Stocks Chapter 9 Common and Preferred Stock 9

Stocks Chapter 9

Common and Preferred Stock 9. 1 • Objectives – How to identify the reasons for investing in common stock – How to identify the reasons for investing in preferred stock

Common and Preferred Stock 9. 1 • Why it’s important – Recognizing the reasons for investing in common and preferred stock will enable you to make the best investments for your financial situation

Common and Preferred Stock 9. 1 • Securities are all of the investments, including stocks, bonds, mutual funds, options, and commodities, that are traded—bought and sold—on securities exchanges or the over-thecounter market.

Common and Preferred Stock 9. 1 • Common Stock – (from chapter 8) is stock that provides the most basic form of corporate ownership • The company uses the money made by selling stock to make and sell its product, fund its operations, and expand • If they company earns a profit, the stockholders earn a return, or gain on their investment

Common and Preferred Stock 9. 1 • People buy and sell stocks for one reason: they want larger returns than they can get from more conservative investments (like savings accounts or government bonds)

Common and Preferred Stock 9. 1 • Why Corporations Issue Common Stock? – To raise money to start up their business and then to help pay for its ongoing activities – Private corporations (closely held corporations) – shares are owned by a relatively small group of people and are not traded openly in stock markets – Public corporations (publicly held) – sells its shares openly in stock markets where anyone can buy them

Common and Preferred Stock 9. 1 • Why Corporations Issue Common Stock? – A Form of Equity – corporations do not have to repay the money a stockholder pays for stock • A stockholder can sell it to another investor • The price is set according to how much the buyer is willing to pay – Dividends Not Mandatory – corporate board of directors decide whether any profits will be paid to stockholders

Common and Preferred Stock 9. 1 • Why Corporations Issue Common Stock? – Voting Rights and Control of the Company • In return for your money, management gives you certain rights as a stockholder (example, by law the corporation holds a meeting every year where stockholders vote on company business) • Stockholders usually get one vote for each share they own • Can vote in person or by proxy (a document that transfers a stockholder’s voting rights to someone else)

Common and Preferred Stock 9. 1 • Why Corporations Issue Common Stock? – Voting Rights and Control of the Company • Some state require that corporations offer existing stockholders a preemptive right (give the current stockholders the right to buy any new stock the corporation issues before the stock is offered to the general public)

Common and Preferred Stock 9. 1 • Why Investors Purchase Common Stock – 1. Income From Dividends – to keep stockholders happy, most board members vote to pay dividends as long as the company is able • Most dividends are paid quarterly (every three months) and sometimes a special cash dividend if the company has a large increase 2. Dollar Appreciation (increase) of Stock Value – have to decide whether to sell or keep the stock if the value goes up • If you sell the difference between the price that you paid for it and the price at which you sell it is your profit

Common and Preferred Stock 9. 1 • Why Investors Purchase Common Stock – 3. Possibility of Increased Value from Stock Splits • Value can increase through a stock split (a process in which the shares of stock owned by existing stock holders are divided into a larger number of stocks) • Example: If you had 10, 000 shares at $50 a share and they split you would then have 20, 000 shares at $25 a share. • Why? Sometimes management believes that the stock should be trading at an ideal price range and if the market value is a lot higher, a stock split will bring it back in line

Common and Preferred Stock 9. 1 • Why Investors Purchase Common Stock – 3. Possibility of Increased Value from Stock Splits • Why? Sometimes management believes that the stock should be trading at an ideal price range and if the market value is a lot higher, a stock split will bring it back in line • It makes the shares more attractive to investors and the price starts to rise • But the value is NOT guaranteed to go up after a split

Common and Preferred Stock 9. 1 • Preferred Stock – gives the owner the advantage of receiving cash dividends before common stockholders – You know the actual dollar amount of the dividend you will receive before you buy – It is either a specific amount of money or a percentage of the par value of the stock • Par value - an assigned dollar value, often random, that is printed on a stock certificate for example if a par value of a stock is $30 and the dividend rate is 5%, the dollar amount of the dividend is $1. 50 ($30 x 5%=$1. 50)

Common and Preferred Stock 9. 1 • Why Corporations Issue Preferred Stock – As a way to raise money (used less often than common stock and only by a few corporations) – Might be attractive to conservative investors who don’t want to buy common stock – Preferred stockholders also have limited voting rights if the company is in financial trouble

Common and Preferred Stock 9. 1 • Why Investors Purchase Preferred Stock? – It’s considered the “middle investment” because its safer than common stock, but not as safe as bonds Bonds Preferred Stocks Common Stocks

Common and Preferred Stock 9. 1 • Why Investors Purchase Preferred Stock? – People who want a steady source of income often buy preferred stock but it lacks growth potential that common stock offers – So…Preferred stocks are not considered a good investment for most people

Common and Preferred Stock 9. 1 • Why Investors Purchase Preferred Stock? – To make preferred stock more attractive to investors some corporations may offer: 1. Cumulative preferred stock – stock whose unpaid dividends build up and must be paid before any cash dividend is paid to common stockholders – For example: if a corporation decides to omit one or more dividend payments to preferred stockholders, then people who have cumulative preferred stock will still receive those dividend payments during a later payment period

Common and Preferred Stock 9. 1 • Why Investors Purchase Preferred Stock? – To make preferred stock more attractive to investors some corporations may offer: 2. Convertible Preferred Stock - stock that can be exchanged for a specified number of shares of common stock 3. Participation Feature – allows preferred stockholders to share in the corporation’s earnings with the common stockholders – After a required dividend is paid to preferred stockholders and a stated dividend is paid to common stockholders, the remainder of the available earnings is shared…very rare feature