Shares & Related Terms

Shares Shares are certificates representing ownership in a corporation. They are also known as stocks or equities. Stock A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner the right to vote at shareholder meetings and to receive dividends that the company has declared. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event a company goes bankrupt and is liquidated. Also known as shares, or equity. A holder of stock (a shareholder) has a claim on a part of the corporation's assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1000 shares of stock outstanding, and one person owns 100 shares, that person would own and have claim to 10% of the company's assets. Stocks are the foundation of nearly every portfolio, and they have historically outperformed most all other investments over the long run. Common Stock A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation common shareholders have rights to a company's assets only after bond holders, preferred shareholders, and other debt holders have been paid in full. In the U.K., these are called "ordinary shares".

If the company goes bankrupt the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets. This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run. Preferred Stock A class of ownership in a corporation with a stated dividend that must be paid before dividends to common stock holders. Preferred stock does not usually have voting rights. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation. Penny Stock A stock that sells for less than $1 a share but may also rise to as much as $10/share as a result of heavy promotion. All penny stocks are traded OTC or on the pink sheets. Penny stocks are highly speculative and risky. Many brokerages don't cover them simply because they are so difficult to track and predict. Unlisted Security A security that is not traded on an exchange, usually because of an inability to meet listing requirements. An unlisted security is also known as an "over-the-counter" (OTC) security. In the UK the term "unquoted" is used. Voting Right The right of a stockholder to vote on matters of corporate policy as well as on who is to compose the board of directors. Most voting involves decisions on issuing securities, initiating stock splits, and making substantial changes in the corporation's operations. The buying back of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase

the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. Share Capital The portion of a corporation's equity obtained from issuing shares in return for cash or other considerations. This is also called Equity Financing. The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation. This is when a company raises money by issuing stock. The other way to raise money is debt financing, which is when the company borrows money. Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets MINUS liabilities, preferred stock and intangible assets. Stockholder's equity is often referred to as the book value of the company. Book Value 1. The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation. 2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. Book value is the accounting value of a firm. It has two main uses: 1) It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. 2) By being compared to the company's market value, the book value can indicate whether a stock is under or over-priced. In the U.K., Book Value is known as "Net Asset Value."

Market Value 1. The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. 2. The market capitalization plus the market value of debt. Sometimes referred to as "total market value". In the context of securities, market value is often different from book value because the market takes into account future growth potential. Most investors who use fundamental analysis to picks stocks look at a company's market value and then determine whether or not the market value is adequate or if it's undervalued in comparison to it's book value, net assets or some other measure. Authorized Stock The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. This figure is usually listed in the capital accounts section of the balance sheet. This number can be changed only by a vote of all the shareholders. Management will typically keep the number of authorized shares higher than those actually issued. This allows the company to sell more shares if it needs to raise additional funds. Also known as "authorized shares" or "authorized capital stock". Outstanding Shares Stock currently held by investors, including restricted shares owned by the company's officers and insiders as well as those held by the public. Shares that have been repurchased by the company are not considered outstanding stock. They are also known as "issued shares" or "issued and outstanding". This number is shown on company's' balance sheets under the heading "Capital Stock" and is more important than the authorized shares or float. It is used in the calculation of many widely used metrics including "market capitalization" and "Earnings-per-Share (EPS)".

Market Capitalization A measure of a public company's size. Market capitalization is the total dollar value of all outstanding shares. It's calculated by multiplying the number of shares times the current market price. This term is often referred to as market cap. Brokerages vary on their exact definitions, but the current approximate classes of market capitalization are: Mega Cap: Market cap of $200 billion and greater Big/Large Cap: $10-$200 billion Mid Cap: $2 billion to $10 billion Small Cap: $300 million to $2 billion Micro Cap: $50 million to $300 million Nano Cap: Under $50 million Keep in mind that there is no one authorative set of guidelines for distinguishing small caps from large caps. For example, the Investment Company Institute (an association of investment companies) provides the following classes: Small Cap: Less than $1 billion Mid Cap: $1 to $5 billion Large Cap: Over $5 billion Paid-Up Capital The total amount of shareholder capital that has been paid in full by shareholders. Paid-up capital is essentially the portion of authorized stock that the company has issued and received payment for. Float The total number of shares publicly owned and available for trading. The float is calculated by subtracting restricted shares from outstanding shares. For example, a company may have 10 million outstanding shares, but only 7 million are trading on the stock market. So, the float would be 7 million. Stocks with small floats, under 3 million shares, tend to be a lot more volatile than others. Also known as "free float."

Share Turnover A measure of stock liquidity calculated by dividing the total number of shares traded over a period by the average number of shares outstanding for the period. The higher the share turnover, the more liquid the share of the company. For example, if the total amount of shares traded over the year was 10 billion and the average amount of shares outstanding for the year was 100 million, the share turnover for the year is 100 times. Stakeholder One who has a share or an interest in an enterprise. Stakeholders in a company may include shareholders, directors, management, suppliers, government, employees, and the community. Shares Buyback A buyback is a method for company to invest in itself since they can't own themselves. Thus, buybacks reduce the number of shares outstanding on the market which increases the proportion of shares the company owns. Buybacks can be carried out in two ways: 1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. 2. Companies buyback shares on the open market over an extended period of time. Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. Because a share repurchase reduces the number of shares outstanding (i.e. supply), it increases earnings per share and tends to elevate the market value of the remaining shares. When a company does repurchase shares, it will usually say something along the lines of, "We find no better investment than our own company.

Employee Stock Option Plans (ESOPs) A stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. An employee stock option is slightly different from a regular exchange-traded option because they are not generally traded on an exchange, and there is no put component (where a profit is made from the underlying stock following). As well, employees typically must wait a specified vesting period before being allowed to exercise the option. The idea behind stock options is to align incentives between the employees and shareholders of a company. Shareholders want to see the stock appreciate, so (in theory) rewarding employees when the stock goes up puts everybody striving for the same goals. However, critics point out that there is a big difference between an option and ownership of the underlying stock. If the stock goes down, the holder of an option would lose the opportunity for a bonus, but wouldn't feel the same pain as the owner of the stock. This is especially true with employee stock options since they are often granted without any cash outlay from the employee. Another problem with employee stock options is the debate over how to value them and the extent to which they are an expense on the income statement. This is an ongoing issue in the U.S. and most countries in the developed world. Derivative A security, such as an option or futures contract, whose value depends on the performance of an underlying security or asset. Futures contracts, forward contracts, options, and swaps are the most common types of derivatives. Derivatives are generally used by institutional investors to increase overall portfolio return or to hedge portfolio risk. Warrant A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors. The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months.

Private Placement Raising of capital via private rather than public placement. The result is the sale of securities to a relatively small number of investors. Private placements do not have to be registered with organizations such as the SEC because no public offering is involved. In most of the private placements stocks are directly sold to institutional investors.