10 * 51 + 60*49 = 6000

Post date: Aug 13, 2010 10:51:58 PM

My father is an SRCC graduate and currently a commerce professor in Delhi University.

He gave me this simple example to explain how companies make money through stock markets and why investing in stocks is exactly like gambing

Assume that you float a company with 100 shares. and sell a 51% shares to yourself at a price of rs 10 each. after that you bring an IPO of that same company and sell 49% of shares for Rs 60 each on the open market. The worth of company is 51*10+60*49 = 3450. you invested 510 rupees but since you have controlling share in that company of 51% your wealth becomes .51*3450 = 1760.

Then he gave a real life example of Reliance petroleum Limited which was used by ambanis to generate money for themselves.

Step 1. make company RPL

Step 2. sell controlling percent of that company to yourself and some percentage to politicians and others at 1 rs each

Step 3. bring IPO of that company fix it at 6 rupees

Step 4. after some time merge RPL with reliance , buy back stocks at the rate of 6 stocks of rpl for 1 stock of reliance.

process complete. ambanis paid 6 rupees for 1 stock of reliance and general public paid 36 rupees for 1 stock.  I will publish more such examples related to stock market, money and other things like how government works from my discussions with mom, dad.

(dad) (money) (shares) (how shares work)