Greenville Business Magazine 2010 January issue : Page 38

Taking Stock

Brandy Woods Snow

Are you guilty of pulling that official-looking proxy statement envelope out of the mailbox with no more than a nonchalant glance? On more than one occasion, I’ve neglected to even open the envelope and instead promptly filed the document into the garbage can. Consequently, I missed an opportunity to exercise my rights as a stockholder. In all fairness, my shares are by far insufficient to allow my prerogative to alter the organization’s course, but nevertheless my voice has gone unheard. I’m not alone, and there are many more like me who give their stock holdings little thought and instead rely on the quarterly figures brought to us in a neat and tidy package by our financial advisor. But for those wanting to be more proactive with their shares, there are rights that accompany stock ownership that can allow you to be informed of your investment’s progress as well as insert your own two-cents in its management.

“You can’t begin to discuss your rights as a shareholder without first understanding the different classes of stock available as well as their respective risk factors,” says Jeremy Elliott, partner at Elliott Davis Investment Advisors.

Stocks are equity investments that represent ownership of real financial assets in a corporation and are generally considered to be smart investments that are expected to generate an excellent rate of return against inflation. There are two types of stocks – common and preferred – that each bring along their own privileges for the holder. Common stock comes with a greater profit potential but lands the holder at the “bottom of the totem pole” in regards to the right to receive monies paid back in the event of liquidation. In this case, the rights of common stock are superseded by those of creditors and preferred stock holders.

Common Stock

Common stockholders are assured these legal rights:

››Reception of stock certificates as proof of ownership

››Reception of company information and financial reports

Stockholders are allotted access to annual audited financial statements, board meeting minutes and a comprehensive listing of stockholders.

If access to the company’s books in accordance with these regulations is denied, the shareholder can pursue legal recourse, including bringing a lawsuit against the corporation for damages.

››Voting rights at stockholder meetings

Common stockholders do retain voting privileges on company issues and policies. “Stockholders have the ability to vote on basic policy decisions and elect officers of the company,” says Celinda Marshall, financial advisor at Edward Jones. “Shares of common stock give you a voice in deciding whether to issue more stock, sell the company to an outside buyer or make a change in the board of directors.”

Before the annual meeting, the company will issue a proxy statement – a legal document cataloging the planned changes in management that require shareholder approval. The proxy statement will also include pertinent information on board member and executive compensation, the audit committee as well as a comparison of stock performance to similar companies and the S&P 500.

Marshall says stockholders have three viable options for casting their vote: mail-in ballot proxy, attendance at the annual meeting, and telephone electronic ballot.

››Reception of dividends and ability to sell

If a company declares a dividend, common shareholders are entitled to this monetary amount for each share of stock owned. Their right to dividend pay-outs, though, is secondary to those holding preferred stock. Generally, many companies instead choose to reinvest their profits to encourage continued growth.

Occasionally, common stockholders may also get pre-emptive rights with the ability to retain proportionate ownership in the company by being given the choice to purchase new issues of stock before they are offered to the public. This right is given by state law or in accordance with the company’s policy.

››Preferred Stock

Although common stocks offer the greatest potential return on investment, more tentative investors desiring a greater degree of security will enjoy the perks offered by preferred stocks.

“Buyers who prefer less risk and greater stability may choose preferred stocks,” says Elliott. “These shares pay fixed dividends to the holder and offer priority over common stock when paying out dividends and assets in the event of liquidation.”

Unlike common stocks, however, preferred stocks typically do not include voting rights in company affairs. This option is especially interesting to private businesses who wish to maintain a separation between the economic interest of shareholders and the ability to retain control of company operations.

There are various types of preferred stocks that offer more specific shareholder rights, including:

››Participating Preferred Stocks

If the dividends for common stock surpass those of preferred stock in the course of a year, stockholders may be entitled to an increased dividend.

››Adjustable-Rate Preferred Stocks

Dividends will vary based on interest rate shifts in accordance with a predetermined formula.

››Convertible Preferred Stocks

Shareholders reserve the option to convert preferred shares into a company’s common stock after an established time period.

››Fixed-Rate Preferred Stocks

These stocks carry a fixed dividend rate that does not change throughout the duration of the issuance and have no maturity date.

Marshall notes some companies may choose to issue different classes of stocks that vary in voting and/or dividend privileges. This setup can facilitate a structure where less than 50 percent of shareholders can maintain control over company policies.

If navigating the privileges of stock ownership seems intimidating, Marshall suggests outsourcing to a seasoned professional. “Financial advisors are specifically trained to help you assess risks as well as communicate your entitlements as a stock owner, helping you find a voice in your investments.” GBM

Why Invest Now?

Time - invest while you still have time to let your securities grow in value. According to Dave Ramsey (www.daveramsey.com), “Over any given five-year period, 97 percent of the mutual funds on the market make money.” The stock market has averaged 12 percent growth over the last 70+ years, so with time on your side, profit will not be far behind.

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