Chapter 10 - Equity markets. The purpose of this chapter is to answer the following questions about equity securities: What are they? How are they bought and sold? How are stock markets regulated? What determines the prices of equity securities? How do we measure the risk of equities? What is the meaning of various stock indexes such as the Dow Jones Industrial Average or the S&P 500? Do movements in the stock market predict changes in economic activity? | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 10 EQUITY MARKETS Common Stock Ownership in a Corporation One vote per share. Have a residual (last) claim on income and assets in liquidation, thus a riskier position than bonds and preferred stockholders. Shareholders’ liability for the debts of the corporation is limited to their investment in the common stock. Common Stock (concluded) Shareholders’ return is derived from dividends declared by the board of directors and from market appreciation in the value of the stock. Common shareholders may vote their shares to elect the members of the board of directors. Members of the board of directors can be elected by cumulative voting or straight voting. Preferred Stock A Preferred or prior claim on earnings and assets compared to common stock Dividends paid ahead of common if declared. Cumulative - arrearage plus current dividends paid before any payment made to common shareholders. Non-participating preferred receive a fixed level of dividends, thus not participating in possible high earnings level of the corporation. Adjustable rate preferred, indexed to market rates, vary as the index varies. Preferred Stock (continued) Preferred stockholders are usually excluded from voting for board of directors and shareholder issues. Many corporations buy preferred stock. A high percentage (70%), depending on the extent of ownership, of dividends received from one corporation by another corporation are federally tax exempt. Investors are concerned about after-tax return. Convertible Securities Convertible preferred stock - convertible to common stock at specific common price or number of shares (conversion ratio). Dividends received until conversion Investor may participate in growth of firm. Convertible bonds - convertible to . | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 10 EQUITY MARKETS Common Stock Ownership in a Corporation One vote per share. Have a residual (last) claim on income and assets in liquidation, thus a riskier position than bonds and preferred stockholders. Shareholders’ liability for the debts of the corporation is limited to their investment in the common stock. Common Stock (concluded) Shareholders’ return is derived from dividends declared by the board of directors and from market appreciation in the value of the stock. Common shareholders may vote their shares to elect the members of the board of directors. Members of the board of directors can be elected by cumulative voting or straight voting. Preferred Stock A Preferred or prior claim on earnings and assets compared to common stock .
