Series 7 for Dummies Chapter 6: Corporate Ownership: Equity Securities

pro rata

If a company declares a dividend, each shareholder receives an equal proportion for for each share that they own.

Opportunity to Inspect Corporate Books and Records

One of the stockholder's rights. This opportunity is provided through a company's public filings, including its annual report. Nowadays, this isn't such a big deal as public companies are required to make their financials public.

The Right to Transfer Ownership

One of the stockholder's rights. This right means that shareholders are allowed to trade their stock on an exchange.

defensive stock

One of the types of stock. A stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market.

speculative stock

One of the types of stock. A stock with a high degree of risk. They may offer the possibility of substantial returns to compensate for its higher risk profile.

counter-cyclical stock

One of the types of stock. A type of stock in which the underlying company belongs to an industry or niche with financial performance that is negatively correlated to the overall state of the economy.

income stocks

One of the types of stock. An equity security that pays regular, often steadily increasing dividends, and offers a high yield that may generate the majority of overall returns.

cyclical stock

One of the types of stock. An equity security whose price is affected by ups and downs in the overall economy. They typically relate to companies that sell discretionary items consumers can afford to buy more of in a booming economy and cut back on during a recession.

growth stocks

One of the types of stock. Company stocks that tend to increase in capital value rather than yield high income.

blue-chip stocks

One of the types of stock. Giant companies with solid companies. Think of General Electric, Intel, Visa, Wal-Mart and Walt disney - financially fit corporations with dependable earnings, usually paying additional income to investors in the form of dividends.

emerging-growth stock

One of the types of stock. The common stock of a relatively young firm that is operating in an industry that has very good growth prospects. Although this kind of stock offers unusually large returns, it is very risky because the expected growth may not occur or the firm may be swamped by the competition.

stockholder's rights

There are 6 main parts of this 1. Voting power on major issues 2. Ownership in a Portion of the Company 3. Right to Transfer Ownership 4. An Entitlement to Dividends 5. Opportunity to Inspect Corporate Books and Records 6. The Right to Sue for Wrongful Acts

ex-rights formula

Value of a right = (market price - subscription price) / (number of rights needed to purchase one share)

escrow receipts

a bank's guarantee that the option writer has the security and that it is easily deliverable.

standby underwriter

a broker-dealer that purchases any stock that wasn't sold in the rights offering and then resells the shares to other investors.

Sinking-fund provisions for preferred stock

a part of a bond indenture or preferred stock charter that requires the issuer to regularly set aside in a separate custodial account for the exclusive purpose of redeeming the bonds or shares.

Convertible preferred

allows investors to trade their preferred stock for common stock of the same company at any time. Because the issuers are providing investors with another way to make money, investors usually receive a lower dividend payment what with regular preferred stock.

Participating Preferred

although rarely issued, this stock allows the investor to receive common dividends in addition to the usual preferred dividends.

cumulative voting

although the investor still gets the same number of overall votes as if the corporation were offering statutory voting, the stockholder can vote the shares in any way they see fit.

registrar

an independent entity that works along with a company's transfer agent to maintain a record of stock and bond owners. The main function of them is to make sure that the outstanding shares don't exceed the amount of stock the issuer authorizes under its corporate charter. They are responsible for counting things.

types of stock

blue-chip, growth, emerging-growth, income, cyclical/counter-cyclical, defensive, speculative, special-situation

units

bundled bonds and warrants or bundled stock and warrants.

reverse split

consolidating shares so they can raise the price of the stock and perhaps boost investor confidence. The market price of the security increases and the number of shares decreases.

liquidity

ease of trading

Par Value

for common stock this is not as important to investors as it is to bondholders and preferred stockholders. For common stockholders it is basically a bookkeeping value for the issuer.

preferred stock

has some characteristics of both equity and debt securities. One advantage of purchasing this over common stock is that shareholders of this stock receive money back before common stockholders do if the issuer declares bankruptcy. Issuers of this stock are required to pay consistent cash dividends.

Variable or adjustable (floating rate) preferred

holders of this stock receive a dividend that's reset every six months to match movements in the prevailing interest rates. Because the dividend adjusts to changing interest rates, the stock price remains more stable.

Residual Claim on assets

if a corporation is liquidated the corporation's assets are applied to satisfy outstanding claims against the corporation - indebtedness, employee salaries, taxes, contractual obligations. Shareholders have a residual claim on the assets. Any assets left over after all other claims have been met belong to them. Generally, those residual assets are liquidated, and the proceeds are distributed to shareholders as a fixed payment per outstanding share.

common stock

issued by companies to raise business capital. Represents ownership of the issuing corporation. One of the most basic rights that these give stockholders is voting rights.

stock dividends

just like forward stock splits in that the investor receives more shares of stock, only the corporation gives a percentage dividend instead of splitting the stock. These are not taxable to the stockholder because the overall value of the investment does not change. The primary reason for a company to give investors a stock dividend is to make the market price more attractive to investors.

Transfer Agent

maintains records of a corporation's stock and bond owners (much like a registrar) but also mails and cancels stock certificates as necessary. They are responsible for transferring or sending things.

American Depositary Receipts

receipts for foreign securities traded in the United States. these are negotiable certificates that represent a specific number of shares of a foreign stock. Investors of these may or may not have voting rights. U.S. banks issue them; therefore investors receive dividends in U.S. dollars. Owners of these are subject to currency risk, economic risk, political risk, and so on.

stock split

shares after a split = shares x A/B price after a split = stock price x B/A

no par value stock

stock issued without a stated par value

property forms

stock of a subsidiary company or sample products made by the issuer.

Prior (senior) preferred

stockholders of these shares receive compensation even before other preferred stockholders. Because of the extra safety factor, this stock pays a slightly lower dividend than other preferred stock from the same issue.

conversion ratio

tells you the number of shares of common stock that an investor receives for converting one share of preferred stock. par value/conversion price

Corporate spin-off

the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.

conversion price

the dollar price at which a convertible preferred stock par value can be exchanged into a share of common stock. When the convertible preferred stock is first issued, this is specified and is based on par value.

ex-date

the first day the stock trades without rights

statutory or regular voting

the most common type of voting that corporations offer to their shareholders. Stockholders typically receive one vote for every share (although in some cases it may be more depending on the distinctions) that they own multiplied by the number of positions to be filled on the board of directors. They must split their votes evenly for each item on the ballot.

forward stock split

the number of shares increases and the price decreases without affecting the total market value of the outstanding shares.After a company does this investors receive additional shares, but the market price (and par value) per share drops.

Authorized Shares

the number of shares of stock that a corporation can issue. The issuer's bylaws or corporate charter states the number of shares the company is authorized to sell.

Outstanding Shares

the number of shares that are in investors' hands. This quantity may or may not be the same number as the issued shares. issued-treasury

Issued Shares

the portion of authorized shares that the issuer has sold to the public to raise money.

cum rights formula

the value of a right while shares are still trading with rights attached. Value of a right = (Market Price - Subscription Price) / (number of rights needed to purchase one share + 1)

stated par value

this is printed on the stock certificate; it changes if the issuer splits its stock.

proxy or absentee ballot

this is the way that stockholders usually cast their votes when voting for the board of directors, because having all of them their present to do so would be difficult.

Callable preferred

this stock allows the issuer to buy back the preferred stock at any time at a price on the certificate. This stock is a little riskier for investors because they don't have control over how long they can hold the stock, so corporations usually pay a higher dividend on this stock than on regular preferred stock.

Cumulative

this type of preferred stock is more common. If an investor owns this stock and doesn't receive an expected dividend, the issuer still owes that dividend. If the issuer declares a common dividend, the issuer first has to make up all delinquent payments to this type of stockholders.

Noncumulative (straight) preferred

this type of preferred stock is rare. If the issuer fails to pay a dividend, the issuer doesn't owe it to investors. An investor may choose this stock over common stock because the company is still supposed to pay a consistent cash dividend.

Ownership in a portion of the company

One of the stockholder's rights. A stockholder has a claim on a portion of the assets owned by the company.

The Right to Sue for Wrongful Acts

One of the stockholder's rights. Basically the right that a shareholder has to sue the corporation if anything fishy is up.

An entitlement to dividends.

One of the stockholder's rights. The fact that whenever there are dividends paid out, shareholders are entitled to their share.

Voting power on major issues

One of the stockholder's rights. This includes the electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation

shelf registration or shelf offering or shelf prospectus

a type of public offering where certain issuers are allowed to offer and sell securities to the public without a separate prospectus for each act of offering.

cash dividends

a way for a corporation to share its profits with its shareholders. When an investor receives these, it is a taxable event. Although these are nice, the market price of the stock falls on the ex-dividend date.

rights

allow existing stockholders to purchase new shares of the corporation at a discount directly from the issuer, before the shares are offered to the public. These are marketable and may be sold by the stockholders to other investor.

warrants

certificates that entitle the holder to buy a specific amount of stock at a fixed price; They're usually issued along with a new bond or stock offering. Holders of these have no voting rights. They are sweeteners.

equity securities

common or preferred stock, represent ownership interest in the issuing company. All publicly held corporations issue these to investors. They have historically outperformed most other investments.

nonvoting common stock

common stock that does not give their shareholders the right to vote, this is not attractive to investors who like to have some control over who's running the company.

special situation

refers to particular circumstances involving a security that would compel investors to trade the security.

treasury stock

stock that the issuer repurchases.

paid-in capital, paid-in surplus, or capital surplus

the amount over par value that an issuer receives for selling stock.

consolidation

the combination of assets, liabilities and other financial items of two or more entities into one.

Ex-dividend date

the first day the stock trades without a dividend. price on this day = stock price - dividend

hostile takeover

when another company is trying to gain control of the issuer. At times, an issuer may decide to repurchase its stock in the market to either help increase the demand (and the price) of the stock trading in the market or to avoid this.

limited liability

where a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership.

parity price

where the convertible preferred stock and common stock would be trading equally.