Ch 11 Common Stock Common Stock Test 3 Study Guide Common stock owners are Residual owners holders of common stock have no guarantee that they will receive any return on their investments preferred stock and debts paid first Returns on common stock at greater than bonds some bonds Advantages outperform stocks Easy to buy and sell Disadvantages Risk Subject to high volatility Sacrifice in current income Issuing new shares of stock Public offering offering new shares of stock to the public Rights offering existing stockholders are given the first opportunity to buy the new issue Common Stock as Corporate Security Stock spin offs when a company gets rid of one of its subsidiaries or divisions o Ex Ralston Purina spun off Energizer Stock splits increasing the of shares and decreasing market price o Ex 2for1 split 1 00 share 10 000 shares 50 20 000 Treasury stock company buys back outstanding shares of stock Classified common stock class A vs class B o Ex Ford class A 1 vote share class B offers higher voting power 40 o Dividends vs no dividends Common Stock Values Par Value stated or face value of a stock o Almost irrelevant Book Value amount of stockholders equity in a firm o Amount of stockholders funds used to finance the firm o ASSETS LIABILITIES PREFFERED STOCK o Per share BV of shares Market Value prevailing market price of an issue o Market capitalization market cap ex 50 share 1 000 000 shares 50 million Investment value what the investor values the stock at o What it should be trading for Common Stock Dividends typically paid quarterly EPS earnings per share Net Profit after taxes Preferred dividends of shares of common stock outstanding Important dates Date of record date on which the investor must be a registered shareholder of the firm to be entitled a dividend o All investors who are official holders at the close of this date will receive the dividends Payment date follows record date by week or two Ex dividend date official shareholder of the stock by the time it opens o Must must buy stock before this date o Can sell on this date Types of Dividends Cash dividends a cash payment to shareholders most common o Dividend Yield Annual dividends received per share Current market price of the stock o Dividend payout ratio Dividends per share Earnings per share Stock dividend dividend paid in additional shares of stock almost no value o ex 10 stock dividend each holder receives 1 for every 10 shares owned Dividend Reinvestment Plans DRIP reinvesting to additional shares If a company is good enough to invest in it s good enough to reinvest in Partial participation part part reinvestment Some plan offer stock at a discount 3 5 Not to be confused with stock dividends must pay taxes on them Types of Common Stock Blue Chip Stocks cream of the crop most impressive most attractive o Ex Nike P G Chevron Income Stocks appealing because of the dividends that they pay limited growth potential o Dividends Capital gains Growth Stock very rapidly growing stock could be considered blue chip o Ex Netflix Starbucks Berkshire Hathaway etc o Capital gains dividends Tech Stocks represent the technology sector of the market o Potential growth speculative blue chips Speculative stocks lack sustained records of success but offer the potential for substantial price appreciation o Could hit it big Cyclical stocks earnings linked with the general level of business activity o Do especially well when the country is recovering Defensive stocks price remains stable or even increase when the economy is tapering off Mid Cap stocks steady returns o Ex A F Whole Foods Nordstrom o Baby blue chip just like blue chip except size Small Cap stocks small companies o IPO initial public offering Investing in Foreign Markets Tax barriers language barriers foreign country stock markets are deregulated ADR American Depository Receipts represent ownerships in a foreign o Trade in market as ADS American depositary shares o Difference ADR legal document that describes the security o Difference ADS the vehicle through which you invest in the security o ADS represent shares in ADR Total returns current income capital gains changes in currency exchange company rates Alternative Investment Strategies Common stocks used as 1 storage of value 2 way to accumulate capital 3 source of income Strategies Buy and Hold buy security watch it grow retirement education etc Current income seek high levels of current income supplement Quality Long Term Growth less conservative seeks capital gains as the primary source of return greater risk o Total return approach combining high income gains Aggressive stock management seeking eye catching returns mainly through capital gains o Like QLTG but trades more o Ex Goes after 2 years returns in 6 months risks Speculation and Short Term Trading least conservative the shorter the time in which the objective can be achieved the better o SOLELY capital gains o Many transactions little or no profits large loss Ch 13 Mutual Funds Mutual funds portfolio of securities sometimes resembles an index Unlimited of shares open ended HIGHLY Liquid Trade directly with fund o Buy sell shares directly with fun redeem NO supply and demand NAV asset value liabilities NAV Share NAV of shares Long term investment o Fund does not like people who jump in and out Priced once at end of trading day Funds management split have management company runs daily operations investment advisor buys sells and oversees distributor sells the funds shares custodian physically safeguards the assets and transfer agent keeps track of purchase and redemption requests Close ended funds funds that have a limited of shares traded on the secondary market Limited shares Trade between investors traded on exchange just like stock Supply and demand apply NAV same as mf Exchange Traded Funds ETF and open ended fund that trades as a listed security on one of the stock exchanges hybrid Can sell at premium or discount due to S D Pay commisions o NOT using cash trade units o NOT generating capital gains to distribute Open ended Payment in kind unit Tax efficient Distribute dividends Trade like stock Pay Commissions S D NAV Fees and Load Charges cap between all loads Load charge commission you pay when you buy or sell shares in a mf 8 5 o Low load funds 2 3 o Front end load levies commissions when the shares are bought o Back end load fund levies commissions when the shares are sold Made to discourage investors from trading in and out may disappear after
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