Investment and security analysis

Chapters: 1

Equity

Ú  Equity represents an ownership position of the investor, that is, in this case the investor is an owner of the firm and is entitled to a residual share of profits

o   Direct equity investments

o   Common stock and preferred stocks are two main direct equity investments

Common Stock

Ú  The holders of common stock are the owners of the firm

Ú  Have the voting power electing the board of directors

Ú  Have a right to the earnings of the firm after all expenses and obligations have been paid

Ú  Have also the risk of receiving nothing if earnings are insufficient to cover all obligations

Preferred Stock

Ú  Preferred stock is said to be a ‘hybrid’ (mixture) security because it has features of both common stock and bonds

Ú  Preferred stock is preferred with respect to assets and dividends

Ú  In the event of liquidation, preferred-stock holders have a claim on available assets before the common-stock holders

Ú  Furthermore, preferred-stock holders get their stated dividends before common stock holders can receive any dividends

Return on equity

Ú  (1) Dividends, dividends are received if the company earns sufficient profit and the board of directors declare a dividend and

Ú  (2) Capital gains, capital gains arise from an advance in the market price of the common stock, which is generally associated with a growth in per-share earnings. Because earnings often do not grow smoothly over time, stock prices historically have been quite volatile over time

Stock dividend

Ú  Instead of (and sometimes in addition to) cash dividends, investors receive dividends in the form of stock

Ú  Stock dividends are stated in percentage terms, as for example 20 percent stock dividend means 20 percent increase in the number of shares outstanding (investor owning 100 shares previously would own 120 shares after the stock dividend)