Equities vocabulary Series 7 outline part three

• Par value-bookkeeping term used to show the dollar value assigned to the issued and outstanding common and preferred stock on the balance sheet
• the board of directors establishes the par value prior to the shares being issued
• market price is not related to par value
• no par stock: no par value assigned
• preferred stock is usually issued with $100 par value, most are less
• par value of preferred stock directly relates to original issue price
• no relationship between par value and market price with common stock 

Which of the following describes treasury stock?

• stock registered with the SEC, purchased by shareholders and then repurchased by the company. The U.S. government does not issue stock since their is no ownership in the government. The corporate finance department of a corporation is involved in the issuance of the stock and keeps track of any stock repurchased by the company

Common stock

1. holders are not guaranteed any return on their investment and the value of their investment can grow or lose value
2. liability/risk is limited to the amount they originally paid for the stock
3. if the company earns a profit, the corporation can provide holders with a dividend at the end of the quarter, a distribution of profit to owners, amount is determined by board of directors
4. right to receive dividends if dividends are declared by the board of directors and paid by the corporation
5. right to elect the board of directors and to vote on major management decisions such as a change in the nature of the business
6. the right to maintain their proportionate ownership in the stock, preemptive right
7. the right to transfer ownership in their stock-sell or give their stock to someone else
8. the right to receive copies of the corporation's annual report
9. the right to inspect the financial records of the corporation 

• Closely held-only a few people hold a majority of the stock. Only a small quantity of shares are freely traded. Buying shares or trying to sell shares is difficult-liquidity is limited a.k.a. thinly traded stock

Preferred stock

1. in event of liquidation, preferred stockholders are always paid off before common holders
2. paid dividends before common holders
3. different types of preferred stock may provide additional rights to preferred holders
4. preferred holders have limited voting rights
5. 5%=%5, 6%=$6
6. cumulative stock, convertible stock, callable preferred stock, participating preferred stock

• Cumulative preferred stock-preferred stock that will pay dividends every year when declared by a board of directors, no dividends can be paid to common stockholders until cumulative preferred is completely paid up on all past and current dividends
• Which of the following best describes cumulative preferred stock issued by a company? The dividends accumulate every year the preferred stock and the common stock miss dividends. Then they are paid missed dividends when the company wants to pay dividends to the common stockholders. The shares do not accumulate for any conversion or for the preferred stockholders to get shares of common stock. Only common stockholders have the rights to new issues of common stock. Only missed dividends accumulate
• Convertible preferred stock: can be converted/exchanged into shares of common stock if requested by the holder of the preferred stock. 

1. the company cannot force a preferred holder to convert the shares
2. preferred will tend to change in price as the common stock changes both increasing and decreasing in value
3. the preferred will "trade at parity" with the common stock-trading at a price that makes the two stocks equal based on the individual stock prices combined with the number of shares of preferred stock and common stock respectively 
4. a conversion ratio is used to determine the number of common shares a holder of preferred stock can get for a convertible preferred stock
5. conversion ratio: par value of preferred stock/conversion price=# of common shares for each share of preferred 
6. to determine parity price of the common stock-the equivalent price for the same amount of shares divide the preferred stock's market price/conversion ratio. It is the price at which the two stocks have an equal value

Callable preferred stock

1. preferred stock that gives the company the option (provision) to call the stock back at any time
2. if the company exercises the call it must pay a predetermined amount usually the par plus a premium
3. most preferred stock is issued with a call provision-printed in the prospectus and on the stock certificate at the time the stock is issued

Participating preferred stock

1. a type of stock that is rarely issued
2. guarantees that a fixed amount will be paid if any dividend is declared and also participates in a percentage of the dividends paid to common stock
3. the owners of a p.p. also participate/receive a percentage of the common dividend as well-this fixed amount must be paid to the preferred stockholders if the common is to receive any amount of dividend

• Which of the following preferred stockholders can change their shares into shares of common stock? Convertible preferred-can be converted into common stock at a set price and therefore has a set number of shares of common stock called the conversion ratio.