Chapter 9 Common and Preferred Stock 91 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 91 ID: 561538
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Stocks
Chapter 9Slide2
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 stockSlide3
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 situationSlide4
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-the-counter market.Slide5
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 investmentSlide6
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)Slide7
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 themSlide8
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 stockholdersSlide9
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)Slide10
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)Slide11
Common and Preferred Stock 9.1
Why Investors Purchase Common Stock –
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
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 profitSlide12
Common and Preferred Stock 9.1
Why Investors Purchase Common Stock –
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 lineSlide13
Common and Preferred Stock 9.1
Why Investors Purchase Common Stock –
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 splitSlide14
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 ($30x5%=$1.50)Slide15
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 troubleSlide16
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 bondsSlide17
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 peopleSlide18
Common and Preferred Stock 9.1
Why Investors Purchase Preferred Stock?
To make preferred stock more attractive to investors some corporations may offer:
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 periodSlide19
Common and Preferred Stock 9.1
Why Investors Purchase Preferred Stock?
To make preferred stock more attractive to investors some corporations may offer:
Convertible Preferred Stock - stock that can be exchanged for a specified number of shares of common stock
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