CLASSES TO GO
Capitalization
Gretchen Hurt
BIVA Board Director
BETTERINVESTING NATIONAL CONVENTION
Disclaimer
•
The information in this presentation is for educational purposes only and is not
intended to be a recommendation to purchase or sell any of the stocks, mutual funds,
or other securities that may be referenced. The securities of companies referenced
or featured in the seminar materials are for illustrative purposes only and are not to
be considered endorsed or recommended for purchase or sale by BetterInvesting™
National Association of Investors Corporation (“BI”) or the BetterInvesting Volunteer
Advisory Board, its volunteer advisory board (“BIVA”). The views expressed are
those of the instructors, commentators, guests and participants, as the case may be,
and do not necessarily represent those of BetterInvesting™ or BIVA. Investors
should conduct their own review and analysis of any company of interest before
making an investment decision.
•
Securities discussed may be held by the instructors in their own personal portfolios or
in those of their clients. BI presenters and volunteers are held to a strict code of
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BETTERINVESTING NATIONAL CONVENTION
Capitalization
• Companies have three ways of
obtaining money to grow
– Retained earnings
– Leverage
– Selling additional shares of stock
• Information about Capitalization is
found on the front side of the
Stock Selection Guide
BETTERINVESTING NATIONAL CONVENTION
Preferred
Stock
Common
Shares
Total Debt
% Insiders
% Institutional
Holdings
% debt to
capitalization
% Potential
Dilution
BETTERINVESTING NATIONAL CONVENTION
Capitalization
• This section identifies the risk level
– Volatility
– Debt
– Dilution
BETTERINVESTING NATIONAL CONVENTION
Volatility
Debt
Dilution
BETTERINVESTING NATIONAL CONVENTION
VOLATILITY
• Too few shares: sizable trades can
affect price
• Too high institutional ownership:
price fluctuations or stampede on
institutional selling
• Too much insider ownership
BETTERINVESTING NATIONAL CONVENTION
Common Shares
• Should be large enough to carry buy
and sell orders
• Represents ownership in a company.
• On the bottom of the priority ladder in
the ownership structure.
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PREFERRED STOCK
• Convertible
• Redeemable
• Participating
• Cumulative
BETTERINVESTING NATIONAL CONVENTION
PREFERRED STOCK
• May entitle shareholders to specific
dividend rates
• Entitle shareholders to “first rights”
to payment if the company fails
• Common shares may become
worthless if preferred shareholders
are paid first.
BETTERINVESTING NATIONAL CONVENTION
Why issue preferred stock?
• To avoid dilution
• For option of suspending the
dividend
• To attract a conservative investor
• To use in mergers and acquisitions
as a “guaranty” to the seller
BETTERINVESTING NATIONAL CONVENTION
WHAT IS INSTITUTIONAL
OWNERSHIP?
• Blocks of shares held by
investing groups such as
insurance companies, mutual
funds, banks, and pension
plans
BETTERINVESTING NATIONAL CONVENTION
INSTITUTIONAL OWNERSHIP
• Can make a stock price volatile
since funds have a short-term
view
• Caution: Institutional
ownership may be misleading!
BETTERINVESTING NATIONAL CONVENTION
INSIDER OWNERSHIP
• Officers and directors within
the company
• Original founders of the
company
BETTERINVESTING NATIONAL CONVENTION
% INSIDER OWNERSHIP
• Large companies- insiders
may own as little as 1%
• Small companies – insiders
may own as much as 30%
BETTERINVESTING NATIONAL CONVENTION
DEBT
• % of debt to capitalization
• Remember that interest
payments must be met
regularly
BETTERINVESTING NATIONAL CONVENTION
Dilution
• Reduces value of the shareholders’
portion of earnings
• May come from conversion of
preferred stock or issuing of new
stock
BETTERINVESTING NATIONAL CONVENTION
REVIEW
Capitalization section
identifies the risk level
• Volatility
• Debt
• Dilution
BETTERINVESTING NATIONAL CONVENTION
Volatility
Debt
Dilution
BETTERINVESTING NATIONAL CONVENTION
Information derived from:
• The Stock Selection Handbook by
Bonnie Biafore
• The Motley Fool: Power of Preferred
Stocks by Todd N. Lebor April 24, 2001
• Investopedia. com
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