Module 8 - Section 2: Common and Preferred Stock, Stock Market Features

Common Stock

• Shareholder Rights

  • Voting rights, often through proxy votes.
  • Different classes (e.g., Class A, Class B) have varying rights:
    • Class A might offer dividends but fewer voting rights.
    • Class B might have opposite rights.
  • Right to dividends and remaining assets upon liquidation (after IRS, customers, employees, etc.).
  • Preemptive right: Existing shareholders must be offered new shares before the public.

• Dividend Information

  • Dividends are liabilities only when declared by the board.
  • Companies might omit paying dividends.
  • Dividends are not business expenses and do not have tax deductions.

Preferred Stock

• Preference in Dividends
  • Preferred shareholders receive dividends before common stockholders.
  • Dividends are not liabilities until declared.
  • Most preferred dividends are cumulative:
    • Unpaid dividends must be settled before issuing common dividends.
  • Generally, preferred stockholders lack voting rights.
  • Preferred shares have a stated liquidation value, often $100.

Stock Market Overview

• Primary vs. Secondary Markets

  • Primary: Sales of new stocks by the company.
  • Secondary: Trading existing stocks among investors.

• Dealers vs. Brokers

  • Dealers hold inventory and trade stocks.
  • Brokers facilitate transactions between buyers and sellers.

New York Stock Exchange (NYSE)

• One of the largest hybrid markets (both electronic and face-to-face trades).
• License Holders
  • 1,366 licenses, including:
    • Designated Market Makers (DMMs): Dealers for specific stocks, maintain inventory, profit from bid-ask spread.
    • Floor Brokers: Match buyers and sellers, operate for fees, no inventories.
    • Supplemental Liquidity Providers (SLPs): Investment firms trading for their own account, do not operate on the exchange floor.

NASDAQ

• National Association of Securities Dealers Automated Quotations.
• Not a physical exchange, computer-based.
• Many market makers hold inventory of stocks.

Example - Costco Stock

• Highest price: $169.59, Lowest price: $138.57 (yearly range).
• Dividend: $1.80 per share with a yield of 1.12%.
• P/E Ratio: 29.3 (stock selling for 29.3 times earnings).
• Most recent price: $160.63.

This concludes the section for Module 8.