Common stock refers to the certificate issued to owners of a corporation. Common stock’s financial value is located in the equity section of the balance sheet. Common stock is sold to raise capital for business operations and fixed asset purchases.
With options, an owner of stock fears a sudden steep drop in price and thus they may purchase an option called ‘PUTs’ to force someone to buy the stock at a preset price. The key for the owner of a PUT is to set a floor price for their existing stock position. A seller of a PUT desires to own the stock at a certain price if it can get there.
The basic principle of stock is an ownership right of a company based on the percentage of outstanding shares in possession. It is essentially a mutual understanding between shareholders that each investor’s percentage of ownership is similar in rights based on that percentage of ownership.
In the equity section of the balance sheet there is an account that tallies the lifetime earnings net of dividends for the company. The value identifies the total amount retained by the company for operational purposes. This account is referred to as the Retained Earnings of the business.
The shareholder agreement lays out the rules of the relationship between the shareholders of a company. Most often the agreement is poorly written because the legal team fails to understand the business aspect of each of the respective sections. One of these sections is referred to as the Article of Capitalization or commonly called the Capitalization Clause.
The one single term mostly equated to capitalism is ‘Stock’. When a business is incorporated, stock is the core medium of exchange for the investment. The company issues a certificate referred to as stock in exchange for the investment – most often cash. This is the one true form of pure risk. Most other forms of investments generally have some form of collateral, credit, or cash flow to substantiate the investment.
There are several definitions associated with the term ‘Book Value’ and depending on the context of its use, determines the correct definition and proper use.
A document indicating ownership in a corporation is often referred to as common stock. It identifies an equity position in a business. The document or certificate is commonly referred to as a security and provides certain rights to the holder (owner). These rights include voting and residual value upon liquidation of the company.
Within the family of corporations, the Internal Revenue Service (IRS) grants tax free status to S-Corporations. It is strictly an IRS term. In the IRS code, there are several subchapters pertaining to corporations; Subchapter S identifies and regulates S-Corporations. In essence, S-Corporations are a pass through entity meaning that all income, losses, credits and special deductions are pass-through to the stockholders of the company.
The equity section of the balance sheet equals assets minus liabilities. Traditionally the equity section is referred to as the net worth of the company. If you were to dispose of all the assets through a sale and pay off liabilities, the money left over would be available for distribution to the shareholders. The shareholders basically own the equity section of the balance sheet.
