Rich Dad’s Financial IQ Cultivation: Stock Fundamentals

Chapter 2 Overview of Stocks (2)
There are three ways to withdraw preferred shares: (1) Premium method: when the company redeems preferred shares, although it is carried out at a predetermined price, because this often brings inconvenience to investors, the issuing company often pays at the par value of preferred shares. Plus a "premium". (2) When the company issues preferred shares, it draws a part of the funds obtained to create a "sinking fund", which is dedicated to redeeming a part of the issued preferred shares on a regular basis. (3) Conversion method: that is, preferred shares can be converted into ordinary shares according to regulations.Although the convertible preferred stock itself constitutes a type of preferred stock, in the foreign investment circle, it is often regarded as an actual way of recovering preferred stock, but the initiative of this recovery is in the investor rather than in the company. Here, it is very advantageous for the investor to do so when the market price of the common stock is rising.

([-]) Subsequent allotment
Post-allotment is a stock that is at a disadvantage compared to ordinary shares in the distribution of benefits or interest dividends and remaining property. Generally, after the distribution of ordinary shares, the remaining interests are redistributed.If the company's profits are huge and the number of post-allotment shares issued is very limited, shareholders who purchase post-allotment shares can obtain high returns.After the allotment of shares, generally the funds raised cannot generate income immediately, and the scope of investors is limited, so the utilization rate is not high.Post-allotment shares are generally issued under the following circumstances:
(1) When the company issues new shares to raise funds for equipment expansion, in order not to reduce the dividends of the old shares, before the new equipment is officially put into use, the new shares will be issued as a post-allotment;

(2) In the case of enterprise merger, in order to adjust the merger ratio, allot shares after delivering part of the shares to the shareholders of the merged enterprise;
(3) In companies with government investment, before the dividends of privately held stocks reach a certain level, the stocks held by the government will be used as post-allotment.

[-]. Other types of stocks
In addition to common stock, preferred stock, and post-allotment stock, stock can be divided into voting stock and non-voting stock according to the voting rights of stock holders on the company's business decisions; according to whether the face value of the stock is recorded , stocks can be divided into par shares with par value and par stock without par value; according to whether the par face of the stock contains the name of the shareholder, the stock can be divided into registered stock and bearer stock; in addition, there are treasury stock, repayment stock, employees' internal stock and savings stock, etc.Among these stocks, the more special ones are mixed stocks.

Mixed stock.Mixed stock is a stock that combines the right to receive dividends first and the right to finally distribute the company's remaining assets.Specifically, when a joint stock company distributes dividends, mixed shareholders exercise their rights before common shareholders.When the company is liquidated, the order of the mixed shareholders in distributing the company's remaining property is behind the ordinary shareholders, and the mixed shares are a combination of preferred shares and post-allotment shares.

(Section [-]) The role of stocks
For issuers, there are four basic functions of stocks

[-]. Stocks are an effective means of raising funds

The most original function of stocks is to raise funds.By issuing shares, the joint-stock company can widely attract temporarily idle funds from the society, concentrate the scattered funds in the society into huge production capital in a short period of time, and form a "social enterprise" - a joint-stock company.And through the circulation in the secondary market, short-term funds can be connected to long-term funds through stock transfers.It is precisely based on this feature that many countries in the world today, especially some developed countries in the West, set up joint stock companies by issuing stocks to operate some large enterprises in industry, agriculture, transportation, and finance and insurance.The main purpose of some joint-stock companies in our country to issue stocks is also to raise the funds needed for the further development of the enterprise.

[-]. Diversify investment risk by issuing shares

The second function of issuing stocks is to diversify investment risks.No matter what kind of enterprise it is, there will always be operational risks, especially in some high-tech industries, because the market prospects of products are not clear, and the technology and technology have not yet matured and stabilized, the risks are even greater in the process of operation.For some enterprises with unpredictable prospects, when the promoters are difficult or unwilling to bear the risks they face, they will always try to transfer or share the risks to others, and forming joint-stock companies by issuing stocks is a way to diversify investment risks. good idea.Even if the investment fails, the losses suffered by each shareholder are very limited.

[-]. Increase the value of venture capital by issuing shares

In the stock issuance market, the issue price of the stock is always related to the operating performance of the enterprise.When a company with excellent performance issues shares, its issue price is much higher than the net assets per share. If it encounters a hot market in the secondary market, its premium can often reach 2~3 times or even more than the net assets per share. Many, and the premium issuance of shares has added value to the venture capital of the founders of the joint-stock company.For example, the state-owned shares of listed companies in our country are all discounted by the same amount of net assets, and the stocks with a face value of one yuan correspond to their original net assets of one yuan.After issuing stocks at a high premium, the net asset content of the joint-stock company can be increased by 30% or more.

[-]. Play the role of advertising through the issuance and listing of stocks

Since a large number of the public participate in stock investment, the stock market has become a hot spot for public opinion propaganda. Various media are repeatedly disseminating stock market information every day, which invisibly increases the popularity of listed companies and plays a role in publicity and advertising.

For stock buyers, the basic functions of stocks are as follows:

([-]) Since stocks are profitable, stock investment has become a tool for public investment.People always hope that money can make money, and in addition to bank deposits, buying bonds and setting up economic entities by themselves.Earnings can also be obtained through the purchase of stocks to achieve capital appreciation.

([-]) Realize the combination of production factors by purchasing stocks.By purchasing stocks, investors can easily achieve the purpose of participating in investment or holding shares, purchasing and merging joint-stock companies, so as to realize the combination of production factors and improve the operating efficiency of enterprises.For example, large companies in the United States and Japan have participated in the operation and management of these two companies by purchasing the shares of Jiangling Motors in Jiangxi and Beilv Motors in Beijing, and introduced advanced Western technology and management methods to these two companies. Realize the combination of production factors to achieve the purpose of improving operating efficiency.

([-]) Earn the stock price difference by buying and selling stocks. Due to the influence of many factors, the stock price has strong volatility, so people can use stocks to speculate and earn the stock price difference from buying and selling. It is also one of the reasons why the stock market attracts many investors.

(Section [-]) A Comparison of Stocks and Bonds

Both stocks and bonds are securities and are the two main financial instruments in the securities market.Both are issued in the primary market and transferred and circulated in the secondary market.For investors, both are financing vehicles that can raise capital through public offerings.It can be seen that both are essentially capital securities.From a dynamic point of view, the yield and price of stocks and the interest rate and price of bonds affect each other, and often move in the same direction in the securities market, that is, one rises and the other rises, and vice versa, but the rise and fall are not necessarily consistent.These are the links between stocks and bonds.

Although both stocks and bonds are securities and can be used as means of financing and investment tools, there are obvious differences between the two.

[-]. Different issuers

As a means of financing, whether it is the state, local public organizations or enterprises, all can issue bonds, while stocks can only be issued by joint-stock enterprises.

[-]. Different income stability

From the perspective of income, the interest rate is fixed before the bond is purchased, and fixed interest can be obtained upon maturity, regardless of whether the company that issued the bond is profitable or not.Generally, the dividend rate is not fixed before the stock is purchased. The dividend income changes with the profit of the joint-stock company.

[-]. Different Capital Preservation Capabilities

From the perspective of principal, the principal can be recovered when the bond matures, that is to say, even the principal and interest can be obtained, just like lending money.Stocks have no expiration date.Once the stock principal is handed over to the company, it cannot be taken back. As long as the company exists, it will always be at the disposal of the company.Once the company goes bankrupt, it depends on the liquidation of the company's remaining assets. At that time, even the principal will be wiped out, especially for minority shareholders.

[-]. Different economic interests

The above principal and interest situation shows that bonds and stocks are essentially two types of securities with different properties.The two reflect different economic interests.Bonds represent only a claim on the company, while stocks represent ownership of the company.The difference in ownership relationship determines that bond holders have no right to intervene in the company's operation and management, while stock holders have the right to directly or indirectly participate in the company's operation and management.

Five, the risk is different

Bonds are just general investment objects, and their transaction turnover rate is lower than that of stocks. Stocks are not only investment objects, but also the main investment objects in the financial market. Their transaction turnover rate is high, and the market price can fluctuate greatly, which can skyrocket Plunging, low security, high risk, but high expected income can be obtained, so it can attract many people to invest in stock trading.

In addition, when the company pays income tax, the interest of corporate bonds has been deducted from the income as an expense, and it is listed before income tax.The dividends of the company's stocks belong to the distribution of net income, not expenses, and are listed after income tax.This point has a great influence on the company's financing decision-making, and it is often used as the decisive factor in the choice when deciding to issue stocks or issue bonds.

From the above analysis, we can see the characteristics of stocks: First, stocks are irreversible.Once the stock is sold, it cannot be returned to the company, and the share capital can no longer be requested.Second, stocks are risky.Whether you can get the expected income from investing in stocks depends on the company's operating conditions and the market conditions in the stock exchange market, which are not certain and change greatly, so you must be prepared to take risks.Third, stock market prices, that is, the stock market, are volatile.There are various factors that affect stock market fluctuations, including internal and external; operational and non-operational; economic and political; domestic and international; and so on.These factors change frequently, causing the stock market to fluctuate constantly.Fourth, stocks are extremely speculative.The riskier the stock, the more volatile the market price, the more conducive to speculation.Speculation is destructive, but it also speeds up capital flow and capital concentration, which is conducive to the adjustment of industrial structure and increases the total supply of society, which has important positive significance for economic development.

(Section V) Comparison of Stocks and Savings
Stocks and savings deposits have a certain similarity in form, and the owner of the currency delivers funds to a joint-stock company or bank, and is entitled to receive income accordingly, but stocks and savings deposits are fundamentally different in essence.

[-]. Although both stocks and savings deposits are based on credit, their natures are different
Stocks are based on capital credit, which embodies the rights and obligations between joint-stock companies and shareholders around the form of investment; savings deposits are a kind of bank credit, which establishes a loan claim between the bank and depositors debt relationship.The purchaser of the stock is the shareholder of the joint-stock company, and the depositor is actually the lender, who lends his temporarily idle funds to the bank.

[-]. The legal status and rights of stock holders and bank depositors are different
Although both stockholders and depositors enjoy certain rights and assume corresponding responsibilities, stockholders are in the position of shareholders and have the right to participate in the production and operation decisions of the joint stock company; depositors are only creditors of the bank, and their creditors' rights The content is limited to regular recovery of principal and interest, but cannot participate in the operation and management of the debtor, and is not responsible for its operating conditions.

[-]. Although both stocks and savings deposits can increase the value of money.But the risk is different

Stock is a direct investment in a joint stock company, and it can directly obtain the income it seeks—dividends and bonuses—according to the operating conditions and profitability of the joint stock company.This income can be very high, or it can be very low or none, it depends on the operating performance of the joint-stock company, it is different every year, and it is in a kind of regular change; Savings function to obtain income - deposit interest.This value-added part is agreed and fixed in advance, and it will not be affected by the bank's operations.

[-]. The duration and transfer conditions of stocks and savings deposits are different
The stock is indefinite. No matter how the situation changes, the shareholders cannot ask the joint-stock company to withdraw the shares and take back the share capital, but they can be traded and transferred.Savings deposits generally have a fixed term, and savings depositors can recover the principal and interest when they mature.Even if it is withdrawn in advance, any form of savings can recover the principal, but the stock can only be transferred in the securities market, and its price must follow the market, and whether the investment can be recovered depends on the stock market at the time of transaction.

[-]. The cost of stocks and savings is different

When buying stocks, investors need to devote considerable energy to pay attention to changes in the stock market, and use relevant newspapers, magazines, and the Internet to obtain information and materials to help study the operating conditions of listed companies, thereby deciding to buy and sell stocks.Savings deposits only need to choose the deposit term in advance, without spending too much energy and material resources.

[-]. The calculation of the income of stocks and savings is based on different
The interest earned by depositors is calculated based on the principal of the deposit, and the amount of income is proportional to the amount of funds invested. The more deposits, the greater the income; while dividends are distributed according to the number of stocks held by shareholders, which is the same as There is no direct relationship between the amount of funds invested by shareholders. Although some investors have invested a large amount of funds, their returns may be far lower than the interest on bank deposits in the same period due to the high price of the purchased stocks.

(Section VI) Value of Shares

Stocks are a form of fictitious capital that have no value in themselves.Essentially, a stock is just a certificate of ownership.The reason why stocks can be valuable is because the holders of the stocks, that is, shareholders, can not only participate in the general meeting of shareholders and exert influence on the company's business decisions, but also enjoy the right to participate in dividends and dividends, and obtain corresponding economic benefits.In the same way, with a certain unit of stock, the greater the economic benefits that its holders can obtain, the higher the stock price will be.

The value of stocks can be divided into five types: face value, net value, liquidation price, issue price and market price.

[-]. Face value

The face value of a stock is the face value marked on the face of the stock issued by the joint-stock company. It is in yuan/share, and its function is to indicate the amount of capital contained in each stock.The face value of the stocks circulated in my country's Shanghai and Shenzhen stock exchanges is one yuan, that is, one yuan per share.

One of the functions of the stock par value is to indicate the proportion of the stock subscribers in the joint-stock company's investment, as a basis for determining shareholder rights.For example, if the total share capital of a listed company is 1 yuan, holding one share means that the shareholding in the company is 000/000.The second function is to use the face value of the stock as a basis for pricing when the stock is issued for the first time.Typically, shares are issued at a price above their face value.When the stock enters the circulation market, the face value of the stock has nothing to do with the stock price.It will be as high as stockholders like to speculate the stock price.

[-]. Net worth

The net value of the stock is also called the book value, also known as the net assets per share, which is the net asset value contained in each stock calculated by accounting statistics.Its calculation method is to divide the company's net assets (including registered capital, various provident funds, accumulated surplus, etc., excluding debts) by the total share capital, and the net value per share is obtained.The higher the book value of a corporation, the more assets shareholders actually own.Since the book value is the result of financial statistics and calculations, the data is more accurate and highly reliable, so it is one of the important basis for stock investors to evaluate and analyze the strength of listed companies.Shareholders should pay attention to this data of listed companies.

[-]. The liquidation price of the stock
The liquidation price of a stock refers to the actual value represented by each stock once the joint-stock company is liquidated after bankruptcy or bankruptcy.Theoretically speaking, the liquidation price per share of a stock should be consistent with the book value of the stock. The price is generally lower than the actual value.Therefore, the liquidation price of the stock will not be consistent with the net value of the stock.The liquidation price of the stock is only used as the basis for determining the stock price when the joint-stock company loses its legal personality due to bankruptcy or other reasons, and it has no meaning in the process of stock issuance and circulation.

[-]. Issue price of shares

When the stock is listed and issued, the listed company, from the perspective of the company's own interests and ensuring the success of the stock listing, does not issue the listed stocks at face value, but formulates a more reasonable price for issuance. This price is called the issue price of the stock.

[-]. The market price of the stock
The market price of a stock refers to the transaction price reached by both parties during the transaction of the stock, and the stock price usually referred to refers to the market price.The market price of a stock directly reflects the market conditions of the stock market and is the basis for investors to buy stocks.Due to the influence of many factors, the market price of stocks is in constant change.The stock price is a concentrated reflection of the stock market value, so this price is also called the stock market.

(End of this chapter)