Types of Stocks Issued by Corporations
The prevailing market conditions and financial needs are the key determinants of the kind of stocks that a company is going to trade-in. There is a huge portfolio of stocks that a company can trade-in. The easiest way to trade in stocks would be by issuing common stocks indirectly or directly (Weygandt et al, 2010).
A company can for instance trade in capital stock. This stock is assigned a value per share by the charter. It has both Par and a No-Par value per stock. A company can also trade in treasury stock. This involves the case where a company trades in a stock that it has issued, has fully paid for it and repossessed but not retired (Weygandt et al, 2010).
Moreover, a corporation can issue preferred stocks to the public. Through this stock, the owners get to earn dividends besides having more priority over holders of common stock. People who invest in preferred stock have the privilege of getting their money back long before the common stockholders get theirs. However, there is a tradeoff between the two stocks in that owners of preferred stock do not get to enjoy the full benefits of profits since they are paid a fixed amount of dividend as opposed to variable dividends which are paid to the owners of common stock.
Calculations of stocks, dividends, and stock splits
If a company declares a dividend of $3 per share, then it will have to pay dividends amounting to $60,000 if there are 20,000 shares of outstanding stock i.e. $3 x 20,000 shares = $60,000.
On the other hand, if a company has the following portfolio of outstanding shares (Preferred Stock (3%) 5,000 shares, $5 par = $25,000 at par. And Common stock 50,000 at $1= $50,000 at par)
Annual calculations would be as follows
Annually preferred dividend $25,000 x 3% = $750. This means that preferred shareholders would receive up to the first $750 dollars and the common shareholders would share anything beyond that figure. In case the amount to be paid to preferred shareholders was not enough during the first year i.e. only $250 was paid, the remaining is carried forward to the following year and the common shareholders do not receive anything. During the second year, the preferred shareholders will have to be paid $750 plus the previous $500 i.e. $1,250 dollars. If the company was paying out a dividend of $2250 during this specific period, the common shareholders would get to share $1,000.
A stock split is issued by a company when people are no longer interested in purchasing stocks that it has issued. This involves the reduction of a company’s stock prices and the redistribution of stocks. The later is achieved by allocating stock owners with more stock for their money. Through this scheme, a person who did not have enough money can get to own a part of the company. For instance, a company may decide to split its stocks in the ratio of 2:1. This means that a person holding 10 shares for 100 dollars will now have 20 shares of $5 dollars each.
Record of Treasury Stock Transactions
XYZ Inc. acquires 500 shares of its own stock at $2 per share.
Reference
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th ed.). Hoboken, NJ: John Wiley & Sons.