V. STOCKS

A. Definitions

1. Stock – an ownership share of a corporation2. Stockholder or Shareholder – an entity that

owns stock3. Common Stock – unit of ownership in a public

corporation, includes voting rights and entitles the owner to receive dividends

4. 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

5. Stock Classes – may indicate ownership of a subsidiary or have different voting rights and/or restrictions on ownership

A. Definitions (Continued)

6. Stock Splits – dividing shares of stock to increase the number of shares available, lowering price, but generally keeping market capitalization constant

7. Reverse Split – combining shares of stock, resulting in higher stock price; frequently done to meet stock market listing requirements

8. Blue Chip – stocks in the largest, most consistently profitable corporations

B. Public versus Private Corporations

1. 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

2. Public Company – issues shares that trade on securities markets – must meet regulatory and reporting requirements

a. Can be used to raise capitalb. Can be a means to providing financial rewards

to founders and venture capital firms while broadening the firm’s ownership base

B. Public vs. Private Corporations (Con’t)

3. Private Placement – shares sold directly to investors without regulatory approval or oversight – private placement shares, however, can not be traded

4. Nationalization – where a government takes over a private or publicly traded company

5. Mutual Companies – shares owned by policyholders (insurance companies) or by depositors (banks) – dividends paid to owners, owners have voting rights

C. Initial Public Offerings – Going Public

1. Underwriting Firm – normally an investment banka. Agrees to buy all of the shares of an Initial Public

Offering (IPO) at a set price or using “best efforts”b. Underwriter then resells to investors, obtaining

gains from increasing share prices and from per share fees

2. Initial Prospectus (Red Herring) – developed by issuer and underwriter

a. Contains financial information and a description of the business’ history, officers, pending litigation, and plans

b. Not complete in all respectsc. Not SEC approved, thus not to be re-distributed

C. Initial Public Offerings (Continued)

3. Statutory Prospectus (Offering Circular)a. Must be complete and approved by the SECb. Must be distributed to all IPO share purchasers

4. Tombstone – an ad publicizing an Initial Public Offering

5. Issue Pricing – the offering price per share set the day before the actual issue – all IPO investors pay the issue price

6. Brokers – receive allocations of shares, fill customer orders proportionately or by a prioritized method

7. 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

D. Variations

1. Secondary Offering – sales of substantial shares of stock by underwriting firms, control persons, or institutions

a. Sales rely upon previously SEC approved documents (prospectus, etc.) from the IPO

b. Must file an additional form with the SEC (SEC forms 3, 4 &5)

D. Variations (Continued)

2. Tender Offer – a purchase of stock by a company for a set price, generally slightly above market

a. Increases share price by decreasing the number of shares in circulation

b. Increases earnings per share by decreasing shares in circulation

c. Can be made by the issuing company, or by another company in a hostile takeover

E. Voting

1. 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

2. Different classes of stock can have different voting rights The Ford Family Sells – TIME

3. Exercising the right to votea. Can vote by attending corporate annual meeting, orb. Proxy voting

i. Proxy statement – gives information regarding directors, auditor, and other information to be voted on at the corporate annual (shareholders’) meeting

ii. 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

E. Voting (continued)

4. 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)

F. Stock Markets

1. 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

2. NASDAQ – totally electronic market with no trading floor NASDAQ Stock Market - Stock Quotes - Stock Exchange News - NASDAQ.com

3. AMEX – smaller than the NYSE, but similar, specializing in Exchange Traded Funds American Stock Exchange

4. 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?

F. Stock Markets (Continued)

4. Each market has its own listing requirements:

F. Stock Markets (Continued)

5. Physical Trading – trading floora. Bid – the price a potential buyer is willing to pay

for a securityb. Ask – the price that a seller wants to receive for

his or her securitiesc. Spread – the difference between bid and askd. 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