Investing in Stocks

mature	stock	corporate charter	be issued	claimants
return	claim	outstanding stock	stockholders	bondholders

A share of stock in a firm represents ownership. A stockholder owns a percentage interest in a firm, consistent with the percentage of ... held.

Investors can earn a ... from stock in one of two ways. Either the price of the stock rises over time, or the firm pays the stockholder dividends. Frequently, investors earn a return from both sources. Stock is riskier than bonds because ... have a lower priority than ... when the firm is in trouble, the returns to investors are less assured because dividends can be easily changed, and stock price increases are not guaranteed. Despite these risks, it is possible to make a great deal of money by investing in ..., whereas that is very unlikely by investing in bonds. Another distinction between stock and bonds is that stock does not....

Ownership of stock gives the stockholder certain rights regarding the firm. One is the right of a residual claimant: stockholders have a ... on all assets and income left over after all other ... have been satisfied. If nothing is left over, they get nothing. As noted, however, it is possible to get rich as a stockholder if the firm does well.

Most stockholders have the right to vote for directors and on certain issues, such as amendments to the ... and whether new shares should....

Common Stock versus Preferred Stock

common	rights	stable	voting	vote
fixed dividend	preferred	dividends	issuing	distribution

There are two types of stock, common and preferred. A share of common stock in a firm represents an ownership interest in that firm. Common stockholders vote, receive ..., and hope that the price of their stock will rise. There are various classes of common stock, usually denoted as type A, type B, and so on. Unfortunately, the type does not have any meaning that is standard across all companies. The differences among the types usually involve either the ... of dividends or ... rights. It is important for an investor in stocks to know exactly what ... go along with the shares of stock being contemplated.

Preferred stock is a form of equity from a legal and tax standpoint. However, it differs from common stock in several important ways. First, because preferred stockholders receive a ... that never changes. Second, because the dividend does not change, the price of preferred stock is relatively.... Third, preferred stockholders do not usually … unless the firm has failed to pay the promised dividend. Finally, ... stockholders hold a claim on assets that has priority over the claims of ... shareholders but after that of creditors such as bondholders.

Less than 25% of new equity issues are preferred stock, and only about 5% of all capital is raised using preferred stock. This may be because preferred dividends are not tax-deductible¹ to the firm but bond interest payments are. Consequently, ... preferred stock usually costs the firm more than issuing debt, even though it shares many of the characteristics of a bond.

B. Choose the correct alternative.

1. Stocks / bonds offer an ownership stake in the company.

2. Stocks / bonds are akin to loans made to the company.

3. The value of stocks / bonds corresponds to the value of the company and therefore, stock / bond price fluctuates depending upon how the market values the company.

4. Stocks / bonds are loans offered at a fixed interest rate.

5. With stocks / bonds, an investor is promised a fixed return.

6. While stocks / bonds are "safer" than stocks / bonds because of lower volatility, it should be noted that there is always a chance that company will be unable to repay bond / stock-holders.

7. However, when a company declares bankruptcy, bond-holders / stockholders are the first to bear losses. Creditors (including bond-holders / stockholders) are next.

8. Common / preferred stock typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.

9. Common / preferred stock typically carries voting rights that can be exercised in corporate decisions.

Exercise 15. Learn more about trading on the stock exchange. Read an interview with the broker and match the interviewer’s questions and the broker’s answers.