COMMON STOCKS

Meaning of Common Stock Basic Characteristics of Common Stock

Types of Stock Different classes of Common Stock

Common Stock Values Common Stock Dividend

What causes Stock prices to change? Conclusion on Common Stocks

Meaning of common stock

Common stock is a security representing ownership interest in a firm, providing voting rights and entitling the holder to share of the company’s success through dividends and /or capital appreciation.

In the event of liquidation, they have a residual claim

Have one voting right per share to elect the firms BOD

Basic characteristics of common stock 1. stock rights: common stock represent some right and

powers which include: i. the right to receive dividend payments ii. The power to sell the stock iii. The right to receive consideration in a merger or other

fundamental tractions. iv. The right to receive a proportionate distribution of assets

on corporate liquidation v. entitles the holder to an equal ownership position and

participation in the firm’s earnings and dividend, an equal vote and equal voice in management

vii. It has no maturity date 2. uncertain returns: the returns on the stock are uncertain

3.value based on dividend: common stock holders are entitled to dividend payments and stock analyst mostly depend on the dividend to value the stock. Some firms may pay high dividend, others to may pay less dividend and reinvest it into the firm for capital appreciation. In the end, stock has value because of the possibility of cash returns:

i. earnings. Even if current earnings are retained and reinvested, the reinvested earnings should produce future earnings that eventually will be paid as dividends.

ii. Capital gains: if a stock holder sell stock on the market, it is because the buyer values the potential for future returns, that is, dividend

iii. Merger: if a company is acquired in a merger, and its shareholder paid for their stock, the acquirer values the company’s potential for creating returns-dividends

Types of stock Common stock and preferred stock

Different classes of common stock 1. blue chips stock: are high-quality, well-known, large capitalization,

dividend-paying companies with long track records of steady, secure earnings. Blue chip stocks refers to companies with a long history of sustained earning and dividend payments.

These established companies have developed leadership positions in their respective industries and because of their importance and large size, have stable earnings and dividend records.

The blue chip companies tends to be less risky in period of economic uncertainties because of their dependable earnings

2.income stock: They are matured companies, who produce reasonable earnings and utilize a significant portion of their earnings in the form of a dividend payout. That is they have high dividend payout, and the firms are mostly in the matured stage of their industry life cycles. The expansion of these firms is slow because they have reach their maturity stage. They tend not to concentrate on price appreciation as blue chip stock. They have stable earnings and cash flows. Eg utility companies and real estate firms

3. growth stock: they are considered to hold tremendous potential for capital appreciation. They tends to grow at a vey high rate than the over all market or economy.

they are issued by firms expected to have sustained high rates of growth in sales and earnings. They have high P/E ratios and do not pay dividend they reinvest them into research and expansion.

4.value stocks: they are stock that have lower prices relative to their fundamental values(growth in sales and earnings)

They have low P/E ratios, low price to book ratios, high dividend yields.

Investors have relatively low expectation for immediate growth hence their stock trade at lower prices relative to their earnings and dividends.

Patient investors with longer investment period may go in for these stock

It is belief that ones market conditions and business conditions improves, the stock will rise in value.

5. cyclical stock: these are stock that are sensitive to business cycles and closely connected to changing economic conditions. E.g. hospitability, entertainment, automobile manufacturing, home building, heavy machinery and tools and raw materials such as metals.

These stock move high when the economy is doing well and vice versa. When the economy is in recession, these stock see a decline in sales

and earnings. During recession period these stocks are considered as patient stocks because when the economy picks up there will be an appreciation in the share value.

6. defensive stock: are stock whose prices are expected to remain stable or do well when the economy declines because they are immune to changes in the economy and are not affected by downturns in the business cycle. they are stock of companies that manufacture product consumers need regardless of economic conditions . Eg. Of defensive industries include: beverage, food, household products, utility companies, pharmaceuticals etc.

These companies resist downturns in the economy because they produce necessary goods, however during period of economic expansion, they move up slowly than other types

7. speculative stocks: they are stock issued by companies that have a small probability for large increase in the prices of their stock. These companies do not have earnings records and are considered to have a high degree of risk

These categories of stock has a wide range of companies each with a unique set of circumstances and charaterics including risky, new ventures and even well establish companies that have fallen into distress and for various reasons are experiencing tremendous financial difficulty and business difficulties.

They are also often issued by new companies with promising future.

Common stocks value Book value: represent the amount of stockholders equity in the

firm. It indicate the amount of equity used to finance the firm. Its given as total asset less total liabilities

Par value: is the state or face value of the stock. Now most stocks are issue at no par value or low par value

Market value: the price of the asset as determined in the competitive market place. It is therefore the prevailing market price of an issue

Investment value/intrinsic value: it indicates the worth investors place on the stock. that is what investors think the stock should be trading for.

It is therefore the resent value of the expected future cash flows discounted at the decision maker’s required rate of return. It there fore represent the maximum price investors should be willing to ay for security of a company

Common stock dividend Dividend: payment made out of a firm’s earnings to its owners in the

form of either cash or stock. When a firm makes profit, that earning can be used in two ways either to

reinvest it into the firm or pay it out to shareholders. There are two ways to distribute cash to shareholders: share repurchase

or dividend. Forms of dividend payments.

1. cash dividends: are those paid out in currency, usually via electronic funds transfer or a printed paper cheque. Cash dividends are normally taxed.

2. stock/scrip dividends: are those paid out in the form of additional stock of the issuing firm or another firm such as its subsidiary. They are usually issued in proportions to share owned( e.g for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra shares).

Stock split increases the number of shares but lowers the share price without changing the market capitalization.

3. property dividends: are those paid out in the form of assets from the issuing corporation or another corporation, such as a subsidiary corporation.

Dividend Payments

1) Declaration Date: The board of directors declares the dividend, determines the amount of the dividend, and decides on the payment date.

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Dividend Payments

2) Ex-Dividend Date: is two trading days before the record date. To receive the dividend, you have to buy the stock before the ex-dividend date. On this date, the stock begins trading “ex-dividend” and the stock price falls approximately by the amount of the dividend.

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Dividend Payments

3) Date of Record: is that date that all shareholders must be registered in the books of the corporation or else they will not be entitle to receive dividends. Two days after the ex-dividend date, the firm receives the list of stockholders eligible for the dividend.

Often, a bank trust department acts as registrar and maintains this list for the firm.

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Dividend Payments

4) Payment Date: Date on which the firm mails the dividend checks to the shareholders of record.

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What causes stock prices to change

1. by market forces : due to demand and supply

2. earnings : they are the profit a firm makes. Most analyst base their future value of a company on their earnings projections. If the firm pays more earnings than expected it has a positive effect on the share price and vice versa.

3. investors sentiments and attitudes