Tag Archives | preferred stock

Red Herring Definition

See Also:
Ten In-House Secrets for Reducing Your Company’s Legal Costs
Board of Directors
Benefits of an Advisory Board
How to Form an Advisory Board
Why is Intellectual Property Risk Everybody’s Problem

Red Herring Definition

The red herring definition, or preliminary prospectus, is a legal document that must be submitted to the SEC for approval prior to an initial public offering (IPO). It is prepared by the company that is planning to go public in conjunction with the investment bank syndicate that is underwriting the IPO.

Red Herring Document

Furthermore, the document includes details about the company. It includes an explanation of the company’s operations and competitive position as well as copies of its financial statements. The document also includes the details of the IPO, including the type of security (common stock, preferred stock, etc.) offered, the number of shares offered, and the anticipated share price.

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red herring definition

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Preferred Stocks (Preferred Share)

Preferred Stocks (Preferred Share) Definition

Like common stock, shares of preferred stocks (preferred share) represent ownership of a public corporation. However, unlike common stock, preferred stock typically does not give the owner voting rights.

Preferred stock usually pays a dividend. But due to its preferred status, preferred stockholders will receive dividend payments before common stockholders. For example, if, for whatever reason, the company does not have enough cash to meet all of its dividend payment obligations, the common stockholders will not begin to receive dividends until after all of the preferred stockholders have received their dividends.

Likewise, if the company were to go out of business and liquidate its assets, preferred stockholders have seniority over common stock holders. Preferred stockholders have a higher ranking claim to the liquidated assets than common stockholders. Common stockholders will not have access to liquidated assets until all of the preferred stock holders have been paid off.

Preferred stock may have a convertible provision, allowing it to be exchanged for shares of common stock under certain specified circumstances.


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Preferred Stocks

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Preferred Stocks

See Also:
Company Valuation
Fixed Income Securities
Arrears
Subscription (Preemptive) Rights

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Common Stock Definition

See Also:
Intrinsic Value – Stock Options
Company Valuation
Basis Definition
Balance Sheet
Paid in Capital (APIC)
Capital Gains
American Depositary Receipts (ADRs)

Common Stock Definition

The common stock definition is shares of common stock represent ownership of a public or private corporation. Shares of common stock usually give the shareholder voting rights. Therefore, the shareholder can vote on matters of corporate policy and the selection of members of the board of directors. The more shares an investor owns, then the more influence that investor has on the company.

Shares of common stock typically trade on financial exchanges. Thus, their values fluctuate according to the company’s performance and the market’s perceptions of the company.

But if a company goes out of business and liquidates its assets, then the last ones to get their invested capital back are the common stockholders. Bondholders and preferred stock holders are reimbursed before common stockholders.

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common stock definition

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Arrears

See Also:
Dividend Payout Ratio
Dividends
Dividend Yield Analysis
Preferred Stocks (Preferred Share)
Define Payment Terms

Arrears Definition

Arrears is defined as an amount of a liability which is past due or has simply not been paid yet. There are generally two types of arrears concerning annuities and loans, and the second is in respect to preferred dividends.

Arrears Meaning

The majority of the time arrears accounting is concerned with preferred dividends as most companies try and make their payments when they are due with respect to a loan or annuity. They occur in dividends when a company issued preferred stock promising a certain percentage payment of the income every year. However, the company does not have to pay the amount that year. However, the amount is put in arrears account until the company does pay the amount. It could be years or maybe just next year, but the amount keeps accumulating until the arrears payment is made. It should also be noted that the company cannot pay common stock dividends until the arrears account has totally been reduced.

Example

Judy has bought $4,000 worth of preferred stock that pays a 10% dividend every year. The total amount of stock outstanding is $100,000. This means that the total dividend amount paid each year by the company is $10,000.

In the first year the company did not make a dividend payment. This means that the company would need to put $10,000 in the arrears account.

If in the next year the company made a payment of $12,000 it would mean that the entire $10,000 in arrears would be emptied, but would fill back up by $8,000 ((10,000 * 2) – 12,000) or the new amount in the arrears account. The payment to Judy would be in the amount of her percentage ownership of the preferred dividends, 4%, times the amount in the amount of dividends paid to date, which is $12,000. Therefore, Judy will have made $480 on her investment thus far.

If in the next year the company empties the arrears account and current payment by paying dividends of $18,000. Judy will have made $720 more with the payment. The new balance in arrears would be equal to zero.

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