Ch 3: Equity Sec Flashcards
2 primary types of equity sec
- common
2. preferred
each share of common stock entitles owner to…
portion of the co’s profits and dividends and an equal vote on directors
BOD
they oversee co’s biz
Ways to classify common stock
authorized
issues
outstanding
treasury
authorized stock
founders of the biz decide number of shares the co is authorized to issue
if a co wants to issue more shares than authorized, the charter must be amended thru a stockholder vote
issued stock
authorized stock that has been sold to investors.
authorized but unissued stock do NOT carry rights and privileges of issued shares and is not considered in determining a co’s total capitalization.
when a corp issues/sells fewer shares than the total # authorized, it normally reserves the unissued shares for future needs, including
- raising new capital for expansion
- paying stock dividends
- OR exchanging common stock for outstanding convertible bonds/preferred stock
outstanding stock
any shares that a co has issued and are in the hands of investors. If co. gets back its shares, that stock is no longer outstanding.
treasury stock
stock a corp has issued and subsequently reacquired.
Treasury stock does NOT carry the rights of outstanding common shares, such as voting rights and the right to receive dividends.
limited liability
stockh can’t lose more than the amt they invested/bought the stock of
residual claims to assets
residual right to claim assets
if corp is liquidated, common stockh have residual rights to claim corporate assets. (meaning all debts and other sec holders have been satisfied). But common stock is the most junior sec.
stock splits
high mkt price scaring away investors? co declares aa stock split to make the stock price attractive to more investors.
forward stock split increases number of shares.
stock dividends
paying common stockh a dividend in additional shares of stock.
Like stock split, there is no real change to the overall value. The market price of the stock drops.
transferability
shares of stock are freely transferrable (aka shareh do not need the permission of anyone to sell the stock in the open mkt)
1 exception is restricted stock, where sales depend on meeting the requirements of SEC Rule 144.
voting takes place at the co’s annual meeting and could include topics like…
- issuance of convertible sec or additional common stock
- substantial changes in corp’s biz (ie M&A)
- declaration of stock splits (forward and reverse)
proxies
stockh often find it difficult to attend the annual stockh’s meeting, so most vote on co matters by means of a PROXY (form of an absentee ballot).
After the proxy is returned to co, aa proxy can be auto canceled if stockh attends the meeting, authorizes a subsequent proxy, or dies.
stockh may revoke a proxy at any time before co. tabulates the final vote at its annual meeting.
nonvoting common stock
Class A vs B
Issuing nonvoting stock allows a co to raise more capital while maintaining mgmt control and continuity without diluting voting power.
preemptive rights
anti-dilution provision when issuing new shares; stockh have right to purchase enough newly issues shares to maintain their proportionate ownership in the corp.
inspection rights
right to receive annual fin statem and obtain lists of stockh.
inspection rights do not include the right to examine detailed fin records or the minutes of BOD meetings.
Preferred Stock
reps ownership in corp; NO VOTING RIGHTS; does NOT offer appreciation potential associated with common stock.
preferred stock - always issued with a FIXED rate of return. That fixed return is a fixed dividend that’s being paid.
- which is why these are usually purchased for INCOME
- SOME preferred stock is issued with variable dividend payout (known asa adjustable-rate preferred stock)
preferred stock prices tend to move inversely with interest rates. they typically do not have growth potential like common stock, making it subject to inflation risk.
Adv of Preferred Stock
- when BOD declares dividends, owners of preferred stock must receive their stated dividend in full before common stockh may receive a dividend
- if a corp goes bankrupt, preferred stockh have a priority clim over common stockh on the. remaining after creditors have been paid
bc of this, preferred stock appeals to investors looking for income and safety.
Fixed rate of return
Preferred stocks’ fixed dividend is a key attraction for income-oriented investors.
% of par value
Important point about these dividends is that, just as with common stock, there is NO OBLIGATION FOR THEM TO BE PAID. It’s NOT a debt security where interest paym are required.
- takes a vote of BOD for dividend to be declared; it IS true that the dividend is fixed and must be paid BEFORE common tho
states rate of dividend payments for preferred stock causes…
market price of preferred stock to move OPPOSITE changes in int rates
*** preferred stock reps ownership in a co like common stock, but…
its price is sensitive to int rates just like price of a bond!)
altho it’s aa fixed-income investm, preferred stock (unlike bonds) have no preset date at which it matures and no scheduled redemption/maturity value/date.
straight preferred
no special features beyond the stated dividend paym
Divid does NOT have to be made-up in future if co. can’t pay divid this yr.
Cumulative preferred
any dividends skipped must be paid before paying common dividend (aka dividends in arrears)
for anyone seeking income, cumulative is safer than straight. That is why the dividend rate is somewhat lower.
convertible preferred
gives the owner the right to exchange each preferred share for common stock shares
conversion rate is fixed at time of issue; conversion feature also results in shares with lower dividend rate
par/conv price = # of shares of common
participating preferred
fixed dividend
stock is eligible for a % of common dividend
max % is stated when stock is issued; before the participating dividend can be paid, a common dividend must be declared.
callable preferred/redeemable preferred
co can buy back the stock from investors at a stated price on the call date/any day after. the call feature would most likely be used when int rates decline. They could issue a new preferred with a lower dividend and use that money to call in the old stock.
Similar to refinancing loan when int rates go down.
Risk: issuer may decide to redeem it. That ends dividend payments.
Adj Rate Preferred
int rates on US gov T bills is one frequently used. Adjustm done quarterly.
Adv to an adjustable-rate preferred stock: it does not have the int rate risk of other fixed-income securities.
Preemptive Rights/Stock Rights
proportionate ownership in a co.
rights offering allows stockh to purchase common stock below current market price.
altho referred to as an equity security, these rights are NOT ownership. ONLY when it’s exercised does hte investor have more shares. Just like any other shares, they have voting and dividend rights.
Rights themselves do NOT pay dividends + do not vote.
stockh who receives stock rights may…
ex the rights to buy stock by sending the rights certificate and a check for the required amt fo the rights agent
sell the rights and profit from their MV (rights certificates are negotiable sec), or
let the rights expire and lose their value
subscription rights
certificate rep the privilege to buy additional shares of a corp. Corp sends this certificate to each common shareholder.
This certificate grants 1 right for each share of common stock they own. These rights have a short lifespan.
Most rights expire within 30-45 days of issue.
