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the valuation and characteristics of stock

preferred stock

often referred to as a hybrid security because it has many characteristics both common stock and bonds. Preferred stock is similar to common stock in that it has a fixed maturity date, if the firm fails to pay dividends, it does not bring on bankruptcy, and dividends are fixed in amount.

characteristics of preferred stock

multiple series of preferred stock, preferred stocks claim on assets and income, cumulative dividends, protective provisions, convertibility, retirement provisions.

multiple series

if a company desires it can issue more than one series of preferred stock, and each series can have different characteristics.

claim on assets and income

priority over common stock on assets and income but has second choice with bonds.

cumulative feature

a requirement that all past, unpaid preferred stock dividends be paid before any common stock dividends are declared.

protective provisions

provisions for preferred stock that protect the investors interest. The provisions generally allow for voting in the event of nonpayment of dividends, or they restrict the payment of common stock dividends if sinking fund payments are not met or if the firm is in financial difficulty.

convertible preferred stock

preferred shares that can be converted into a predetermined number of shares of common stock, if investors so choose.

call provision

a provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods

sinking fund provision

a protective provision that requires the firm periodically to set aside an amount of money for the retirement of its preferred stock. this money is then used to purchase the preferred stock in the open market or through the use of call provision, whichever method is cheaper.

retirement provision

characteristic in preferred stocks that allows a firm a method of retiring stock, either by sinking fund provision or call provision.

common stock

shares that represent the ownership in a corporation

claim on income

have the right to left over income after preferred stock and bonds have been paid, potential return is limitless or you can be left with nothing for yourself.

claim on assets

in the case of liquidation claims on assets often go unsatisfied because bond holders and preferred stock holders have first and second claims on assets.

limited liability

a protective provision whereby the investor is not liable for more than the amount he or she has invested in the firm

proxy

voting in which a designated party is provided with the temporary power of attorney to vote for the signee at the corporations annual meeting.

proxy fight

a battle between rival groups for proxy votes in order to control the decisions made in a stockholders meeting

majority voting

voting in which each share of stock allows the shareholder one vote, and each position on the board of directors is voted on separately. As a result, a majority of shares has the power to elect the entire board of directors.

cumulative voting

voting in which each share of stock allows the shareholder a number of votes equal to the number of directors being elected. The shareholder can then cast all of his or her votes for a single candidate or split them among various candidates.

preemptive right

the right entitling the common shareholders to maintain his or her proportionate share of ownership in the firm.

right

certificates issued to common stockholders giving them an option to purchase a stated number of new shares at a specified price during a 2 to 10 week period.

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