Why companies split stock?

Stock split or forward stock split is a corporate action where board of directors decides to issue more shares by dividing existing outstanding shares into multiple shares defined by the predetermined ratio. Most common ratios are 2 for 1 or 3 for one where investors for every share they own get two or three shares respectively. Likewise, price will be divided accordingly. If for example you originally owned 100 shares, each worth $15 in 2 for 2 split you will receive 200 shares each worth $7.5 and in situation where 3 for 1 split is done it will be 300 shares with $5 price per share. As you can see no real value is added and market capitalization is the same just like with reverse stock split.

Companies do this for various reasons. Some stock price can reach astonishing level and company’s official might want to lower the price to make it more appealing to small retail investors. Some argue that there is a psychological effect which makes owning more stock at a lower price more satisfying than owning a smaller number of shares with higher price. Stock exchanges have standardized number of shares as a trading unit and it is usually a 100 shares so it will be easier for small investor to buy one hundred shares at a lower price. Higher number of shares results in greater liquidity because of course there is a bigger float and popular trading price will almost certainly renew interest in the stock. This is shown through narrow bid – ask spread which reflect supply and demand for certain company’s shares. After stock split price decreases but it can be followed by an increase because of the interest of small investor who now perceive stock as more affordable and boost demand in that way.

Popular media service provider company Netflix has split stock twice since it started trading publicly in 2002. Company’s success has been followed by dramatic increase in price which company lowered by doing two for one stock split in 2004 leaving share price to $40. A little more than ten years later Netflix undergoes seven for one stock split lowering share price from $700 to $100. Other companies like Apple, Amazon and Berkshire Hathaway also undergone stock split mostly to expand shareholders base and make their stock more affordable to average investor.

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How to find Angel Investors

Public Angel Investors

  • The advantage of “public” angel investor is that they are easy to find. The disadvantage is that because they are easy to find, they are constantly being approached with investment opportunities and can only fund a tiny portion of those that they see.
  • Public angel investors are angel investment groups or individual angel investors that you can find online and/or specify themselves as angel investors.
  • The other type of “public” angel is someone who publicly identifies themselves as an angel investor. By going to a site like LinkedIn and searching the keyword “angel investor”, you can probably find such individuals.

Private Angel Investors

  • Private angel investors are people who have either made just one or a small amount of angel investments or who have the financial ability to make an angel investment, but has.
  • Most “private” angel investors have the means and interest in making an angel investment, but they just don’t know about them. Because “private” angels have much less to choose from, there is a high likelihood that they’re going to choose you.

Finding private or “latent” angel investors

The name of the game here is networking. Networking allows you to find other business owners, executives and/or other people with money.

How to get started

The easiest way to get started is to target “public” angels and then start your networking process to find “private” angels. While these angels are much harder to find, remember that when you do find them, they have a much higher likelihood of funding you.

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Being a public company – what it means?

In simple term public company is company whose shares are publicly traded on one or more stock exchanges or over the counter market (OTC) and that ownership is dispersed among the many investors. History of public market dates back in early modern period when Dutch helped lay foundation of modern financial system. Publicly traded companies usually have many investors while privately held companies had fewer, but company with big number of investor doesn’t have to be public company. Securities and Exchange Commission (SEC) states that every company with more than 500 investors and more than $10 million in assets must register with SEC and adhere to its regulations. Most public companies where private and after that they meet requirements to become publicly traded company mainly because it brings many advantages.

Public companies are able to raise capital through the sale of stock in a way shares become company’s currency which is then traded on the market. Before it was difficult to obtain larger sums of capital. It was only possible through wealthy investors and banks willing to take the risk. Investors can profit from stocks dividends – payment made by corporation to its shareholders, usually as a distribution of profits. Once that company goes public it can generate new revenue through sale of new shares (secondary offering).

When a company is public it is under a lot of scrutiny, having to meet all the needed requirements and regulations. Those requirements include disclosure of financial statements and annual reports that truthfully represent the state of the company. SEC requires hat public companies report to their major shareholders each year, including institutional shareholders, company’s officials who own shares and any other investors that own more than 5% of shares. Many stock exchanges require from companies to have their accounts regularly audited by an outside auditor. This requirement for audited financial is not imposed by OTC Pink. What this means is that more information is available to the public in order to help investors deciding whether to add particular stock in their portfolio.

Being a publicly traded company can have a certain amount of prestige, especially if your stock are traded on one the big exchanges like The New York Stock Exchange (NYSE) and NASDAQ. Public companies with many shareholders tend to be more recognizable to public than private companies. Initial public offerings are, especially of big companies are usually covered in media, creating a buzz of excitement and attracting more potential investors. It is a way for initial shareholders to share the risk or provide an exit strategy while increasing assets liquidity and avoiding bank debt. Giving shares of your company to the management and employees is a good incentive program that will inspire them to work harder and ensure company’s success.

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What is an Initial Public Offering?

When a private company first offers shares of its stock (ownership) for purchase to the general public, this is known as an initial public offering (IPO).

Goals and Reasoning

There are a few main reasons why a private company will decide to make an IPO:
– Raise expansion capital
– Monetize the investments of early private investors.
– Become a publicly traded company on a securities exchange
– Gain credibility and prestige

The Process

When a company is ready to offer shares of its stock to the public, there are a few major steps involved:

Step 1:
Company hires an investment bank (underwriters).
Step 2:
The investment bank puts together a registration statement to be filled with the SEC. This document contains information about:
– The offering
– Financial statements
– Management background
– Any legal problems
– Where the money is to be used
– Insider holdings

Step 3:
The SEC then requires a cooling off period, in which they investigate and make sure all material information has been disclosed.

Step 4:
During the cooling off period details of the proposed offering except for the offer price and the effective date are offered to potential institutional investors in the form of a document called the initial prospectus.

Step 5:
Once SEC approves the offering, stock price and a date is set when the stock will be offered to the public.

Step 6:
Finally, the shares are sold on the stock market and the money is collected from investors.

Advantages of an IPO

– Proceeds from the IPO go directly to the company and its early private investors.
– Early investors have the opportunity to cash out, selling some or all of their shares.
– A large pool of public investors provides a diverse equity (ownership) base.
– Sale of shares provides capital for growth and repayment of debt.
– An IPO provides cheaper access to capital than taking on debt.
-After the IPO, a company has new options for acquisitions, potentially using the sale of its shares.
– Going public also offers companies new financing options including: equity, convertible debt and cheaper bank loans.
– A company going public carries a great deal of exposure, prestige and enhanced public image. This attracts better employees and management.
– Even if the company fails. It is not responsible to pay back their investment, they must sell their shares at market price.

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Regulation A vs Other Capital Raise Options

The JOBS Act of 2012 created and revised various methods for small and emerging companies to raise capital.
The updated Reg A, sometimes called “Reg A+,” was split into two tiers and allowed for significantly higher raises (up to $20 million with Tier 1 and up to $50 million with Tier 2) and more flexibility around how and to whom securities can be marketed.

Reg A falls into a middle ground between private capital raise options like Reg D, and public options like an Initial Public Offering, but presents its own unique benefits to issuers.

Reg A vs Reg D 506 b & 506 c

Two major benefits to Reg D over Reg A are the ability to raise capital without a maximum limitation and the eligibility of SEC-registered companies to participate in the exemption.

But the primary difference between Regulation A and private offerings under Regulation D is the eligibility of non-accredited investors. While 506 b does allow for up to 35 non-accredited investors in an offering, it is forbidden to market those securities online to potential investors. 506 c, does not allow unaccredited investors, but can be marketed online via the “general solicitation” rule, bringing it more in line with Reg A.

Reg A vs Crowdfunding

It is a common misconception that because Reg A is marketable to any and all investors, it is crowdfunding. However, there are some significant differences between Reg A and true crowdfunding under Regulation CF.
Because of the lower capital raise limit, companies utilizing Reg CF tend to have lower valuations and be in earlier developmental phases. Reg A is for more established companies looking to use the capital for growth.

Reg A vs Initial Public Offering

Though Reg A is an exemption from federal registration requirements like private capital raise exemptions Regulation D and CF, Reg A actually has more in common with a traditional IPO. Because it is open to all investors and because in some cases securities can even be resold or traded, Reg A offerings are considered public offerings.

A traditional IPO is designed for large companies with the capital needed to cover the legal and accounting costs associated with going public. Reg A opens up the door for smaller companies to do the same, including the ability to list Tier 2 offerings on securities exchanges like NASDAQ or NYSE or even OTC. For this reason, a Tier 2 offering is sometimes called a “Mini-IPO.”

 Unique aspects of a Reg A deal:

  • No required minimum capital raise goal (unless listing on NASDAQ or NYSE)
  • Shorter document preparation time
  • Lower legal and filing fees
  • Total issuer process can take up to 20 weeks

Listing on Stock Exchanges

Not all Reg A issuers list their offerings on exchanges, but for those that have sufficient resources to accommodate the extra costs and administrative burden, it can serve as an effective means to gain more market exposure.
Reg A offerings advance through the “regulatory pipeline” faster than standard IPOs.
Reg A deals take 60 to 90 days to be approved, this is an advantage as traditional IPOs may take 90 to 180 days to be approved and can carry significant costs.

Many small or emerging businesses involved in Reg A offerings have successfully raised funds without listing on any major stock exchanges, keeping costs low. But, the lack of a trading market will likely increase the difficulty for current shareholders of these companies to sell their shares in the future. Listing on an exchange may help attract investors that are looking for a more liquid investment than is offered by non-traded securities.

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7 Steps to Starting Your Own Business

Step 1. Personal Evaluation

Why do you want to start a business? Is it money, freedom, creativity or some other reason?

Step 2. Analyze the Industry

Who will buy your product or service? Who would be your competitors? How much money will you need to start?

Step 3. Make it Legal

Name you business. Register it. Get the proper business license and permits. Check into your insurance needs.

Step 4. Write a Business Plan

Define your strategy, tactics and specific activities for execution, including key dates, deadlines and budgets and cash flow.

Step 5. Get Financed

Most small businesses begin with private financing from credit cards, personal loans, help from the family etc.

Step 6. Set Up Shop

Find a location. Negotiate leases. Buy inventory. Get the phones installed. Have stationery printed. Hire staff. Set your prices.

Step 7. Trial and Error

Expect mistakes. Be open minded and creative. Adapt. Look for opportunities.

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Merger and Acquisition Roadmap

During a merger or acquisition, there are 4 key steps that must happen to ensure a smooth transition internally, in the media and in the boardrooms of your customers.

STEP 1:

PRE-ANNOUNCEMENT

Develop key messages to be used internally and externally in branding, communications, PR, advertising and social media.

STEP 2:

DAY-1 TACTICAL EXECUTION PLAN

Announce the transaction and be prepared with collateral to address the media, clients, customers and employees.

STEP 3:

THE FIRST 100 DAYS

Open communication to customers and employees is critical. Step 1 is critical in preparing both companies to operate smoothly during this transition.

STEP 4:

DAY 101–1 YEAR POST ACQUISITION

The newly joined companies now function as a fully integrated team. Any lingering divisions between the two sides can result in a failed merger or acquisition.

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