COMMON STOCK
CHAPTER FIVE
Practical Investment Management
Robert A,Strong
5 - 2Strong C5 – Common Stock
? People who own stock have an equity
interest in the organization.
? If a business has shares of stock,it is
organized as a corporation rather than a
proprietorship or a partnership.
? The shares of some corporations are closely
held,while others are publicly held,
? The two types of stock are common stock
and preferred stock.
Corporations,Shares,and Shareholder Rights
5 - 3Strong C5 – Common Stock
? the right to receive declared dividends on
a pro rata basis
? the right to vote
- Some companies have more than one class
of stock.
? the right to maintain ownership percentage
- The mechanics of the preemptive right are
accomplished by a rights offering.
Shareholder Rights
Corporations,Shares,and Shareholder Rights
5 - 4Strong C5 – Common Stock
? cash dividends
- paid in cash
Some firms have an optional
dividend reinvestment plan.
The Mystique of Dividends,Types of Dividends
5 - 5Strong C5 – Common Stock
The Mystique of Dividends,Types of Dividends
Selected Dividend Reinvestment Plans
DISCOUNT
FROM
FIRM MARKET PRICE
Chase Manhattan Bank (CMB,NYSE) 5%
Central Maine Power (CTP,NYSE) 5%
Green Mountain Power (GMP,NYSE) 5%
Hibernia Corp,(HIB,NYSE) 5%
York Financial (YFED,NASDAQ) 10%
5 - 6Strong C5 – Common Stock
? stock dividends
- paid in additional shares of stock
? property dividends
- the pro rata distribution of a
physical asset
The Mystique of Dividends,Types of Dividends
5 - 7Strong C5 – Common Stock
? spin-offs - a parent firm divests itself of a
subsidiary,and all the shares in
the subsidiary are distributed
proportionally to the shareholders
in the parent
? split-offs - a parent firm divests itself of a
subsidiary,and the shareholders
must make a choice between
keeping shares in the parent,or
exchanging them for shares
in the separated subsidiary
The Mystique of Dividends,Special Distributions
5 - 8Strong C5 – Common Stock
? An increasingly common type of
recapitalization is the issuance of shares
called tracking stock.
? These shares track the performance of a
subsidiary,and in many respects,are just a
new class of shares,
The Mystique of Dividends,Special Distributions
5 - 9Strong C5 – Common Stock
The Chronology of Events
1,date of declaration
Ex-dividend date
(2 business days prior
to the date of record)
2,date of record
3,date of payment
The Dividend Payment Procedure
5 - 10Strong C5 – Common Stock
? A dividend paid in accordance with a
previously announced corporate policy is a
regular dividend.
? Companies usually pay dividends quarterly,
? A firm that wishes to make an extra
distribution of cash to the shareholders does
so through a special dividend,also called an
extra or extraordinary dividend.
The Dividend Payment Procedure
5 - 11Strong C5 – Common Stock
? Paying dividends reduces the amount in a
firm’s checking account,and hence the
shares are worth less.
? On the ex-dividend date,
share prices tend to fall by
about the amount of the
dividend,
Why Dividends Do Not Matter
5 - 12Strong C5 – Common Stock
? A stock split is an accounting decision to
change the number of shares outstanding
without selling any more to the public.
? With a forward split,also called a regular way
or direct split,shareholders end up with a
greater number of shares than before the
split.
? With a reverse split,the number of existing
shares is reduced.
Stock Splits,Forward and Reverse Splits
5 - 13Strong C5 – Common Stock
The value of a firm cannot be increased by
splitting,or combining,its shares.
Stock Splits,Why Stock Splits Do Not Matter
5 - 14Strong C5 – Common Stock
? The primary motivation for a stock split is
usually a desire to reduce the share price.
? Large reverse splits often reduce the number
of shareholders.
? The difference between a stock split and a
stock dividend is purely an accounting
phenomenon,With a stock split,the par
value of the stock changes by the split
factor,With a stock dividend,the par
value is not affected.
Stock Splits
5 - 15Strong C5 – Common Stock
The Financial Page Listing
52 Weeks Yld Vol Net
Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg
25.38 20.38 AtlanEngy ATE 1.54 7.2 12 371 21.25 20.88 21.25 +.13
5 - 16Strong C5 – Common Stock
? Income stocks are those that historically
have a higher-than-average payout ratio (the
proportion of net income after taxes paid as
a dividend).
? A cyclical stock is one whose fortune is
directly tied to the state of the overall
national economy.
? A blue chip stock usually has a
long history of uninterrupted
dividends.
Categories of Stock
5 - 17Strong C5 – Common Stock
Categories of Stock
Insert Table 5-2 here.
5 - 18Strong C5 – Common Stock
Categories of Stock
Insert Table 5-3 here.
5 - 19Strong C5 – Common Stock
? A defensive stock is largely immune to
changes in the economy.
? Growth stocks reinvest most of their
earnings rather than paying them out as
dividends and may be good candidates for
above-average returns.
? A speculative stock has a high probability of
a loss and a small probability of a large
profit.
? Penny stocks refer to unusually risky,
especially inexpensive shares.
Categories of Stock
5 - 20Strong C5 – Common Stock
? Category overlap,The stock categories are
not mutually exclusive.
? A note on stock (ticker) symbols,
- are usually between one and four letters
- the letter after a decimal indicates the class
of stock
- under the NASDAQ system,the last letter
of a five-letter symbol indicates what type
the security is
Categories of Stock
5 - 21Strong C5 – Common Stock
Categories of Stock
Insert Table 5-6 here.