The Stock Market: Types of Stocks

I love the market. It is my work, my play and my life – Rene Rivkin

I came to love Sidney Sheldon because his English was simple to understand and I needed not have a dictionary to go through his novels. The same cannot be said about Ngugi Wa Thiong’o (who is more African then Sidney). Plus I have other reasons to hate Ngugi including he is outright ugly. It was my wish today to write about an informative topic. However, I realised that half of us will find it difficult to grasp the very important concepts so I felt the need to first of all come up with a preface, then my later blogs will contain the table of contents, acknowledgments, introduction and so on and so forth. This is to make sure you reduce your visits to google and thus slightly reduce the chances of you continuing hating me (I am sure you have other reasons including I am hot) as I have come to hate Ngugi. Here is my first episode to a long series whose season one I would like to call The Stock Market.

The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It is an instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation’s assets and profits. The stock of a business is divided into shares. If a business has 100 shares, each share is 1% of the stock. Used in plural, stocks is often used as a synonym for shares even though it ought to be used only when referring to stock of more than one company.

Types of Stocks.
1.Common Shares are securities representing equity ownership in a corporation, providing voting rights (of the company’s board of directors, corporate objectives and policy, stock splits etc), and entitling the holder to a share of the company’s success through dividends and/or capital appreciation. In the event of bankruptcy, common share investors receive their funds after preferred share holders, bondholders, creditors etc. However, overtime, common shares perform better than bonds or preferred shares.

2.Preferred/Preference Shares/Preferreds is a capital share that provides a specific dividend- that does not fluctuate thus limiting appreciation-that is paid before any dividends are paid to common share holders, and which take precedence over common stock in the event of a liquidation. However, preferred shareholders do not have voting rights. The four types of preferred stock are: cumulative (dividends accrue in the event that the issuer does not make timely dividend payments); Non-cumulative (opposite of cumulative); Participating (The holder receives dividends equal to the normally specified rate that preference dividends receive as well as an additional dividend based on some predetermined condition); and convertible (can be converted into a fixed number of common shares, usually anytime after a predetermined date.)

Others are:

3.Outstanding Shares/Shares Outstanding are the shares of a corporation’s stock that have been issued and are held by investors, including restricted shares (see below) owned by the company’s officers and insiders,as well as those held by the public. This number is shown on a company’s balance sheet under the heading ‘capital Stock.’

4.Treasury Shares/Reacquired Shares is stock which is bought back by the issuing company, reducing the number of outstanding stock in the open market (including insiders’ holding). Stock repurchases are used as tax-efficient method to put cash into shareholders’ hands rather than pay dividends. Companies will also do this when they feel their stock is undervalued on the open market. This is advantageous to shareholders (because it reduces the number of share outstanding). However, if it is done to improve financial ratios eg EPS or P/E, then it is detrimental to the shareholders. These shares are not used in calculating the above ratios, do not pay dividends and have no voting rights.

5.Authorised Shares/Shares Authorised is the maximum number of shares that a company can issue. This number (usually higher than those actually issued) is specified in the company’s articles of association but can be changed by shareholder approval.
Shares Authorised = Shares Issued + Shares Unissued
Shares Issued = Shares Outstanding + Treasury Shares

6.Restricted Shares/Letter Stock are given to employees by companies but they are not transferable until certain conditions have been met eg continued employment during a period of time. Sometimes insiders (employees) are given restricted shares after merger and acquisition activity, underwriting activity, and affiliate ownership in order to prevent premature selling that might adversely affect the company.

7.Concentrated Stock is an equity making up more than 30% of the investor’s portfolio. The reasons for keeping a concentrated stock may be restrictions for sale (as in the case of restricted shares), emotional attachment, donation, inheritance, stock options etc.

8.Golden Share is a nominal share which is able to outvote all other shares in certain circumstances, often held by a Government Organisation, in a parastatal undergoing the process of privatisation and transformation into a stock company.

Let me have your comments on the Stock Market. Is it a profitable venture?

THE DAY’S

Quote: In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten – Peter Lynch.

Cool Blog: The Trot and The Run – A great review of Ngugi Wa Thiong’o’s book Wizard of The Crow has been done by Chiira, almost making Ngugi look like a genius. A good sound system can make bad music bearable, me thinks.

Hero/Zero: Tall Guy ATT at almost its best. Will tell you as it is and will not give a hoot of the consequence. Great great guy, will probably make a great investor in the future.