1.5 Common stocks

Question 1

What do common stocks represent?

Answer 1

Equity or an ownership position in a corporation.

Question 2

What form do payments to common stock take?

Answer 2

Dividends

Question 3

How are these payments similar or different to those to debt-holders?

Answer 3

Contrary to payments to debt-holders, payments to stockholders are uncertain in both magnitude and timing.

Question 4

What are imporant characteristics of common stock?

Answer 4

Residual claims

Stockholders have claim to firm’s cash flows/assets after all obligation to creditors are met.

Limited liability

Stockholders may lose their investments, but no more

Voting rights

Stockholders are entitled to vote for the board of directors and on other major decision.

Question 5

What is classed as the primary market?

Answer 5

Underwriting.

Venture capital

A company issues shares to investment partnerships, investment institutions and wealthy individuals.

Initial Public Offering (IPO)

A company issues shares to general public for the first time (”going public”).

Secondary offerings

A public company issues additional shares.

Question 6

What is classed as the secondary market?

Answer 6

Resale market.

Exchanges

LSE, NYSE, Euronext, Deutsche Boerse

OTC

NASDAQ

Question 7

What is the Dividend Discount Model?

Answer 7

DDM values stocks as the present value of expected future dividends.

Question 8

DDM formula

Answer 8