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What is Dividend Enhanced Convertible Stock (DECS)?
This is a type of automatically convertible security that comes in the form of preferred stock shares, which function basically like bonds, that experience a mandatory conversion to common stock at some point. The dividend enhancement is a higher yield payout than other share classes are offered, to compensate the investor for the lack of control he or she has, since the shares will be converted at a predetermined time by the company. Mandatory convertible shares will offer a higher yield than their counterparts, but it will only last as long as the issuing company has determined. Continue reading...
What is absolute frequency?
In statistics, the number of times that a specific value shows up in a data set is the absolute frequency of that value. The absolute frequency can then be used to find the relative frequency, which is the probability that the specific value is observed in a given number of trials. The relative frequency (empirical probability) takes the absolute frequency and divides it by the total number of trials (cumulative frequency), and can be expressed as a ratio or percentage. Continue reading...
What is an Income Bond?
Income bonds are issued by companies and they will only pay a coupon or interest rate if the company generates adequate earnings to do so. Non-payment of a coupon or interest rate does not necessarily mean that the company is in default. The principal amount plus some interest is due to the bondholder at maturity. Income bonds are sometimes issued by companies who are experiencing hard times and cannot guarantee a coupon payment to bondholders. Continue reading...
What is Convertible Preferred Stock?
A convertible preferred stock is one that gives the owner the option to convert shares to common stock, usually by a predetermined date. The shareholder usually has control over when to convert the shares, but in some cases there are provisions that allow the company to force conversion. An investor may choose to do this conversion if they believe the company has high upside potential, and they want common stock exposure which would allow them to participate more in market gains. Continue reading...
What is Enterprise Value?
Enterprise Value is the total cost to acquire a company. The Enterprise Value of a company is the amount that would have to be paid for full ownership of it, which would include market capitalization (price per share x shares outstanding) + net debt (all liabilities - cash and equivalents). Market cap alone is technically just shareholders equity, and not capital from debt, so Enterprise Value adds that in for consideration. Enterprise value is the numerator in EV/E (Enterprise Value over EBITDA), a very common valuation ratio. Continue reading...
What is Investment Income?
Also referred to as passive income, investment income is money paid to an investor from the dividends, premiums sold, or sale of assets in their portfolio. Some investors treat it like a part-time job, such that there is nothing passive about it. In retirement, investors often receive income from bonds, preferred stock, and dividend-paying common shares. Income can be pulled from several kinds of investments, including real estate, and it is likely to be taxed at ordinary income tax rates. Continue reading...
What is the difference between Common Stock and Preferred Stock?
A preferred stock is higher up the equity chain than a common stock - preferred stockholders receive dividends first and will be paid out first in the event of liquidation. The primary difference between a preferred stock and a common stock is that preferred stockholders have a greater claim to assets of the company. This can come in two forms: preferred shareholders being paid dividends first, and also having a higher claim to being paid out in the event a company goes bankrupt or liquidate assets. Continue reading...
What is a Preferred Stock?
Preferred stock are dividend-paying equity shares issued by corporations, which pays a dividend with a higher priority than common stock, but lacks the voting rights that come with common stock. Preferred stock is very similar to a bond, because it will often be issued to raise capital for projects, and dividends (or interest) are expected to be paid regularly by the issuing company, but it still experiences the appreciation (and depreciation) of equity shares. Continue reading...
What are Fixed Income Funds?
Fixed income funds may not be used for income at all, but are relatively safe investments that primarily consist of dividend-paying bonds. Fixed income funds, also known as bond funds, invest primarily in bonds, but might also include some preferred stock, which pays regular dividends and behaves much like debt instruments. In fact, there are also Preferred Stock Funds and ETFs that fit into this category. Continue reading...
What are Mergers and Acquisitions (M&A)?
Companies often hold minority interest positions in other companies, but sometimes they decide to merge into one company, maybe by selling-out to a bigger company, or acquiring a smaller one. Very often, small companies are very agile and develop new technologies quickly, but do not have sufficient funds to bring them to the market. Large companies need the technologies and it is cheaper for them to buy smaller companies rather than spending money to develop them on their own. Continue reading...
What does Equity or Security Mean in the context of Capital Markets?
An equity or security generally refers to an individual position owned within a portfolio. An equity generally signifies some level of ownership in a corporation. When a person has ‘equity in a company,’ it generally means they own some portion of it and have a claim on the company’s value. An equity is another way of referring to a stock, which also represents a shareholder’s stake in a company. A security is a broader term, which refers to an instrument of ownership. Stocks are considered securities, but fixed income or debt holdings can also be labeled securities within a portfolio. Continue reading...
What is a Dividend Rate?
The dividend rate is basically just the value of the annual dividend of a company, stated as the monetary value. Not to be confused with the dividend yield, or the dividend growth rate, both of which are percentages. Dividend yield and dividend rate are slightly different from one another. The dividend yield is the size of a dividend in relation to the share price, and is stated as a percentage. The dividend rate is actually the amount of money paid out per share, per year, stated as a dollar amount. Continue reading...
What is a Stock?
Buying a stock means taking an ownership position in a publicly traded company. Once you purchase a stock, you become a shareholder. A company has two ways of acquiring capital needed for growth: borrowing it (often in the form of issuing bonds), or selling shares of their company's equity, which is known as stock. In other words, when you buy shares of a company’s stock, you are buying a claim to the company's profit margin, because you are technically a part-owner in the company. Those who hold shares of Common Stock, the most typical form of stock, have voting rights in the election of the company’s board members. Continue reading...
What is the Equity Multiplier?
The Equity Multiplier is a number used to compare companies, arrived at by dividing total assets by owner’s equity, and it gives an idea of what proportion of the company’s assets have been financed through equity vs debt. In general a low Equity Multiplier is a good sign because it means that a higher proportion of equity has been used to acquire assets, as opposed to funding assets with debt. However, the absence of significant debt could mean that the company lacked the credit rating to issue debt or take out loans. Continue reading...
What is Corporate Equity?
Corporate equity is retained earnings plus common shares outstanding. On a corporate balance sheet, the retained earnings and the outstanding common stock capitalization combined would be considered the corporate equity, also called shareholder’s equity / owner’s equity. Of the total corporate equity, the portion representing common stock equity is only the capital raised through the issuance of shares in an IPO (initial public offering), where payment for those shares was paid to the company. Subsequent trading in those shares does not affect the common stock equity on the company books. Continue reading...
What is Private Equity?
In the world of finance, private equity is a relatively new industry whereby private companies finance other businesses through direct investment, often in exchange for equity in the company and in some cases, decision-making capabilities. Private equity companies generally use capital of the principals or of high net worth investors to strategically invest in growing companies that need growth capital or seed capital to expand operations. Continue reading...
What is Shareholders Equity?
In the standard accounting equation, when all company liabilities are subtracted from company assets, the remainder is called shareholders equity. What this means is that in the event that the company were liquidated, all debts would be serviced first, including bonds issued by the company, and the remaining balance would be divided amongst shareholders. If a company has a respectable debt-to-equity ratio, it can improve the appeal of a company’s stock and lead to a higher market price for the shares. Continue reading...
What is Return on Equity?
Return on Equity refers to the return on shareholder’s equity, which is like looking at the compounding effects of profits. Shareholder’s equity, in the standard accounting equation, is the amount of assets and retained earnings in a company over and above the company’s liabilities. Return on Equity is a ratio which divides the net income of a company by the total shareholder’s equity in a company, which is effectively looking at the profitability of the profits of a company. Continue reading...
What is a Balance Sheet?
A company's balance sheet gives a picture of how all the assets, liabilities, and equities of the company "balance out." The basic accounting equation is Total Assets = Total Liabilities + Equity, and a Balance Sheet is going to detail these parts to show how everything adds up at the time of the report. With things equal on both sides of the equation, the company's books are balanced, the same way someone might go back through the carbon copies of checks they've written and "balance the checkbook" to make sure all checks written have been accounted for. Continue reading...
What is Common Stock?
A common stock is the one you’re most familiar with - having a share of ownership in a company. Owning common stock in a company is a vote of confidence that an investor thinks the company will perform well, and grow. Owning common stock also entitles an investor to equity ownership in a corporation, voting rights, and shared participation in a company’s success through dividends and/or capital appreciation. Continue reading...