Stocks and all information about it

1. Stocks
Adzhar Doolotova
AUCA 2022

2. Corporate Equity Capital
• Corporate equity capital is the financial capital supplied by the
owners of a corporation.
• This ownership claim can be represented by a paper stock certificate
• Today most record keeping is done electronically
• Shares are usually traded 100 shares at a time (called a “round lot”)
or multiples thereof
• An “odd lot” is a trade involving less than 100 shares

4. Common stock

5. Common Stock
• Common stock represents ownership shares in a corporation.
• Ownership gives common stockholders certain rights and privileges
that bondholders do not have.
• Common shareholders can vote to select the corporation’s board of
directors and vote on major issues facing the firm, such as corporate
charter changes and mergers.

6. Common Stock
• The common shareholders have a claim on all business profits that remain after
paying coupon payments or returns.
• The firm may wish to retain some of those profits to reinvest in the firm to
finance modernization, expansion, and growth.
• The dividend is typically a cash payment that allows shareholders to receive some
income from their investment.
• To many investors, an attractive characteristic of common stock dividends is their
potential to increase over time.
• A firm may experience poor earnings or losses, in which case shareholders bear
the risk of smaller dividends or the elimination of dividend payments until the
firm’s financial situation improves.

7. Preferred Stock
• Preferred stock - is an equity security that has a preference, or senior
claim, to the firm’s earnings and assets over common stock.
• Preferred shareholders must receive their fixed dividend before
common shareholders can receive a dividend.
• In liquidation, the claims of the preferred shareholders are to be
satisfied before common shareholders receive any proceeds.

8. Preferred Stock
• Preferred stock generally carries a stated fixed dividend. The dividend is
specified as a percentage of par value or as a fixed number of dollars per year.
• For example, a preferred stock may be a 9 percent preferred, meaning that its
annual dividend is 9 percent of its par or stated value. In such cases, unlike
common stock, a preferred stock’s par value does have important meaning,
much like par value for a bond.
• The dividend for no-par preferred stock is stated in terms of a dollar amount,
for example, preferred as to dividends in the amount of $9 annually.
• The holder of preferred stock accepts the limitation on the amount of
dividends as a fair exchange for the priority held in the earnings and assets of
the company.

9. Preferred Stock
• Preferred stocks are frequently nonvoting, many corporations issue
them as a means of obtaining equity capital without diluting the
control of the current stockholders.
• Unlike coupon interest on bonds, the fixed preferred stock dividend is
not a tax-deductible expense.
• Preferred stock may have special features.

10. Preferred Stock
• Cumulative preferred stock requires that before dividends on common stock
are paid, preferred dividends must be paid for all periods in which preferred
dividends were missed.
• Unlike debt holders, the preferred stockholders cannot force the payment
of their dividends. They may have to wait until earnings are adequate to
pay dividends.
• Callable preferred stock gives the corporation the right to retire the preferred
stock at its option. Convertible preferred stock has a special provision that
makes it possible to convert it to common stock of the corporation, generally
at the stockholder’s option.
• Preferred stock that is cumulative and convertible is a popular financing
choice for investors purchasing shares of stock in small firms with growth
potential.

11. Preferred Stock
• Participating preferred stock allows preferred shareholders to
participate with common shareholders when larger dividend payouts
are available.
• Holders get a larger dividend, if sufficient earnings exist and if
common shareholders will be getting a dividend larger than the
preferred shareholders.

12. Dividends
• Many investors purchase shares of stock expecting to receive cash
dividends.
• There are several strategies that can guide the board’s decision regarding
the level of dividends, including
• target payout - adjusting the dividend payout ratio toward the target
dividend payout ratio if the higher earnings appear to be sustainable
• constant payout - the firm pays a constant percentage of earnings as
dividends; as earnings rise and fall, so does the dollar amount of
dividends
• residual dividend - dividends will vary based upon how much excess
funds the firm has from year to year

13. Dividends
• Some firms return funds to shareholders via share repurchases. Other
firms may offer stock dividends or a stock split, which give the illusion
of receiving value when none is transmitted.
• stock dividend - a dividend in which investors receive shares of stock
rather than cash
• stock split - a process in which the firms distributes additional shares
for every share owned

14. Valuation of Stocks
• All securities are valued on the basis of the cash inflows that they
are expected to provide to their owners or investors.

15. Valuation of Stocks
• If the firm’s dividends are expected to remain constant, so that D0 =
D1 = D2 …, we can treat its stock as a perpetuity.
• A perpetuity is an annuity that never ends! It keeps going and going,
paying cash flows on a regular basis throughout time.
• P0 = D0/ rs
• Annual dividend (in dollars) = dividend payout ratio × earnings per
share.

16. Valuation of Stocks
• Valuing Stocks with Constant Dividend Growth Rates:
• Dt = D0(1 + g)t
• Gordon model (constant dividend growth model) a means of
estimating common stock prices by assuming constant dividend
growth over time:
• P0 = D1 / (rs − g)
• rs = D1 / P0 + g
• g = (P0 × r − D0) / (P0 + D0)