Unit 5: Stock Market Terminology

Mr. ElsesserWall Street I

The stock market crash “Black Thursday” created new laws.

Securities Act of 1933Requires that any security before its Requires that any security before its offered for sale to the public must be offered for sale to the public must be registered. registered. Disclosure about a company’s Disclosure about a company’s financial picture must be made financial picture must be made available to interest investors.available to interest investors.

Securities Exchange Act of 1934Led to the creation of the Securities and Led to the creation of the Securities and Exchange Commission (SEC)Exchange Commission (SEC)

Watchdog agency that enforces Federal laws Watchdog agency that enforces Federal laws pertaining to the stock market.pertaining to the stock market.

Rules breakers (Insider Trading) face harsh Rules breakers (Insider Trading) face harsh penalties.penalties.

Before stock can be sold to the public, it must be registered with the SEC.

The corporation files a prospectus which is financial data and stock proposal.

The prospectus must be totally correct and revealing, to allow investors to decide whether or not to buy the stock.

All information must be provided, even if it is All information must be provided, even if it is negative.negative.

Red Herring:A preliminary prospectus that has a disclaimer in RED stating the SEC has not yet approved the sale of the stock.

Authorized Shares:The shares of stock a corporation is allowed to issue.

Issued Shares:The shares actually issued and sold to investors.

Outstanding Shares:Shares purchased by stockholders. Shares standing out in the hand of the public.

Treasury Stock:Treasury Stock:Shares repurchased by a Shares repurchased by a corporation.corporation.

Par Value:A dollar value assigned to stocks for bookkeeping purposes only.

When a corporation is formed, most states require that a corporation put a value on its common stock before it can be sold. The assigned value is used to construct the balance sheet, and is otherwise meaningless..

Market Value:Market Value:The price people are presently willing to pay for a stock.

Book Value:Total assets of a corporation, minus the total liabilities.

Investors are concerned with the book value per share, which is the assets minus the liabilities, divided by the number of shares outstanding.

Book Value per ShareAssets minus liabilities divided by outstanding shares.

Assets $2,000,000Liabilities - $1,000,000Net Worth = $1,000,000

Net Worth $1,000,000Divided by SO 100,000 BV per Share = $10

Stockholders received special Stockholders received special treatment because company dividends treatment because company dividends are distributed to them before being are distributed to them before being paid to common stockholders. paid to common stockholders. Should the company go bankrupt, Should the company go bankrupt, preferred shareholders would receive preferred shareholders would receive payment prior to common stockholders.payment prior to common stockholders.

Disadvantage- Preferred stock holders have no Disadvantage- Preferred stock holders have no voting rights.voting rights.

1)1) Right to receive a Right to receive a stock certificatestock certificate – a – a piece of paper that shows ownership in piece of paper that shows ownership in a corporation that states the name of a corporation that states the name of the corporation, the number of shares the corporation, the number of shares you won, a CUSIP number that you won, a CUSIP number that identifies the security issue, and the identifies the security issue, and the name of the owner of the shares.name of the owner of the shares.

2)2) The right to sell your shares, buy more The right to sell your shares, buy more of them, or transfer ownership of them of them, or transfer ownership of them to someone else.to someone else.

3)3) The right to receive a dividend if the The right to receive a dividend if the company decides to pay one.company decides to pay one.

4)4) The right to be informed through the The right to be informed through the company’s annual report.company’s annual report.

5)5) Voting rights on issues such as a Voting rights on issues such as a change in the Board of Directors, or change in the Board of Directors, or sale of the company. Voting is done at sale of the company. Voting is done at the company’s annual meeting or the company’s annual meeting or through the mail.through the mail.

Is a form of giving another person, usually a Is a form of giving another person, usually a corporate representative, authority to vote corporate representative, authority to vote on behalf of the shareholder.on behalf of the shareholder.

Common Stock Proxy

Occurs when an investor or Occurs when an investor or a group of investors try a group of investors try to gain control of the to gain control of the company by company by encouraging other encouraging other shareholders to vote shareholders to vote against management or against management or to sign over their to sign over their proxies.proxies.

A short-term privilege that allows current A short-term privilege that allows current stockholders to buy stock of a new issue stockholders to buy stock of a new issue at less than market value.at less than market value.

Stock rights may be sold, usually on a Stock rights may be sold, usually on a stock exchange.stock exchange.

A long-term privilege similar to stock A long-term privilege similar to stock rights that allows the public to buy rights that allows the public to buy additional shares at a set price.additional shares at a set price.

Warrants are shown on the stock Warrants are shown on the stock exchange by WT after the name of the exchange by WT after the name of the corporation.corporation.

Primary Distribution◦A corporation’s stock when it is sold to the public for the first time.

“Going Public” The first time a brand new company decides to go

public, its stock offering is called an IPO (Initial Public Offering).

This is handled by an investment banker or a brokerage firm, and it usually overpriced.

1) Corporation contacts investment banker to handle underwriting procedure.

Ex. Prudential, Merrill Lynch.

2) Investment banker arranges to purchase large blocks of new issue from corporation at slightly lower price. These are the issued shares.

3) Corporation announces its intention to issue new stock through “tombstone ads” in the financial press. (Black boarder around ad)

Stock transactions that take place only between brokers and investors.

After the primary distribution of stock, all subsequent sales take place in secondary markets.