Equities - Equity Terminology
Each type of equity position will be discussed in turn, but first you need a working vocabulary to understand the discussion.
Descriptive Share Terms
- Authorized refers to the maximum number of shares an enterprise may issue according to its own articles of incorporation. It is not obligated to issue all those shares.
- Issued or outstanding refers to the number of shares actually sold.
- Treasury refers to the number of shares that were once outstanding, have been repurchased by the company. Treasury stock can be either reissued or retired by the company; these shares typically have neither voting rights nor claims to dividends.
Share Value Terms
The worth of a share is entirely determined by the market. Still, the issuing company may make claims about a share's value, so here are some terms you need to know:
- No-par value is what you will encounter most often. For legal reasons, most companies defer to the market and make no claims as to the intrinsic value of their stock.
- Stated value is the worth of the no-par value stock as assigned by the issuing company's directors. This is strictly for accounting purposes and is not reflected in the share's market price.
- Par, or face, value is a nominal price assigned by the issuing company. Few common stock issues have a par value, and those tend to be very low. It is a term more likely to apply to bonds or to preferred stock, which is similar in many ways to bonds. In those cases, par value is used in computing interest or dividend rates.
General Share Terms
Before zeroing in on any particular class of equities, you will also need to know these general terms:
- Limited liability refers to the degree of personal financial risk an investor in securities generally takes. If you own a store and it is destroyed in a fire and you are uninsured, you could lose everything you invested in the store. If, heaven forbid, someone is in the store at the time and is disfigured or killed, you as the owner have unlimited liability. You could lose not only everything you invested, but also everything you own. However, if you buy shares of a corporation, you generally have limited liability as an individual and only risk losing the amount you invested.
- A stock certificate is a formal document stating you own a certain block of shares of stock of a company. It includes the name of the issuing corporation, the number of shares, the registered owner and the transfer agent.
- A transfer agent is a firm retained by a corporation or a mutual fund to maintain records that include each registered shareholder's name, address and number of shares owned. The transfer agent also ensures that stock certificates presented for transfer are properly cancelled and that new ones are issued in the name of the new owner.
- A registrar is like a transfer agent, but its main purpose is to document the names of all stockholders and the number of shares each one owns.
- Transfer procedures are the means by which ownership of a security is passed from one party to another, whether it involves physically moving paper or doing an electronic data transfer (which is more often the case in the 21st century). The legal change of ownership can come by way of a gift, sale or resale of a security. The task of transferring may involve the physical delivery of a stock certificate or the change of ownership on the books of the corporation by the transfer agent.
- An endorsement is the signature used to legally transfer a security, whether it is an interest-rate option or a personal check.
- An escrow receipt is a bank guarantee that an options writer has the option's underlying securities on deposit and that they are ready for delivery if the option is exercised.