>> There are three common ways companies finance long-term assets and projects.
They are debt financing,
which will focus on bonds, equity financing,
which will focus on preferred stock and common stock,
and equity financing, which will focus on the use of retained earnings.
Each of these methods will be covered in detail in this video series,
but the focus of this video is at equity financing with stock,
specifically, common stock characteristics.
Common stock is a certificate that indicates an ownership in a corporation.
When you buy a share of stock,
you buy a part of the company and attain ownership rights
in proportion to your share of the company.
Common stockholders are the true owners of a firm.
Bondholders and preferred stock holders can be viewed
as creditors from a finance perspective.
There are several other common stock characteristics in terms that you'll learn about,
they are listed on the slide,
let's talk about each one of them.
First, a characteristic that sounds great but rarely is.
Common stockholders have residual claims on all assets in the case of liquidation.
So after the debts had been paid off and the preferred stockholders have been paid,
all remaining asset values go to the common stockholder.
The problem is, the companies which liquidate
are not companies with a lot of assets and profits.
Amazon, for example, isn't liquidating anytime soon,
but Kmart and the like are.
So in practice, debt holders get pennies on the dollars
and preferred and common stockholders often get nothing during liquidation.
Likewise, common stockholders have claims on all residual income.
Now, this is a great benefit to stockholders of profitable companies.
Claim on residual income implies that there is no upper limit on income,
whereas bondholders and preferred stockholders have
a limit in the form of interest payment or a fixed dividend.
The common shareholder has no limit.
As companies become more and more profitable,
the board of directors can direct management to pay out
income to common shareholders in the form of dividends.
The liability of shareholders is limited to the amount of their investment.
Common shareholders can lose all of their investments if a company goes bankrupt,
but they can't lose anymore.
No personal assets can be claimed by corporate creditors.
This reduces the risk and exposure to shareholders
who are more willing to invest with this type of protection.
Voting rights are an important characteristic of common stock with rare exception.
Common stockholders are the only group that can vote for board of directors
and approve any changes to a corporate charter.
Voting is usually done via proxy,
so shareholder don't have to be present to vote,
voting is also done annually at a corporation's annual meeting.
There are generally two ways votes are counted.
The first is that each share of stock owned grants the shareholder one vote.
So one share is one vote,
10 shares are 10 votes,
1,000 shares are 1,000 votes, etc.
The other method is called cumulative voting.
This means that each share grants a number of votes
equal to the number of directors being elected.
So if five directors are being elected,
each share grants five votes.
In the real world,
shareholders don't really pick the board,
they select from a list of nominees chosen by management,
and you can probably infer that those who own a lot of shares of stock,
and thus have a lot of votes also tend to be on the board of directors.
The final characteristic is known as preemptive rights.
This right entitles shareholders to maintain a proportional share
of ownership in a company .
Thus if a shareholder currently owns 25 percent of the shares,
he has the right to purchase 25 percent of the shares when new shares are issued.
These rights are issued in the form of certificates that gives shareholders the options
to buy new shares at a specific price during some fixed period of time.
These rights can be exercised,
sold on the open market, or allowed to expire.
In practice, they are rarely exercised because over time,
it's just too expensive to maintain a high percentage of ownership.
This is why no descendants of Alexander Graham Bell are majority shareholders in AT$T.