* The bankruptcies of WorldCom and Enron resulted in
shareholders losing their entire investments.
* Shareholders of Home Depot were irate at the $123.7 million
pay package (excluding stock options) of CEO Bob
Nardelli over a five-year period when Home Depot’s
stock price declined by 9 percent for the same period.
Rival Lowe’s stock price increased by 185 percent during
that same period.
CHARACTERISTICS OF COMMON STOCK
* Common stockholders are the residual owners of the
corporation because they have voting rights and bear the
ultimate risk associated with ownership.
* In bankruptcy, common stockholders are last in line (after
bondholders and preferred stockholders) for claims on assets.
* Shareholders’ liability is limited to the amount of their
investments (limited liability).
* With regard to claims on earnings, common stockholders
are entitled to receipt of dividends only after all the corporation’s
obligations have been met.
* Shareholders receive dividends only when a company’s
board of directors declares a dividend.
When a new company is formed, common stock is sold to
shareholders to raise money for the company. Companies that need
additional funds to expand sell more common stock, bonds,
and/or preferred stock.
Ownership of common stock is evidenced by stock certificates.
The front of a certificate shows the name of the issuing
company, the name of the owner of the shares, the number of
shares of ownership, the identifying serial number, the name of
the register, and the par value of the stock. The back of a stock
certificate normally includes an assignment statement, which must
be signed by the holder of the stock when the holder transfers
ownership of the shares.
Voting rights are the rights of shareholders to vote. A characteristic
of common stock is that shareholders can vote on important issues
facing the corporation, such as membership to the board of directors.
The board of directors, in turn, selects officers to run the
corporation. Common shareholders must approve of any changes
to the charter of incorporation. A charter of incorporation is a document
that the company files with the state when forming a corporation.
For example, a corporation’s management team that would
like to take over another corporation through the issuance of
new common shares would have to get approval from their shareholders.
Rather than attend the shareholders’ meeting to vote in person,
many shareholders use a proxy vote. A proxy is a legal document
that gives a designated person temporary power of attorney to vote
at the shareholder meeting for an absentee shareholder. Most often
management chooses both the slate of candidates to stand for the
board of directors and the important issues to be voted on by shareholders.
The names of these choices are then sent out on proxy cards
to be voted on by shareholders.
Corporations use either the majority voting procedure (also
known as the statutory method) or the cumulative voting procedure.
In the majority voting procedure, shareholders are allowed one vote
for each share held for each director’s position. Under the majority
voting procedure, the number of votes a shareholder has equals
the number of shares he or she holds. The majority of votes cast
determines the issue or the director elected.
In the cumulative voting procedure, shareholders are entitled to
a total number of votes equal to the total number of shares owned
multiplied by the number of directors being elected. Shareholders
can cast all their votes for a single candidate or split them as
they see fit. Cumulative voting gives increased weight to minority
shareholders, enabling them to elect at least one director.
The following example illustrates the difference between
majority voting and cumulative voting. Assume that a company
has 1,000 shares outstanding and that two candidates are to be
elected to the board of directors. Under majority voting, a minority
shareholder with 300 shares, for example, can cast 300 votes for
each of the two candidates. However, under cumulative voting,
a minority shareholder with 300 shares could cast all 600 votes
(300 * 2) for one candidate. This method is advantageous for
minority shareholders because they can work together to cast all
their votes for one candidate who might be more sympathetic to
Preemptive rights allow shareholders to maintain their constant
percentage of a company’s outstanding stock by being given the
first chance to purchase newly issued stock in proportion to
their existing percentage ownership of stock. Not all corporations
provide preemptive rights in their charters. For example, if a shareholder
owns 10 percent of a company’s stock, that shareholder is
entitled to purchase 10 percent of new shares being offered. To put
it another way, existing shareholders have the first right of refusal
in purchasing new shares. Certificates called rights are issued to the
shareholders, giving them the option to purchase a stated number
of new shares at a specific price during a specific period. These
rights can be exercised (which allows the purchase of new common
stock at below-market price), sold, or allowed to expire.
Categories in Trading Mistakes
Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor
Using too much Leverage
Determining the proper capital requirements for trading is a difficult task
Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure
Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader
Useful Advices to Beginning Trader
You can control your success or failure
All about Stocks
Encyclopedia about Stocks. That you should know about Stocks before starting
All terms about Forex market