Question

2. Explain the difference between par value, book value, and market value for common stock. Which is most important? Why?

3. What is meant by market efficiency? What are the three types of market efficiency?

4. What rights are given to stockholders? Explain each.

Answer 1

2. Par value also known as face value is the value of a company listed in its books and share certificate. The company decides the face value when it offers shares at the time of issuance.

Book value is the total value of a business' assets found on its balance sheet, and represents the value of all assets if liquidated.

Market value is the worth of a company based on the total value of its outstanding shares in the market, or its market capitalization.

The book value does not change. So, it is useful for calculating various financial ratios.

Market value is more important because it based on current market price and more updated. So, it is useful for decision-making process.

3. Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available.

Efficient market hypothesis theorizes the market is generally efficient, the theory is offered in three different versions: weak, semi-strong, and strong.

The weak form suggests today’s stock prices reflect all the data of past prices and that no form of technical analysis can aid investors.

The semi-strong form submits that because public information is part of a stock's current price, investors cannot utilize either technical or fundamental analysis, though information not available to the public can help investors.

The strong form version states that all information, public and not public, is completely accounted for in current stock prices, and no type of information can give an investor an advantage on the market.

4. Individuals that own common shares of company stock are viewed as the true owners of that company.

The most important rights that all common shareholders possess include:

• The right to share in the company's profitability, income, and assets
• A degree of control and influence over company management selection
• Preemptive rights to newly issued shares.
• General meeting voting rights

Right to Share in Profitability

As partial owners of the company, common shareholders have the right to participate in a company's profitability for as long as they own the shares. The division of profits is based on the number of shares owned by a shareholder, and gains can be substantial to shareholders over time.

In addition to a share in profits generated by the company, shareholders also have rights to income distributions through dividend payments. If a company's board of directors declares a dividend in a certain period, common shareholders are in line to receive it.

Right to Influence Management

Common shareholders also have the right to influence company management through the election of a company's board of directors. In smaller companies, the president or chairperson of the board is typically the individual who owns the largest share of common stock. Larger companies may have greater diversity in the common shareholder investor pool.

In either case, individuals in the management of the company do not own enough of a stake in the company to influence who sits on the board of directors. Shareholders have the right to influence who holds management positions through control over the election of board members.

Right to Buy New Shares

Common shareholders also have preemptive rights. If the company issues new shares to the public, current shareholders have the right to buy a specific number of shares before the stock is offered to new potential shareholders. Preemptive rights can be valuable to common shareholders, as they are often provided at a subscribed price on a per-share basis.

Right to Vote

The greatest right for common shareholders is the ability to cast votes in a company's annual or general meeting. Major shifts within a publicly-traded company must be voted on before changes can take place, and common shareholders hold the right to vote either in person or via proxy. Most common shareholder voting rights equate to one vote per share owned, resulting in greater influence from shareholders who own a larger number of shares.

The Right to Sue for Wrongful Acts

Common shareholders who feel their rights have been violated also have the right to sue the issuing company. A court has the power to enforce common shareholder rights when corporations are found to have violated their rights, either through a single shareholder complaint or as a class-action lawsuit.