Introduction to Stocks Flashcards
Class A Shares
Class A Shares pay cash dividends and are sold to the public to raise capital, but investors might have zero or diminished voting power.
Class B Shares
Voting stock held by management that is entitled to zero or reduced cash dividends. The top managers of the corporation usually take Class B stock as payment for founding, merging, or reorganizing the corporation. Voting power, combined with its management authority, can give top executives of a corporation total control of the firm without investing any money.
Par Value of Stock
When a corporation is first chartered, it is authorized to issue up to a stated number of shares of common stock, each of which has a specified par value.
Book value of stock
Book value is calculated by dividing the net worth of a company by the number of shares outstanding.
As a corporation generates income over time, much of it is paid out to creditors as interest and shareholders as dividend. Any remainder is added to the amount shown as cumulative retained earnings on the corporation’s books.
Cumulative retained earnings + Capital contributed in excess of par + Common stock = Book value of the equity
Preferred Stockholder Rights
Preferred stock investors have many rights, but they are fewer than common stockholders. Since preferred stockholders stand to gain more from cash dividends than from capital appreciation, cash dividends are an important benefit to preferred stock investors. People who invest in preferred stocks are typically seeking a steady stream of income rather than capital appreciation.
Cumulative Preferred Stock
Gives owners the right to “accumulate” dividend payments skipped due to financial problems. When the company resumes paying dividends, owners receive their missed payments (dividends in arrears) first.
Non-cumulative Preferred Stock
Does not give their owners back payments for skipped dividends.
Participating Preferred Stock
Entitled to a fixed rate of cash dividends. They may receive higher than normal dividend payments if the company turns a larger than expected profit.
Convertible Preferred Stock
May be converted into a specified number of shares of common stock at the option of the holder.
Adjustable-Rate Preferred Stock
Issued with an adjustable rate rather than fixed rates of cash dividend.
Money Market Preferred Stock
Money Market Preferred Stock (MMPS) is reissued with a new cash dividend rate typically every 7 weeks. They are offered in large denominations because they are targeted at large corporate investors.
Primary Market for stocks
The Initial Public Offering market where the shares are initially sold from the company to a dealer.
Secondary Market for stocks
Exchanges such as NYSE, AMEX, and the OTC.
Third market for stocks
Securities that are listed in an exchange but trading in another exchange.
Fourth market for stocks
Direct trading of exchange listed securities among investors. It is cheaper to trade and it is anonymous. I.e., Instinet – trading network that facilitates trades between subscribers.
