Equities Flashcards
- Stockholders are owners. Owners have equity.
- An equity security.
- Negotiable – Trades in the open market.
- Transferable.
- Non-Callable – Cannot be called by the issuer.
- Issued by corporation, invest companies (i.e. Mutual Funds & Real Estate Investment trusts)
- Common shareholders have limited liability – the most they can lose is their investment.
Common Stock
- When a corporation is formed, a fixed number of shares are authorized to be issued.
- Assigned an arbitrary par value, which is typically set quite low.
Authorized Stock
• For Common Stock – An arbitrary (meaningless) value assigned to shares at issuance.
Par Value
• A corporation has the option to issue a portion of their authorized stock to the public, and sell the rest at a later date.
Issued Stock
• Stock that is in the public’s hands / Shares that trade in the market.
Outstanding stock
• Outstanding stock that is repurchased by the issuer.
Treasury Stock
- Low Market Price / Good Buy Price
- Reduces the number of outstanding shares / Increases Earnings per share.
- Used to Fund pension plan and stock option plans
- Can be used for payment for an acquisition or merger
Reasons to Repurchase Stock (Treasury Stock)
- Right to vote
- Right to inspect books and records
- Right to transfer ownership
- Preemptive right
- Right to corporate distributions
- Right to corporate assets upon dissolution (Last in line)
Rights of a common share holder
Is shareholder approval needed to?
• Declare a stock split (Can change par value of company stock)
Declare a reverse stock split (Can change par value of company stock)
• Issue convertible bonds of preferred stock (Results in the issuance of more common stock. Dilutive)
• Issue stock options to officers on a preferential basis
Needs Shareholder Approval
Is shareholder Approval needed to? • Declare a cash dividend • Declare a stock dividend • Declare a rights distribution • Repurchase shares for treasury
Shareholder approval is not required
- Assume that 6 directorships are open (6 voting items), with a choice of one of three persons for each directorship. Voting for a 100-share owner works as follows
- 100 votes maximum are allowed for each directorship. In total, 600 votes are cast. (Used by most corporations)
- Known as proportionate voting.
Statutory Voting
- Assume that 6 directorships are open (6 voting items), with a choice of one of three persons for each directorship. Voting for a 100-share owner works as follows
- 6 directorships x 100 votes = 600 votes that can be cast in any manner. (Considered to be an advantage for the small investor)
Cumulative Voting
- Used to combat corporations who make it difficult to attend annual meetings.
- Shareholders can’t vote if they don’t attend.
- Voting cards that shareholders not attending the annual meeting must receive.
- Many shareholders don’t respond to these.
Proxies
- Dividends are paid to common stockholders only if declared by the Board of Directors.
- Cash dividends are typically paid quarterly.
- Stock dividends and stock splits are distributed on a non-regular basis.
Common Dividends Paid Quarterly
- Common stockholders have the right to maintain proportionate ownership.
- If the company wishes to issue additional common shares, the existing common shareholders have the right to buy them before anyone else.
Preemptive Right
- Takes the annualized common stock dividend and divides by the current market price of the stock.
- = Annual Income / Market Price
Dividend Yield
- = Market Price of Security/ Earnings Per Share
- Used to determine if a stock is overpriced.
- Is a measure of valuation
P/E Ratio
• Market Price/Multiple
Earnings per Share
- Can distribute cash dividends
- Can distribute additional shares of stock in that company as a dividend to conserve cash
- Can distribute shares of another company (such as a subsidiary) to shareholders
Corporate Distributions:
- Cannot be distributed to shareholders under the corporate business form
- Can only be passed to owners of partnerships.
Tax Credits
- Termed a “senior” security.
- Has priority over the common stock issued by the company
- Must receive dividend payments before common stock
- In the case of liquidation, receives payment before common stock
- Typically issued at $100 Par w/ a stated dividend rate
Preferred Stock
- Termed a “senior” security.
- Has priority over the common stock issued by the company
- Must receive dividend payments before common stock
- In the case of liquidation, receives payment before common stock
- Typically issued at $100 Par w/ a stated dividend rate
Preferred Stock Dividends
- = Annual Income from Security / Market price of Security
- 10%= $10 Annual Dividends/ Market Price
• ABC 8% $100 par preferred is trading at $105 in the market. The _____ ____ is:
8% of 100 / 105 * 100 = 7.6
Current Yield
- = Annual Income/Market Yield
* $10/10% or 0.1 = $100
Theoretical Market Price
- If Interest rates rise, theoretical price falls.
* If Interest rates fall, theoretical price rises.
Interest Rates effect on Theoretical Price
- Does not have the right to vote
- Doesn’t have preemptive rights.
- Issuance of additional shares does not dilute existing holders return.
Preferred Stock Features
- Has an indefinite life
- Bondholders have priority of claim to interest payments and corporate assets upon liquidation before preferred shareholders;
- Preferred dividends are only paid if declared by the Board of Directors
Preferred vs Bond
- Cumulative
- Callable
- Convertible
- Participating (Performance)
Preferred Stock Features
• If the issuer omits dividend payments, they “accumulate” and are paid if the issuer can ever resume making dividend payments. Must be paid in order to make common div distributed
Cumulative
• The issuer has the right to “call in” the shares after a set date, usually at par. Issuers call in shares if interest rates have fallen. After retiring the old high rate shares, the new preferred shares can be issued at the current lower rates.
Callable
• The preferred shareholder can “convert” his or her shares into common stock of the issuer based on a predetermined price. Value is impacted by the market price of the common. Convertible holders can enjoy capital gains if the price of the common movers up. The issuer can sell convertibles at lower dividend rates because of the value of the conversion feature.
Convertible
In addition to the fixed dividend rate, the preferred “participates” in any “extra” dividends declared by the Board of Directors.
Participating / Performance
- A long-term option to buy a stock at a fixed price.
- Typically attached to the sale of a new or bond, to enhance the deal.
- An example: A stock is sold at $20; the ______ allows for the purchase of an additional stock at $30.
Warrant
- Usually have a wait period, before they can be exercised (i.e. 1 year)
- Usually have an expiration date (i.e. 5 years)
- Indeterminate value at issuance.
- Allows the issuer to raise the price (if it is stock) or lower the interest rate (if it is debt) of the issue to which the _______ is attached.
- Issued at a substantial premium to the stock’s current market price and only gain additional value if the common stock price rises.
Warrant Features
- No life cycles.
* Trades separately from common stock on the exchange where the stock is listed
Perpetual Warrants
- Very short term.
- They typically have a 30-60 Day expiration date.
- Issued under an offering of new common share to existing shareholders under their pre-emptive rights.
- Companies can raise additional capital from existing customers without an underwriter.
Rights
- Issued when buying shares of foreign companies, instead of stock certificates.
- Issued by US banks. Backed by securities held in trust.
- Market price is influenced by foreign company’s performance and fluctuation of the currency exchange
American Depositary Receipts
- Doesn’t have voting or preemptive rights.
- The bank has voting rights and sells preemptive rights.
- Has the dividends passed on to them by the bank.
- Dividends are declared by the foreign company in their local currency, then converted into U.S. dollars.
ADR Holder
- Assembled by banks and broker-dealers without issuer’s participation.
- May have more than one depositary bank.
- Receives annual reports in the language of the issuer.
- Trades “Over the counter”
Non Sponsored ADRs
- Exchange listed. The foreign company “sponsors” the issue to increase its worldwide ownership base.
- Use one depositary bank – appointed by the issuer.
- Issuers provide quarterly and annual financial reports to shareholders in English.
- Listed and traded on the NYSE, NYSE American, and NASDAQ.
Sponsored ADRs
