 Personal Finance PowerPoint Presentation, Common Stock, prepared to get financially fit by practicing personal finance. Most of this information can be found at Investopedia Common Stock, which you can find online. Take a look at the references, resources, continue your research from there. This by James Chen, updated April 27, 2022. In prior presentations, we've been taking a look at our investment goals, investment strategies. Now we're given an overview of what is Common Stock. Common Stock is a security that represents ownership in a corporation. Holders of Common Stock elect the board of directors and vote on corporate policies. So when we're thinking about investing in Common Stock, we're usually thinking about Common Stock for corporations that are on an exchange, therefore usually larger corporations that are publicly traded corporations. When we look at the structure of a corporation, we can compare it to say a Democratic Republic, for example. If we were to vote in a Democratic Republic, we don't vote on the actual policies, the day-to-day policies that are being made, but instead we vote for people to represent us who hopefully will then go and make policy decisions on our behalf acting in a way as our agents. Obviously, there's kind of problems with that to the extent that people that are supposed to be acting on our behalf sometimes act on their own behalf, and that's an agency type of problem. Similar kind of thing could happen with a corporation. We've got the structure of the corporation where we are basically the owners, although if we have a small number of shares, we have a small kind of power for our voting power in a similar way as if we're voting in a Democratic Republic, we could vote for then the board of directors. The board of directors then could be hiring management, and management are the people that are actually going to be running the day-to-day types of operations, hopefully acting as agents on behalf of the owners, which are the shareholders. How do they do that? They make money. They should be making decisions. They grow the company and make money. So this form of equity ownership typically yields higher rates of return long-term. So when you compare investing in stocks versus other types of investments like bonds or savings accounts accumulating interest, the stocks over the long term typically do better, although of course there's more risk related to it. However, in the event of liquidation, common shareholders have rights to a company's assets only after bond holders, preferred shareholders, and other debt holders are paid in full. So in other words, if the corporation liquidates, they go out of business. In other words, they go basically bankrupt, for example. Then the common stockholders are actually at the end because they're kind of the owners of the corporation. The corporation has made commitments to other people such as bond holders. So if we were to hold corporate bonds and the company liquidated, we would be paid first. As a corporate shareholder, we're betting not on the company liquidating. We're betting on the company growing. And as the company grows, we would then benefit from having an increase in the common stock price, as well as possible more dividends that could be paid out. If we own bonds in a corporation, then we get a fixed amount of return. And if the company grows, it's not going to increase basically the amount of return because the terms of the bond have already been set. But if the company was to liquidate, go out of business, they pay the bond holders before the stockholders, unless the government comes in and says they're too big to fail and they do something funny. So common stock is reported in the stockholders equity section of a company's balance sheet. So when you look at the balance sheet, it's kind of like a personal balance sheet. Assets minus liabilities is equity, or kind of you could think of it as net assets. Understanding common stock, common stock represents a residual claim to a company's ongoing and future profits. Assets, shareholders are said to be part owners in a company. So once again, common stock represents a residual claim to a company's ongoing and future profits. So when you're looking at the common stock, you're looking for them to basically grow, generate more revenue in the future, and you having kind of an equity interest to claim in that growth, in that value of the company. So this does not be in the shareholders can walk into a company's office and claim ownership of a portion of the chairs or desks or computers. So in other words, you as the common stockholder, clearly we could say, well, if I have a claim to the assets of the company, I should be able to just say, give me some money. And if I was in a sole proprietorship, for example, that's kind of how it works. You could say, I'm just going to draw out some money whenever I kind of feel like it. But when you're talking about a corporation, the idea of the shares, which was a genius idea, was that we're going to make all the shares the same so that so that we can't have one shareholder basically pulling out money from the from the company, unless it's going to be kind of the same, you know, the shares have to have equal kind of rights. That's why they can be traded on the exchange. And we can know the value of those shares, which allows other people to basically invest and increase the pool of capital available and the ability for investors to invest. So these things are owned by the corporation itself, which is the legal entity. Note that a corporation, we call it a legal entity, which is another really big kind of step in terms of increase in the economy. A lot of people would say in that the corporations, we give it kind of rights that we would have as a human being, we kind of as humans allocate some rights that we would think of if you think of natural rights theories, we would think of as a natural right to own property being something for a human being that we give to artificially to a corporation that then has its own legal. So now it's its own legal entity that basically owns has ownership of the asset. So instead, the shareholders owns this residual claim common stock is traded on exchanges and may be bought and sold by investors or traders. Shareholders of common stock may be entitled to receive dividends. So clearly when we're investing common stock, we're trying to have the stock price go up. And because all the stocks are the same, that means that that the value of any one stock, any one trade can kind of give us an idea of the full value of all the stocks, because they're kind of like currency in that case, they're the same. That's what allows them to be more liquid and tradable. And we also might want the dividends, which would be the corporation deciding to pay money out to the shareholders. If it was a sole proprietor, we would call that draws. We could just take money out whenever we wanted to if it was our own small business. But corporations have to determine whether or not they're going to pay out dividends. They may not pay out dividends if they're in a growing spurt, because they would rather keep those dividends, invest them back in the company and give value back to the shareholders by growing the company. Companies that have already been grown, they're at the peak of their curve and are just kind of moving along at a good pace might give more dividends, something like an energy company or something that's well established, like an Edison or something like that. So the first ever common stock was established in 1602 by the Dutch East India Company and introduced on the Amsterdam Stock Exchange. Over the following 400 plus years, stock markets have appeared around the world with tens of thousands of companies listed on global stocks exchanges, such as the London Stock Exchange and the Tokyo Stock Exchange, among others. Larger US based stocks are traded on a public exchange, such as the New York Stock Exchange, that's the NYSE or the NASDAQ. As of Q1 2022 quarter one, the New York Stock Exchange had 7,417 listings with a market capitalization totaling around $53 trillion, making it the biggest stock exchange in the world by market cap. There are also several international exchanges for foreign stocks, companies that are smaller in size and unable to meet an exchange's listing requirements are considered unlisted. These unlisted stocks are said to be traded over the counter OTC. So notice when you get into basically trading on the exchanges, then the exchange itself has incentives to try to say we want to make things as transparent as possible. And one of the reasons the US exchanges have done quite well over the years is that when you when you put those they have the regulations that say that we have to be somewhat transparent when you put the information on the exchange meaning you have to have your reports lined up in a way that people can understand in a way that can be comparable. And that then if you can have transparency with corporations because the corporations are looking for capital when they put it on the exchange they're looking for people to invest in the company. So if they want that capital because they don't have to do that they could not go corporate and then they don't then right so if they want the capital they got to be transparent with the people they're asking money from and present their information in such a way that those investors can compare it with other corporations and decide where to put their money. That transparency has really increased the US's capacity to to bring in capital to to the companies even though we don't have as much growth potential at this point then you would think industrializing companies that are still in their industrializing countries that are still in kind of their growth phase. You would think that they would be able to grow faster to catch up to where we are at given the fact that they're kind of we've kind of trotted the trail already so if they just follow the wake they can probably grow faster but the US still gets a huge component of of capital investment in part because of that transparency of the exchanges and the trust that's involved in it. So special considerations corporate bankruptcy so with common stock if a company goes bankrupt the common stock holders do not receive their money until the creditors bondholders or preferred shareholders have received their respective shares. So the benefit of being a bond holder for example is that you typically get paid first and you have more of a guaranteed kind of amount that you will be paid. If you're a shareholder then you're hoping that your benefit is that the that the value goes up in the company and you get paid more through dividends and increase in the valuation of the stock. So this makes common stock riskier than debt or preferred shares. The upside to common shares is is they usually outperform bonds and preferred shares in the long run. So clearly if the company does good then you're gonna get you're gonna have a better deal on the common stocks but that comes with risk. So many companies issue all three types of securities for example Wells Fargo a company has several bonds available on the secondary market. So it also has preferred stock such as its Serial L the New York Stock Exchange WFCL and common stock WFC. IPOs for a company to issue stock it must begin by having an initial public offering known as an IPO. An IPO is a great way for a company seeking additional capital to expand to begin the IPO process. A company must work with an underwriting investment banking firm which helps determine both the type and pricing of the stock after the IPO phase is completed the general public is allowed to purchase the new stock on the secondary market. Common stock and investors stocks should be considered an important part of any investor's portfolios. So clearly stocks are some a big part of the portfolio. Note however that oftentimes people get kind of confused between common stocks and then buying mutual funds and buying index funds for example. And so just note that you know oftentimes these things are using the common stocks if you look at a mutual fund that's just a format of buying the common stocks that allows people common people oftentimes to be able to have a diversified portfolio even though they don't have the same kind of funds as a wealthy individual so that they can pool the money together that's the idea pool the money together so that the pooled assets can then buy the underlying you know common stock so we're still buying in essence common stock but we're doing so not one at a time one individual common stock for one individual company at a time but instead using tools mutual funds to pool money together making it more affordable to buy the common stocks and be diversified so there are also several types of stocks growth stocks or companies that tend to increase in value due to growing earnings value stocks or companies lower in price in relation to their fundamentals so then you can start to think about you know what are the different categories of stocks and where do we want to put our money you might be trying to think about where the stock is in their life cycle so as we as we talked about it's similar in in countries it's similar in companies in that you have this kind of growth phase a country goes through the kind of the industrial phase you know if they're growing and you know and sometimes some companies don't grow some companies and some countries tend to stagnate and so on why does that happen but if a company was going through a growth phase phase and you're imagining that they're going to be a big company or country right they're going to go through the country will go through the industrialization right and then they'll then they'll get to post industrial and so on and then if you're talking about a company that makes it then they're going to have a high growth phase and then they're going to take taper off up top so what you would like to do ideally if you had a crystal ball is to be purchasing the companies that are going to make it at that growth phase because that's when you would if you purchased apple when it jumped up that would be the time to do it but nobody knows when that is and a lot of those companies don't actually make it and then you can think about a more conservative investing investing in stocks that have already made it and are actually doing quite well they're just they're just plowing along like like the utilities company or possibly an apple at this point in time and so on and so so value stocks offer a dividend unlike a growth stocks stocks are categorized by market capitalization either large mid or small large cap stocks are much more heavily traded and are generally an indication of a more stable company small cap stocks are usually newer companies looking to grow so they can be much more volatile compared to large caps so your objective when you look at these is saying okay if i'm looking at a company that's are growing companies that are growing there's more risk involved there so i have to compare that to my time horizon how does that fit into my portfolio if i'm looking at stocks that have already been matured and they're doing well and they're at the end of kind of their cycle and they're just going along they're probably going to give more dividends and you might think about those kind of stocks and your overall mix and again this overall mix concept might be able to do do that with different kinds of tools like mutual funds for example possibly targeted mutual funds for example they can change over the time horizon of your savings so how does common stock differ from preferred stock common stock is the most widely available type of shares issued by a company and what you will likely encounter when trading stocks on an exchange so clearly usually when you think about stocks and investing in the market you're talking common stocks so these shares typically come with voting rights but are the last in line the preferred ordering of being repaid if a company goes bankrupt so the benefit of the common stocks is you've got that voting capacity although again if you have small shares just like voting in a democratic republic then you don't have a lot of influence but that's you got that voting capacity and you have the claim to the equity but your last in line to get paid if the company goes bankrupt and they're trying to liquidate just pay off all their assets to who they owe money to preferred shares come ahead of common stock in that ordering so the preferred shares that's the idea of them being preferred the name's a little bit misleading because you might think if you had if you knew nothing else and someone said you can get a common stock or a preferred stock and you'd say well the preferred stock sounds better but you know it's not always better it's preferred in that there's less risk in the event that there's a bankruptcy you're going to get paid first but if the company does well and outperforms and grows then the the return you get on the common stock could be better so preferred doesn't necessarily mean better it's not like you got everything you got on the common stock plus something else it's something different so preferred shares also often lack voting rights so you don't have the same kind of voting rights but do come with a regular and higher dividend payments and this respect preferred shares are sometimes considered to be a hybrid between bonds and common stock so notice when you think about bonds you're usually investing in something where you have a guaranteed return or a more guaranteed return and you know what the terms of that return are and you if there's a if there's liquidation then you get paid basically first I believe the preferred stock is that if there's a liquidation it's kind of in the middle and and then you also have the the dividends which usually get paid first on the dividends but the company might still have some say in terms of what their dividend policy will be so how can I use common stock to vote at company meetings most ordinary common shares come with one vote per share granting shareholders the right to vote on corporate actions often conducted a company's meeting of shareholders if you cannot attend you can choose to cast your vote by proxy instead whereby a third party will vote on your behalf along with others who cannot attend votes may be held on issues such as whether to merge with or acquire a company to elect members of the board of directors or to approve stock splits or dividends so why is common stock referred to as an equity common stock represents a residual ownership stake in a company a company maintains a balance sheet composed of assets and liabilities assets are the things the company owns or is entitled to such as its property equipment cash reserves and accounts receivable on the other side of the balance sheet are liabilities which are what the company owes these includes payables debts and other obligations if a company is healthy the total assets will be larger than the total liabilities what is left over is the residual amount left to the owners known as shareholders equity so you might ask you know why do people refer to it as equity and and if you were to if you were to think about the value of the company the first calculation you might make is say well how much assets do you have minus how many liabilities do you have you look at the balance sheet to do that the difference between those two is equity from the accounting equation standpoint we see it as assets equal liabilities plus equity because assets represent what the company has liabilities and equity represents who the company owes those assets to as a separate legal entity either a third party like the bank for loans for example or the owners the shareholders the equity the actual company itself is just a shell it doesn't really own you know it owns stuff because we gave it the capacity to as owners right that artificial right of ownership that's a human right from a natural law perspective given it to the company artificially but if you think about them as a separate entity every assets that they have they're going to eventually pay out to somebody either a third party for obligations they took on liabilities or the owners the shareholders that third part assets minus liabilities is equity and so that's kind of like the net value