Unit 5: Stock Market Terminology Mr. Elsesser Wall Street I
The stock market crash “Black Thursday” created new laws.
Securities Act of 1933 Requires that any security before its offered for sale to the public must be registered. Disclosure about a company’s financial picture must be made available to interest investors.
Securities Exchange Act of 1934 Led to the creation of the Securities and Exchange Commission (SEC) Watchdog agency that enforces Federal laws pertaining to the stock market. Rules breakers (Insider Trading) face harsh penalties.
Before stock can be sold to the public, it mustbe registered with the SEC.The corporation files a prospectus which isfinancial data and stock proposal.The prospectus must be totally correct andrevealing, to allow investors to decide whetheror not to buy the stock.Allinformation must be provided, even if it isnegative.
Red Herring: A preliminary prospectus that has a disclaimer in RED stating the SEC has not yet approved the sale of the stock.
Authorized Shares: The shares of stock a corporation is allowed to issue.Issued Shares: The shares actually issued and sold to investors.Outstanding Shares: Shares purchased by stockholders. Shares standing out in the hand of the public.Treasury Stock: Shares repurchased by a corporation.
Par Value: A dollar value assigned to stocks for bookkeeping purposes only. When a corporation is formed, most states require that a corporation put a value on its common stock before it can be sold. The assigned value is used to construct the balance sheet, and is otherwise meaningless..Market Value: The price people are presently willing to pay for a stock.
Book Value: Total assets of a corporation, minus the total liabilities. Investors are concerned with the book value per share, which is the assets minus the liabilities, divided by the number of shares outstanding. Book Value per ShareAssets minus liabilities divided by outstanding shares.Assets $2,000,000 Net Worth $1,000,000Liabilities - $1,000,000 Divided byNet Worth = $1,000,000 SO 100,000 BV per Share = $10
Stockholders received specialtreatment because company dividendsare distributed to them before beingpaid to common stockholders.Should the company go bankrupt,preferred shareholders would receivepayment prior to common stockholders. Disadvantage- Preferred stock holders have no voting rights.
• Right to receive a stock certificate – a piece of paper that shows ownership in a corporation that states the name of the corporation, the number of shares you won, a CUSIP number that identifies the security issue, and the name of the owner of the shares.• The right to sell your shares, buy more of them, or transfer ownership of them to someone else.
1) The right to receive a dividend if the company decides to pay one.2) The right to be informed through the company’s annual report.3) Voting rights on issues such as a change in the Board of Directors, or sale of the company. Voting is done at the company’s annual meeting or through the mail.
Is a form of giving another person, usually a corporate representative, authority to vote on behalf of the shareholder. Common Stock Proxy
Occurs when an investor or a group of investors try to gain control of the company by encouraging other shareholders to vote against management or to sign over their proxies.
A short-term privilege that allows current stockholders to buy stock of a new issue at less than market value. Stock rights may be sold, usually on a stock exchange. A long-term privilege similar to stock rights that allows the public to buy additional shares at a set price. Warrants are shown on the stock exchange by WT after the name of the corporation.
Primary Distribution ◦ A corporation’s stock when it is sold to the public for the first time. “Going Public” The first time a brand new company decides to go public, its stock offering is called an IPO (Initial Public Offering). This is handled by an investment banker or a brokerage firm, and it usually overpriced.
1) Corporation contacts investment banker to handle underwriting procedure. Ex. Prudential, Merrill Lynch.M Investment banker arranges to purchase large blocks of new issue from corporation at slightly lower price. These are the issued shares.
l Corporation announces its intention to issue new stock through “tombstone ads” in the financial press. (Black boarder around ad)
Stock transactions that take place only between brokers and investors. After the primary distribution of stock, all subsequent sales take place in secondary markets.