SIE Chapter 6: Equity Securities Ownership

Common Stock

An equity security representing partial ownership of a company

Stockholder’s rights

Right of inspection: Stockholders may Inspect records and meeting minutes

Right to vote: Stockholder's have the right to vote for the company’s board of directors and also major decisions such as corporate bylaw ammendments and mergers

Order of distribution in bankruptcy

1) Unpaid workers

2) IRS

3) Secured creditors

4) General Creditors

5) Subordinated debenture holders

6) Preferred stock holders

7) Common stock holders

Common stock holder’s have residual claims

Types of Voting

Statutory (regular) voting: 1 Vote per 1 Share per open Board Seat, and all votes must be split evenly across all open seats

Cumulative voting: Shareholder can allocate their votes however they like, this can help smaller shareholders concentrate influence on one board candidate

*Cumulative voting (shareholders have the same amount of total votes as statutory)

Voting by proxy

An absentee ballot letting a shareholder vote without attending in person; its sent out by the transfer agent

Proxy fight (proxy battle)

An attempt by a group of unhappy shareholders to vote together in order to replace the board of directors

Categories of shares

Authorized shares: The maximum number of shares a corporation’s charter allows it to issue (to raise this requires a shareholder vote)

Issued shares: The number of shares sold to the public

Outstanding shares: The number of shares currently held by investors

Treasury Stock: Shares the issuer has repurchased from the market

NOTE: Outstanding Shares = Issued - Treasury Stock

Par Value and APIC

Par Value: A bookeeping figure set by the issuer with no relationship to the market price

Additional paid in capital: The amount received above par value when stock is sold

Buyback:

A company repurchases its own shares as treasury stock (this usually lifts the stock’s market value)

Tender offer

An offer usually at a premium by an outside group to buy shares directly from shareholders to gain control of the company

• It requires agreement from holders of more than 50% of outstanding shares

Exchange offer

The issuer offers to swap one security for another (e.g. new bonds for old bonds, or stock for debt)

difference between Mergers and Aquisition

Merger: Two companies combines into one

Acquisition: One company gains majority control of another

Types of Stock Splits

Forward Stock Splits: Increase share count and proportionally decrease price: total market value is unchanged

*For an A-for-B SPlit: New shares = Old Shares * (A/B)

New Price = Old Price * (B/A)

Reverse stock split: Consolidate shares to raise the price per share, its used often to avoid delisting and is the same formula as a forward split

Ex-divdend date

The first day a stock trades without the right to the upcoming dividend (the price goes down by the dividend amount)

Types of dividends:

Cash dividend: A cash payment to shareholders; It is taxable

Stock dividends: Extra shares distributed instead of cash (example 5% dividend);

• it is not taxable

• total value of wealth stays the same

• Price per share goes down the same percentage your share count goes up

Preferred stock

An equity security with debt like traits

• Fixed pritoized dividend usually stated as a percentage of $100 par

• Preferred stock trades closer to par than common stock

• Preferred stock has no voting rights unless dividends are missed

Cumulative preferred stock

Missed dividends accumulate and must be fully paid back before any common dividend

• Most preferred stock is like this

Noncumulative (straight) preferred stock

Missed dividends are simply lost

• This makes this type of preferred stock riskier and so it typically pays a higher dividend in exchange for higher risk

Convertible preferred stock

Preferred stock which is exchangeable for common stock of the same company

• It pays a lower dividend in exchange for that upside

Conversion ratio

The number of common stock shares received per converted share

Par value/Conversion price

Parity Price

The price at which a convertible security and the stock it converts into are of equal value

Callable preferred stock

the issuer can redeem the preferred stock at a set date at a stated call price

• Pays a higher dividend to compensate for that uncertainty

Participating preferred stock

Is a preferred stock which shareholders Can receive extra common stock dividends in addition to the stated preferred dividend

• This is generally rare

Prior (senior) preferred stock

Preferred stock paid before other preferred stock in the case of bankruptcy

• Pays a slightly lower dividend for the added safety

Adjustable (variable) preferred stock

Is preferred stock where the Dividend resets periodically, based on a benchmark interest rate

American Depositary Receipt *ADR)

A US traded receipt for shares of a foreign company

• dividends are paid in US dollars

• ADRs are negotiable (they can be sold or transferred to another party)

  • Shareholders lack voting rights and face currency risk

Rights

Lets existing common stock shareholders buy new shares directly from the issuer at discount before the public offering in order to help them protect their proportional ownership

Warrants

Long term certificates letting the holder buy stock at a fixed price above the market price (at the time of its issuance)

• Its usually bundled with bonds and preferred stocks as a sweetener

• Can be traded separately

• Holders have no voting rights or dividends