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COMMON STOCK
CHAPTER FIVE
Practical Investment Management
Robert A. Strong
South-Western / Thomson Learning © 2004 5 - 2
Corporations, Shares, and Shareholder Rights Corporations Shares Shareholder Rights
The Mystique of Dividends Types of Dividends Special Distributions The Dividend Payment Procedure Why Dividends Do Not Matter
Outline
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Stock Splits Forward and Reverse Splits Why Stock Splits Do Not Matter Why Firms Split Their Stock Stock Splits vs. Stock Dividends
The Financial Page Listing The Basic Information Footnotes and Symbols
Outline
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Categories of Stock Blue Chip Stocks Income Stocks Cyclical Stocks Defensive Stocks Growth Stocks Speculative Stocks Penny Stocks Category Overlap A Note on Stock Symbols
Outline
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People who own stock have an equity interest in the organization.
If a business has shares of stock, it is organized as a corporation rather than a proprietorship or a partnership.
The shares of some corporations are closelyheld, while others are publicly held.
The two types of stock are common stock and preferred stock.
Corporations, Shares, and Shareholder Rights
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the right to receive declared dividends ona pro rata basis
the right to vote- Some companies have more than one class of stock.
the right to maintain ownership percentage- The mechanics of the preemptive right are accomplished by a rights offering.
Shareholder Rights
Corporations, Shares, and Shareholder Rights
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cash dividends - paid in cashSome firms have an optional dividend reinvestment plan.
The Mystique of Dividends: Types of Dividends
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The Mystique of Dividends: Types of Dividends
Selected Dividend Reinvestment Plans
DISCOUNT FROM
FIRM MARKET PRICE
Chase Manhattan Bank (CMB,NYSE) 5%
Central Maine Power (CTP, NYSE) 5%
Green Mountain Power (GMP, NYSE) 5%
Hibernia Corp. (HIB, NYSE) 5%
York Financial (YFED, NASDAQ) 10%
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The Mystique of Dividends: Types of Dividends
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stock dividends - paid in additional shares of stock
property dividends - the pro rata distribution of a
physical asset
The Mystique of Dividends: Types of Dividends
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spin-offs - a parent firm divests itself of a subsidiary, and all the shares in the subsidiary are distributed proportionally to the shareholders in the parent
split-offs - a parent firm divests itself of a subsidiary, and the shareholders must make a choice between keeping shares in the parent, or exchanging them for shares in the separated subsidiary
The Mystique of Dividends: Special Distributions
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An increasingly common type ofrecapitalization is the issuance of shares called tracking stock.
These shares track the performance of a subsidiary, and in many respects, are just a new class of shares.
The Mystique of Dividends: Special Distributions
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The Chronology of Events
1. date of declaration
Ex-dividend date (2 business days prior to the date of record)
2. date of record
3. date of payment
The Dividend Payment Procedure
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A dividend paid in accordance with apreviously announced corporate policy is a regular dividend.
Companies usually pay dividends quarterly.
A firm that wishes to make an extradistribution of cash to the shareholders doesso through a special dividend, also called an extra or extraordinary dividend.
The Dividend Payment Procedure
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Paying dividends reduces the amount in a firm’s checking account, and hence the shares are worth less.
On the ex-dividend date, share prices tend to fall by about the amount of the dividend.
Why Dividends Do Not Matter
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A stock split is an accounting decision tochange the number of shares outstanding without selling any more to the public.
With a forward split, also called a regular wayor direct split, shareholders end up with a greater number of shares than before the split.
With a reverse split, the number of existingshares is reduced.
Stock Splits: Forward and Reverse Splits
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The value of a firm cannot be increased by splitting, or combining, its shares.
Stock Splits: Why Stock Splits Do Not Matter
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The primary motivation for a stock split isusually a desire to reduce the share price.
Large reverse splits often reduce the numberof shareholders.
The difference between a stock split and astock dividend is purely an accounting phenomenon. With a stock split, the par value of the stock changes by the split factor. With a stock dividend, the par value is not affected.
Stock Splits
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Footnotes and Symbols
boldface type, underlined, , , , s, n, dd, g, x, ...
The Financial Page Listing
52 Weeks Yld Vol Net
Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg
25.38 20.38 AtlanEngy ATE 1.54 7.2 12 371 21.25 20.88 21.25 +.13
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The Financial Page Listing
new 52-week high
new 52-week low
cc PE ratio > 100
dd loss in the most recent four quarters
g dividends and earnings in Canadian dollars
n newly issued in the past 52 weeks
pf preferred stocks
s stock split/stock dividend > 10% in past 52 weeks
wt warrant
x ex-dividend
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Income stocks are those that historicallyhave a higher-than-average payout ratio (the proportion of net income after taxes paid as a dividend).
A cyclical stock is one whose fortune is directly tied to the state of the overall national economy.
A blue chip stock usually has along history of uninterrupted dividends.
Categories of Stock
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Categories of Stock
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Categories of Stock
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Categories of Stock
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A defensive stock is largely immune tochanges in the economy.
Growth stocks reinvest most of their earnings rather than paying them out as dividends and may be good candidates for above-average returns.
A speculative stock has a high probability of a loss and a small probability of a large profit.
Penny stocks refer to unusually risky, especially inexpensive shares.
Categories of Stock
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Categories of Stock
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Category overlap: The stock categories are not mutually exclusive.
A note on stock (ticker) symbols: - are usually between one and four letters- the letter after a decimal indicates the class of stock- under the NASDAQ system, the last letter of a five-letter symbol indicates what type the security is
Categories of Stock
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Categories of Stock
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Corporations, Shares, and Shareholder Rights Corporations Shares Shareholder Rights
The Mystique of Dividends Types of Dividends Special Distributions The Dividend Payment Procedure Why Dividends Do Not Matter
Review
South-Western / Thomson Learning © 2004 5 - 30
Stock Splits Forward and Reverse Splits Why Stock Splits Do Not Matter Why Firms Split Their Stock Stock Splits vs. Stock Dividends
The Financial Page Listing The Basic Information Footnotes and Symbols
Review
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Categories of Stock Blue Chip Stocks Income Stocks Cyclical Stocks Defensive Stocks Growth Stocks Speculative Stocks Penny Stocks Category Overlap A Note on Stock Symbols
Review