ch.8 Flashcards
Common shares
-OWNERS OF COMPANY
-INITIALLY PROVIDE EQUITY CAPITAL TO START THE BIZ
○ If business proper’s- shareholders also prosper
Summary of C/S
○Last priority if company liquidated
○ Dividends not guaranteed
○ shares registered in “street form: name of securities firm instead of beneficial owner (makes them more readily transferable to new owner)
○ Trading units: stocks trade in lot sizes on stock exchg
§ Standard trading unit: regular unit that has uniformly been decided upon by the exchages
Benefits of C/S ownership
○ CAPITAL APPRECIATION
○ Right to receive c/s and dividends paid by company
○ Voting rights
○ Favourable tax treatment of dividend income and capital gains
○ Marketability
Limited liability
C/S-Capital appreciation
§ C/S may increase in value as Retained Earnings increase the size of shareholders equity, makes stock more attractive
C/S- Retained earnings
earnings kept within the company rather than paid out
C/A- dividends
○ Company net earnings available for distribution as dividends, OR may be retained within company and reinvested in business or BOTH
*NOT CONTRACTUAL OBLIGATION
REGULAR DIVIDEND
specified amount that will be paid each year
EXTRA DIVIDEND
bonus paid in addition to regular pmt, not to assume pmt will happen all the time
EX DIVIDEND
purchaser of these shares does not receive dividend that has just been declared.
DIVIDEND RECORD DATE
all s/h recorded on this date entitled to dividend
○ To determine if seller or buyer gets dividend when sales takes place
EX DIVIDEND DATE
on or after this day, stock sells without dividend–seller retains dividend right
® If buy stocks on day of ex-div. does not get div. declared
CUM DIVIDEND
- comes WITH dividend
- if bought day before ex-div date
AUTOMATIC DIVIDEND REINVESTMENT PLAN
company automatically purchases additional shares in company with owners dividends from thE company.
® b/c purchases made regularly, s/h can reduce avg cost paid per unit (dollar cost averaging)
STOCK DIVIDENDS
§ Dividend in form of additional stock, not cash
§ Paid by rapidly growing company that needs to retain high degree of earnings to finance future growth
C/S VOTING RIGHTS
shareholders exercise rights as owners to control destiny of corporation
○ Elect directors who guide / control business
○ Sale, merger/liquidation of business and amendment of charter- need shareholder approval
RESTRICTED SHARES
give shareholders right to participate to unlimited degree in earnings of company and assets on liquidation BUT not full voting rights
3 TYPES:
- NON VOTING
- SUBORDINATE VOTING
- RESTRICTED VOTING
Non voting rstricted shares
no right to vote, except maybe in limited circumstances
SUBORDINATE VOTING
right to vote if another calss of shares with greater voting per share
RESTRICTED VOTING
carry right to vote, subject to a limit/restriction on the number and % of shares that may be voted by a person
TAX BENEFITS FOR C/S
○ Dividend tax credit (ALLEVIATE DOUBLE TAXATION)
○ Capital gains exemption of 50%
STOCK SAVINGS PLANS:
STOCK SAVINGS PLANS
entitle residents of some prov’s to deduct up to specified annual amounts (or tax credit) the cost of certain stocks purchases in respective prov’s I the year
C/S? DIVIDENDS FROM TAXABLE CANADIAN CORP
- interest on debt, interest paid with company’s pre-tax dollars b/c interest considered tax deductible cost of doing business
- dividends on shares, dividends paid with after tax dollars b/c dividends not tax deductible cost of doing business
C/S? TAX ON FOREIGN DIVIDENDS
• Individuals that get dividends from NON Canadian sources usually get net amount from sources (taxes deducted at source)
C/S? capital gains/ capital losses
- C/G arises from the sale (or deemed sale) of capital property for more than it costed.
- Capital loss arises from sale of capital property for less than its cost.
- 50% INCL IN INCOME
- Capital losses- reduce any capital gains, cannot be used to reduce any other Income
stock split/subdivision
brings high yield priced stock into rage or consolidation, to bring low priced stock more atractive
STOCK SPLITS
- Split itself does not affect dollar value of company equity, nor proportion and value of s/h stake
- Equity /share reduced (#) , but equity section ($) of stmts of financial position doesn’t change
REVERSE SPLIT/ CONSOLIDATION
○ DONE If:
○ market price of shares too low
○ Used when company in danger of being delisted on stock exchange b/c share price below exchanges min share price rule
○ Total shareholding in company reduced
○ Raises market price of the new shares
○ put company in better position to raise capital
LISTED
TRADED ON STOCK EXCHANGE
UNLISTED
TRADES O OVER THE COUNTER MARKET
PREFERRED SHARES
DEFINITION: ?
usually entitled to a fixed dividend payment
PREFERENCE SHARES
generally hold same meaning as p/s, rank ahead of the different
P/S PREFERENCE AS TO ASSETS
○ Usually given a prior claim to assets ahead of IF bankruptcy or dissolution of a company
○ Creditors and debt holders rank ahead of p/s
P/S PREFERENCE AS TO DIVIDENDS
○ Entitled to a fixed dividend expressed as either a % of the par or stated value, or as stated amount of dollars and cents
○ Dividends not obligatory
WHY ISSUE P/S INSTEAD OF DEBT?
○ Not feasible for it to market new debt issue
○ Market conditions temporarily unreceptive to new debt issues
○ has enough short and long term debt o/s (debt/equity ratio high)
○ legal obligations to pay interest and principal
Directors decide paying dividends will not be to expensive
WHY BUY P/S
- Bought largely by income oriented investors
- Conservative investor– seeking income, take advantage of dividend tax credit
Institutional investors– attracted to preferential tax treatment
P/S FEATURES
• CUMMULATIVE: arrears • NON CUMMULATIVE: NO ARREARS • Callable • Non callable • Non voting -PURCHASE FUND SINKING FUND
PURCHASE FUND
if price of shares declines in market to or below stipulated price, fund tries to buy specified amts of shares for redemption
SINKING FUND
attempts to retire shares in open market when shares trade at/below stipulated price
TYPES OF P/S
- STRAIGHT PREFERREDS
- CONVERTIBLE PREFERREDS
- RETRACTABLE PREFERREDS
- FLOATING RATEPREFERREDS
- FOREIGN PAY PREFERREDS
- OTHER: participating, deferred
STRAIGHT PREFERREDS
- normal preferences as to asset and dividends ahead of c/s
- fixed dividend
- If interest rates rise, dividend pmt less valuable and vice versa
- Greater safety than c/s
- Tax advantage– dividend tax credit
- No voting privileges OR maturity date
- Poorer marketability than C/S
- Limited appreciation potential compared to c/s
CONVERTIBLE PREFERREDS
- Similar to convertible bonds and debentures
- Enable holder to convert p/s to other class of shares (c/s) at predetermined price, for stated period of time
sell at premium above price its expected to sell at
• Sometimes convert in to less(or more) than standard trading unit of c/s
RETRACTABLE PREFERREDS
- Can force company to buy back retractable preferred for cash on specified dates and Prices
- Can create maturity date for the preferred by exercising retraction privileges and tendering shares to issuer for redemption
Shorter time interval to retraction date= less vulnerable
retractable p/s will not fall significantly below retraction price as retraction date approaches
capital gain if purchased at discount from retraction price
FLOATING RATE P/S
• Pay dividends in amt that fluctuate reflecting changing interest rates
Rates rise= dividend pmts rise
• For purchaser:
Higher income if rates rise
FOREIGN PAY PREFEREDS
Create and issue preferred with dividends and certain other features payable in or related to foreign funds
• Key factor to selecting foreign pay p/s is desirability of receiving dividends in curency other than Canadian funds • Risk: curency risk ○ Foreign currency increases, dividend will increase
Canadian dollar increases, dividend will decrease
OTHER TYPES OF PREFERREDS: PARTICIPATING PREFERRED
have certain right to a share in the earnings of company over and above specified dividend rate
OTHER TYPES OF PREFERREDS: DEFERRED PREFERRED
doesn’t pay regular dividend
On maturity date, diff between purchase price and redemption value = dividend premium
DIVIDEND PREMIUM
cumulative amount equal to dividends that would have been rec’d if purchased p/s paying regular dividend
STOCK INDEXES
Stock indexes or averages are indicators used to measure changes in a representative grouping of stocks
• Gauge overall performance and directional moves in the stock market
Enable portfolio mgr and investors to measure portfolio’s performance
Value weighted and derived by using total market value (i.e market capitalization) by multiplying current price X number of shares o/s
STOCK AVERAGE
arithmetic avg of the current prices of a group of stocks designed to represent overall market or some part of it
weight based on stocks total market capitalization
CANADIAN MARKET INDEXES
§ s&p/tasx composite index
§ s&p/tsx 60 index
§ s&p/TSX venture composite index
U.S STOCK MARKET INDEXES
§ The DOW jones Industrial Average (DIJA)
§ S&P 500
- The NYSE composite index
- NYSE mkt composite index
- NASDAQ composite index:
Value line Composite Index:
INTERNATIONAL MARKET INDEXES AND AVERAGES
- NIKKEI stock average (225) price index: tokyo Stock Exchange Average
- FTSE 100 Index:London Stock exchg,
- The DAX: German Securities
- CAC 40 indexparis stock exhange
Swiss market Index
The s&p/TSX composite index
§ Measures changes in total market capitalization of the stocks in the index
§ Index created for each sector + 3 subsector indesxes, specific to cdn market: □ Diversified mining □ Real estate □ Gold
The s&p/TSX 60 index
§ 60 largest companies that trade on the TSX as measured by market capitalization
The s&p/TSX venture composite index
§ Canadian benchmark index
Market capitalization based index meant to provide indication of performance for companies listed on TSX venture exchg
The DOW JONES Industrial average (DIJA)
○ Most publicity given to trading performance of 30 issues that make up the Dow jones Industrial Average (DIJA)
§ Not true representative indicatior of broad market activity (too few companies incl in average)
• The S&P 500
○ Based on large number of industrial stocks, some financial stocks, some utility stocks, and a smaller number of transportation stocvks, that are weighted in index by market capitalization
