber addition slows down, but remains higher on y-o-y basis

With many new players waiting to launch their operations and Mobile Number Portability to be implemented shortly, the competition will intensify further.

India's wireless subscriber growth is easing sequentially from 15.63 million additions in March 2009 to 11.92 million in April 2009, which has further inched down to 11.58 million subscriber additions in May 2009. Viewed differently, still the wireless net adds are higher than FY 2009 monthly average net adds of 10.89 million.

Reliance Communication (Rcom), which has been adding more than 3 million subscribers per month till March 2009, after launching its GSM services in January 2009 when it added 4.95 million net subscribers (GSM + CDMA), could add just 2.387 million subscribers (still a recovery from 2.18 million subscribers in April 2009).

Among other Bharti Airtel has sustained its net adds at 2.81 million while that of Vodafone has slipped further with 2.54 million in May 2009 against 2.85 million in Mar'09 and 2.77 million in Apr'09. Subscriber addition by BSNL and MTNL were also down while Idea Cellular and Tata Teleservices could increase its net adds on M-o-M basis. Net adds by Aircel were also consistent and it added 1.1 million subscribers.

As per TRAI, Total 11.44 million telephone connections (Wireline and Wireless) have been added during May 2009 as compared to 11.75 million connections added in April 2009. The total number of telephone connections reaches 452.91 million at the end of May 2009 (441.47 million in April 2009). With this growth, the overall tele-density has reached 38.88 at the end of May 2009 as against 37.94 in April 2009.

The total wireless subscribers (GSM, CDMA & WLL(F)) base stood at 415.25 million at the end of May 2009. A total of 11.59 million wireless subscribers have been added during the month of May 2009 as against 11.90 million wireless subscribers added during the month of April 2009. In the wire line segment, the subscriber base has decreased to 37.66 million in the month of May 2009 as against 37.81 million subscribers in April 2009 registering a slight decrease of 0.15 million.

Total Broadband subscribers base has reached 6.40 million by the end of May 2009 as compared to 6.28 million by the end of April 2009

Individual player wise performance

Bharti Airtel regained its position as market leader and added 2.81 million subscribers with 24.3% market share in net adds. Overall the company has almost touched 100 million mark and has 99.55 million subscribers with 24% share in total wireless subscribers.

The net adds by Vodafone Essar were lower on M-o-M against 2.77 million in Apr'09 to 2.54 million in May'09 and thus exceeded from net adds by Rcom which added 2.39 million in May'09. The total subscriber base of Vodafone Essar stood 74.08 million with 17.8% of overall market share.

Rcom could add just 2.39 million subscribers in May'09 against 2.18 million in Apr'09. Though the company has increased its net adds on M-o-M basis, the company could not sustain its monthly addition pace as it started in Jan'09 with the launch of GSM operations. The monthly net adds for the company is continuously declining.

Idea's net adds improved to 1.3 million from 1.15 million in Apr'09 and its net adds share rose to 11.3% of total wireless addition. However, Idea's performance in the two metros was poor, mostly due to strong push by Aircel. Idea continued to lose subscribers in Delhi (30,645 loss in May and 48,465 in April), and its net adds growth in Mumbai declined to 30,376 (against 74,232 in April). Among other recently launched circles, Idea's net adds in Bihar were robust at 199,311 or 23.5% of the net adds in Bihar (excluding Rcom' net addition). Idea added 65,218 subscribers in Orissa (launched in April'09) and 6,066 in Tamil Nadu (launched in May'09).

Aircel added more than one million net adds for the third month in a row, driven by better performance in recently launched circles, especially in highly competitive metro circles of Delhi & Mumbai. Aircel added 99,244 subscribers (42% of net add share) in Delhi where it had launched services in March '09 and added 79,335 subscribers in Mumbai (42% of net add share) where it launched services in April '09.

The net adds by BSNL has sharply came down from 1.03 million in Apr'09 to 0.42 million in May'09 against 2.90 million in Mar'09 and 1.03 million in Apr'09. Tata Teleservices has also performed well on M-o-M basis and added 0.76 million subscribers higher from 0.61 million in Apr'09. The total subscriber base reached to 36.49 million with 8.8% market share. Tata Teleservices is ready to launch its GSM services from late June onwards, which may give a boost to its subscriber addition.

Other recent developments

Competition to intensify further

The Indian telecom sector is at a critical point as net adds are approaching peak while the competition is intensifying. The competition is to be intensified further with many new entrants waiting in line to launch their services. The tariffs in the industry are at their historical lows and also lowest in the world while the minutes of usage not increasing at that pace at which the tariffs are coming down and as a result the average revenue per user (ARPUs) for the incumbents is coming down on an ongoing basis.

With more launches and mobile number portability in waiting, competition will intensify further. Tata Teleservices (TTSL) has announced the launch of its GSM services, Tata DoCoMo by end-June, starting with South India and then in West and North. MTS (earlier Shyam-Sistema) launched its CDMA services in Tamil Nadu and Kerala in April'09 and in Chennai in May'09.

Mobile Number Portability by Sep'09

The DoT in its notification has announced that MNP (Mobile Number Portability) is to be implemented in 9 circles (Metro + Category A) by Sep'09 and in remaining circles by Apr'10. MNP is not expected to have a major impact on wireless pricing, since tariffs are already quite low.

Furthermore, with prepaid comprising over 92% of the total wireless subscriber base and already high prepaid churn (4-5% per month), bulk of the customer base is already insensitive to number change. In any case, a porting fee of Rs50-100 would be a barrier to churn for most prepaid subscribers.

However, having said that, the new operators may try to attract customers of other operators by offering very low call rates from their existing service providers. The incumbents are less likely to indulge themselves in price war because it will ultimately dent their profitability.

MNP may tend to induce some churn in high-value prepaid and postpaid customers, who are more likely to churn for reasons of quality (network coverage and Quality of Service, billing and customer care) and brand image, not tariffs. As such, industry's SG&A cost may increase post MNP, because of the pressure to retain high value subscribers. This could lead to incremental pressure on wireless EBITDA margin.

Bharti Airtel again entered in exclusive talks with MTN

Bharti Airtel has again dialed for the African telecom giant MTN, after a year when the talks between the two failed last year. The two-telecom giants have entered in to an agreement to discuss the potential transaction exclusively with one another until 31^st July 2009. Under the potential scheme of arrangement, Bharti Airtel would acquire a 49% shareholding in MTN and, in turn, MTN and its shareholders would acquire an approximate 36% economic interest in Bharti Airtel (25% by MTN and 11% by MTN shareholders).

Both the companies are leader in their respective emerging markets. While Bharti Airtel is market leader in India with more than 100 million telecom customers and USD 7.25 billion revenue for FY09, MTN also has more than 100 million telecom subscriber having its operations in 21 countries across Africa and Middle East and revenue of USD 12.06 billion for CY08.

Outlook

So far, the Indian telecom operators have driven growth largely through metros and A-circle urban areas, but the challenge is to reach to the rural area. While the growth drivers for mobility are intact in terms of lower tariffs, increasing coverage and raising per capita spend, the low density of rural population spread will make it challenging to expand coverage.

The cost benefit analysis for rural coverage is not so encouraging as the cost of rural coverage is significantly higher than in urban areas while the usage in rural areas would be lower. Further the subscriber growth from rural areas will likely become irrelevant for financial performance of telcos in the wake of high growth being driven by aggressive promotional plans, which will increase the churn and strain ARPUs.

Many new players are at final stage of launching their telecom services, which will intensify the already stiffed competition. Further the MNP will put pressure on incumbents to retain customers resulting in pressure on margins. The Telecom minister A Raja has already indicated that he is expecting the tariffs to come down at significantly lower level and specifically targeted to bring down STD tariffs to 25 paise/minute and local call rates to 10 paise/minute in the span of next two years. Thus in the time to come the price competition will be a serious cause of concern for all the players.

Wireless Telecom Service subscribers: On Aggregate Basis (Players and Operating Circles wise)

Players (In current Operating Circles)	Total Subscribers as on			Additions during May-09	% Of Total Additions	% change M-o-M	% change Y-o-Y	Market Share as on
	31st May 09	30th Apr 09	31st May 08					31st May 09	31st May 08
Bharti Airtel(23 circles)	99.549	96.735	66.826	2.814	24.3	2.9	49.0	24.0	24.0
Reliance Communication (23)	77.223	74.837	49.048	2.386	20.6	3.2	57.4	18.6	17.6
BSNL(21 Circles)	53.599	53.174	41.578	0.424	3.7	0.8	28.9	12.9	15.0
Vodafone Essar (23)	74.081	71.542	47.467	2.539	21.9	3.5	56.1	17.8	17.1
Tata Teleservices (23)	36.487	35.727	25.476	0.760	6.6	2.1	43.2	8.8	9.2
MTNL (2)	4.568	4.530	3.632	0.039	0.3	0.9	25.8	1.1	1.3
Loop Telecom (BPL(1))	2.257	2.205	1.331	0.052	0.5	2.4	69.5	0.5	0.5
HFCL (1)	0.383	0.386	0.326	-0.003	0.0	-0.8	17.3	0.1	0.1
Shyam Telecom [Get Quote] (4)	0.936	0.769	0.108	0.168	1.4	21.8	763.7	0.2	0.0
Aircel+dishnet (17)	20.686	19.585	11.492	1.100	9.5	5.6	80.0	5.0	4.1
Idea + Spice (15)	45.478	44.174	30.638	1.304	11.3	3.0	48.4	11.0	11.0
Total Wireless Subscribers	415.246	403.663	277.923	11.583	100.0	2.9	49.4	100.0	100.0
Source: COAI & AUSPI
Subscribers in Million

Wireless Telecom Service subscriber addition: Players (Operating Circles)

Players (In current Operating Circles)	Additions during May-09	Additions during May-08	% Growth	Additions during Apr09-May09	Additions during Apr08-May09	% Growth	Additions during Apr08-Mar09	Additions during Apr07-Mar08	% Growth	Market Share
										31st May 09	31st May 08
Bharti Airtel(23 circles)	2.814	2.456	14.6	5.63	24.84	-77.4	31.94	24.84	28.6	24.0	24.0
Reliance Communication (23)	2.386	1.634	46.0	4.57	16.83	-72.8	26.86	16.83	59.6	18.6	17.6
BSNL(21 Circles)	0.424	0.316	34.4	1.45	13.36	-89.1	11.35	13.36	-15.0	12.9	15.0
Vodafone Essar (23)	2.539	1.686	50.5	5.31	17.68	-70.0	24.64	17.68	39.3	17.8	17.1
Tata Teleservices (23)	0.760	0.701	8.4	1.36	8.30	-83.6	10.79	8.30	30.0	8.8	9.2
MTNL (2)	0.039	0.065	-40.6	0.09	0.78	-89.1	0.95	0.78	21.2	1.1	1.3
Loop Telecom (BPL(1))	0.052	0.017	198.6	0.09	0.22	-58.6	0.87	0.22	288.3	0.5	0.5
HFCL (1)	-0.003	0.010	=	-0.01	0.17	-103.3	0.09	0.17	-47.8	0.1	0.1
Shyam Telecom (4)	0.168	0.000	999	0.34	0.01	999	0.49	0.01	999	0.2	0.0
Aircel+dishnet (17)	1.100	0.503	119.0	2.21	5.10	-56.7	7.87	5.10	54.4	5.0	4.1
Idea + Spice (15)	1.304	1.236	5.5	2.46	11.47	-78.6	14.81	11.47	29.1	11.0	11.0
Total Wireless Subscribers	11.583	8.624	34.3	23.50	98.78	-76.2	130.67	98.78	32.3	100.0	100.0
Source: COAI & AUSPI
Numbers in Million
= Positive to negative growth; + Negative to Positive growth

Total wireless Subscriber base

Month	GSM			CDMA			Total
	2008-09	2007-08	Var%	2008-09	2007-08	Var%	2008-09	2007-08	Var%
June	212.505	135.995	56	74.363	45.304	64	286.868	181.299	58
July	219.298	141.747	55	76.782	47.246	63	296.080	188.993	57
August	225.983	147.700	53	79.265	49.241	61	305.248	196.941	55
September	233.677	153.997	52	82.049	51.047	61	315.726	205.044	54
October	241.728	159.708	51	84.421	52.996	59	326.149	212.704	53
November	249.730	166.157	50	86.346	59.284	46	336.076	225.441	49
December	288.768	172.219	68	88.575	61.406	44	377.343	233.625	62
January	267.929	178.415	50	94.365	63.651	48	362.294	242.066	50
February	277.515	185.017	50	98.605	65.912	50	376.120	250.929	50
March	288.756	192.696	50	102.992	68.383	51	391.748	261.079	50
April	298.153	199.182	50	105.511	70.116	50	403.663	269.298	50
May	306.889	205.813	49	108.357	72.110	50	415.246	277.923	49
Source: COAI & AUSPI
Numbers in Million

Total Telecom Subscribers Base
Year	2007-08			2009
Category	As on 31/05/2007	As on 31/05/2008	% growth during May 07-May 08	As on 30/04/2009	As on 31/05/2009	% growth during May 2008-May 2009	Monthly additions in May 09
Wireless	171.79	277.92	61.8	403.66	415.25	49.4	11.59
Wireline	40.26	39.05	-3.0	37.81	37.66	-3.6	-0.15
Total	212.05	316.97	49.5	441.47	452.91	42.9	11.44
Figures in million
Source: TRAI

Sugar: Budget will benefit select firms

Players in the midst of expanding / setting up cogeneration power plant will benefit from the extension of the terminal date for 80-IA benefit by one year upto 31^st March 2011.

Budget provisions

• Extending the terminal date for starting the power generation by cogen plant upto 31-03-2011
• The budget proposes to abolish FBT (Fringe Benefit Tax).
• Minimum Alternate Tax hiked from 10% to 15%
• Service Tax to be imposed on the following services: (a) Service provided in relation to transport of goods by rail (b) Service provided in relation to transport of coastal cargo; and goods through inland water including National Waterways

Industry expectations

The premier sugar body in the country Indian Sugar Mills Association (ISMA) has raised following demands with the finance ministry for union budget 2009-10:

• To include Ethanol in the list of declared goods.
• To grant exemption of service tax on goods transport to the sugar industry.
• To cover the ethanol projects under section 80-IA of the Income Tax Act and extend the income tax benefit to the Ethanol Projects as well in form of income tax exemption.
• Promotion of Ethanol as a biofuel by the government.
• Weighted deduction of 150% of the cost incurred for Construction of Roads in Rural Areas by sugar companies.
• To extend the terminal date for section 80-IA benefit for cogen plants by 5 years i.e. upto 31^st March 2015 for starting the generation of power.
• No budget expectations for the sector has been fulfilled except extension of terminal date for starting the power generation by cogen plant by one year i.e. upto 31-03-2011, though the industry demanded five year extension.

Budget impact

The Union Budget 2009-10 has proposed to extend the terminal date for starting the power generation by cogen plant by one more year i.e. upto 31-03-2011. The cogeneration projects get the benefit of tax exemption for 10 years u/s 80-IA of the Income Tax Act, however this benefit was available only if power generation begins before 31^st March 2010.

Now it has been extended by one year and now the cogen plants which will start power generation by 31^st March 2011, would be eligible for Section 80-IA benefits of Income Tax Act. This will benefit the companies whose cogen plants will start power generation by March 2011.

However, the industry demanded the extension of this facility by 5 years i.e. upto 31^st March 2015 so that the new investment could be made for setting up cogen plants, but it has been extended by only one year.

Just before the budget, the SMP (Statutory Minimum Prices) has been increased to Rs 107.76 a quintal for sugar season 2009-10 from Rs 81.18 a quintal in 2008-09 sugar season. The levy price, or the price at which sugar is sold to the government, which is 10% of production, is based on SMP prices. Such an upward revision in cane SMP should increase levy prices by Rs 2-3/kg from the current Rs 13.8/kg.

Further in Union Budget 2008-09 i.e. last year, the government proposes the abolition of tax on cash withdrawals from the bank, which has come in effect from 1^st April 2009.

The levy of service tax on service provided in relation to transport of goods by rail (b) Service provided in relation to transport of coastal cargo; and goods through inland water including National Waterways can affect some players. But most of them are transporting sugarcane as well as sugar by road, which is also impacted by rise in petrol and diesel prices recently.

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector. On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative. The increase in liability towards MAT will be matched by an incremental deferred tax credit. Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.

But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them. So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Outlook

All the demands of the sugar industry have been ignored by the Union Budget 2009-10 except partial extension of terminal date for Section 80-IA benefit, so the outlook for the sector will remain budget neutral. However increase in SMP just before the budget is likely to increase the minimum cost for the sugar companies who pay for sugar cane based on SMP. Though, atleast for coming sugar season 2009-10, the cane cost is expected to remain higher than SMP based cost.

Considering the higher sugar prices, a cause of concern for government due to sensitivity to inflation, not much positive benefits were expected from the Union Budget.

How to discover growth stocks

Growth stock hunters believe that there are no excess returns to be gained from investing in the tried and true 'blue chip' stocks representative of a mainstream stock index such as the Dow Jones Industrial Average and the S & P 500. The big profits in the stock market rest in ferreting out the next growth stocks, the next Cisco.

For example, Cisco Systems, Inc., now the leading supplier of high-performance internetworking products for linking computer system networks, traded at $4-1/2 per share shortly after going public in 1990 (adjusted for 2-for-1 stock splits in both 1991 and 1992. At the time, Cisco Systems generated less than $30 million in annual revenues. In 1992, the innovative company looks to reach $325 million in revenues and earn around $1.25 per share.

Alert emerging growth investors who discovered Cisco Systems in its formative years and had the conviction to see its tremendous prospects, despite huge competitors such as IBM and NEC Corpora­tion, earned substantially higher returns than the market averages. From a low of $4-1/2 per share in 1990, the market price of Cisco Systems stock had already soared to $52 per share in 1992.

Growth stocks and their subset, emerging growth stocks, are well-managed companies operating in industries where earnings and dividends are expected to grow faster than inflation and the overall economy. They are expected to maintain their exceptional growth momentum through economic retractions as well as during economic prosperity.

Typically, growth stocks are not located in the traditional well-known sectors but in new and upcoming fields, such as computers, telecommunications, health care, and biotechnology.

Major characteristics of growth stocks include:

• Higher price/earnings ratios than the market average,
• Substantial potential for above-average, long-term price appreciation,
• Price volatility, and
• Conservation of capital to fuel growth, therefore little or no dividend payouts in the early years.

For the smaller, emerging growth stocks, price volatility can be even more pronounced due to small capitalization, which makes their shares less liquid; there may be a shortage of available financial and operational information by which to properly judge the company's merits or prospects; investor sentiment swings for large versus small company investments can cause the market price of emerging growth stocks to drop substantially despite rising revenues and earnings and the typical pattern of earnings gains interruptions due to high research and development and expansion expenses can cause investors to flee the stock.

James W. Broadfoot III in his book, Investing in Emerging Growth Stocks: Making Money With Tomorrow's Blue Chips spelt out how to understand emerging growth stock investing and learn how to pick the right emerging growth stocks for above average returns.

Obviously, the higher returns associated with emerging growth investments also carry with them a higher degree of risk. That's why Broadfoot stressed that investors planning to enter this brand of in­vesting must have a stomach for risk, financial staying power since emerging growth stocks go through cycles of poor performance, and the ability to make a sufficient commitment of time and effort.

Emerging growth stock, screening standards set forth by Broadfoot include the following:

• Avoid companies with two down earning years in the past five
• Choose companies with a minimum average 20 per cent revenue and earnings growth
• Avoid any firm with return on average equity below 13 per cent
• Avoid firms with debt in excess of 30 percent of total capital.

If the firm passes the above tests, consider the growth prospects of the industry (including the degree of industry fragmentation), the level of competition, and the quality of management.

Broadfoot warned about stumbling blocks to the company's success and higher stock prices. A lack of visibility, lengthening sales cycles, and new product dependence can each work to short-circuit the company's potential. In addition, too rapid a growth can wreak havoc with financial and operational controls, causing the company to stumble.

As a warning, Broadfoot said that when emerging growth companies run into trouble, such as a significant earnings shortfall, sell as fast as possible and ask questions later.

Finally, be patient. Emerging growth investing profits don't occur overnight. When you do hit upon a winner, ride it for all its worth; you need the exceptional gains from your growth stock winners to make up for the mistakes that come with the emerging growth investing territory.

Basics of Stock Market

Financial markets provide their participants with the most favorable conditions for purchase/sale of financial instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within establishing proposition and demand and decreasing of operational expenses, incurred by the participants of the market.

Financial market comprises variety of instruments, hence its functioning totally depends on instruments held. Usually it can be classified according to the type of financial instruments and according to the terms of instruments’ paying-off.

From the point of different types of instruments held the market can be divided into the one of promissory notes and the one of securities (stock market). The first one contains promissory instruments with the right for its owners to get some fixed amount of money in future and is called the market of promissory notes, while the latter binds the issuer to pay a certain amount of money according to the return received after paying-off all the promissory notes and is called stock market. There are also types of securities referring to both categories as, e.g., preference shares and converted bonds. They are also called the instruments with fixed return.

Another classification is due to paying-off terms of instruments. These are: market of assets with high liquidity (money market) and market of capital. The first one refers to the market of short-term promissory notes with assets age up to 12 months. The second one refers to the market of long-term promissory notes with instruments age surpasses 12 months. This classification can be referred to the bond market only as its instruments have fixed expiry date, while the stock market’s not.

Now we are turning to the stock market.

As it was mentioned before, ordinary shares’ purchasers typically invest their funds into the company-issuer and become its owners. Their weight in the process of making decisions in the company depends on the number of shares he/she possesses. Due to the financial experience of the company, its part in the market and future potential shares can be divided into several groups.

1. Blue Chips

Shares of large companies with a long record of profit growth, annual return over $4 billion, large capitalization and constancy in paying-off dividends are referred to as blue chips.

2. Growth Stocks

Shares of such company grow faster; its managers typically pursue the policy of reinvestment of revenue into further development and modernization of the company. These companies rarely pay dividends and in case they do the dividends are minimal as compared with other companies.

3. Income Stocks

Income stocks are the stocks of companies with high and stable earnings that pay high dividends to the shareholders. The shares of such companies usually use mutual funds in the plans for middle-aged and elderly people.

4. Defensive Stocks

These are the stocks whose prices stay stable when the market declines, do well during recessions and are able to minimize risks. They perform perfect when the market turns sour and are in requisition during economic boom.

These categories are widely spread in mutual funds, thus for better understanding investment process it is useful to keep in mind this division.

Shares can be issued both within the country and abroad. In case a company wants to issue its shares abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks and point at shareholders’ right to possess the shares of a foreign company under the asset management of a bank. Each ADR signals of one or more shares possession.

When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends. They depend on: type of share, financial state of the company, shares category etc.

Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on its profitability and spare cash. Dividends differ from each other as they are to be paid in a different period of time, with the possibility of being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when a company is in a financial distress or in case executives decide to reinvest income into the development of the business. While calculating acceptable share price, dividends are the key factor.

Price of ordinary share is determined by three main factors: annual dividends rate, dividends growth rate and discount rate. The latter is also called a required income rate. The company with the high risks level is expected to have high required income rate. The higher cash flow the higher share prices and versus. This interdependence determines assets value. Below we will touch upon the division of share prices estimating in three possible cases with regard to dividends.

While purchasing shares, aside of risks and dividends analysis, it is absolutely important to examine company carefully as for its profit/loss accounting, balance, cash flows, distribution of profits between its shareholders, managers’ and executives’ wages etc. Only when you are sure of all the ins and outs of a company, you can easily buy or sell shares. If you are not confident of the information, it is more advisable not to hold shares for a long time (especially before financial accounting published).