Investing
Financial
Resources
Chapter 18: Stocks
Section 1: Common and Preferred Stocks
Table of contents
01
Why Stocks?
Explanation of why
companies offer common &
preferred stock
03
02
Common stock
investment
Discussion of the reasons
for investing in commmon
stock
Preferred stock
investment
Discussion of the reasons
for investing in preferred
stock
2
Important terminologies
Securities
Private
corporation
Public
corporation
Appreciation
of value
Par value
Stock Split
01
Why
stocks?
Why do companies offer stocks?
 Investors have a choice of Securities, which are all investments (Stocks, bonds, mutual funds,
options, and commodities) that are bought and sold on the stock market.
 When investors buy shares of stock in a company, the company uses that money to make and sell
its products, fund its operations, and expand.
 If the company earns a profit, the stockholders earn a return on their investment.
 People buy and sell stocks for one reason: They want larger returns than they can get from
conservative investments.
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02
Common stock
investment
6
Why Coprporations Issue Common stock?
Companies issue common stock to raise money to start up their
businesses and then to help pay for ongoing activities.
 Types of corporations
 A private corporation is a company that issues stock to a small group of people. A private
corporation’s stocks are not traded openly in stock markets.
 A public corporation is a one that sells its shares openly in stock markets, where anyone can
buy them.
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Common Stocks characteristics
 A form of Equity
Corporations doesn’t have to repay the money for stockholders, instead they use that money to fund
their ongoing activities. However, for the stockholder to make money, he should sell it to another
investor, and the price is set according to how much the buyer is willing to pay.
 Dividends Not Mandatory
It is up to the corporate board of directors to make the major decisions for the corporation, to decide
whether any profits will be paid to stockholders as dividends. Companies that are going quickly might
pay low or no dividends instead using profits to expand the company.
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Why investors Purchase Common stock?
Investors purchase common stock to make money in three different ways:
1.
Income from Dividends: In case the BOD decided to pay dividends, each common stockholder receives an equal
amount per share. Most dividends are paid quarterly. If the company have large increases in earnings, it might declare a
special cash dividend at the end of the year.
2.
Appreciation of Stock $ Value: If the value of stock appreciates, you must decide whether to sell it at the higher price or
continue to hold it. The profit or loss is the difference between the purchase price and the selling price
3.
Increased Value from Stock Splits: This occurs when the shares of stock owned by stockholders are divided into a
larger number of shares. They do so, to bring the market value back into line if it its higher than the range, as the lower
price will attract more investors. As a result, the price starts to rise again.
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Voting rights and control of the company
A corporation is required by law to hold a yearly meeting at which stockholders can vote on company
business. Stockholders usually get one vote for each share they own.
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03
Preferred
Stock
investment
Is preferred stock preferable?
 You could buy preferred stock instead of common stock. If a company is struggling financially,
then the preferred stockholder might get the dividends.
 Preferred stockholders should know the amount of the dividend they will receive. It is either a
specific amount of money or a % of the par value of the stock.
 The par value is a dollar value that is printed on a stock certificate. If the par value is $30 and the
dividend rate is 5%, then the dollar amount of the dividend is $1.50 per share ($30x5%=$1.50).
Unlike market value, par value does not change.
 Preferred stocks attracts conservative investors who do not want to buy common stock.
 Preferred stockholders receive limited voting rights and usually only if the corporation is in
financial trouble.
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Why investors Purchase Preferred stock?
Preferred stocks has lower yield than common stocks. It is a safer investment. Yet,
they lack the potential for growth. Correspondingly, to make it more attractive, some
corporations may offer the following:
1.
Cumulative Preferred Stock: Stock whose unpaid dividends build up and must be paid before any cash dividend is paid
to the common stockholders. If the company decides to omit dividend payments. Cumulative preferred stockholders will
still receive those dividends during a later date.
2.
Convertible Preferred Stock : Stock that can be exchanged for shares of common stock. Provides an investor with
safety and the possibility of greater returns.
3.
Participation Feature: Rare feature. Allows stockholders (Preferred & Common) to share the remainders of earning after
paying the required dividends for both.
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Thanks!
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