V. STOCKS

1. V. STOCKS

2. “Bulls Make Money, Bears Make Money, but Pigs Get Slaughtered” – Wall Street Saying

3. A. Definitions • Stock – an ownership share of a corporation • Stockholder or Shareholder – an entity that owns stock • Common Stock – unit of ownership in a public corporation, includes voting rights and entitles the owner to receive dividends • Preferred Stock – a unit of ownership, generally without voting rights, with specified dividend amount and higher legal priority against assets than common shares in liquidation • Stock Classes – may indicate ownership of a subsidiary or have different voting rights and/or restrictions on ownership

4. A. Definitions (Continued) • Stock Splits – dividing shares of stock to increase the number of shares available, lowering price, but generally keeping market capitalization constant • Reverse Split – combining shares of stock, resulting in higher stock price; frequently done to meet stock market listing requirements • Blue Chip – stocks in the largest, most consistently profitable corporations

5. B. Public versus Private Corporations • Private Company – shares of the company are not traded on stock markets, generally owned by corporate insiders, wealthy individuals, private equity firms, and venture capital firms • Public Company – issues shares that trade on securities markets – must meet regulatory and reporting requirements • Can be used to raise capital • Can be a means to providing financial rewards to founders and venture capital firms while broadening the firm’s ownership base

6. B. Public vs. Private Corporations (Con’t) • Private Placement – shares sold directly to investors without regulatory approval or oversight – private placement shares, however, can not be traded • Nationalization – where a government takes over a private or publicly traded company • Mutual Companies – shares owned by policyholders (insurance companies) or by depositors (banks, credit unions) – dividends paid to owners, owners have voting rights

7. C. Initial Public Offerings – Going Public • Underwriting Firm – normally an investment bank • Agrees to buy all of the shares of an Initial Public Offering (IPO) at a set price or using “best efforts” • Underwriter then resells to investors, obtaining gains from increasing share prices and from per share fees • Initial Prospectus (Red Herring) – developed by issuer and underwriter • Contains financial information and a description of the business’ history, officers, pending litigation, and plans • Not complete in all respects • Not SEC approved, thus not to be re-distributed

8. C. Initial Public Offerings (Continued) • Statutory Prospectus (Offering Circular) • Must be complete and approved by the SEC • Must be distributed to all IPO share purchasers • Tombstone – an ad publicizing an Initial Public Offering • Issue Pricing – the offering price per share set the day before the actual issue – all IPO investors pay the issue price • Brokers – receive allocations of shares, fill customer orders proportionately or by a prioritized method • Direct Sales – eliminates the underwriter, provides sales at an auction price where bid is set at or above market – can provide more money to the company, but does not raise a guaranteed amount of capital

9. D. Variations • Secondary Offering – sales of substantial shares of stock by underwriting firms, control persons, or institutions • Sales rely upon previously SEC approved documents (prospectus, etc.) from the IPO • Must file an additional form with the SEC (SEC forms 3, 4 &5)

10. D. Variations (Continued) • Tender Offer – a purchase of stock by a company for a set price, generally slightly above market • Increases share price by decreasing the number of shares in circulation • Increases earnings per share by decreasing shares in circulation • Can be made by the issuing company, or by another company in a hostile takeover

11. D. Variations (Continued) • Crowdfunding– where small amounts of capital are raised from a large number of individuals to fund a corporation or project • Funds are generally raised through Internet solicitation • Can be used a variety of ideas, from funding music to starting small businesses • New regulations allow informal crowdfunding of shares of stock in a corporation under certain specific conditions

12. E. Voting • Stockholders are corporate owners – can vote to elect members of the board of directors and on major issues effecting the corporation, such as issuing additional stock or selling the business • Different classes of stock can have different voting rights. SeeUnequal Shares • Exercising the right to vote • Can vote by attending corporate annual meeting, or • Proxy voting • Proxy statement – gives information regarding directors, auditor, and other information to be voted on at the corporate annual (shareholders’) meeting • Proxy ballot – lists board of director candidates, auditor being considered by the firm, and other issues to be voted on – can be voted by mail, phone, or online

13. E. Voting (continued) • Cumulative Voting – allows all of a shareholder’s vote to be allocated to one, several, or all candidates for the corporate board of directors (ex. – a shareholder owns 100 shares, can vote for 8 candidates to the board of directors, making 800 votes available for the shareholder to use – the shareholder can vote all 800 shares for one candidate, 100 for each candidate, or 400 & 400)