01 Equity Securities and Bonds

01 Equity Securities and Bonds - Equity Securities and...

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Unformatted text preview: Equity Securities and Bonds Professor Alexander Barinov Terry College of Business University of Georgia FINA 4310 Survey of Investments Alexander Barinov (Terry College) Equity Securities and Bonds FINA 4310 Investments 1 / 22 Outline 1 Common Stock 2 Other Types of Stock 3 Stock Trading 4 Bonds Basics 5 How to Play It Alexander Barinov (Terry College) Equity Securities and Bonds FINA 4310 Investments 2 / 22 Common Stock Ownership rights Stockholders are residual claimants- if the company is liquidated, they get what is left after paying to everyone (workers, government, lenders) Stockholders have limited liability- if the assets are not enough to pay all creditors, the stockholders do not have to pay from their own money Alexander Barinov (Terry College) Equity Securities and Bonds FINA 4310 Investments 3 / 22 Common Stock Voting rights Stockholders elect the board of directors, which appoints managers, and vote on other significant business decisions (mergers, liquidation, issuing more stocks) The voting is usually cumulative- if two directors are being elected and you hold 10% of shares, you can cast 20% of votes for one of them and 0% for the other Alexander Barinov (Terry College) Equity Securities and Bonds FINA 4310 Investments 4 / 22 Common Stock Dividends Stockholders can receive dividends, i.e. part of the profit, if it is positive Dividends are paid quarterly , but reported at the annual rate Now the majority of firms do not pay dividends, though some do share repurchases instead Which means that shareholders count primarily on price appreciation Liquidating dividend- paid when the firm goes out of business Alexander Barinov (Terry College) Equity Securities and Bonds FINA 4310 Investments 5 / 22 Common Stock Dividends Firms are usually reluctant to cut dividends If a firm does, the stock price drops sharply Conversely, if a firm announces that it will start paying dividends, the stock price increases Does it mean that all firms should start paying dividends? When the firm pays the dividend, the price drops by almost the amount of the dividend Why does the price drop? Why not by the whole amount of the dividend? Alexander Barinov (Terry College) Equity Securities and Bonds FINA 4310 Investments 6 / 22 Common Stock Stock Return By definition, stock return is Ret = P 1 + Div 1 P P 1 P measures price appreciation, i.e. gains because of the increase in the stock price Div 1 P is called dividend yield The price appreciation part is also called ex-dividend return (and the whole return is then cum-dividend return) Alexander Barinov (Terry College) Equity Securities and Bonds FINA 4310 Investments 7 / 22 Other Types of Stock...
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This note was uploaded on 06/06/2011 for the course FINA 4310 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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01 Equity Securities and Bonds - Equity Securities and...

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