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CH 6 COMMON STOCK (Type of common stock (Blue Chips Stock - Stock are high…
CH 6 COMMON STOCK
Type of common stock
- Blue Chips Stock - Stock are high in quality & have long & stable record of earnings & dividends. Firms provide reasonable dividend yield & capital gain . Example : Nestle, Maybank
- Income stock - Issued by the firm and have long & sustained record of regularly paying higher than average dividends . Has high dividend yield but low in Price earning ratios. Example public utilities MRT, KTM
- Growth Stock - Issued by small & growing firms which have the potential to expand their business. Growth stock usually pays little/ no dividends. Suitable for investor who looking for capital gains rather than dividends.
- Tech Stock - Issued by firms which core business contains significant technological components may potential attractive returns.Suitable for more risk tolerant investors. This kind of stock listed on the ACE Market.
- Speculative Stocks - Issued by firms with highly unstable earning records & very uncertain future earnings. No dividend to the investors, highly risk, focused on capital gain
- Cyclical stock - The stock earnings & overall market performance are closely linked to the general state of the economy. For investors who willing to trade for the durable items like houses cars that based on the economic outlook dictates
- Defensive Stock - The stock can survive & maintain even though the economic is poor / starts to fall, because the goods that company produce are necessary to the consumer. Thus shares includes the share of many public utilities , industrial, consumer goods like beverages, foods, drugs.
Features of CS
- Claim on assets - CS holder are the last party to claim the income & assets of the company
- Dividends - Is not fixed & it is not compulsory for the company to pay dividends
- Maturity Period - CS has no maturity period
- Voting rights - CS holders Have voting rights to vote for the BOD of the company
- Limited Liability - The risk only affects the amount invested
- Pre- emptive rights - Existing shareholder' right to maintain their proportionate share of ownership in a company.
Investing in CS
Advantages
- Better hedge against inflation
- Expected returns are higher
- Capital appreciation on investment
- Enjoy pre emptive rights
- Easily marketable at the stock exchange
Disadvantages
- Bear the highest risk in the company
- Company is not obligated to pay dividend
- Dividends do not enjoy tax shield
- Tax rate on dividend is high
- Possibility of not receive residual assets of the company in case of liquidation
Issuing CS
Advantages
- The firm is not legally obligated to pay CS dividend
- CS has no maturity date, the firm does not have a major cash outflow associated with its redemption
- By issuing CS the firm increase its financial base
Disadvantages
- The cost of underwriting & distributing CS are usually higher because its higher investigating cost and stocks are riskier than debt
- CS dividends are not deductible as an expense for calculating the corporation's taxable income
- Issuing new CS may result in change in the ownership and control of a firm