DIADEM PEARL R.

MANSAYON

LLB

What is the par value of a stock?

The par value of a share of stock is the value stated in the corporate charter below
which shares of that class cannot be sold upon initial offering; the issuing company promises
not to issue further sharesbelow par value, so investors can be confident that no one else will
receive a more favorable issue price.
Par Value: The nominal monetary amount assigned to a security by the issuer.
Simply put it is the peso amount that is setup by the company for their shares of stock. For
example Company X is incorporated and that the shares of stock are assigned a par value of
Php 1.00 per stock. Some companies has a no-par value stock. Having a par value helps the
company have an exact measure of their capitalization because such things must be recorded.
In some instances when the stock is first issued by the company a stockholder may invest more
than the setup par value which results into a over-payment. In practice this is not recorded as
gain but rather it is an additional capital recorded as additional paid in capital.
Ok ok I know its to technical. The question now is that why do you as an investor need to know
what is PAR Value. Well as I said it is a measure. It will be a good reference when buying stock.
Probably you will notice the importance of this term when you compare Par Value and Market
Value for example take PLDT Stock(listed as TEL, go to www.pse.com.ph and type TEL in the
Right top search named Symbol Lookup). When PLDT Stocks were first issued it was at Php 5.00
only but as of last Friday the Market value is at Php 2, 445.00. Now do you see what I mean.
DEFINITION of 'Par Value'
The face value of a bond. Par value for a share refers to the stock value stated in the corporate
charter. Par value is important for a bond or fixed-income instrument because it determines its
maturity value as well as the dollar value of coupon payments. Par value for a bond is typically
$1,000 or $100. Shares usually have no par value or very low par value, such as 1 cent per
share. The market price of a bond may be above or below par, depending on factors such as the
level of interest rates and the bonds credit status. In the case of equity, par value has very little
relation to the shares' market price.
BREAKING DOWN 'Par Value'
For example, a bond with par value of $1,000 and a coupon rate of 4% will have
annual coupon payments of $40. A bond with par value of $100 and a coupon rate of 4% will
have annual coupon payments of $4.
One of the main factors that causes bonds to trade above or below par value is the level of
interest rates in the economy, as compared to the bonds coupon rates. A bond with a 4%
coupon will trade below par if interest rates are at 5%. This is because in such a scenario,
investors have a choice of buying similar-rated bonds that have a 5% coupon. The price of a
lower-coupon bond therefore must decline to offer the same 5% yield to investors. Likewise, a
bond with a 4% coupon will trade above par if interest rates are at 3%.
A bond that is trading above par is said to be trading at a premium, while a bond trading below
par is regarded as trading at a discount. During periods when interest rates are low or have
been trending lower, a larger proportion of bonds will trade above par or at a premium. When
interest rates are high, a larger proportion of bonds will trade at a discount.
If an investor buys a taxable bond for a price above par, the premium can be amortized over the
remaining life of the bond, offsetting the interest received from the bond and hence reducing
the investors taxable income from the bond. Such premium amortization is not available for
tax-free bonds purchased at a price above par.
WHAT IT IS:

Par value is the face value of a bond. It is the principal amount that the lender (investor) is
lending to the borrower (issuer).
HOW IT WORKS (EXAMPLE):
Let's assume Company XYZ issues $1,000,000 in bonds to the public. It may do so by issuing
1,000 bonds, each with a $1,000 par value.
When each bond matures, the borrower will pay back the par value of $1,000 to thelender.
Most corporate bonds have $1,000 face values, but municipal bonds often have $5,000 par
values and federal bonds often have $10,000 par values.
Stock is also assigned a par value, though it is generally a very small, arbitrary value (usually
$0.01) assigned to each share. Preferred stock may be assigned a higher par value because it is
often used to calculate dividends.
WHY IT MATTERS:
For bonds, par value is a pricing benchmark. When the bond's price is below the par value, the
bond is selling "at a discount"; when the bond's price is above par value, the bond is selling "at
a premium."
The difference between a bond's price and a bond's par value cannot be overemphasized. In
fact, it's one of our 3 Most Deadly Misconceptions About Bonds.
Par value has little significance for equities because it generally does not influence
thestock price itself. The cumulative par value of all the company's shares outstanding is
reflected in the shareholders' equity section of the balance sheet.

What does no par value mean?

Most shares issued today are classified as no-par or low-par valuestock. No-par value stock
prices are determined by what investors are willing to pay for them in the market.
DEFINITION of 'No-Par Value Stock'
Stock that is issued without the specification of a par value indicated in the company's articles
of incorporation or on the stock certificate itself.
A type of stock share that is issued in its initial public offering, or IPO, without a stated par
value listed. Instead, the stock will be sold based upon what investors will pay for
the shares. Also called no par value stock.
BREAKING DOWN 'No-Par Value Stock'
Most shares issued today are classified as no-par or low-par value stock. No-par value
stock prices are determined by what investors are willing to pay for them in the market.
Companies find it beneficial to issue no-par value stock as they have flexibility in setting higher
prices for future public offerings and have less liability to shareholders in the case that their
stock falls dramatically.
Share issued with no par value specified either on the share certificate or in
the issuer firm's charter or prospectus. The objectives of its issuance include (1) avoidance of
taxes levied according to the share's face value, (2) avoidance of the issuer

firm's liability to shareholders in the event the shares have to be sold at a discount, and (3)
elimination of investor confusion over the par valueand the real (market) value of the
share. Cash proceeds from the share-sale are accounted for by debiting the cash account and
crediting the capital share account, thus assigning an implicit value to the issued shares.
Why would a stock have no par value?
By Investopedia Staff
A:
People often get confused when they read about the "par value" for a stock. One reason for this
is that the term has slightly different applications depending on whether you are talking
about equity ordebt.
In general, par value (also known as par, nominal value or face value) refers to the amount at
which a security is issued or can be redeemed. For example, a bond with a par value of $1,000
can be redeemed at maturity for $1,000. This is also important for fixed-income securities such
as bonds or preferred shares because interest payments are based on a percentage of par. So,
an 8% bond with a par value of $1,000 would pay $80 of interest in a year.
It used to be that the par value of common stock was equal to the amount invested (as with
fixed-income securities). However, today most stocks are issued with either a very low par value
(such as $0.01 per share) or no par value at all.
You might be asking yourself why a company would issue shares with no par value. Corporations
do this because it helps them avoid a liability to stockholders should the stock price take a turn
for the worse. For example, if a stock was trading at $5 per share and the par value on the stock
was $10, theoretically, the company would have a $5-per-share liability.
Par value has no relation to the market value of a stock. A no par value stock can still trade for
tens or hundreds of dollars - it all depends on what the market feels the company is worth.
What is the difference between par and no par value stock?
A:
The par value of a stock is the stated value per share as outlined in the issuing company's
charter. Also called the face value because it's the value printed on the face of a bond or stock
certificate, the par value of a stock represents the minimum amount that must be paid per
share. The difference between par and no par value stocks, therefore, is the presence or
absence of this baseline valuation.
Companies sell stock as a means of generating equity capital, so the par value multiplied by the
total number of shares issued is the minimum amount of capital that will be generated by

selling all the shares. However, the par value of stock constitutes a binding, two-way contract
between the company and the shareholder.
On one hand, if shareholders pay less than the par value for a share of stock and the issuing
company later becomes unable to meet its financial obligations, its creditors can require that
shareholders pay the difference between the purchase price and the par value as a means of
fulfilling the company's unpaid debts. On the other hand, if the market price of the stock falls
below the par value, the company may be liable to shareholders for the difference. To
circumvent both these scenarios, most companies issue stock with very low par values, often
one cent.
In some states, companies are allowed to issue stock with no stated par value. No par value
stocks do not carry any of these theoretical liabilities since there is no baseline value per share.
However, since most companies use such low par values to begin with, the effect of this
difference is minimal.
In most cases, the par value of stock is little more than an accounting concern, a relatively
minor one. The only financial effect of a no par value issuance is that any equity funding
generated by the sale of no par value stock is credited to the common stock account, while
funds from the sale of par value stock is divided between the common stock account and
the paid in capital account.

What is the difference between issued share capital and subscribed share capital?
By Claire Boyte-White
A:
The difference between subscribed share capital and issued share capital is the former relates to
the amount of stock for which investors have expressed an interest, while the latter relates to
the amount of stock the company actually issues.
What Is Share Capital?
Share capital refers to the amount of funding a company raises through the sale of shares of
stock to public investors. Share capital constitutes the main source of equity financing and can
be generated through the sale of common or preferred shares.
Though share capital refers to a dollar amount, it is dictated by the number and selling price of
a company's shares. If a company issues 1,000 shares for $25 per share, it generates $25,000 in
share capital.

Share capital falls into one of several categories, depending on where the company is in the
equity-raising process.
Authorized Share Capital
The maximum amount of share capital a company is allowed to raise is called its authorized
capital. Though this does not limit the number of shares a company may issue, it does put a
ceiling on the total amount of money that can be raise by the sale of those shares.
Subscribed Share Capital
When a company prepares to "go public" by issuing stock for the first time, investors can submit
an application expressing their desire to participate. Subscribed share capital refers to the
monetary value of all the shares for which investors have expressed an interest.
Issued Share Capital
Issued share capital is simply the monetary value of the shares of stock a company actually
offers for sale to investors. The number of issued shares generally corresponds to the amount of
subscribed share capital, though neither amount can exceed the authorized amount.
Called-Up Vs. Paid-Up Share Capital
Depending on the business and applicable regulations, companies may issue stock to investors
with the understanding the investors will pay at a later date. Any funds due for shares issued
but not fully paid for are called-up share capital. Any funds remitted for shares are
considered paid-up capital.

What is the difference between par and no par value stock?

Some states' laws require or may have required common stock issued by corporations residing
in their states to have a par value. The par value on common stock has generally been a very
small amount per share. Other states might not require corporations to issue stock with a par
value. So the par value on common stock is a legal consideration.
From an accounting standpoint, the par value of an issued share of common stock must be
recorded in an account separate from the amount received over and above the amount of par
value. For example, if a corporation issues 100 new shares of its common stock for a total of
$2,000 and the stock's par value is $1 per share, the accounting entry is a debit to Cash for
$2,000 and a credit to Common StockPar $100, and a credit to Paid-in Capital in Excess of Par
for $1,900. In total the Cash account increased by $2,000 and the paid-in capital reported
under stockholders' equity increased by a total of $2,000 ($100 + $1,900).
If a corporation is not required to have a par value or a stated value and the corporation issues

100 shares for $2,000, then the accounting entry will be a debit to Cash for $2,000 and a credit
to Common Stock for $2,000.
In other words, when the issued stock has a par value, the proceeds from the issuance gets
divided between two of the paid-in capital accounts within stockholders' equity. If the issued
stock does not have a par value, the proceeds from the issuance goes into just one paid-in
capital account within stockholders' equity.

Voting Shares
WHAT IT IS:
Voting shares are shares of stock that allow the owner to vote on company matters.
HOW IT WORKS (EXAMPLE):
Stocks, also known as equities, represent ownership interests in corporations. If you own one,
100, or 100 million shares of stock in a company, you're an owner of the company.
Corporations sell stock, or ownership in the company, in return for cash to run their businesses.
There are a number of different kinds of stocks, and their classifications largely depend on the
rights they confer on the holder. Investors evaluate these categories based on
their investment objectives, and they look for stocks that meet those objectives. The two most
popular categories of stock are common stock and preferred stock.
The most prominent characteristics of common stock are that they entitle the shareholder to
vote on corporate matters (typically, the shareholder gets one vote for every share he or she
owns, though that is not always the case) such as whether the company should acquire another
company, who the board members should be, and other big decisions. Common stock also often
comes with pre-emptive rights, which means the shareholder has a "right of first refusal," or first
dibs on buying any new stock the company tries toissue.
Perhaps the most important attribute of common stock is that their holders are the last in line
when it comes to getting their money back. If the company goes bankrupt and has to sell off all
its assets, the cash from the asset sale first goes to pay off lenders, employees, and lawyers.
The shareholders get whatever is left (which is usually nothing, or just a few pennies for every
dollar they originally invested).
This pecking order is why preferred stock, the other popular category of stock, exists.
Although preferred shares aren't usually voting shares, they usually receive a
steadydividend and their claim to the company's assets "outrank" the common stockholders'
claims (i.e., in the event of bankruptcy, the company must pay off lenders, preferred
shareholders, employees, and lawyers before the common shareholders get anything).
WHY IT MATTERS:
Voting shares carry a lot of power, and they represent the inherent communal nature of the
ownership of corporations. Plenty of companies also issue nonvoting shares so that the voting

shares can be retained by the founding family, for example, or the original investors, and these
actions only emphasize the power inherent in voting shares. Without shareholders voting in
approval, corporations often can't do things such as re-elect directors or merge with another
company, for example. Accordingly, investors must consider the voting rights attached to
any investment and decide whether those rights are important.
DEFINITION of 'Voting Shares'
Shares that give the stockholder the right to vote on matters of corporate policy making as well
as who will compose the members of the board of directors.
BREAKING DOWN 'Voting Shares'
Different classes of shares, such as preferred stock, sometimes don't allow for voting rights.
DEFINITION of 'Voting Shares' Shares that give the stockholder the right to vote on matters
of corporate policy making as well as who will compose the members of the board of directors.
What is the difference between voting and non voting shares?
Non-voting stock is stock that provides the shareholder very little or novote on corporate
matters, such as election of the board of directors or mergers.
Non-voting stock is stock that provides the shareholder very little or no vote on corporate
matters, such as election of theboard of directors or mergers. This type of share is usually
implemented for individuals who want to invest in the companys profitability and success at the
expense of voting rights in the direction of the company. Preferred stock typically has nonvoting
qualities.
Not all corporations offer voting stock and non-voting stock, nor do all stocks usually have equal
voting power. Warren Buffetts Berkshire Hathaway corporation has two classes of stocks, Class
A voting stock (NYSE: BRK.A) and Class B non-voting stock (NYSE: BRK.B). The Class B stock
carries 1/10,000th of the voting rights of the Class A stock, but 1/1,500th of the dividend.
Non-voting shares
Non-voting shares carry no rights to vote and usually no right to attend general meetings either.
Such shares are widely used to issue to employees so that some of their remuneration can be
paid as dividends, which can be more tax-efficient for the company and the employee. The
same is also sometimes done for members of the main shareholders' families. Preference shares
are often non-voting.
Common stock is a form of corporate equity ownership, a type of security. The terms "voting
share" or "ordinary share" are also used frequently in other parts of the world; "common stock"
being primarily used in the United States.
It is called "common" to distinguish it from preferred stock. If both types of stock exist, common
stockholders cannot be paid dividends until all preferred stock dividends are paid in full.

In the event of bankruptcy, common stock investors receive any remaining funds after
bondholders, creditors (including employees), and preferred stockholders are paid. As such,
common stock investors often receive nothing after a bankruptcy.
On the other hand, common shares on average perform better than preferred shares or bonds
over time.
Shareholders' rights
Common stock usually carries with it the right to vote on certain matters, such as electing the
board of directors. However, a company can have both a "voting" and "non-voting" class of
common stock.
Holders of voting common stock are able to influence the corporation through votes on
establishing corporate objectives and policy, stock splits, and electing the company's board of
directors. Some holders of common stock also receive preemptive rights, which enable them to
retain their proportional ownership in a company should it issue another stock offering. There is
no fixed dividend paid out to common stockholders and so their returns are uncertain,
contingent on earnings, company reinvestment, efficiency of the market to value and sell stock.
[2]

Additional benefits from common stock include earning dividends and capital appreciation.
Classification[edit]
Common stock is classified to differentiate the founders' share from publicly held stock. 'Class A'
is frequently used to designate the publicly held portion of the firm's common stock, while 'Class
B' is used for the founders' share. Class B shareusually holds more voting rights, sometimes 10
votes per share compared to 1 vote per share; the standard for Class A share.

[3]

Ordinary shares[edit]
Ordinary shares are also known as equity shares and they are the most common form of share
in the UK. An ordinary share gives the right to its owner to share in the profits of the company
(dividends) and to vote at general meetings of the company. The residual value of the company
is called common stock. A voting share (also called common stock or anordinary share) is a
share of stock giving the stockholder the right to vote on matters of corporate policy and the
composition of the members of the board of directors.
Common Stock
Evidence of participation in the ownership of a corporation that takes the form of printedcertific
ates.
Each share of common stock constitutes a contract between the shareholder and the corporatio
n.The owner of a share of common stock is ordinarily entitled to participate in and to vote atstoc
kholders' meetings. He or she participates in the profits through the receipt of dividends afterthe
payment of dividends on preferred stock. Shares of common stock are the Personal
Propertyof their holder.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights
reserved.
common stock
n. stock in a corporation in which dividends (payouts) are calculated upon a percentage of netpr
ofits, with distribution determined by the Board of Directors. Usually holders of common stockha
ve voting rights. These are distinguished from preferred stock in which the profits are apredeter
mined percentage and are paid before the common shareholders who gamble on higherprofits,
and collectively have voting control of the corporation. (See: corporation, stock, share,prefer
red stock)

DEFINITION of '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
shareholdershave rights to a company's assets only after bondholders, preferred shareholders
and other debtholders have been paid in full.
In the U.K., these are called "ordinary shares."
BREAKING DOWN 'Common Stock'
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.
common shares
Definition
Securities representing equity ownership in a corporation, providing voting rights, and entitling
the holder to a share of the company's success throughdividends and/or capital appreciation. In
the event of liquidation, common shareholders have rights to a company's assets only
after bondholders, other debtholders, and preferred shareholders have been satisfied. Typically,
common shareholders receive one vote per share to elect the company's board of
directors (although the number of votes is not always directly proportional to the number
of shares owned).
The board of directors is the group of individuals that represents the owners of the corporation
and oversees major decisions for the company. Common shareholders also receive voting rights
regarding other company matters such as stock splits and company objectives. In addition to
voting rights, common shareholders sometimes enjoy what are called "preemptive rights".
Preemptive rights allow common shareholders>to maintain their proportional ownership in the

company in the event that the company issues another offering of stock. This means that
common shareholders with preemptive rights have the right but not
the obligation to purchase as many new shares of the stock as it would take to maintain their
proportional ownership in the company. also called junior equity or common stock.
common stock

Definition
Type of security that serves as an evidence of proportionate ownership, imparts
proportionate voting rights, and gives its holder unlimited proportionate claim on
the assets and income of the firm (after the claims of lenders, and other obligations, are
satisfied). Common stock constitutes the equity capital (also called risk capital) of the firm which
is never paid back (redeemed), and is lost if the firm fails. Common stock usually has a par
value (amount for which each share is sold for when first issued) but has no
guaranteed value afterwards.
In bad years, common stock holders may receive little or no income (dividends) at all. But, in
good years, there is no limit to the amount they may receive except the limits imposed by
the government, the lenders, or the financial position of the firm. Common stock
holders elect directors of the firm and thus participate in determining its policies and direction.
But their claim on the firm's assets are subordinate to those of debenture holders, preferred
stock (preference share) holders, creditors, and statutory agencies (such as tax authorities). On
the winding up of the business, the surplus of the assets over liabilities is divided among
common stockholders in proportion to their stockholding. Called ordinary shares in UK and most
British Commonwealth countries.
What is the difference between preferred stock and common stock?
By Melissa Horton
A:
Preferred and common stocks are different in two key aspects.
First, preferred stockholders have a greater claim to a company's assets and earnings. This is
true during the good times when the company has excess cash and decides to distribute money
in the form ofdividends to its investors. In these instances when distributions are made,
preferred stockholders must be paid before common stockholders. However, this claim is most
important during times of insolvencywhen common stockholders are last in line for the
company's assets. This means that when the company must liquidate and pay all creditors and
bondholders, common stockholders will not receive any money until after the preferred
shareholders are paid out.
Second, the dividends of preferred stocks are different from and generally greater than those of
common stock. When you buy a preferred stock, you will have an idea of when to expect a

dividend because they are paid at regular intervals. This is not necessarily the case for common
stock, as the company's board of directors will decide whether or not to pay out a dividend.
Because of this characteristic, preferred stock typically don't fluctuate as often as a company's
common stock and can sometimes be classified as a fixed-income security. Adding to this fixedincome personality is the fact that the dividends are typically guaranteed, meaning that if the
company does miss one, it will be required to pay it before any future dividends are paid on
either stock.
To sum up: a good way to think of a preferred stock is as a security with characteristics
somewhere in-between a bond and a common stock.

Stocks can be classified into many different categories. The two most fundamental categories of
stock are common stock and preferred stock, which differ in the rights that they confer upon
their owners.
Common Stock versus Preferred Stock
Common Stock
Most shares of stock are called "common shares". If you own a share of common stock, then you
are a partial owner of the company. You are also entitled to certain voting rights regarding
company matters.
Typically, common stock shareholders receive one vote per share to elect the company's board
of directors (although the number of votes is not always directly proportional to the number of
shares owned).
The board of directors is the group of individuals that represents the owners of the corporation
and oversees major decisions for the company. Common stock shareholders also receive voting
rights regarding other company matters such as stock splits and company objectives.
In addition to voting rights, common shareholders sometimes enjoy what are called "preemptive
rights." Preemptive rights allow common shareholders to maintain their proportional
ownership in the company in the event that the company issues another offering of stock. This
means that common shareholders with preemptive rights have the right but not the obligation
to purchase as many new shares of the stock as it would take to maintain their proportional
ownership in the company.
Although common stock entitles its holders to a number of different rights and privileges, it does
have one major drawback: common stock shareholders are the last in line to receive the
company's assets. This means that common stock shareholders receive dividend payments only
after all preferred shareholders have received their dividend payments . It also means that if the
company goes bankrupt, the common stock shareholders receive whatever assets are left over
only after all creditors, bondholders, and preferred shareholders have been paid in full.

Preferred Stock
The other fundamental category of stock is preferred stock. Like common stock,preferred
stock represents partial ownership in a company, although preferred stock shareholders do not
enjoy any of the voting rights of common stockholders. Also unlike common stock, preferred
stock pays a fixed dividend that does not fluctuate, although the company does not have to pay
this dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock
is that you have a greater claim on the company's assets than common stockholders. Preferred
shareholders always receive their dividends first and, in the event the company goes bankrupt,
preferred shareholders are paid off before common stockholders.
In general, there are four different types of preferred stock:

Cumulative: These shares give their owners the right to "accumulate" dividend
payments that were skipped due to financial problems; if the company later resumes
paying dividends, cumulative shareholders receive their missed payments first.

Non-Cumulative: These shares do not give their owners back payments for skipped
dividends.

Participating: These shares may receive higher than normal dividend payments if the
company turns a larger than expected profit.

Convertible: These shares may be converted into a specified number of shares of

common stock.

Since preferred shares carry fixed dividend payments, they tend to fluctuate in price far less
than common shares. This means that the opportunity for both large capital gains and large
capital losses is limited. Because preferred stock, like bonds, has fixed payments and small price
fluctuations, it is sometimes referred to as a "hybrid security."
Stock Classes
Although common stock usually entitles you to one vote for every share that you own, this is not
always the case. Some companies have different "classes" of common stock that vary based on
how many votes are attached to them. So, for example, one share of Class A stock in a certain
company might give you 10 votes per share, while one share of Class B stock in the same
company might only give you one vote per share. And sometimes it is the case that a certain
class of common stock will have no voting rights attached to it at all.
So why would some companies choose to do this?
Because it's an easy way for the primary owners of the company (e.g. the founders) to retain a
great deal of control over the business. The company will typically issue the class of shares with
the fewest number of votes attached to it to the public, while reserving the class with the
largest number of votes for the owners. Of course, this isn't always the best arrangement for the
common shareholder, so if voting rights are important to you, you should probably think
carefully before buying stock that is split into different classes.

Do preference shares have voting rights?

Preferred stock generally has a dividend that must be paid out before dividends to common
stockholders and the shares usually do not have voting rights. The precise details as to the
structure of preferred stock is specific to each corporation.
Do preferred shares have voting rights?
A class of ownership in a corporation that has a higher claim on the assets and earnings than
common stock. Preferred stock generally hasa dividend that must be paid out before
dividends to common stockholders and the shares usually do not have voting rights.
DEFINITION of 'Preferred Stock'
A class of ownership in a corporation that has a higher claim on
its assets and earnings than common stock. Preferred shares generally have a dividend that
must be paid out before dividends to common shareholders, and the shares usually do not
carry voting rights.
Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it
has the potential to appreciate in price. The details of each preferred stock depend on the
issue.
BREAKING DOWN 'Preferred Stock'
Preferred shareholders have priority over common stockholders when it comes to dividends,
which generally yield more than common stock and can be paid monthly or quarterly. These
dividends can be fixed or set in terms of a benchmark interest rate like the LIBOR. Adjustablerate shares specify certain factors that influence the dividend yield, and participating shares can
pay additional dividends that are reckoned in terms of common stock dividends or the
company's profits.
Companies in Distress
If a company is struggling and has to suspend its dividend, preferred shareholders may have the
right to receive payment in arrears before the dividend can be resumed for common
shareholders. Shares that have this arrangement are known as cumulative. If a company has
multiple simultaneous issues of preferred stock, these may in turn be ranked in terms of priority:
the highest ranking is called prior, followed by first preference, second preference, etc.
Preferred shareholders have prior claim on a company's assets if it is liquidated, though they
remain subordinate to bondholders. Preferred shares are equity, but in many ways they are
hybrid assets that lie between stock and bonds. They offer more predicable income than
common stock and are rated by the major credit rating agencies. Unlike with bondholders,
failing to pay a dividend to preferred shareholders does not mean a company is in default.
Because preferred shareholders do not enjoy the same guarantees as creditors, the ratings on
preferred shares are generally lower than the same issuer's bonds, with the yields being
accordingly higher.
Voting Rights, Calling and Convertability

Preferred shares usually do not carry voting rights, although under some agreements these
rights may revert to shareholders that have not received their dividend. Preferred shares have
less potential to appreciate in price than common stock, and they usually trade within a few
dollars of their issue price, most commonly $25. Whether they trade at a discount or premium to
the issue price depends on the company's credit-worthiness and the specifics of the issue: for
example, whether the shares are cumulative, their priority relative to other issues, and whether
they are callable.
If shares are callable, the issuer can purchase them back at par value after a set date. If interest
rates fall, for example, and the dividend yield does not have to be as high to be attractive, the
company may call its shares and issue another series with a lower yield. Shares can continue to
trade past their call date if the company does not exercise this option.
Some preferred stock is convertible, meaning it can be exchanged for a given number of
common shares under certain circumstances. The board of directors might vote to convert the
stock, the investor might have the option to convert, or the stock might have a specified date at
which it automatically converts. Whether this is advantageous to the investor depends on the
market price of the common stock.
Typical Buyers of Preferred Stock
Preferred stock comes in a wide variety of forms. The features described above are only the
more common examples, and these are frequently combined in a number of ways. A company
can issue preferred shares under almost any set of terms, assuming they don't fall foul of laws
or regulations. Most preferred issues have no maturity dates or very distant ones.
Due to certain tax advantages that institutions enjoy with preferred shares but individual
investors do not, these are the most common buyers. Because these institutions buy in bulk,
preferred issues are a relatively simple way to raise large amounts of capital. Private or prepublic companies issue preferreds for this reason.
Preferred stock issuers tend to group near the upper and lower limits of the credit-worthiness
spectrum. Some issue preferred shares because regulations prohibit them from taking on any
more debt, or because they risk being downgraded. While preferred stock is technically equity, it
is similar in many ways to a bond issue; some forms, known as trust preferred stock, can act as
debt from a tax perspective and common stock on the balance sheet. On the other hand,
several established names like General Electric, Bank of America and Georgia Power issue
preferred stock to finance projects.
WHAT IT IS:
Preferred shares represent an ownership stake in a company -- in other words, a claim on its
assets and earnings. However, as the term suggests, "preferred" shares carry certain
advantages. While preferred shares usually do not carry the same voting rights as common
shares, they do have priority when it comes to dividends and bankruptcy. And like common
shares, preferred shares can be bought and sold through a broker.
HOW IT WORKS (EXAMPLE):

The primary difference between preferred shares and common shares relates to the order in
which shareholders are paid in the event of bankruptcy or other corporate restructuring. If the
issuing company seeks bankruptcy protection, then the owners of preferred shares take priority
over common shareholders when it comes time to pay dividends andliquidate the company's
assets.
The other main difference between preferred and common shares relates to dividends. Although
dividends paid on common shares are not guaranteed and can fluctuate from quarter to quarter,
preferred shareholders are usually guaranteed a fixed dividend paid on a regular basis. As a
result, preferred stocks often act similar to bonds. The averagedividend yield paid out on
preferred shares has recently ranged from 5% to 7%. That compares to historical yields of
around 6% for investment quality corporate bonds, and roughly 2% to 3% dividends for common
shares.
WHY IT MATTERS:
Preferred shares are a good alternative for risk-averse investors wanting to buy equities. In
general, they are less volatile than common shares and provide a better stream of dividends.
Most preferred shares are also callable, meaning the issuer can redeem the shares at any time,
so they provide investors with more options than common shares. But for all of these
advantages, preferred shares have one downside -- its shareholders generally do not enjoy the
same voting privileges as the holders of common shares. Not all investors actively participate in
voting, but it may be a deterent for some investors.
preferred shares
Definition
Capital stock which provides a specific dividend that is paid before any dividends are paid
to common stock holders, and which takes precedence over common stock in the event of
a liquidation. Like common stock, preferred shares represent partial ownership in a company,
although preferred stockshareholders do not enjoy any of the voting rights of
common stockholders. Also unlike common stock, a preferred share pays a fixed dividend that
does not fluctuate, although the company does not have to pay this dividend if
it lacks the financial ability to do so.
The main benefit to owning preferred share is that the investor has a greater claim on
the company's assets than common stockholders. Preferred shareholders always receive their
dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off
before common stockholders. Ingeneral, there are four different types of preferred
stock: cumulative preferred, non-cumulative, participating, and convertible. also
called preferred stock.

Definition of 'Sales Promotion'

Sales promotions are the set of marketing activities undertaken to boost sales of the product or
service.
Definition: Sales promotions are the set of marketing activities undertaken to boost sales of
the product or service.
Description: There are two basic types of sales promotions: trade and consumer sales
promotions. The schemes, discounts, freebies, commissions and incentives given to the trade
(retailers, wholesalers, distributors, C&Fs) to stock more, push more and hence sell more of a
product come under trade promotion. These are aimed at enticing the trade to stock up more
and hence reduce stock-outs, increase share of shelf space and drive sales through the
channels. However, trade schemes get limited by the cost incurred by the company as well as
the limitations of the trade in India to stock up free goods. Incentives can be overseas trips and
gifts.
A typical trade scheme on soaps would be buy a case of 12 soaps, get 1 or 2 free - or a 8%
discount scheme (1/12=8%). Such schemes are common in FMCG and pharma industries.
But sales promotion activity aimed at the final consumer are called consumer schemes. These
are used to create a pull for the product and are advertised in public media to attract attention.
Maximum schemes are floated in festival times, like Diwali or Christmas. Examples are buy
soap, get diamond free; buy biscuits, collect runs; buy TV and get some discount or a free item
with it and so on. Consumer schemes become very prominent in the 'maturity or decline' stages
of a product life cycle, where companies vie to sell their own wares against severe competition.
The impact of sales promotions: Sales promotions typically increase the level of sales for the
duration they are floated. Usually, as soon as the schemes end, the sales fall, but hopefully,
settle at a higher level than they were before the sales promotion started. For the company, it
can be a means to gain market share, though an expensive way.
For consumers, these can offer great value for money. But sustained sales promotions can
seriously damage a brand and its sales, as consumers wait specifically for the sales promotion
to buy and not otherwise. Therefore, sales promotions are to be used as a tactical measure as
part of an overall plan, and not as an end itself.
What Is a Sales Promotion?
Sales promotion is the process of persuading a potential customer to buy the product. Sales
promotion is designed to be used as a short-term tactic to boost sales it is not really
designed to build long-term customer loyalty. Some sales promotions are aimed at
consumers.
Sales promotions are the set of marketing activities undertaken to boost sales of the product
or service. Definition: Sales promotions are the set of marketing activities undertaken to
boost sales of the product or service. Description: There are two basic types of sales
promotions: trade and consumer sales promotions.
Sales promotions are the set of marketing activities undertaken to boost sales of the product
or service. Definition: Sales promotions are the set of marketing activities undertaken to
boost sales of the product or service. Description: There are two basic types of sales
promotions: trade and consumer sales promotions.
Sales Promotion: Meaning, Definition, Objectives and Importance of Sales Promotion!

Meaning and Definition:

Sales promotion refers to those marketing activities that stimulate consumer shows and
expositions.
Purchasing and dealer effectiveness such as displays, demonstration and various non- recurrent
selling efforts not in the ordinary routine. According to A.H.R. Delens: Sales promotion means
any steps that are taken for the purpose of obtaining an increasing sale. Often this term refers
specially to selling efforts that are designed to supplement personal selling and advertising and
by co-ordination helps them to become more effective.
In the words of Roger A. Strong, Sales promotion includes all forms of sponsored
communication apart from activities associated with personal selling. It, thus includes trade
shows and exhibits, combining, sampling, premiums, trade, allowances, sales and dealer
incentives, set of packs, consumer education and demonstration activities, rebates, bonus,
packs, point of purchase material and direct mail.
Objectives of Sales Promotion:
Sales promotion is a vital bridge or a connecting link between personal selling and advertising.
Sales promotion activities are undertaken to achieve the following objectives:
1. To increase sales by publicity through the media which are complementary to press and
poster advertising.
2. To disseminate information through salesmen, dealers etc., so as to ensure the product
getting into satisfactory use by the ultimate consumers.
3. To stimulate customers to make purchases at the point of purchase.
4. To prompt existing customers to buy more.
5. To introduce new products.

6. To attract new customers.

7. To meet competition from others effectively.
8. To check seasonal decline in the volume of sales.
Importance of Sales Promotion:
The importance of sales promotion has increased tremendously in the modern times. Lakhs of
rupees are being spent on sales promotional activities to attract the consumers in our country
and also in other countries of the world.
Some large companies have also begun to appoint sales promotion managers to handle
miscellaneous promotional tools. All these facts show that the importance of sales promotion
activities is increasing at a faster rate.
DEFINITION of 'Escrowed Shares'
Shares held in an escrow account and in most cases cannot be traded or transfered until certain
circumstances like time horizon have been reached. The use of escrow for holding shares is
often done during acquisitions and for performance-based executive incentives.
BREAKING DOWN 'Escrowed Shares'
These shares can be held by an escrow company or by the exchange the shares trade on.
Let's say a company puts up shares as a guarantee on an acquisition. Should that firm rescind
the offer, they're likely to lose the shares.
escrow shares
Definition
Stock or security shares being held in a type of escrow account that are unable to be either
transferred or traded until certain other events have taken place or a certain time frame has
been reached.
Escrowed Shares
Shares in a publicly-traded
company held by a third party on behalf of two parties to atransaction until certain conditions
are filled. For example, a third party may hold escrowedshares that a potential acquiring
company placed as the equivalent of earnest money forthe target
company. See also: Escrow Agent.

WHAT IT IS:
Convertible preferred stock is preferred stock that holders can exchange for common
stock at a set price after a certain date.
HOW IT WORKS (EXAMPLE):
Let's assume you purchase 100 shares of XYZ Company convertible preferred stock on June 1,
2006. According to the registration statement, each share of preferred stock is convertible after
January 1, 2007, (the conversion date) to three shares of XYZ Companycommon stock. (The
number of common shares given for each preferred share is called the conversion ratio. In this
example, the ratio is 3.0.)
If after the conversion date arrives XYZ Company preferred shares are trading at $50 per share,
and the common shares are trading at $10 per share, then converting the shares would
effectively turn $50 worth of stock into only $30 worth (the investor has the choice between
holding one share valued at $50 or holding three shares valued at $10 each). The difference
between the two amounts, $20, is called the conversion premium (although it is typically
expressed as a percentage of the preferred share price; in this case it would be $20/$50, or
40%).
By dividing the price of the preferred shares ($50) by the conversion ratio (3), we can determine
what the common stock must trade at for you to break even on the conversion. In this case, XYZ
Company common must be trading at a minimum of $16.67 per share for you to seriously
consider converting.
Convertible preferred shares trade like other stocks, but the conversion premium influences
their trading prices. The lower the conversion premium, (that is, the closer the preferred shares
are to being "in the money,") the more the price of the preferred shareswill follow the price
movements of the common stock. The higher the conversion premium, the less the convertible
preferred shares follow the common stock.
Usually, holders of convertible preferred can convert at any time after the conversion date, but
sometimes the issuer can force conversion. Either way, converting preferred stock into common
stock dilutes the common shareholders, which is why companies sometimes offer to buy back
converted shares.
Also, as with traditional preferred, holders of convertible preferred stock generally do not have
the voting privileges enjoyed by holders of common stock.
WHY IT MATTERS:
Like common stock, preferred shares represent an ownership stake in a company; in other
words, a claim on its assets and earnings.
Return
The primary difference between preferred stock and common stock relates to the order in which

shareholders are paid in the event of bankruptcy or other corporate restructuring. If the issuing
company seeks bankruptcy protection, then the owners of preferred shares take priority over
common shareholders when it comes time to pay dividends andliquidate the company's assets.
Further, although dividends paid on common stock are not guaranteed and can fluctuate from
quarter to quarter, preferred shareholders are usually guaranteed a fixed dividendpaid on a
regular basis. This means that interest rates affect the pricing of preferred stock. High rates
could make a preferred dividend seem unattractive and low rates could make it seem attractive.
Risk
Issuing convertible preferred is a way for companies to raise capital on better terms than they
could with traditional equity financing, especially if they have low stock prices already
(new equity would dilute shareholders considerably) or if they have poor credit and cannot
borrow at reasonable rates. With convertible preferred, a company can secure a lower interest
rate than with pure debt financing and use the promise of a dividend to sellshares at a higher
price. However, since companies with poor credit sometimes use preferred shares
to gain revenue, the risk of default may be slightly higher.
Ratings
Like corporate bonds, most convertible preferred stocks are rated by one of the major ratings
agencies, the largest and most widely known being Standard & Poor's andMoody's. If the stock
is rated only by one of the smaller rating agencies, such as Duff & Phelps or Fitch, then investors
should be aware that the organization may not have been able to obtain a positive rating from
either S&P or Moody's.
Regulators generally classify convertible preferred as equity rather than debt. This classification
is helpful to issuers because the interest payments come with tax breaks and the securities
don't increase issuers debt-to-equity ratios. However, analystssometimes consider preferred and
convertible preferred as debt when performing ratio analyses.
Convertible preferred stock is just one of many types of hybrid issues on the market these days,
and in general, the securities are a way to increase yields and lower risk. Ultimately, investors
must consider whether the higher yield of convertible preferred compensates them for the
higher risk of an equity security.
Introduction To Convertible Preferred Shares
By Ben McClure
Buying stocks always poses the risk of losing money, but avoiding stocks altogether means
missing out on the opportunity to make good profits. There is one security, however, that may
help solve this dilemma for some investors: convertible preferred shares give the assurance of a
fixed rate of return plus the opportunity for capital appreciation. Here we review what these
securities are, how they work and how to determine when a conversion is profitable.
SEE: Valuation Of A Preferred Stock

What Convertible Preferred Shares Are

These shares are corporate fixed-income securities that the investor can choose to turn into a
certain number of shares of the company's common stock after a predetermined time span or
on a specific date. The fixed-income component offers a steady income stream and some
protection of the investors' capital. However, the option to convert these securities into stock
gives the investor the opportunity to gain from a rise in the share price.
Convertibles are particularly attractive to those investors who want to participate in the rise of
hot growth companies while being insulated from a drop in price should the stocks not live up to
expectations.
The Opportunity for the Investor
To demonstrate how convertible preferred shares work and how the shares benefit investors,
let's consider an example. Let's say Acme Semiconductor issues 1 million convertible preferred
shares priced at $100 a share. These convertible preferred shares (as these are fixed-income
securities) give the holders priority over common shareholders in two ways. First, convertible
preferred shareholders receive a 4.5%dividend (provided Acme's earnings continue to be
sufficient) before any dividend is paid to common shareholders. Second, convertible preferred
shareholders will rank ahead of common shareholders in thereturn of capital if Acme ever
went bankrupt and its assets had to be sold off. That said, convertible preferred shareholders,
unlike common shareholders, rarely have voting rights.
By buying Acme convertible preferred shares, the worst investors would ever do is receive a
$4.50 annual dividend for each share they own. But these securities offer the owners the
possibility of even higher returns: if the convertible preferred shareholders see a rise in Acme's
stock, they may have the opportunity to profit from that rise by turning their fixed-income
investment into equity. On the reset date, shareholders of Acme convertible preferred shares
have the option of converting some or all of their preferred shares to common stock.
SEE: Leverage Your Returns With A Convertible Hedge
Determining the Profit of Converting
The conversion ratio represents the number of common shares shareholders may receive for
every convertible preferred share. The conversion ratio is set by management prior to issue,
typically with guidance from an investment bank. For Acme, let's say the conversion ratio is
6.5, which allows investors to trade in the preferred shares for 6.5 shares of Acme stock.
The conversion ratio shows what price the common stock needs to be trading at in order for the
shareholder of the preferred shares to make money on the conversion. This price, known as
the conversion price, is equal to the purchase price of the preferred share, divided by the
conversion ratio. So for Acme, the market conversion price is $15.38 ($100/6.5).

In other words, Acme common shares need to be trading above $15.38 for investors to gain
from a conversion. If the shares do convert and drop below $15.38, the investors will suffer
a capital loss on their $100-per-share investment. If common shares finish at $10, for instance,
then convertible preferred shareholders' receive only $65 ($10 x 6.5) worth of common share in
exchange for their $100 preferred shares. (The $100 represents the parity value of the preferred
shares.)
SEE: Analyze Investments Quickly With Ratios
The Conversion Premium
Convertible preferred shares can be sold on the secondary market, and the market price and
behavior is determined by the conversion premium, the difference between the parity value and
the value of the preferred shares if the shares were converted. As we show above, the value of
the converted preferred share is equal to the market price of common shares multiplied by the
conversion ratio. Let's say Acme's stock currently trades at $12, which means the value of the
preferred shares is $78 ($12 x 6.5). As you can see, this is well below the parity value. So, if
Acme's stock is trading at $12, the conversion premium is 22% [($100 - $78)/100].
The lower the premium, the more likely the convertible's market price will follow the common
stock value up and down. Higher-premium convertibles act more like bonds since it's less likely
that there will be a chance for a profitable conversion. That means that interest rates too can
impact the value of convertible preferred shares: like the price of bonds, the price of convertible
preferred shares will normally fall as interest rates go up: the fixed dividend looks less attractive
than the rising interest rates. Conversely, as rates fall, convertible preferred shares become
more attractive.
The Bottom Line
Convertibles appeal to investors who want to participate in the stock market without feeling as
though they are taking wild risks. The securities trade like stocks when the price of common
shares moves above the conversion price. If the stock price slips below the conversion price, the
convertible trades just like a bond, effectively putting a price floor under the investment.
Convertible Security
DEFINITION of 'Convertible Security'
An investment that can be changed into another form. The most common convertible securities
are convertible bonds or convertible preferred stock, which can be changed into equity or
common stock. A convertible security pays a periodic fixed amount as a coupon payment (in the
case of convertible bonds) or a preferred dividend (in the case of convertible preferred shares),
and specifies the price at which it can be converted into common stock.
BREAKING DOWN 'Convertible Security'

Convertible securities usually have a lower payout than that offered by comparable securities
that do not have the conversion feature. Investors are willing to accept the lower payout
because of the conversion feature, which is tantamount to a call option on the common stock.
The conversion price - the preset price at which the security can be converted into common
stock - is usually set at a price significantly higher than the stock's current price.

The performance of a convertible security is heavily influenced by the price of the underlying
common stock. The degree of correlation increases as the stock price approaches or exceeds
the conversion price. Conversely, if the stock price is languishing far below the conversion price
- a busted convertible in market parlance - the security will likely trade as a straight bond or
preferred share, since the prospects of conversion are viewed as remote.
founders' shares
plural noun, Finance.
shares of stock given, at least nominally, for consideration to the organizers or original
subscribers of a corporation, sometimes carrying special voting privileges, but likely to receive
dividends after other classes of stock.
Issued to the originators of a firm, these shares (stock) normally do
not receive any return until dividend payable to common stock holders (ordinary share holders)
is paid out. However, these shares are entitled to all of the remaining (after tax) profits, no
matter how much.

What is Founders Stock, Legally?

Posted on May 1, 2013
Founders Stock Refers to Common Stock Issued to Founders with Certain Characteristics;
Namely, Founders Stock is Normally Issued at Par Value with a Vesting Schedule.
The term founder and founders stock are not legal terms, rather, they are terms of art
describing a certain class of early participants of a company and their ownership interests. You
will not find the terms founder or founders stock defined in the corporations code.
Founders of companies fall into the class of initial stockholder (certainly), director (probably)
and officer (probably). The founders put together the initial plan; they are the people who
decide to make the leap from idea to project to forming a new corporation, and that is when
they receive founders stock. Companies that do not exist cannot issue founders stock.

Founders stock means the shares of common stock stock that are issued in the organizational
minutes or consent of the board of directors of the company when they are setting up the new
business, adopting bylaws and appointing officers. This is called organizing the corporation.
The people who get this initial stock are the founders as a general rule.
Its important to look at the characteristics of founders stock as well. It will generally be a
large percentage of stock to each individual founder (larger than they would ever receive joining
a more mature company). The founders stock is normally issued at a nominal price, often times
the par value of the stock, such as $0.001 per share, a very low number. The company can issue
founders stock at a low price because it hasnt started to do any business yet, and so the new
corporation is essentially worthless. The equity upside of owning the founders stock is likely to
be the only initial compensation for the founder, and, if the company does it right, the founders
stock is subject to vesting contingent upon the continued provision of services to the company
(stock issued subject to a vesting schedule is called restricted stock. The company buys back
unvested founders stock at cost if a founders service to the company is terminated for any
reason).
After incorporation new team members can get stock with these characteristics and are
sometimes called founders, but issuing stock at a very low price after the company has done
anything to build value (built a prototype, gotten some users or customers, first revenue) can
lead to income taxes for the founder getting cheap stock. Because of this, after incorporation
companies normally increase the stock price, close the class of founders stock and issue
options instead going forward.
Our premium incorporation package and restricted stock purchase agreementdocuments both
contain the necessary legal documents for issuing founders stock, including the tax election
forms on IRS Form 83(b).

redeemable shares
Definition
A type of stock in a company that are allowed to be repurchased by that company.
What is the difference between redemption of shares and repurchase of shares?
By Yolander Prinzel
Sometimes, shares of stock offered by a company are not regular, market-driven common
shares. Instead, they may be preferred shares, which are considered fixed income securities and
are issued with a par value. When that par value is paid back to the purchaser of the preferred
share, this is considered a redemption. Redemption can also occur when issued bonds are called
or matured and the principal, or par value, is paid back.

When a company issues shares of common stock for the public to buy and later decides to buy
some of those shares back, that's considered a repurchase rather than a redemption. The major
difference between the two is that the shares bought back in a redemption are considered a
fixed-income security that is expected to be bought back by the issuer. A repurchase of shares,
however, reduces the number of outstanding shares that a company has, and can increase the
company's holdings so that it remains or regains majority shareholder status. It can also
increase the stock's earnings per share, since it reduces the outstanding number of shares. A
repurchase may even allow the company to profit off of the resale of its own shares at a later
time.

What Is a Treasury Stock?

Treasury stock may have come from a repurchase or buyback from shareholders; or it may
have never been issued to the public in the first place. These shares don't pay dividends, have
no voting rights, and should not be included in shares outstanding calculations.
What is the account classification of treasury stock?
Since this treasury stock account is classified within the equity section of the balance sheet
(where all other accounts have a natural credit balance), this means that the account is
considered a contra equity account.
Is Treasury Stock a contra equity account?
Treasury Stock is a contra equity item. It is not reported as an asset; rather, it is subtracted
from stockholders' equity. The presence oftreasury shares will cause a difference between the
number of shares issued and the number of shares outstanding.
Treasury Shares
Shares issued in the name of the corporation. The shares are considered issued, but
not outstanding.Usually refers to stock that was once traded in the market but has since been
repurchased by the corporation. Treasury stock not considered when calculating dividends or
earnings per share.
Treasury Stock (Treasury Shares)
DEFINITION of 'Treasury Stock (Treasury Shares)'
The portion of shares that a company keeps in their own treasury. Treasury stock may have
come from a repurchase or buyback from shareholders; or it may have never been issued to the
public in the first place. These shares don't pay dividends, have no voting rights, and should not
be included in shares outstanding calculations.
BREAKING DOWN 'Treasury Stock (Treasury Shares)'
Treasury stock is often created when shares of a company are initially issued. In this case, not all
shares are issued to the public, as some are kept in the company's treasury to be used to create

extra cash should it be needed. Another reason may be to keep a controlling interest within the
treasury to help ward off hostile takeovers.
Alternatively, treasury stock can be created when a company does a share buyback and
purchases its shares on the open market. This can be advantageous to shareholders because it
lowers the number of shares outstanding. However, not all buybacks are a good thing. For
example, if a company merely buys stock to improve financial ratios such as EPS or P/E, then
the buyback is detrimental to the shareholders, and it is done without the shareholders' best
interests in mind.
treasury shares - stock that has been bought back by the issuing corporation and isavailable f
or retirement or resale; it is issued but not outstanding; it cannot vote and paysno dividends
Treasury Stock
WHAT IT IS:
Treasury stock is stock repurchased by the issuer and intended for retirement or resale to the
public. It represents the difference between the number of shares issued and the number
of shares outstanding.
HOW IT WORKS (EXAMPLE):
Let's assume Company XYZ decides to buy back some of its shares because it feels that
Company XYZ shares are undervalued in the market right now. When Company XYZ acquires
those shares, they become treasury stock.
Treasury stock appears at cost or at par value in the shareholders equity section of thebalance
sheet and thus appears as a "negative" in the shareholders equity section (known as a
contra equity account). It is important to note that if and when Company XYZ decides to resell
treasury stock, there can be no income statement recognition of gains or losses on treasury
stock transactions. That is, if the company profits (or loses) from the resale of treasury shares, it
simply records an increase in cash and a corresponding decrease in shareholders' equity.
Note that purchases of treasury stock are uses of cash, and some states limit the amount of
treasury stock a corporation can own at a given time (this ensures that shareholders do not
jeopardize the interests of debtholders).
WHY IT MATTERS:
Treasury stock consists of shares issued but not outstanding. Thus, treasury shares are not
included in earnings per share or dividend calculations, and they do not have voting rights.
In general, an increase in treasury stock can be a good thing because it indicates that the
company thinks the shares are undervalued. By buying back its stock, a firm reduces the
number of shares outstanding, which in turn gives each shareholder a larger piece of earnings.
Likewise, the lower number of shares can improve EPS and other ratios. However, treasury stock

can be abused. Managers who repurchase shares solely to increase ratios are violating
their fiduciary duty to the shareholders.