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Equity Securities

Is Value Investing Still Relevant?

When we look at what kinds of companies to invest in, we all have different ideas in mind on what makes a company worthy of receiving our money. 

We might look at things like profitability metrics, whether or not the company has strong leadership, or perhaps we care about whether the company shows any kind of social consciousness. 

No matter what we look for in a company to invest in, we want to make sure we are getting good “value” for our money. 

Robert writes in, “Mike, thanks for the insight as always. After reading the headlines the past few weeks, and seeing how the market acts, it makes me wonder if trying to find a good value stock is worth it, or if I should just buy the S&P 500 indexes and let it ride. Hope you can give some good pointers here. Thanks.”

No matter what we are buying, we are making sure we are trying to get “value” for our money. Even if you are buying the S&P 500 index funds, you are still trying to buy value and hoping you will get more money than you started with. The only difference in classic value investing is how you go about doing it.

In classic value investing, you are trying to put a price tag on what a company is worth based on different things, like annual cash flow or book value. From there, you compare the price that you believe a company is worth to the price that it is currently trading at. 

If you can buy the company for less than what it is trading at, then you are receiving it at a good value, in theory.

The idea of value investing has a few celebrities that champion it, most famously Warren Buffet. He has become famous for making a lot of money using theories taught by his teachers, Benjamin Graham and David Dodd.

Some of these theories include things we have mentioned, like cash flow analysis, and also analyzing the margin of safety of your investment.  Essentially, you want your potential investment to be so undervalued by your analysis that if you are wrong, it will lessen the blow.

Now, you might be wondering how one might value a company based on its cash flow, book value, or profitability. We will dive into this question in future posts as part of our “How to Price Stocks” series.

For questions on this topic, please leave a comment below.



Thank you for reading. This article should not constitute legal advice. For help regarding your specific situation, please consult a local advisor.

Categories
Equity Securities

What is Treasury Stock?

When a company decides it needs to raise more money, it has a few ways of doing so. Aside from just increasing its profits, the company can either take on debt or issue more stock to new or existing shareholders to meet its cash flow needs.

But what happens when a corporation decides it doesn’t want more shareholders? What happens when a corporation decides it wants less shareholders?

When a corporation decides it wants less shareholders, for any reason, it can buy back stock from existing shareholders. The stock that the corporation buys is held in its treasury, therefore denoting it the name Treasury Stock.

What Rights, if any, Does Treasury Stock Have?

Because it is owned by the corporation and it no longer is in the hands of the shareholders, treasury stock loses a lot of the privileges and rights that it was granted when it was common stock. It no longer has voting rights and does not pay a dividend.

The reason being is, if it did pay a dividend, it would just be the corporation paying money back to itself.

What Happens to Treasury Stock?

The stock that a corporation buys back can be held, retired, or resold.

The reasons for buying back stock are endless. It may be that the corporation wanted to reduce the number of shareholders to take the company private, or perhaps the price of the stock dropped to a sufficient level that the company thought it would be a good move to buy the stock now for cheap and then attempt to resell it later when the prices rise again.

It’s always important to note when treasury stock is listed on a company’s financial statements, as it may indicate the corporation is readying itself for a strategic move, or is perhaps indicating its intentions.

 


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.

Categories
Equity Securities

Common Stock: What Are Preemptive Rights?

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When buying a security or option, it is important to look at what features the purchase will entail. Many times what may be included are preemptive rights, which may go by many different names, such as an “anti-dilutive” covenant or privilege.

For many investors– especially larger ones with a greater share of equity in a business– this is a very attractive feature.

Why Do Investors Care How Many Other Investors There Are?

If an investor holds a larger share of equity in a business, they usually hold certain privileges such as greater proportional voting power and they likely do not want to give that up. When more shares are issued, it dilutes their proportional percentage of equity.

Therefore, the power of a preemptive right allows an investor to buy the shares being offered from any new issuance of stock, preserving their proportional share of equity in the business. After the existing shareholders have the chance to buy into the additional shares, then the corporation is allowed to offer the new shares to potential new shareholders.

Are There Any Other Benefits To a Preemptive Right?

Before the new share offering, there is what is called a rights offering. Existing shareholders are given rights– the number of rights being based on their number of existing shares– to buy a certain number of new shares at a discount to the current market price of the security.

If the discount is substantial enough, this can be a great benefit for existing shareholders to increase or maintain their current equity in a corporation while potentially making greater returns on their investment.

This right can be a very powerful tool for a large investor to preserve their ownership and voting power in a business. The preemptive right essentially protects the risk of their share diluting. In a way, it’s like having insurance on your security purchase.

 


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.

Categories
Equity Securities

Common Stock: What Are Voting Rights?

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One of the most attractive features of common stock for a large investor in a corporation is the right to vote. Votings take place at the company’s annual meeting. The investors in the corporation vote on anything that will affect their “owner’s interest,” including important events like the vote for the new Board of Directors, otherwise known as the company’s top executives that manage the business.

What Other Things Can Owners Vote On?

Obviously, the owners of common stock are not limited to just voting on the executives of a corporation. The right to vote also entails voting on whether the corporation will issue convertible bonds or whether it will declare a stock split, since both of these affect the owners’ interest in the company and will dilute their proportional ownership.

How do the Common Stockholders Vote?

As mentioned, the actual vote takes place at the company’s annual meeting. As for how the votes are counted, there are a few different ways of implementation; however, the most popular ways are cumulative voting or statutory voting.

Cumulative voting generally benefits minority shareholders because it allows them to direct all of their attention to one choice, as opposed to how statutory voting operates, which forces the shareholders to spread their attention to all of the choices being voted on.

Why Do Common Stockholders Get to Vote?

Anyone who owns common stock is a part owner of a company, and just as a small business owner is responsible for deciding how things operate in their own business, shareholders must decide how things will operate in their business as well. And choosing effective managers is one of the most important parts of making sure that a business runs smoothly and profitably. And making sure that more shares being issued do not affect their ownership stake in the business is equally important to investors.

 


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.

Categories
Equity Securities

What Is Common Stock?

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When talking about securities, the most available (and generally most affordable) equity security is the common stock. When a company goes through incorporation, part of the process requires that the company offer shares of stock to investors so that the owners of the shares in turn become part owners of the company, and therefore have a stake in how the company operates and the profits or losses that it returns.

This is a reason why another name for shareholders or stockholders is also stakeholders.

The stock that the company may offer is divided into two main categories: common and preferred. Here, we will only be discussing common stock and we will save preferred for another time.

So what is special about common stock?

Common stock has many attractive features, including voting rights for certain events in the company, a potential for a high return on investment, and the possibility of a quarterly dividend paid out of a company’s profits.

The voting rights inherent in common stock allow the investor to vote on certain issues in the company, such as voting on the members of the Board of Directors. This feature truly showcases the fact that the owner of the stock really is a proportionate owner of the company, no matter how small their vote may seem compared to the amount of other investors.

Inherent in common stock also is the risk. But with great risk comes the potential for great reward. The potential to lose all of your investment in a common stock is matched by the possibility of unlimited gain in the years to come for that same stock.

Because the price of the stock is influenced by the valuation and performance of the company, the potential for a stock truly is unlimited (in either direction, so remember to use your best judgement and the consultation of a professional before any investment).

 


Disclaimer: This information does not constitute financial advice. For specific information regarding your financial situation, consult your local financial advisor.