While teaching college level accounting, I became amazed at how many educated people had never read a set of publicly traded company financial statements. And how deficient many people are concerning basic stock knowledge. There is more to stock than meets the monthly stock brokerage report statements.
Stock Defined
Stock is a certificate issued to owners to represent their share of the company. Many investors never see their stock certificates because they are held by the brokerage firm. Each stock certificate contains a par value. Par value is the worth of a single share of stock and is traditionally fractions of a cent. The legal implications of par value represent the liability of its owner in case of a total business failure. In layman’s terms, you can be forced to pay the par value of the stock if the business fails and the price you paid for the stock was less than par value. If the par value is .004 cents per share, it will be highly unlikely you paid less than this amount for the stock share.
Different Stock Types
Garden variety stock is referred to as common stock. Preferred stock generally costs more and may have a variety of features. Preferred stock may have the right to receive dividends first or even to participate in common stock dividends.
Dividends are the way owners are rewarded for investing in a company. Dividends are declared and then paid. If there are common and preferred stocks, the dividends are paid based on the rights of the preferred shareholders. If the preferred stock owners are entitled to a 2% dividend each year, they must generally be paid before any common stock dividends. However, just because they are entitled to yearly payments does not ensure yearly payment. If dividends are not declared one year, the dividend entitlement simply accrues. Dividends must be declared before payment. If there is not declaration, no payment will occur.
Treasury stock is when a company repurchases its own outstanding stock. It is eventually retired, resold on the open market, or given to employees as an incentive.
Issued and Outstanding
The corporate board of directors must declare how many stock certificates may be issued. If all the certificates are used, they simply raise the limit issued. Outstanding refers to shares actually sold. If the financial statements list 1,000 shares issued, 518 outstanding, three are 518 shares sold to owners. And 482 more shares may be sold before more have to be issued by the board.
Earnings Per Share
A calculation required on all publicly issued corporate financial statements is earnings per share. Let’s say you have $518 in net income and 518 issued and outstanding share of stock. Your earnings per share are $1.00. But earnings per share may be presented in a column for every item on a financial statement. Sometimes, due to the complexity of many items on the statements, an even more complex diluted earnings per share calculation is presented. Familiarity with the terms is our goal. Suffice it to say you may see some extremely complex stock calculations that are mandatory.
Who Split My Stock?
ABC Company is family oriented. One share of their stock is selling for $100. ABC management would like their stock to be more affordable to the average business person. So they have a 2 for 1 stock split. So for each share of stock you own, you will now have 2 shares, each valued at $50. The concept is the same, but you may have a 3 for 1 stock split and so forth.
There may be a 2 for 1 reverse stock split. In the same example, in lieu of owning one share of stock worth $100, you would own ½ a share of stock worth $100.
Convertible preferred stock usually means you may convert one preferred share of sock for a set number of common shares. But the feature may be contingent upon the occurrence of a certain event.
Summary
Now that you are a stock term expert, the challenge is to obtain a set of financial statements for any publicly traded company. Check out the more information section below for details.
For More Information
To preview any Securities and Exchange Commission financial statement filings, visit the SEC website. A free tutorial will enable you to successfully download the latest financial statements for any company actively trading on the New York Stock Exchange.
