Demystifying Stocks: Ownership, Rights, and Valuation
Stocks are a type of investment that represents ownership or a share in a company, including joint-stock companies, partnerships limited by shares (KGaA), or European companies (SE). By owning stocks, shareholders participate in the company’s equity, along with all the associated rights. Stocks can be classified based on various factors, such as voting rights, transferability, securitization, issuance date, and tradability.
| Characteristic | Description | Example |
|---|---|---|
|
Voting Rights |
The level of influence a shareholder has in the company's decision-making process |
Common stocks (with voting rights) vs. Preferred stocks (limited or no voting rights) |
|
Transferability |
The ease with which a shareholder can transfer their ownership in the stock to another person |
Freely transferable stocks vs. Restricted stocks (transfer limitations) |
|
Securitization |
The way in which the stocks are issued and held, either in physical certificates or electronically |
Certificated stocks (paper certificates) vs. Book-entry stocks (electronic records) |
|
Issuance Date |
The time when the stock was initially issued to the public or private investors |
Initial Public Offering (IPO) stocks vs. Seasoned equity offering (SEO) stocks |
|
Tradability |
The ability to buy or sell the stock in the market, depending on its demand and liquidity |
Actively traded stocks vs. Illiquid stocks (limited trading volume) |
Key Rights of Shareholders
When you own stocks, you’re granted specific rights as a shareholder. These include:
- Profit Participation (Dividend Rights): Shareholders receive a share of the company’s profits (dividends) proportional to the capital they provided.
- Participation and Voting Rights at Annual General Meetings: Shareholders can attend annual general meetings and exercise their voting rights based on their share ownership.
- Right to Information: Shareholders can ask the executive board questions about the company’s operations during the annual general meeting. However, the board may refuse to answer.
Stocks are popular investments for private and institutional investors, as they offer higher returns than other asset classes. Investors can also invest in tangible assets through stocks and potentially speculate on their value.
Stock Valuation Using Key Ratios
There are two primary methods of stock analysis: technical and fundamental. Technical analysis focuses on the stock price and past chart patterns to identify future trends, while fundamental analysis evaluates a company’s stock using key ratios, such as:
- Price-to-Earnings Ratio (P/E): Compares a company’s stock price to its earnings per share.
- Dividend Yield: Calculates the return on the stock based on dividends per share and the stock price.
- Price-to-Cash-Flow Ratio (P/CF): Compares the stock price to the company’s cash flow.
- Price-to-Book Value Ratio (P/B): Evaluates a company’s equity valuation by comparing the stock price to the company’s book value.
- Price-to-Sales Ratio (P/S): Compares the stock price to the company’s revenue.
Understanding and evaluating stocks through these key ratios can help investors make informed decisions about their investments.
Capital Increases and Shareholders’ Rights
Capital increases refer to the process of issuing additional shares in a company to raise more equity capital. To protect existing shareholders from any disadvantage or dilution in ownership, the law mandates the provision of a subscription right for new shares. This right is represented as a ratio between existing shares and new shares. For instance, a 4:1 ratio implies that a shareholder with four existing shares has the right to acquire one new share, thus preserving their proportion of voting rights.
Following a capital increase, an average price will be established, which determines the value of the subscription right. The value of this right can also be calculated using a formula that takes into account the difference between the new and old equity capital.
In summary, capital increases aim to raise funds for a company while safeguarding shareholders’ interests. Subscription rights help maintain the balance of power and protect shareholders from potential dilution in ownership and voting rights.