SIE Flashcards
(21 cards)
Common Stock Defined
Corporations issue common stock to raise new capital to finance the operations and ventures of the company. When you buy the stock of a corporation, you become a part owner or a “shareholder” of the corporation. Common stock is an equity security since shareholders have an equity (meaning ownership) position in the company.
Reasons for Investing
The primary reason that investors buy the common stock of a corporation is to make a profit on their investment. A profit can be realized by receiving dividends (a share of company profits) while investors own the shares and by realizing a capital gain, a profit from selling the shares for more than the amount paid for them.
b
Corporations do not have to pay dividends to common shareholders and the price of the stock may go down. If investors sell shares for less than what was originally paid, the result is a capital loss.
Risks & Reward Potential
Stocks offer investors unlimited upside potential because there is no limit on how high a stock price could go. However, as a common shareholder, the investors downside risk is limited. The price of the stock could decline to zero resulting in the loss of all of money invested, but that is the maximum loss potential. As a common shareholder, investors cannot be held responsible for the unsatisfied claims of the corporation’s creditors.
This feature is called limited liability.
Shareholder Rights
Owning common stock gives the shareholder the right to: 1)receive a stock certificate (a record of ownership). Shareholders may elect to receive a certificate or have their stock held by their brokerage firm for convenience.2) inspect certain (but not all) corporate books of the corporation (Generally the balance sheet and income statement of the corporation).3) 3. receive dividends, as they are declared by the Board of Directors.
- Order of Asset Distribution upon Liquidation:
- Taxes
- Secured debt (generally bonds backed by assets)
- Unsecured debt (debentures, general creditors)
- Preferred stockholders
- Common stockholders
voting
In Person-
By Proxy-
-by attending the corporation’s annual stockholders’ meeting
-Shareholders can use an absentee ballot called a proxy.
American Depositary Receipts (ADRs)
receipts traded in the U.S. for foreign Stocks that are held in bearer form by an American bank in the foreign country. An ADR can represent a ratio or fractional ownership of the foreign ordinary shares. For example, three ordinary (foreign) shares may comprise one ADR share (3 to 1 ratio) or one ADR may comprise a fractional ordinary share ownership, such as 10% of the ordinary share.
a.They have NO voting privilege
b.Dividends are paid in U.S. Dollars, not in the foreign currency.
c.Are taxed as a security and gains & losses are reported on IRS Form 1099b.
d.Are not issued as callable.
Blue Chip Stock
is stock issued by a company that is generally nationally known with a reputation for quality management, products, and services. These companies have demonstrated the ability to pay moderate dividends consistently in good times and in bad times. *Many Blue Chip companies maintain a 50% Dividend Payout Ratio, meaning they pay out half of their net profits in dividends.
Growth Stock
is stock issued by a company that is expected to have above-average increases in revenues and earnings.These companies :
a.have a high percentage of retained earnings; and therefore
b. pay little or no dividend resulting in a low dividend yield and increases shareholders’ equity
c.generally have a high price/earnings ratio
d. stock price may fluctuate widely and typically have high volatility
e.An emerging growth company is a fast-growing company with total annual gross revenues of less than $1.235 billion (previously $1.07 billion) during its most recently completed fiscal year. Generally characterized by high risk, high return, and high failure rates.
(not suitabie for conservatile investors)
Cyclical Stock
stock that is heavily affected by normal business and economic cycles. Cyclical stocks are those that rise and decline(quickly) along with the rise and fall in the economy. Examples include:
a. auto manufacturers (Ford, GM)
b. steel companies
c. appliance manufacturers
d. housing companies
e. paper companies
f. tool and die manufacturers
Countercyclical Stock
Countercyclical stocks would be the opposite of Cyclical stocks. This would refer to stocks that move in the opposite direction of the economy.
a.Gold mining companies
b. Budget retailers (e.g., Walmart)
c. Temp agencies
Defensive / Non-Cyclical Stock (NOT defense industry)
Stocks issued by a company that is resistant to normal business cycles and to general stock market fluctuations. An investor would not expect significant increases or growth of defensive stocks, rather stable and consistent earnings year after year.
ex:
a. tobacco companies
b. utilities
c. food companies d.
pharmaceutical companies
e. auto repair companies
Important Note*
Defensive Stock does not include steel companies, such as auto manufacturers, tool and die manufacturers.
Utility Stocks
Utility companies provide electricity, gas, water, etc. to their customers.
This category of stocks generally shares some unique characteristics including:
a.Offering above-average dividend yields to investors, but less capital appreciation as compared to growth stocks.
b.They are usually highly leveraged (debt) and can do so safely since they supply a commodity on which customers are dependent.
c.Because of the debt carried by utility companies (leverage), the price of common stocks of utility companies will be more susceptible to fluctuation due to changes in interest rates.
leverage = debt
Regular / Statutory Voting
Shareholders receive one vote per share per director who is up for election. Shareholders may cast one vote per share either for or against each candidate for the board. However, no more than one vote per share may be given to any individual candidate. This method is most beneficial to large stockholders and is the most commonly used.
* know that shareholder
can vote up to #of shares 10 each candidate, but if not voting for one then shares cannot go to another
*shareholders do not change method, always chosen by corporation.
Special Situations
are stocks that are undervalued and, therefore, their price can increase suddenly and dramatically due to a number of reasons, such as:
a. new management
b. introduction of a popular new product
c. discovery of natural resource on corporate property
Cumulative / Block Voting
Shareholders receive one vote per share times the number of directors being voted on. They may cast their votes as a block for one candidate or may divide their votes in any manner desired. This is most beneficial to minority stockholders.
Common Stock Defined
Corporations issue common stock to raise new capital to finance the operations and ventures of the company. When you buy the stock of a corporation, you become a part owner or a “shareholder” of the corporation. Common stock is an equity security since shareholders have an equity (meaning ownership) position in the company.
Reasons for Investing
The primary reason that investors buy the common stock of a corporation is to make a profit on their investment. A profit can be realized by receiving dividends (a share of company profits) while investors own the shares and by realizing a capital gain, a profit from selling the shares for more than the amount paid for them.
Corporations do not have to pay dividends to common shareholders and the price of the stock may go down. If investors sell shares for less than what was originally paid, the result is a capital loss.
Risks & Reward Potential
Stocks offer investors unlimited upside potential because there is no limit on how high a stock price could go. However, as a common shareholder, the investors downside risk is limited. The price of the stock could decline to zero resulting in the loss of all of money invested, but that is the maximum loss potential. As a common shareholder, investors cannot be held responsible for the unsatisfied claims of the corporation’s creditors.
This feature is called limited liability.
