Rich Dad’s Financial IQ Cultivation: Stock Fundamentals

Chapter 1 Overview of Stocks (1)
((Section [-])) The concept and characteristics of stocks

concept
In the wave of market economic reform, my country's stock market has also continued to develop and improve. Stock market investment has not only become a hot spot in people's lives, but also a means of financial management for stock market investors willing to take risks. Therefore, stocks have naturally become a topic of discussion among people. Focus.

What are stocks?Stock is the abbreviation of share certificate, which is a kind of securities issued by joint-stock companies to shareholders as shareholding certificates for raising funds and obtaining dividends and bonuses.Each share of stock represents the shareholder's ownership of a basic unit of the business.Stock is an integral part of the capital of a joint-stock company, which can be transferred, traded or mortgaged, and is the main long-term credit instrument in the capital market.

The role of stocks has three points. (1) The stock is a proof of capital contribution. When a natural person or legal person invests in a joint stock company, he can obtain the stock as a certificate of capital contribution; The general meeting of shareholders of the joint-stock company expresses opinions on the operation of the joint-stock company; (2) stock holders use their shares to participate in the profit distribution of the share-issuing company, which is commonly referred to as dividends, in order to obtain certain economic benefits.

[-]. Features

The characteristics of the stock: the stock is the securitization of the capital share invested in the joint stock company, which belongs to the capital securities.Generally speaking, it exists according to the existence of the joint stock company.However, stocks are different from investments themselves.The investment raised through the issuance of shares is the actual capital used by the joint stock company for production and circulation; while the stock is the medium for stock investment, which is independent of the actual capital, relying on the amount of capital it represents and the shareholders' Equity engages in independent value movements in the stock market.

Specifically, in the operation of market economy, stocks have the following basic characteristics:
([-]) Profitability

It means that the holders have the right to receive dividends and bonuses from the company according to the company's articles of association and obtain investment income based on the stocks they hold. This is not only the purpose of stock investors investing in the company, but also a necessary condition for the company to issue stocks.

The size of the stock return depends on the company's operating conditions and profitability.Under normal circumstances, the income obtained from stocks is higher than the interest income of deposits in the bank, and also higher than the interest income of bonds.

The profitability of stocks is also reflected in the fact that holders can use stocks to obtain price difference income and realize currency preservation.That is to say, stock holders can earn price difference profits through low entry and high exit; or when the currency depreciates, the stock will appreciate due to the appreciation of the company's assets, or obtain new shares allotted by the company at a special price lower than the market price or free of charge and benefit the stockholders.

([-]) Risk

The risk of stocks corresponds to the returns of stocks.

By subscribing for stocks, investors may not only obtain higher investment returns, but also bear greater investment risks.In market economic activities, due to the influence of various uncertain factors, the return of stocks is not a fixed value that has been determined in advance, but a dynamic value that is difficult to determine in advance, and it will fluctuate with the company's operating conditions and profitability. , is also affected by the stock market.The better the company is run, the more dividends and bonuses the stock holders will get; if the company is not well run, the profit share of the stock holders will be reduced, or even no profit can be divided.In this way, the market price of the stock will fall, and the stock holders will suffer losses due to the depreciation of the stock; if the company goes bankrupt, the stock holders will not even be able to keep their principal.

It can be seen that the risk and profitability of stocks coexist, and the shareholders' income is to a large extent the compensation for the risks they bear.The size of the stock return is directly proportional to the size of the risk.

([-]) Non-repayment.

A stock is an indefinite legal certificate, which reflects a relatively stable economic relationship between shareholders and the company.At the same time, investors cannot withdraw the shares after purchasing the shares, and the effective existence of the shares is related to the duration of the company.For subscribers, as long as they hold shares, the status of the company's shareholders and shareholder rights cannot be changed.At the same time, the stock represents the permanent investment of the shareholder, and he can only recover the principal by transferring the stock on the stock market.For the company, stock is the main means of raising funds. Since the stock is always in the stock market and cannot be withdrawn, the funds raised through the stock will have a stable self-owned fund during the company's existence.

([-]) Liquidity

Stocks are highly liquid.In the stock trading market, stocks can be transferred at any time as trading objects or collateral.Stock transfer means that the transferor reclaims its capital contribution in the form of stock price, and transfers the shareholder identity and various rights and interests represented by the stock to the transferee.Liquidity is a basic characteristic of stocks.The liquidity of stocks is a special form of commodity exchange. Holding stocks is similar to holding currency, which can be cashed in the stock market at any time.The liquidity of stocks promotes the effective use of social funds and the rational allocation of funds.

([-]) Scalability of shares

The flexibility of shares means that the shares represented by the stock can be split or consolidated.

The subdivision of shares means that the original 1 share is divided into several shares.A stock split does not change the capitalization, it just increases the total number of shares and the total number of equity interests.When the company's profits increase or the stock price rises, investors need more funds to purchase each lot of stocks, and it will be difficult to trade stocks.In this case, the shares can be subdivided, that is, to reduce the price of unit shares by splitting shares, so as to attract more investors and expand the trading volume of the market.

The consolidation of shares is the consolidation of several shares into fewer shares or one share.Share consolidation is generally used when the par value of the shares is too low.Companies implement share consolidation mainly for the following reasons: the company's capital is reduced; the company merges; or the stock market price rebounds due to the reduction of supply.

([-]) Price volatility

Stocks are traded objects in the trading market, and like other commodities, they also have their own market conditions and market prices.The level of stock prices is not only closely related to the company's operating conditions and profitability, but also closely related to the comparison between stock returns and market interest rates.In addition, stock prices will be affected by many factors such as domestic and foreign economics, politics, society, and investor psychology.From this point of view, the change of stock price is not the same as the change of general commodity market price, and its basic characteristics are big ups and downs.

The volatility shown in the transaction price of stocks is not only an important reason for the company to attract the public to actively invest in stocks, but also an important external factor for the company to improve management, strive to improve economic efficiency, and enhance the company's competitiveness.

([-]) Participation in business decision-making

According to the provisions of the relevant laws, the holders of stocks are the shareholders of the company that issued the stocks, and have the right to attend the general meeting of shareholders, elect the company's board of directors, and participate in the company's operating decisions.The investment will and some economic benefits of stock holders are usually realized through the exercise of shareholder participation rights.

Shareholders' right to participate in the company's operating decisions depends on the number of shares they hold.From a practical point of view, as long as the number of shares held by shareholders reaches the actual majority of the decision-making body, they can become the company's decision-makers.

The participatory feature of stock management decision-making has very important practical significance for mobilizing the enthusiasm and creativity of shareholders to participate in company management decision-making, and for establishing a check-and-balance, scientific and reasonable enterprise operation mechanism and decision-making mechanism.

(Section [-]) Classification of Stocks
With the rapid development of the stock market, there are many types of stocks today. These stocks have different names, formations and rights and interests.There are therefore various ways to classify stocks.Due to the different rights and interests included in the stock, the form of the stock is also various.

[-]. Ordinary shares, preferred shares and post-allotment shares.

([-]) Ordinary shares
Common stock is a kind of share that changes with the change of corporate profits. It is the most common and basic share in the capital structure of a joint-stock company and the basic part of the capital of a joint-stock company.

The basic feature of common stock is that its investment income (dividends and dividends) is not agreed at the time of purchase, but is determined afterwards based on the operating performance of the company that issued the stock.If the company's operating performance is good, the return on common stock will be high; conversely, if the operating performance is poor, the return on common stock will be low.Common stock is the most important and basic stock in the capital structure of a joint-stock company, and it is also the most risky stock, but it is also the most basic and common stock.The stocks listed on my country's Shanghai Stock Exchange and Shenzhen Stock Exchange are common stocks.

Generally, the characteristics of ordinary shares can be summarized as the following four points: 1. Shareholders holding ordinary shares are entitled to receive dividends, but they can only be distributed after the company pays the dividends of debt interest and preferred shares.Common stock dividends are not fixed, generally depending on the company's net profit.When the company manages well and the profits keep increasing, the common stock can get more dividends than the preferred stock, and the dividend rate can even exceed 50%. Even lost money. 2. When the company is liquidated due to bankruptcy or closure, ordinary shareholders have the right to share the remaining assets of the company, but ordinary shareholders can only get property after the company's creditors and preferred shareholders. You can only give up.It can be seen that ordinary shareholders are more closely related to the fate of the company and share weal and woe.Ordinary shareholders are the main beneficiaries when the company makes huge profits; and they are the main losers when the company loses money. 3. Ordinary shareholders generally have the right to speak and vote, that is, the right to speak and vote on major issues of the company.Ordinary shareholders who hold one share have one voting right, and those who hold two shares have two voting rights.Any ordinary shareholder is eligible to participate in the company's highest meeting - the annual general meeting of shareholders, but if they do not want to participate, they can also appoint a proxy to exercise their voting rights. 4. Ordinary shareholders generally have preemptive stock options, that is, when the company issues new ordinary shares, existing shareholders have the right to purchase the newly issued shares first (possibly at a low price) so as to keep their original percentage of ownership of the enterprise unchanged. To maintain its interest in the company.For example, a company originally had 1 common shares, and you own 100 shares, accounting for 1%. Now the company decides to issue 10% more common shares, that is, 1000 additional shares. Then you have the right to buy 1 of them at a price lower than the market price. % is 10 shares, so as to keep the proportion of your holdings unchanged.

When issuing new shares, shareholders with preemptive stock options can exercise their preemptive stock options, subscribe for newly issued stocks, or sell and transfer their stock options.Of course, when shareholders think that it is not profitable to buy new shares, and it is difficult or little profit to transfer or sell stock options, they can also let the preemptive stock options expire and become invalid.When the company provides stock options, it generally stipulates the date of stock registration. Shareholders can only obtain stock options and subscribe for new shares first if they register and pay for shares within this date.Usually this kind of stock purchased within the registration date is also called attached stock. In contrast, the stock purchased after the stock registration date is called ex-right stock, that is, the stock is no longer attached to the stock option when it is sold.In this way, investments in shares purchased after the share registration date are no longer accompanied by warrants.In this way, investors (including old shareholders) who buy stocks after the share registration date do not have the right to buy stocks at a low price. In addition, in order to ensure the rights and interests of common stocks, some companies also issue warrants—that is, they can buy stocks at a certain price. A certificate to purchase a certain number of common shares at a certain price for a period of time (or perpetuity).General company warrants are issued together with stocks and bonds, which can attract more investors.

To sum up, it is not difficult to see from the first two characteristics of ordinary shares that the dividends and distribution of residual assets of ordinary shares may fluctuate greatly. Therefore, ordinary shareholders bear the greatest risk.That being the case, ordinary shareholders are of course more concerned about the company's operating conditions and development prospects, and the latter two characteristics of ordinary shares just make this wish a reality—that is, they provide and guarantee that ordinary shareholders care about the company's operating conditions and development prospects. means of power.However, it is also worth noting that when the investment shares and preferred shares are publicly issued to ordinary investors, the company should make investors feel that ordinary shares can obtain higher dividends than preferred shares, otherwise, ordinary shares will not only take risks in investment, And if you can't get more dividends than preferred stocks, who wants to buy common stocks?Generally, preferred stocks issued by companies are mainly targeted at "insurance and security" investors. For those investors who are more "adventurous", common stocks are more attractive.In short, the purpose of issuing these two different types of stocks is to attract more capital with different interests.

([-]) Preference shares
Preferred stock is the symmetry of "common stock."It is a stock issued by a joint-stock company that has priority over common stock in the distribution of dividends and residual property.Preferred stock is also a certificate of entitlement without a time limit, and preferred stock holders generally cannot request the company to withdraw their shares midway (except for a few redeemable preferred shares).There are three main features of preferred shares: First, preferred shares usually have a predetermined dividend yield.Since the dividend rate of preferred shares is fixed in advance, the dividends of preferred shares generally do not increase or decrease according to the company's operating conditions, and generally cannot participate in the company's dividends. However, preferred shares can receive dividends before ordinary shares. For the company, due to The dividend is fixed and it does not affect the company's profit distribution.Second, the scope of rights of preferred shares is small.Preferred shareholders generally do not have the right to vote and be elected, and do not have the right to vote on the major operations of the joint-stock company, but they can enjoy voting rights under certain circumstances.

If the company's general meeting of shareholders needs to discuss the claim rights related to preferred shares, that is, the claim rights of preferred shares are prior to ordinary shares and inferior to creditors. The priority of preferred shares is mainly manifested in two aspects: 1. Dividend receiving priority.The order in which a joint-stock company distributes dividends is that preferred shares come first, followed by common shares.No matter how much the joint-stock company earns, as long as the general meeting of shareholders decides to distribute dividends, preferred shares can receive dividends according to the predetermined dividend rate. Even if there are generally reduced or no dividends, preferred shares should also distribute dividends as usual. 2 Priority for the distribution of remaining assets.When a joint-stock company is dissolved or liquidated in bankruptcy, preferred shares have priority in the distribution of the company's remaining assets. However, the preferred distribution of preferred shares is after creditors and before ordinary shares.Only when the debts of the company's creditors are paid off and there are remaining assets, the preferred shares have the right to distribute the remaining assets.Common shares are distributed only after preferred stock claims.

There are many types of preferred shares. In order to meet the needs of some investors who want to obtain certain preferential benefits, preferred shares have various classification methods.

The main categories are as follows:
1. Cumulative preferred stock and non-cumulative preferred stock.Cumulative preference shares mean that in a certain business year, if the company’s profits are not enough to distribute the prescribed dividends, the shareholders of preference shares in the future have the right to demand the full amount of dividends paid in previous years.For non-cumulative preferred shares, although the company has the right to receive dividends prior to ordinary shares for the company's profits in the year, if the company's profits in that year are not enough to distribute dividends according to the regulations, shareholders of non-cumulative preferred shares The company cannot be required to reissue it in subsequent years.Generally speaking, for investors, cumulative preferred shares have greater advantages than non-cumulative preferred shares.

2. Participating preferred stock and non-participating preferred stock.When the profit of the enterprise increases, in addition to enjoying the interest at a predetermined rate, preferred shares that can participate in profit distribution together with ordinary shares are called "participating preferred shares".In addition to the established dividends, preferred shares that no longer participate in profit distribution are called "non-participating preferred shares".Generally speaking, participating preferred stock is more beneficial to investors than non-participating preferred stock.

3. Convertible preference shares and non-convertible preference shares.Convertible preferred shares are those that allow the holders of preferred shares to convert eugenic shares into a certain amount of common shares under certain conditions.Otherwise, it is a non-convertible preferred stock.Convertible preferred stock is a type of preferred stock that has become increasingly popular in recent years.

4. Recoverable preferred stock and non-recoverable preferred stock.Recoverable preferred stock means that companies that issue this type of stock are allowed to recover the incurred preferred stock at the original price plus some compensation.This right is often exercised when the company believes that it can replace the preferred stock that has occurred with a lower dividend stock.On the contrary, it is an irrevocable preferred stock.

(End of this chapter)