Page 439 - Business Principles and Management

Unit 5

16.2 Raising Capital Through Stock Sales

Goals Terms
• Differentiate between common • common stock • preferred stock
and preferred stock. • par value • book value
• Describe factors that affect the • market value
value of a company’s stock.

Types of Stock

By far the greatest amount of equity investment in U.S. businesses comes from
the sale of stock. The most recent figures from the Census Bureau show the total
value of stock in all U.S. corporations that filed tax returns is $4.2 trillion. Over
25 million households own individual shares of stock, and more than double
that number, 53 million households, have investments such as mutual funds and
retirement plans that include stocks. Corporations use several types of equity
and debt financing to raise money, but about 44 percent of the total equity in
the average corporation is made up of stocks.
Stockholders are the owners of corporations but their ownership rights and
responsibilities vary based on the type of stock they hold. Two kinds of stock
are issued by corporations, common stock and preferred stock.

COMMON STOCK

Common stock is stock that gives holders the right to participate in managing
the business by voting on basic issues at the corporation’s annual meeting and
by electing the board of directors. Holders of common stock receive one vote
per share of stock owned. As owners they also can share in the corporation’s
profits. When the corporation makes a profit, some or all of that profit may
be paid back to stockholders as dividends. The corporation’s board of direc-
tors makes the decision about whether holders of common stock will receive
a dividend or not and the amount of that dividend per share of stock.
The board of directors decides on the number of shares of common stock that
will be issued by the corporation. If they decide to issue new shares, they assign a
value to those shares, known as par value. The par value is somewhat arbitrary in
that it may not be the price that stockholders pay for the shares. If stockholders
believe the company is a good investment, they may pay more than par value. The
price at which stock is actually bought and sold is its market value. The price of
stock goes up and down based on the financial performance of the company and
general economic conditions. Investors purchase stocks with the expectation that
the company’s financial performance will be strong, dividends will be paid, and
the stock price will increase. They hope to sell the stock in the future for a much
greater value than they paid for it.
Common stockholders have the right to purchase any new stock issued before
it is offered for sale on the open market. That right protects the interests of the
current stockholders. Otherwise it would be possible for management of the

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