Section 2 - Investment Vehicles Flashcards
Preemptive Rights
A preemptive right is a privilege that may be extended to certain shareholders of a corporation that grants them the right to purchase additional shares in the company prior to shares being made available for purchase by the general public in the event of a seasoned offering, which is a secondary issuing of stock shares. A preemptive right, also referred to as preemption rights, anti-dilution provisions or subscription rights, is written into the contract between the stock purchaser and the company
Right to sue for wrongful acts
Suits brought by the shareholder to address fraud or mismanagement by executives of the corporations. I,e, company grossly overstating their earnings.
Stockholder Rights
- ) Right to inspect records
- ) Right to vote on relevant matters.
- ) Right to receive dividends
- ) Right of limited liability
- ) Transfer Rights
- ) Preemptive Rights
- ) Right to sue for wrongful acts
Par Value of common stock
Price at which a company sold its stock. 1/100th of a cent or lower. Accounting artifact with little relevance on the stock
Transfer Agent and Registrar
How companies keep track of their stock (usually a bank or trust company). Keeps records of stocks and in what forms, cancels stock certificates, issues new certificiates, mails proxy materials, etc.
Registrar makes sure a company doesn’t issue more stocks than available and keeps records clean and up-to-date (usually banks and independent of transfer agent)
Preferred Stock
Representatives ownership share in a company and is an equity security that acts as a debt security. Generate income from a fixed monetary payment rather than a share in the companies financial gains. Fluctuates with the company creditworthiness rather than the companies losses and gains. Less risky than common stock but offers less growth potential. Risker than debt b/c companies can miss regularly scheduled dividend payments w/o being in default. Dividends are provided to perferred stock holders before common stock holders. Has a higher claim in bankruptcy than common stock. Usually come w/o voting rights
Common v. Preferred
Common - more risky but more growth potential, voting rights ( 1 per share), dividends (may receive company share and may be paid regularly), appreciate in companies value in stock price
Preferred: Dividend payments are paid on a fixed % of par, receive dividend payments before common stockholders, receive priority during the liquidation
Issuance of Preferred Stock
Issued when bonds or common stock is not feasible.
Value at Issuance
Preferred stock has face value at issuance (or par value). Usually $25, $50 or $100. Par Value represents the value of the prerred shareholder during liquidation. Means the amount a pref shareholder can claim, Do not receive the par value at maturity like bonds
Price of Preferred Stock
Trade in the secondary market but price fluctuations are caused by changing interest rates. As with bonds, preferred stocks appreciates with falling interest rates. When interest rates fall, the pref stock will rise above par. Usually will not fluctuate as much as common stock b/c they act more like bonds.
Classes of Preferred Stock
Cumulative Preferred Stock: Dividends accumulate when dividends are not paid. Corp must pay accrued dividends before it pays common stockholders. Preferred by investors seeking income
Straight Preferred Stocks: does not accrue of unpaid dividends (aka non-cumulative)
Participating Preferred Stock
Receives extra dividends when the company exceeds predetermined financial goals. Investors receive regular dividend and can participate in accelerated company growth. usually receives a greater claim in liquidations than non-participating preferred. Most stock is non-participating.
Convertable Preferred Stock
Allows the shareholders to participate in the growth of the company. The right to convert their preferred stock at a set conversation ratio. Can occur at the investor’s sole discretion. This is usually more dependent on the company’s common stock than then change in interest rates, like preferred stock.
Market Price x Conversation Ratio = Conversion Parity Price
Conversation Ratio = # of shares
Converatable Price / Face value of Preferred Stock = # of shares
Callable Preferred Stock
Gives the issuing company the right to shares after a set date at set price. Usually do this if interest rates drop and the issuer can issue new stock at a lower rate, Usually redeemed at a premium to par. Usually pays more than callable stock to compensate for the fact that the stock may be called
Protective Provisions
Allow preferred stockholders to permit certain actions by the company, such as a sale or merger of the company. Meant to protect preferred stockholders against common stockholders.
