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The Business and Accounting Advisor

Business survivability in this economy is difficult at best. This blog will offer useful business and accounting advise and ideas for ongoing business and competitive advantage.

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Publicly Traded Stock

July 3rd, 2012 at Tue, 3rd, 2012 at 1:52 am by glennsmith

Share prices of companies.

As a finance and accounting instructor many students ask questions about market price and price per share for publicly traded companies. Share prices are the price that someone is willing to pay for one share of ownership in a company. Take for example McDonalds. If someone wants to own one share or one vote in the future happenings of McDonalds they can buy a share of the company. McDonald’s is publicly traded which means that anyone can buy some of the ownership of the company. The greater the demand for shares of ownership in the company the higher the price will be. Check out the YouTube video’s on market share and earnings per share.

So what does it mean to own one share of the company? Every publicly traded company must release an annual report each year audited by an independent certified public accountant. If you look at the McDonalds annual report you will find McDonalds has 165.0 shares issued to the public. That is a lot of stock compared to the one share purchased.

There are three categories of shares important to understand what issues shares represent. The categories are authorized, issued, and outstanding. Publicly traded companies must gain permission in the United States from the Securities Exchange Commission to trade publicly. Companies are authorized to issue a certain number of shares but rarely issue all the shares they are authorized to issue. They issue, or sell, shares to the public to raise money quickly for various endeavors. Companies can also buy shares back from the public for different reasons such as to maintain control of company profits. Each share of stock sold represents a partial ownership of the company. Owners of the company share in the profit of a company. The less shares outstanding means the less profit companies may have to give away. Consider an example, if a company is authorized to issue 200 million shares they may choose to only sell ten percent of those shares. This means that 20 million shares will be issued. If the company was only able to sell them for one dollar each they would raise 20 million dollars, plus or minus some for underwriting and brokerage fees. The company may never pay dividends.

A popular question is why would anyone buy shares if they won’t earn dividends? Remember if you buy a share you can also sell it to anyone wanting to buy it. If you buy for a low price you can sell for a high one. You can even sell it minutes, hours, or days later. You can hold on to the ownership as long as you desire. Consider another example. If someone desires to buy in the morning a share of stock they can turn around and sell it in the afternoon. This would be considered day trading and many people participate in ongoing activity.

Another popular question dealing with the market is how preferred stock compares to common stock. Common stock is the typical voting stock that people consider when they talk about the price of stock or owning stock in a company. Preferred stock is a secondary type of stock with the typical disadvantage of having no voting rights. So what makes this type of stock preferred? It has elements of a liability in that owners of preferred stock receive money before owners of capital stock. Typically, two situations should be considered to illustrate how this preferred quality works.

The first situation where preferred stock is paid before common stock is in bankruptcy. Companies do not have to pay stockholders back for their stock. If a company goes bankrupt assets are sold to cover company debts. The first payments are made to creditors or those owed money by a company. These are the liabilities of the company. The second group paid is preferred stockholders and if anything is left common stockholders share in the financial remains.

The second situation is in dividends. Preferred stockholders may be owed cumulative dividends in arrears. Companies never have to declare dividends but once dividends are declared they become a liability and must be paid. Preferred stockholders get paid first before common stockholders. If preferred stock is cumulative in arrears each year dividends were not paid up to the current year is counted and multiplied by a percentage agreed upon in the sale of the preferred stock. For more information on this other great YouTube videos are available.

Trading is risky but well worth the investment for those willing to explore the market. Enjoy.

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