Common Stocks

Naples, Florida Investment and Securities  Attorney - Russell L. Forkey, Esq.

Frequently, attorney's website assume that all investors have a general working knowledge of the markets and the fundamental investments that are traded thereon. If this is you, then most likely it will not be necessary for you to read this post other than to scan it to possibly refresh your memory. If, on the other hand, you have never invested before or consider yourself a novice, we strongly urge you to take the time to read the below described information. If you have any questions, please feel free to contact us for an initial free consultation. The below described information should not be considered legal or investment advice but is being provided for educational purposes only.

Below are some FAQs relating to common stock.

What is Common Stock?

When most companies are created, the incorporators usually don't start the company with the idea that they are going to one day go "public". Therefore, when most people incorporate, they usually authorize a small number of common shares, 100, 500 or 1000 that might be split between one or more partners, usually equally. This entitles these founding shareholders to directly own a percentage of the company. The shareholder is usually entitled to vote in the election of directors and on other important matters and to theoretically share in the wealth of the company by earn dividends, if any are paid. In the event that the company is liquidated, common stockholders divide the assets remaining after creditors and preferred shareholders have been repaid. Practically, common shareholders, especially in the case of bankruptcy receive only pennies on the dollar, if anything.

Is it Possible to Issue Additional Shares of Common Stock?

As time passes, our pro-type company does quite well. The founding shareholders decided that they want to raise additional capital to expand the business by bring in new investors. Now they have to restructure the company. One of the things that they are going to have to do is to issue more stock so that they can bring in more shareholders to raise the needed capital. For them to do this, the articles of incorporation of the company need to be amended to increase the number of authorized shares of common stock. This is generally a matter that is voted upon by the then shareholders, with majority controlling, unless other factors exist which are not being discussed herein.

While the company is still controlled by the original stock holders, this can be accomplished very easily and the sky is the limit. The hard part is determining how many shares to authorize, 50,000, 500,000, 5,000,000 or more. Because the original stockholders, in our pro-type company want to think big, they might also authorize another series of common stock and one or more series of preferred stock. It is not necessary to initially set forth the terms under which the additional series of common stock might be issued or the designations and limitations associated with the preferred stock. However, if this is not done initially, future shareholders may have a say in this matter.

What Limitations Are There on the Sale or Distribution of the Common Stock?

Both federal and state securities laws come into play when stock is being offered for sale to third parties. This post is not going to address those issues. Suffice it to say that compliance with these laws is of paramount importance and must be strictly complied with. For purposes of this post, we are going to assume that the common stock has been distributed properly and that it is trading on a recognized exchange.

How do I buy and sell common stock?

Shares of common stock are almost exclusively purchased through a licensed broker/dealer, except that some companies permit direct purchase of shares as part of their dividend reinvestment plan. All sales are done through registered broker/dealers. Consequently, as an investor, it is important that you verify that the entity that you are dealing with is in fact licensed.

However, please keep in mind that this discussion does not deal with private securities transactions that might be allowed under some type of exemption from registration.

What Charges Can an Investor Incur by using a Broker/Dealer?

The charges that will be incurred are commissions on agency transactions, mark-up and mark-downs on principal transactions, which vary from firm to firm and by the value and/or size of the transaction. Discount brokers charge less than full service brokers. Online brokers usually offer the deepest discounts but do carry a risk of technical interruptions. Additionally, other small ticket charges apply such as a nominal transfer tax.

What are Some of the Risks Associated with Common Stock?

Obviously, when you purchase a common stock there is no assurance that you will get your original investment back. With each stock that you purchase and/or sell one of three things will happen. First, you will make a profit because the value of the common stock that you have purchased as gone up because of the prospects of the company or maybe because of overall market forces. The second thing that could happen is that you would break-even. The third thing that could happen is that you could lose money because the value of the stock that you purchased has declined for any number of reasons, with the ultimate loss being your entire investment.

These three scenarios can be caused by any number of factors to numerous to discuss herein. This is because shares in public corporations have market value primarily based on an investor's expectations of future earnings and dividends. The relationship of these this market price to the actual earnings, called the price-earnings ratio or "multiple," is a measure of these expectations. Stock values are also affected by forecasts of business activity in general and by whatever' investor psychology" is produced by the immediate business and economic environment.

What is the Average Investor To Do?

Historically, the individuals that we have represented over the years have relied on their brokerage firm and account executive to help them determine which companies' common stock is suitable for them not only in amount and number of shares but also as to risk. They rely upon their professionals to tell them what to buy, how long to hold it and when to sell. Sometimes this reliance is misplaced because of the fact that the legal duties that an account executive owes to his customer is based upon the type of account relationship that exists or the course of conduct that has been relationship that the client has with his account executive. For more information relative to this last issue follow the highlighted link to discretionary account, hybrid account and non-discretionary account. Even with your review of these links, you will need to retain an experienced attorney to assist you in determining what relationship category that you fall in.

Contact Us

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.