Question

1. Describe the rights and advantages belonging to shareholders
2. Explain the differences between the Standard and Poor's 500 Index and the Dow Jones Industrial Average. Which is a better measure of stock market performance? Why?
3. Describe the differences between common stock and preferred stock.

Answer 1

Shareholders right are as follow :

1. Voting Power on Major Issues : Voting power includes electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation. Voting takes place at the company’s annual meeting. If the shareholder cannot attend, they can do so by proxy and mail in their vote.
2. Ownership in a Portion of the Company : Previously, we discussed a corporate liquidation where bondholders and preferred shareholders are paid first. However, when business thrives, common shareholders own a piece of something that has value. Common shareholders have a claim on a portion of the assets owned by the company. As these assets generate profits and as the profits are reinvested in additional assets, shareholders see a return as the value of their shares increases as stock prices rise.
3. The Right to Transfer Ownership : The right to transfer ownership means shareholders are allowed to trade their stock on an exchange. The right to transfer ownership might seem mundane, but the liquidity provided by stock exchanges is important. Liquidity—the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price—is one of the key factors that differentiate stocks from an investment such as real estate. If an investor owns the property, it can take months to convert that investment into cash. Because stocks are so liquid, investors can move their money into other places almost instantaneously.
4. An Entitlement to Dividends : Along with a claim on assets, investors also receive a claim to any profits the company pays out in the form of a dividend. Management of a company essentially has two options with profits: they can be reinvested back into the firm (thus, one hopes, increasing the company’s overall value) or paid out in the form of a dividend. Investors do not have a say as to what percentage of profits should be paid out—the board of directors decides this. However, whenever dividends are declared, common shareholders are entitled to receive their share.
5. Opportunity to Inspect Corporate Books and Records : Regulations require that public companies release their financials in the form of two annual reports: one for the Securities and Exchange Commission (SEC) and one for their shareholders. Form 10-K is the annual report made to the SEC, and its content is strictly governed by federal statutes.
6. The Right to Sue for Wrongful Acts : Suing a company typically takes the form of a shareholder class-action lawsuit. For example, Worldcom faced a firestorm of shareholder class-action suits in 2002 when it was discovered that the company had grossly overstated earnings giving shareholders and investors an erroneous view of its financial health.

Advantages of Shareholder :

1. Privacy: Unlike the articles of association and special resolutions, a shareholders’ agreement does not need to be filed at Companies House. This allows the company to retain an element of privacy on the internal workings of the company and the relationship between the shareholders.
2. Dividends policy: It is of great importance to lay out in a shareholders’ agreement how shareholders are to receive the profits of the business, more so in companies whereby shareholders hold varying degrees of shares, which includes the percentage of net profit that must be distributed annually. This prevents any disputes arising and allows clarity with the payment of dividends.
3. Non-compete clauses: A shareholders’ agreement allows the shareholders to formally exclude any shareholders from creating companies which directly compete with the company while they are a shareholder. Such a non-compete provision will often continue in force for a certain time after the individual ceases to be a shareholder of the company.
4. Preference of lenders: Lenders to a company will often prefer for a shareholder’s agreement to be in place as it allows greater transparency on how the company is run and often contains exit clauses for lenders.

Differences between the Standard and Poor's 500 Index and the Dow Jones Industrial Average are as follows :

S & P's 500 Index :

The S&P 500 Index, started in 1957, is a stock market index of 500 large publicly traded American stocks. The stocks in this index are from all sectors of the economy and are selected by a committee. To be selected, stocks must have a market cap of $8.2 billion or more (as of 2019), have a public float of at least 50 percent, have positive earnings for the most recent four quarters, and have adequate liquidity as measured by price and volume.

Stocks in the S&P 500 are weighted by their market value rather than their stock prices. In this way, the S&P 500 attempts to ensure that a 10 percent change in a $20 stock will affect the index the same way that a 10 percent change in a $50 stock will.

While both of these indexes are used by investors to determine the general trend of the U.S. stock market, the S&P 500 is more encompassing, as it includes a greater sample of total U.S. stocks.

The Dow Jones Industrial Average

The DJIA is the best-known index. Started in 1896 with 12 companies, the index today consists of 30 U.S. blue-chip stocks. The name "Industrial" is largely historical, as most stocks in this index are not from manufacturing industries, but rather from all the major sectors except utilities and transportation. They include household names such as Johnson & Johnson, Coca Cola, and McDonald's.

The criteria for a company to get on the Dow is somewhat vague; the companies are leaders in their industry and very large. The components in the DJIA do not change often, as it takes an important change in a company for it to be removed from the index. If the index comes up for review, the members of a committee can replace more than one company at a time.

The DJIA is price-weighted. This means the sum of the component stock prices is divided by a divisor. Rather than using a simple arithmetic average and dividing by the number of stocks in the average, the Dow Divisor is used. This divisor smooths out the effects of stock splits and dividends. The DJIA, therefore, is affected only by changes in the stock prices, so companies with a higher share price have a larger effect on the Dow's movements.

The Dow companies are the most capitalized companies in the world.Therefore, as a new great uptrend cycle has started, it should be better that the more diversified SP 500.

Differences between common stock and preferred stock are as follows:

Common Stock :

Common stock is the most common type of stock that is issued by companies. It entitles shareholders to share in the company’s profits through dividends and/or capital appreciation. Common stockholders are usually given voting rights, with the number of votes directly related to the number of shares owned. Of course, the company’s board of directors can decide whether or not to pay dividends, as well as how much is paid.

Owners of common stock have “preemptive rights” to maintain the same proportion of ownership in the company over time. If the company circulates another offering of stock, shareholders can purchase as much stock as it takes to keep their ownership comparable.

Common stock has the potential for profits through capital gains. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Shareholders are not assured of receiving dividend payments. Investors should consider their tolerance for investment risk before investing in common stock.

Preferred Stock:

Preferred stock is generally considered less volatile than common stock but typically has less potential for profit. Preferred stockholders generally do not have voting rights, as common stockholders do, but they have a greater claim to the company’s assets. Preferred stock may also be “callable,” which means that the company can purchase shares back from the shareholders at any time for any reason, although usually at a favorable price.

Preferred stock shareholders receive their dividends before common stockholders receive theirs, and these payments tend to be higher. Shareholders of preferred stock receive fixed, regular dividend payments for a specified period of time, unlike the variable dividend payments sometimes offered to common stockholders. Of course, it’s important to remember that fixed dividends depend on the company’s ability to pay as promised. In the event that a company declares bankruptcy, preferred stockholders are paid before common stockholders. Unlike preferred stock, though, common stock has the potential to return higher yields over time through capital growth. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk.