Unit 1 Equity Securities.docx

Unit 1 Equity Securities.docx

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Unit1EquitySecurities

Unit1EquitySecurities

Asecurityisaninvestmentthatrepresentseitheranownershipstakeoradebtstakeinacompany.

Adebtsecurityisusuallyacquiredbybuyingacompany’sbonds.

Adebtinvestmentisaloantoacompanyinexchangeforinterestincomeandthepromisetorepaytheloanatafuturematuritydate.

Stocksandbondsarenormallypurchasedandsoldonastockexchangeorintheover-the-counter（OTC）market.

AstockexchangesuchasNewYorkStockExchange（NYSE）isanauctionmarketwherebuyersandsellersarematchedbyaspecialist（designatedmarketmaker）whomaintainsafairandorderlymarketforaparticularsetofstocks.

TheOTCmarketisaninterdealermarketlinkedbycomputerterminalstoFinancialIndustryRegulatoryAuthority（FINRY）memberfirmsacrossthecountry.

Stockrepresentsequityorownershipinacompanyandbondsarealoantoacompany（adebt）.

Assets=liabilities+networth（equity）

Mostcorporationsareorganizedinawaythattheirstockholdersregularlyvoteforandelectcandidatestoaboardofdirectors（BOD）tooverseethecompany’sbusiness.

Preferredstockrepresentsequityownershipinacorporationbutitusuallydoesnothavethesamevotingrightsorappreciationpotentialascommonstock.Preferredstocknormallypaysafixed,semiannualdividendandhaspriorityclaimsovercommonstock.Thepreferredispaidfirstifacompanydeclaresbankruptcy.

Commonstockcanbeclassifiedasauthorized,issued,outstandingandtreasury.

Authorizedstockreferstoaspecificnumberofsharesthecompanyhasauthorizationtoissueorsell.

Issuedstockhasbeenauthorizedanddistributedtoinvestors.Acorporationnormallyreservestheunissuedsharesforfutureneeds,including:

raisingnewcapitalforexpansion,payingstockdividends,providingstockpurchaseplansforemployeesorstockoptionsforcorporateofficers,exchangingcommonstockforoutstandingconvertiblebondsorpreferredstockorsatisfyingtheexerciseofoutstandingstockpurchasewarrants.

Authorizedbutunissuedstockdoesnotcarrytherightsandprivilegesofissuedsharesandisnotconsideredindeterminingacompany’stotalcapitalization.

Outstandingstockincludesanysharesthatacompanyhasissuedbuthasnotrepurchasedthatis,stockthatisinvestorowned.

Treasurystockisstockacorporationhasissuedandsubsequentlyrepurchasedfromthepublic.Treasurystockdoesnotcarrytherightsofoutstandingcommonsharessuchasvotingrightsandtherighttoreceivedividends.

Acorporationbuysbackitsstockforanumberofreasonssuchasto:

increaseearningpershare;haveaninventoryofstockavailabletodistributeasstockoptions,fundanemployeepensionplanoruseforfutureacquisitions.

Issuedstock=treasurystock+outstandingstock

Forinvestors,acommonstock’sparvalueismeaningless.Whenthecorporationsellsstock,themoneyreceivedexceedingparvalueisrecordedonthecorporatebalancesheetascapitalinexcessofpar,alsoknowaspaid-insurplus,capitalsurplusorpaid-incapital.

Astock’sbookvaluepershareisameasureofhowmuchacommonstockholdercouldexpecttoreceiveforeachshareifthecorporationwereliquidated.Thebookvaluepershareisthedifferencebetweenthevalueofacorporation’stangibleassetsanditsliabilitiesdividedbythenumberofsharesoutstanding.

Marketprice,thepriceinvestorsmustpaytobuystockisthemostfamiliarmeasureofastock’svalue.Marketvalueisinfluencedbyacompany’sbusinessprospectsandtheconsequenteffectonsupplyanddemand.

Parvalue=anarbitraryvalue

Bookvalue=currentliquidationvalueofashare

Marketvalue=supplyanddemandvalue

Rightsofcommonstockownership

Commonstockholdersusetheirvotingrightstoexercisecontrolofacorporationbyelectingaboardofdirectorsandbyvotingonimportantcorporatepolicymattersatannualmeetingssuchas:

issuanceofconvertiblesecuritiesoradditionalcommonstock,substantialchangesinthecorporation’sbusinesssuchasmergersoracquisitionsanddeclarationsofstocksplits.

Stockholdershavetherighttovoteontheissuanceofconvertiblesecuritiesbecausetheywilldilutecurrentstockholders’proportionateownershipwhenconverted（changeintosharesofcommon）.

StatutoryvotingallowsastockholdertocastonevotepershareownedforeachitemonaballotsuchascandidatesfortheBOD.

Cumulativevotingallowsstockholderstoallocatetheirtotalvotesinanymannertheychoose.

Cumulativevotingbenefitsthesmallerinvestor,whereasstatutoryvotingbenefitslargershareholders.

Shareholdersdonotvoteondividend-relatedmatterssuchaswhentheyaredeclaredandhowmuchtheywillbe.Theydovoteonstocksplit,boardmembersandissuanceofadditionalequity-relatedsecuritieslikecommonstock,preferredstockandconvertiblesecurities.

Stockholdersoftenfinditdifficulttoattendtheannualstockholders’meeting,somostvoteoncompanymattersbymeansofproxy,aformofabsenteeballot.

Whenacompanysendsproxiestoshareholders,usuallyforaspecificmeeting,itisknownasaproxysolicitation.

Beforemakingaproxysolicitation,companiesmustsubmittheinformationtotheSecuritiesandExchangeCommission（SEC）forreview.

Ifaproxyvotecouldchangecontrolofacompany（aproxycontest）,allpersonsinvolvedinthecontestmustregisterwiththeSECasparticipantsorfacecriminalpenalties.

Companiesmayissuebothvotingandnonvotingorlimitedvotingcommonstock.

Issuingnonvotingstockallowsacompanytoraiseadditionalcapitalwhilemaintainingmanagementcontrolandcontinuitywithoutdilutingvotingpower.

Whenacorporationraisescapitalthroughthesaleofadditionalcommonstock,itmayberequiredbylaworitscorporatechartertoofferthesecuritiestoitscommonstockholdersbeforethegeneralpublic.Thisisknownasanantidilutionprovision.Stockholdersthenhaveapreemptiverighttopurchaseenoughnewlyissuedsharestomaintaintheirproportionateownershipinthecorporation.

Preemptiverightsgiveinvestorstherighttomaintainaproportionateinterestinacompany’sstock.

Limitedliabilityprotectsstockholdersfromhavingtopayacorporation’sdebtsinbankruptcy.

Stockholdershavetherighttoreceiveannualfinancialstatementsandobtainlistsofstockholders.

Ifacorporationisliquidated,thecommonstockholder（asowner）hasaresidualrighttoclaimcorporateassetsafteralldebtsandothersecurityholdershavesatisfied.Thecommonstockholderisatthebottomoftheliquidationprioritylist.

Tomakethestockpriceattractivetoawiderbaseofinvestorsthatis,retailversusinstitutionalinvestors,thecompanycandeclareastocksplit.

Aforwardstocksplitincreasesthenumberofsharesandreducesthepricewithoutaffectingthetotalmarketvalueofsharesoutstanding.

Moreshareslessvalue=sametotalownershipinterestbeforeandafter.

Areversesplithastheoppositeeffectonthenumberandpriceofshares.Afterareversesplitinvestorsownfewersharesworthmorepershare.

Aninvestorwhobuyssharesisconsideredlongthestock.

Aninvestormayalsosellsharesbeforeheownsthem,withtheintentofbuyingthembackatalowpriceinthefuture,sellhighandbuylowlater.Suchatransactionknownasashortsale,involvesborrowingsharestosellthattheinvestormusteventuallyreplace.Aninvestorwhosellsborrowedsharesisconsideredshortthestockuntilhebuysandreturnsthesharestothelender.

Inincreaseinthemarketpriceofsharesisknownascapitalappreciation.

Manycorporationspayregularquarterlycashdividendstostockholders.Issuersmayalsopaystockdividends（additionalsharesintheissuingcompany）orpropertydividends（sharesinasubsidiarycompanyoraproductsample）.

Stockdividendsarefrequentlypaidbycompaniesthatwishtoreinvestearningsforresearchanddevelopment.Technologycompanies,aggressivegrowthcompanies,andnewcompaniesareexamplesofcompanieslikelytopaystockdividends.Propertydividendsaretheleastcommonformofdividendpayment.

Buyinglowandsellinghighisoneofthemainobjectivesofstockinvestors.Whenthatisaccomplishment,investorsexperiencecapitalgains.Iftheinvestorsellsthestockatthehigherprice,theinvestorhasarealizedgainandwillberesponsiblefortaxesonthegain.Iftheinvestordoesnotsellthestock,theinvestorhasanunrealizedgain,whichisnottaxed.Stockgainsaretaxablyonlywhentheyarerealized.

Anotherreasonpeoplebuystockistogenerateincomefromthedividendspaid.

Thechancethatastockwilldeclineinpriceatatimetheinvestorneedshismoneyisoneriskofowningcommonstock.

Anotherriskofstockownershipisthepossibilityofdividendincomedecreasingorceasingentirelyifthecompanylosesmoney.

Ifacompanydeclaresbankruptcy,theholdersofitsbondsandpreferredstockhavepriorityovercommonstockholders,makingacompany’sdebtandpreferredsharesconsideredtobeseniorsecurities.Commonstockholdershaveonlyresidualrightstocorporateassetsupondissolution.

Whenacustomerpurchasesstocktoopenaposition,thecustomerissaidtobelongthestock.Theriskofalongpositionisthatthepriceofthestockfalls.Maximumlossoccursifthestockbecomesworthless.

Whenacustomersellsshorttoopenaposition,thecustomerissellingstockhedoesnotown.Hedoesthisbyborrowingstockfromastocklenderandsellingtheborrowedshares.Thecustomeristakingtheviewthatthestockwilldeclineinprice,enablinghimtobuythesharesbackatalowerpriceforreturntothestocklender.

Acustomer