V. STOCKS A. Definitions Stock – an ownership share of a ...


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V. STOCKS A. Definitions Stock – an ownership share of a ...

  1. 1. V. STOCKS
  2. 2. A. Definitions <ul><ul><li>Stock – an ownership share of a corporation </li></ul></ul><ul><ul><li>Stockholder or Shareholder – an entity that owns stock </li></ul></ul><ul><ul><li>Common Stock – unit of ownership in a public corporation, includes voting rights and entitles the owner to receive dividends </li></ul></ul><ul><ul><li>Preferred Stock – a unit of ownership, generally without voting rights, with specified dividend amount and higher legal priority against assets than common shares in liquidation </li></ul></ul><ul><ul><li>Stock Classes – may indicate ownership of a subsidiary or have different voting rights and/or restrictions on ownership </li></ul></ul>
  3. 3. A. Definitions (Continued) <ul><li>Stock Splits – dividing shares of stock to increase the number of shares available, lowering price, but generally keeping market capitalization constant </li></ul><ul><li>Reverse Split – combining shares of stock, resulting in higher stock price; frequently done to meet stock market listing requirements </li></ul><ul><li>Blue Chip – stocks in the largest, most consistently profitable corporations </li></ul>
  4. 4. B. Public versus Private Corporations <ul><li>Private Company – shares of the company are not traded on stock markets, generally owned by corporate insiders, wealthy individuals, private equity firms, and venture capital firms </li></ul><ul><li>Public Company – issues shares that trade on securities markets – must meet regulatory and reporting requirements </li></ul><ul><ul><li>Can be used to raise capital </li></ul></ul><ul><ul><li>Can be a means to providing financial rewards to founders and venture capital firms while broadening the firm’s ownership base </li></ul></ul>
  5. 5. B. Public vs. Private Corporations (Con’t) <ul><li>Private Placement – shares sold directly to investors without regulatory approval or oversight – private placement shares, however, can not be traded </li></ul><ul><li>Nationalization – where a government takes over a private or publicly traded company </li></ul><ul><li>Mutual Companies – shares owned by policyholders (insurance companies) or by depositors (banks) – dividends paid to owners, owners have voting rights </li></ul>
  6. 6. C. Initial Public Offerings – Going Public <ul><li>Underwriting Firm – normally an investment bank </li></ul><ul><ul><li>Agrees to buy all of the shares of an Initial Public Offering (IPO) at a set price or using “best efforts” </li></ul></ul><ul><ul><li>Underwriter then resells to investors, obtaining gains from increasing share prices and from per share fees </li></ul></ul><ul><li>Initial Prospectus (Red Herring) – developed by issuer and underwriter </li></ul><ul><ul><li>Contains financial information and a description of the business’ history, officers, pending litigation, and plans </li></ul></ul><ul><ul><li>Not complete in all respects </li></ul></ul><ul><ul><li>Not SEC approved, thus not to be re-distributed </li></ul></ul>
  7. 7. C. Initial Public Offerings (Continued) <ul><li>Statutory Prospectus (Offering Circular) </li></ul><ul><ul><li>Must be complete and approved by the SEC </li></ul></ul><ul><ul><li>Must be distributed to all IPO share purchasers </li></ul></ul><ul><li>Tombstone – an ad publicizing an Initial Public Offering </li></ul><ul><li>Issue Pricing – the offering price per share set the day before the actual issue – all IPO investors pay the issue price </li></ul><ul><li>Brokers – receive allocations of shares, fill customer orders proportionately or by a prioritized method </li></ul><ul><li>Direct Sales – eliminates the underwriter, provides sales at an auction price where bid is set at or above market – can provide more money to the company, but does not raise a guaranteed amount of capital </li></ul>
  8. 8. D. Variations <ul><li>Secondary Offering – sales of substantial shares of stock by underwriting firms, control persons, or institutions </li></ul><ul><ul><li>Sales rely upon previously SEC approved documents (prospectus, etc.) from the IPO </li></ul></ul><ul><ul><li>Must file an additional form with the SEC (SEC forms 3, 4 &5) </li></ul></ul>
  9. 9. D. Variations (Continued) <ul><li>Tender Offer – a purchase of stock by a company for a set price, generally slightly above market </li></ul><ul><ul><li>Increases share price by decreasing the number of shares in circulation </li></ul></ul><ul><ul><li>Increases earnings per share by decreasing shares in circulation </li></ul></ul><ul><ul><li>Can be made by the issuing company, or by another company in a hostile takeover </li></ul></ul>
  10. 10. E. Voting <ul><li>Stockholders are corporate owners – can vote to elect members of the board of directors and on major issues effecting the corporation, such as issuing additional stock or selling the business </li></ul><ul><li>Different classes of stock can have different voting rights The Ford Family Sells – TIME </li></ul><ul><li>Exercising the right to vote </li></ul><ul><ul><li>Can vote by attending corporate annual meeting, or </li></ul></ul><ul><ul><li>Proxy voting </li></ul></ul><ul><ul><ul><li>Proxy statement – gives information regarding directors, auditor, and other information to be voted on at the corporate annual (shareholders’) meeting </li></ul></ul></ul><ul><ul><ul><li>Proxy ballot – lists board of director candidates, auditor being considered by the firm, and other issues to be voted on – can be voted by mail, phone, or online </li></ul></ul></ul>
  11. 11. E. Voting (continued) <ul><li>Cumulative Voting – allows all of a shareholder’s vote to be allocated to one, several, or all candidates for the corporate board of directors (ex. – a shareholder owns 100 shares, can vote for 8 candidates to the board of directors, making 800 votes available for the shareholder to use – the shareholder can vote all 800 shares for one candidate, 100 for each candidate, or 400 & 400) </li></ul>
  12. 12. F. Stock Markets <ul><li>New York Stock Exchange – contains traditional (physical) trading and online trading, operates in the U.S. and Europe NYSE, New York Stock Exchange > About Us </li></ul><ul><li>NASDAQ – totally electronic market with no trading floor NASDAQ Stock Market - Stock Quotes - Stock Exchange News - NASDAQ.com </li></ul><ul><li>AMEX – smaller than the NYSE, but similar, specializing in Exchange Traded Funds American Stock Exchange </li></ul><ul><li>Over the Counter (OTC) – “Pinksheets” and NASD Bulletin Board – Bulletin Board for registered stocks that do not meet exchange listing requirements, Pinksheets are unregistered – generally small and new companies with small market volume Why Do Stock Exchanges Matter ? </li></ul>
  13. 13. F. Stock Markets (Continued) <ul><li>Each market has its own listing requirements: </li></ul>
  14. 14. F. Stock Markets (Continued) <ul><li>Physical Trading – trading floor </li></ul><ul><ul><li>Bid – the price a potential buyer is willing to pay for a security </li></ul></ul><ul><ul><li>Ask – the price that a seller wants to receive for his or her securities </li></ul></ul><ul><ul><li>Spread – the difference between bid and ask </li></ul></ul><ul><ul><li>Liquidity – how “easy” it is to buy or sell a security – depends upon average number of shares traded per day, an indicator of liquidity is the bid/ask spread </li></ul></ul>