Stock Market Terms and Definitions 2

In the previous blog, we have discussed some of the stock market terms and definitions. These stock market terms like Closing Price,Target Price, Outstanding Shares, Market Capitalization, Sales, Net Profit, Earnings Per Share, Net Profit Margin, PE Ratio, Dividend Yield, Price to Book value, ROE can be seen in http://theofwinvestor.blogspot.com/2011/07/stock-market-terms-and-definitions.html

We will continue with the definition of other stock market terms. Here we go.

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 bondholders, preferred shareholders and other debtholders have been paid in full. 

Example: Randy Corporation issued 1,000 common stock to you and 1,000 preferred stock to your sister. In this case, since you are the owners of the common stock of Randy Corporation, you can vote on company policies and board of directors that will represent you in the company. Your sister on the other hand is not entitled to vote on company policies and board of directors.

Preferred Stock - Also known as "preferred shares". A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. 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. 

Example: Randy Corporation issued 1,000 common stock to you and 1,000 preferred stock to your sister. The company became successful and you decided to declare dividends (remember, you are the owner of the common stock and as such is entitled to direct the company policies). In this case, your sister must be paid out first from these dividends before you can pay yourself.

After ten years, Randy Corporation went bankrupt because of mismanagement. In this case, your sister who owns the preferred stock must be paid first from the sale of assets before you can pay yourself.

In the Philippine's stock market, things are changing. Recently, PLDT issued preferred voting shares which can vote on the election of board of directors.

Which one is better, common stock or preferred stock?

I think common stock appreciates more than the preferred stock in terms of share prices. Investors tend to buy these type of stock than the preferred stock. Common stock normally outperforms the preferred stock in the long-run. Sometimes there are companies that issue 10% dividends of the net income to preferred stocks. For example, Randy Corporation has 1,000,000 net income for the Year 2010. In this case, 100,000 (1,000,000x10%) must be paid to the preferred stockholders. 

All my stocks right now are common stocks because some companies have common stock only and if the company has preferred stock, the share price of preferred stock normally is way behind the price of common stock.

Value Investing - The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

A good example of this is VLL Company. Out of the many property developers listed in the stock market, VLL has the lowest price to earnings ratio. It means that investors are not keen in buying VLL's stock although it is a good buy. I bought VLL last week because i believe that it is undervalued and that in just a matter of time before the price will shoot up.

That's it for the meantime. Happy Investing!