Common stock

 

Common stock is preferred by regulators as a source of external capital. It has no fixed maturity and thus represents a permanent source of funds. Dividend payments are also discretionary, so that common stock does not require fixed charges against earnings.

Common stock is not as attractive from the bank’s perspective due to its high cost. Because dividends are not tax-deductible, they must be paid out of after-tax earnings. They are also variable in the sense that shareholders expect per-share dividend rates to rise with increases in bank earnings. Transactions costs on new issues exceed comparable costs on debt, and shareholders are sensitive to earnings dilution and possible loss of control in ownership. Most firms wait until share prices are high and earnings performance is strong before selling stock.

Issuing common stock is frequently not aviable alternative for a bank that needs capital. If the current share price is far below book value, new issues dilute the ownership interests of existing shareholders. Stocks of the largest banks are traded in national markets with substantial liquidity. Bank managers attempt to increase share prices through strong earnings, consistent dividend policy, and adequate disclosure of performance to security analysts. Even with these efforts, however, stock prices often fall with adverse economic conditions or disfavor in the industry market.

Small bank stocks are traded over the counter, with far fewer annual transactions. Still, a market for new issues does exist within local communities. Banks can often sell new shares to existing stockholders or current customers. Share prices are less volatile but are sensitive to deviations in current versus historical earnings.

 

1. Answer the questions:

 

1. What issues are controlled by shareholders and what are not?

2. What classes of common stock do most companies issue?

3. How does the corporation try to protect itself against «takeover pirates»?

4. In what way does the preferred stock differ from the common one?

5. What are advantages and disadvantages of holding preferred stocks?

6. Is investing in shares risky? Why?

 

2. Complete sentences by inserting the following words in the gaps:

 

barometer stocks, deferred shares, mutual fund, preference shares, blue chips equities, ordinary shares, defensive stock, growth stock, participation certificates

 

1. Another name for stocks and shares is......, because all stocks or shares of a company - or all those of a particular category - have an equal nominal value.

2....... (US: common stock) are often the only kind of shares with voting rights.

3. Some companies issue...... which, like shares, grant their holders part of the ownership of a company, but usually without voting rights.

4......., as their name suggests, usually receive a fixed dividend, which must be paid in full before any dividend is paid on other shares.

5....... or stock, again as the name suggests, do not receive a dividend until other categories of shares have had a dividend paid on them, but might earn a higher dividend if the company does well.

6. Securities in companies that are considered to be without risk are known as.......

7. Widely-held stocks, e.g. blue chips or 20-year Treasury Bonds that can be considered as indicators of present and future market performance, are known as...... (GB) or bellwether stocks (US).

8. A....... or share is one that is expected to appreciate in capital value; it usually has a high purchasing price and a low current rate of return.

9. A...... or income stock or share is one that offers a good yield but only a limited chance of a rise or decline in price.

10.A way of spreading risks is to invest in a unit trust (in Britain) or a...... (in the US), organizations that invest small investors’ money in a wide portfolio of securities.

 

3. Complete the text by inserting the following words in the gaps:

 

common dividend, common stockholder, dividend, equity security, financing, holder, junior, option, preferred dividend, repayment date, restrictions, voting privilege

 

Preferred stock, on the other hand, accounts for only a small part of, new issues, and so it will occupy less time later on. However, we shall see that it is a useful method of......(1) in mergers and certain other special situations.

Preferred stock is legally an......(2). Despite the fact that it offers a fixed......(3) like debt, payment of the dividend is almost invariably within the complete discretion of the directors. The only stipulation is that no dividends be paid on the common until after the......(4) has been paid. For some older issues the firm could pay......(5) without making up preferred dividends that had been skipped in previous years. This gave an opportunity for considerable abuse. Therefore, almost all new issues specifically provide that the obligation should be cumulative, so that the firm must pay all past......(6) before common stockholders get a cent.

Like common stock, preferred stock does not have a final......(7). However, roughly half the issues make some provision for periodic retirement and in many cases companies have......(8) to repurchase or call preferred stock at a specified price. If the company goes out of business, the claim of the preferred stock is......(9) to that of any debt but senior to that of common stock.

The contract which sets out the terms of the preferred stock also imposes......(10) on the company, including some limits on payments to common stockholders either as dividends or through repurchase of the common stock. These restrictions may also stipulate that the company cannot make any payments to......(11) unless it is able to maintain a minimum level of common equity and a minimum ratio of working capital to debt.

Preferred stock rarely confers full......(12). However, almost always the consent of two-thirds of the preferred holders must be obtained on all matters affecting the seniority of their claim. Most issues also provide the......(13) with some voting power if the preferred dividend is skipped.

 

4. Speak on:

 

1. Raising funds.

1. The investment portfolio of an individual.

2. Financial instruments in Russia in comparison with those abroad.

 

5. Make written translation of the text into Russian:

 

A significant proportion of private placement bonds and a smaller proportion of public issues are sold with warrants. In addition, warrants are sometimes attached to issues of preferred stock or given to investment bankers as compensation for underwriting services. Although a number of United States companies have issued warrants, the main action in the warrant market has involved Japanese firms. By the end of the 1980s these firms accounted for the great majority of warrant issues, and Japanese investors seemed to have an almost insatiable appetite for warrants. Then in early 1990 the Japanese equity market nose-dived, investors discovered that warrant prices can fall rapidly, and the warrant market dried up.

The term warrant usually refers to a long-term option issued by a company on its own stock or bonds, but in recent years investment banks and other financial institutions have issued «warrants» to buy the stock of another firm.

Most warrants are changeable into common stock, but some companies have issued warrants on bonds.

The owner of a convertible owns a bond and a call option on the firm’s stock. So does the owner of a bond-warrant package. There are differences, of course, the most important being the requirement that a convertible owner give up the bond in order to exercise the call option. The owner of a bond-warrant package can generally exercise the warrant for cash and keep the bond. Nevertheless, understanding convertibles is easier if you analyze them first as bonds and then as call options.

Convertibles are usually issued at their face value, that is, 100 percent of par. Since they consist of a bond plus an option, the underlying bond at issue is worth less than 100. Thus the value of the bond can be expected to increase between issue and maturity. This means that for most convertibles the value of the bond that must be surrendered (i.e., the exercise price of the option) increases over time. For very low coupon convertibles these changes in exercise price can be dramatic.

 

6. Translate the text into English:

 

Акция есть ценная бумага, удостоверяющая долевое участие владельца в капитале деловой единицы бизнеса, имеющего статус юридического лица в форме корпорации. Акция есть доля акционера во всем том, что имеет компания, его узаконенное право на часть капитала, имущества, дохода. Она существует столько же времени, сколько существует сама корпорация, хотя за это время может смениться множество владельцев данной акции. Акционер не имеет права возвратить акции корпорации, их выпустившей. Акционер может лишь продать их на вторичном рынке.

Уставной капитал — разрешенный к выпуску капитал. Он может быть разделен, в свою очередь, на находящийся в обращении капитал (обыкновенные и привилегированные акции акционеров) и остающиеся в портфеле компании ценные бумаги.

Корпорация имеет право выкупа собственных акций. Однако в законодательстве ряда стран содержится положение о том, что если корпорация неплатежеспособна, то она не имеет права выкупа собственных акций. То же самое предусмотрено и в том случае, если подобный выкуп приведет к неплатежеспособности этой корпорации.

 

UNIT 6