chapter 8 - common + preferred shares Flashcards
what are common shares
ownership of the company
value of each share changes with changes in total value of the company’s equity and it’s total shares outstanding
- potential for significant gains + losses
define preferred shares
-provides a cash payment/dividend
-these cash payments/dividends are fixed; hence preferred shares are often viewed as fixed income and not equity
- most attractive to an investor wanting a steady income and more security that their investment will not be volatile
which is more volatile? preferred shares or common?
common is more volatile
define stock splits
a company splits its shares thereby doubling its shares outstanding
- a stock split doesn’t increase a company’s market capitalization
what’s market capitalization
total equity value = total share * share price
why would a company split its share if it has no effect on its overall equity value/market capitalization
to encourage more people to buy their stocks at a lower price - increase liquidity
for common shares do company’s have to pay dividends?
no - they can choose to or not
why do some companies pay dividends and other retains all of their net income
retain net income to invest into other projects for the company
or appease their shareholders by paying dividends
timing of dividends
dividend declaration date
ex-dividend date - 1 business day before the record date
record date - date the shareholders are recorded to receive the dividends
payment date - date the dividends are paid
what happens to the share price on the ex-dividend date
share price declines based on the dividend amount
define stock diviends
you receive an additional company shares
define dividend reinvestment plans (DRIPs)
the investor decides to receive a stock rather than a cash dividend
voting privileges in common shares
you might get them, restricting voting shares, restricts the rights/votes of shareholders
do dividends have to be paid for preferred shares
yes - legal obligation
what’s the tax treatment of dividends?
dividends aren’t tax deductive but but the investors receive a dividend tax credit - pay less tax rate
