TOPICCharacteristics of common stocks

SUBMITTED BY:Hafsa Khan2k13/BPA/78

STOCKStocks represent ownership capital

Stockholders are part owners of the company

COMMON STOCKA common stock is a security that represents ownership in a

corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy.

Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common

shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders

have been paid in full.

CORPORATE FORMA corporate exists only when it has been granted a character, or

certificates of incorporations, by a state. This document specifies he rights and obligations of stockholders.

STOCK CERTIFICATESIn corporate law, a stock certificate (also

known as certificate of stock or share certificate) is a legal document that certifies

ownership of a specific number of shares or stock in a corporation.

Historically, certificates may have been required to evidence entitlement to dividends, with a receipt for the payment being endorsed on the back; and the original certificate may have been required to be provided to effect

the transfer of the shareholding.

VOTINGVoting shares are shares that give the stockholder the right to vote on matters of corporate policy making as well as who will compose

the members of the board of directors. In general, common shareholders are the only security holders given the right to vote.

Some firms have multiple classes of stock with different voting rights. Most shareholders vote by proxy.

PROXY FIGHTA proxy fight is when a group of shareholders are persuaded to

join forces and gather enough shareholder proxies to win a corporate vote.

There are two commonly used procedures for voting: majority voting

cumulative voting.

TAKEOVERSA change in the control of a company, accompanied usually by a changed in the board of directors and senior management if the

takeover is hostile. In a friendly takeover, the management doesn't usually change, and the takeover works to the benefit of the target

company. In a hostile takeover there may be an attractive public offer for the shares, or unsolicited merger proposals for the management,

accumulation of controlling shares through buying in the open market, or proxy fights. There are various methods of fighting off

hostile takeover bids, with colourful names

OWNERSHIP VERSUS CONTROLCorporate management team in a corporation, ownership& direct control are typically separate. BODs elected by shareholders have ultimate decision making authority. Ethics and Incentives within

Corporations Agency Problems, Managers may act in their own interest rather than in the best interest of the shareholders. One potential

solution is to tie management’s compensation to firm performance.

CORPORATE GOVERNANCE The stakeholders may own the company, but they usually don’t manage it.

Generally, management is delegated to a team of professionals. Though the details of corporate governance vary somewhat, this principal of separation of

ownership and control of a firm is found around the world. Several mechanisms have evolved to mitigate this conflict: The Board oversees

management and can fire them. Management remuneration can be tied to performance. Poorly performing firms may be taken over and the managers

replaced by a new team.

STOCKHOLDERS EQUITYStockholders' equity is the portion of the balance sheet that represents the capital received from investors in exchange

for stock (paid-in capital), donated capital and retained earnings. Stockholders' equity represents the equity stake

currently held on the books by a firm's equity investors.

PAR VALUEPar value is a per share amount appearing on stock

certificates. It is also an amount that appears on bond certificates. In the case of common stock the par value per share is usually a very small amount such as $0.10

or $0.01 or $0.001 and it has no connection to the market value of the share of stock. The par value is

usually described as the common stock's legal capital and it is part of the corporation's paid-in (or

contributed) capital.

BOOK VALUEA corporation will generate income, much of which is paid out to creditors (as

interest) & to stockholders (dividend). Any remainder is added to the amount shown asCumulative retained earning on the corporation’s book. The sum of cumulative

retainedEarning or other entries under stockholders equity is the book value of equity. Book value is the amount that would be left for common shareholders if all the tangible and intangible assets of a company could be liquidated and all the long and short-

term debt, taxes, and preferred shareholders were paid.

STOCK RESERVE or buffer stock is a stock quantity which is based on the normal average expected consumption during the lead-time to replenish

depleted stock.

RESERVED & TREASURY STOCK

A treasury stock (treasury shares) is the portion of shares that a company keeps in their own

treasury. Treasury stock may have come from a repurchase or buyback from shareholders; or it may have never been issued to the public in the

first place. These shares don't pay dividends, have no voting rights, and should not be included

in shares outstanding calculations.

CASH DIVIDENDSA cash dividend is money paid to stockholders, normally out of the corporation's current earnings or accumulated profits.

Not all companies pay a dividend. Usually, the board of directors determines if a dividend is desirable for their particular company based upon various financial and

economic factors. Dividends are commonly paid in the form of cash distributions to the shareholders on a monthly, quarterly

or yearly basis. All dividends are taxable as income to the recipients.

Process of payment: Declaration date Date of record

Ex- dividend date Payment dateSTOCK DIVIDENDS & STOCK SPLITS

Like cash dividends, stock dividends and stock splits also have effects on a company's stock price.

Stock dividend issued in place of a cash payment. A 5% stock dividend results in,

Example: 5% of 100 shares = 5 shares

Stock splits occur when a company perceives that its stock price may be too high. Stock splits are usually done to increase the liquidity of the stock (more shares outstanding) and to make it more affordable for investors to buy regular lots (a

regular lot = 100 shares). New shares issue after the split,Example: a 2 for 1 split (par = $1)

A 200 share holder receive 400 new share at $.50 parThus, there is no dilution of shareholder’s equity position.

The right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of

any future issue of common stock. Most states consider preemptive rights valid only if made explicit in a corporation's charter. Provided for in the

articles of incorporations.

PREEMPTIVE RIGHTS

COMMON SOCK BETASIn finance, the beta (β or beta coefficient) of an investment indicates whether the

investment is more or less volatile than the market. In general, a beta less than 1 indicates that the investment is less volatile than the market. It is a measure of a stock’s sensitivity

of future market movements.

Calculation using linear regression the model equation is specified

ri = α + β ri + εi ri is the return of stock I

α is the average return of stock I β is the stock I’s beta

ri is the return of indexεi is the error term

The standard error of beta indicates the extent of standard deviation of the estimates.

GROWTH VERSUS VALUEIn general, growth stocks are stocks of companies that have experienced, or are expected, or are expected to experience, rapid increases in earnings. Whereas, value socks are stocks whose market price seems to be low relative to measure

of their worth.

BOOK VALUE TO MARKET VALUE RATIOThe book-to-market ratio is a ratio used to find the value of a company by comparing the book value of a firm to its market value. Book value is calculated by looking at the firm's historical cost, or accounting value. Market value is determined in the stock market through its market capitalization.

Formula:

EARNING TO PRICE RATIOThe earnings yield (aka earnings-price ratio, E/P ratio) for stocks is the inverse of the price-earnings ratio (P/E) of stocks, and is equal to the earnings per share of common

stock divided by the market price of the stock. The E/P ratio increases with earnings and decreases with increases in the stock price.

Earnings Yield = Earnings per Share of Common Stock / Stock Price

PRIMARY MARKETA primary market is a market that issues new

securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets are

facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale

directly to investors.

A private placement is the sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual

funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

PRIVATE PLACEMENTS

PUBLIC SALEWhen public sale is much more must be done then with

private placements. Many firms may servers as intermediaries in the process. One acting as the “lead”

investment banker, puts together a syndicate (or purchase group) and a selling group. The syndicate includes firms that purchase the securities from the issuing corporation and are said to underwrite the

offering. The selling group includes firms that contact potential buyers and do the actual selling, usually on a

commission basis.

COMPETITIVE BIDDINGA competitive bid is a step in the initial public offering process

whereby an underwriter submits a sealed bid to a company that is making its first issue of stock. A process by which a

contracting firm selects from among competing vendors or contractors who have submitted bids at the request of the firm. Bids are usually sealed and selection occurs

through either an open bidding process, in which they are revealed in view of the bidders, or a closed bidding process, in which they are

opened in a closed session. The process is designed to increase the competitiveness of pricing and minimize

the preferential treatment.

REGISTRATION STATEMENTBegin the SEC registration process. Covered issuer of

securities must file a written registration statement with SEC. contains required information about the issuer and the

securities to be issued. The SEC doesn’t pass upon the merits of the registered securities. Decides only whether

the issuer has met the disclosure requirements.

FIRM COMMITMENTA firm commitment is a lending institution's promise to enter into a

loan agreement with a specific entity within a certain period of time. A firm commitment underwriting agreement is the most desirable for the issuer because it guarantees them all of their money right away. The more in demand the offering is, the more likely it is that it will be

done on a firm commitment basis. In a firm commitment, the underwriter puts their own money at risk if they can’t sell the

securities to investors.

A standby underwriting agreement will be used in conjunction with a preemptive rights offering. All standby underwritings are done on a firm commitment basis. The standby underwriter agrees to purchase any shares that current shareholders do not purchase.

The standby underwriter will then resell the securities to the public.

STANDBY AGREEMENT

PEGGINGA method of stabilizing a country's currency by fixing

its exchange rate to that of another country. A practice of an investor buying large amounts of an underlying commodity or security close to the expiry date of a

derivative held by the investor.

Underpricing is the pricing of an initial public offering (IPO) below its market value. When the offer price is lower than the price of the first trade, the stock

is considered to be underpriced. A stock is usually only underpriced temporarily because the laws of supply and demand will eventually drive it

toward its intrinsic value.

UNDERPRICING OF IPO’s

SEASONED OFFERINGSA seasoned offering is a new issue of security that has previously been placed in

the market through a prior issuance. Although an SEO is a primary market transaction, it is not the first time that the security will actually be held by the general investing public; it simply adds to the number of outstanding shares.

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