Values of Common Stock

A common stock’s market value is determined by supply and demand and may or may not have any real relationship to what the shares are actually worth. The market value of common stock is affected by the current and future expectations for the company.

Book Value

A corporation’s book value is the theoretical liquidation value of the company. The book value is found by taking all of the company’s tangible assets and subtracting all of its liabilities. This will give you the total book value. To determine the book values per share, divide the total book value by the total number of outstanding common shares.

Par Value

Par value, in a discussion regarding common stock, is only important if you are an accountant looking at the balance sheet. An accountant uses the par value as a way to credit the money received by the corporation from the initial sale of the stock to the balance sheet. For investors, it has no relationship to any measure of value that may otherwise be employed.

Rights of Common Stockholders

As an owner of common stock, investors are owners of the corporation. As such, investors have certain rights that are granted to all common stock holders.

Preemptive Rights

As a stockholder, an investor has the right to maintain a percentage interest in the company. This is known as a preemptive right. Should the company wish to sell additional shares to raise new capital, it must first offer the new shares to existing shareholders. If the existing shareholders decide not to purchase the new shares, then the shares may be offered to the general public. When a corporation decides to conduct a rights offering, the board of directors must approve the issuance of the additional shares. If the number of shares that are to be issued under the rights offering would cause the total number of outstanding shares to exceed the total number of authorized shares, then shareholder approval will be required. Existing shareholders will have to approve an increase in the number of authorized shares before the rights offering can proceed.

Number of Existing Shares

Number of New Shares

Total Shares After Offering

100,000

100,000

200,000

10,000

10,000

20,000

10% Ownership 10% of Offering 10% Ownership

In the example above, the company has 100,000 shares of stock outstanding and an investor has purchased 10,000 of those original shares. As a result, the investor owns 10% of the corporation. The company wishing to sell 100,000 new shares to raise new capital must first offer 10% of the new shares to the current investor (10,000 shares) before the shares may be offered to the general public. So if the investor decides to purchase the additional shares, as is the case in the example, the investor will have maintained a 10% interest in the company.



Types of Stock

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