UNIVERSITY OF ECONOMICS & LAW

SCHOOL OF FINANCE & BANKING

Stock

Security Analysis
 Main Content
Focused points in this session

1 The definition &

characteristics of stock
4 Common & Preferred
stocks

2 Stock valuation
5 Return on stock
investment

3 Stockholder’s right
6 Stock splits & Reverse
splits

Security Analysis 2
 What is stock?
Definitions & characteristics of stocks

• Capital mobilization tool of the joint stock companies.

• Represent the ownership of the company within the limit of the number of shares
held and receive dividends (for common stock).
• No maturity date, and the company has no obligation to repay the principal as for
debt securities.
• Ownership diversity & centralized operating
• Attract many investors to contribute capital, the number of shareholders is unlimited.
• The General Meeting of Shareholders elects the Board of Directors on its behalf to run the
company.
Security Analysis 3
 Different kinds of stock?
Common stock vs preferred stock

• Common stocks:
• Have voting right
• Receive dividend, depends on the business situation & the company's charter

• Nonvoting common stocks

• Preferred stocks
• Usually have no voting rights, dividends are fixed and required
• The voting right is different from common stock
• Other priorities

Security Analysis 4
 Different kinds of stock?
Based on ability to grow

• Growth stock: Is a stock of a business with high growth expectation in revenue

and profit, with high ROE. Due to high growth expectations, these stocks are also
highly valued

• Value stock: Is a stock of a business that does not expect high growth. Therefore,
the price of these stocks (PEG) is low, creating a safe margin for investors

Security Analysis 5
 Different kinds of stock?
Based on capitalization

• Small cap stock

• Mid cap stock
• Large cap stock

• The criteria of small, medium or large capitalization depend on each market and
change over time

Security Analysis 6
 Stock valuation
How to define the value of stocks

• Par value (face value)

• As specified in the company's charter, stable, only change in case of split or reverse split

• Book value
• Measure (in theory) the value of each share if the company is liquidated
• Book value per shares (BVPS) = (Total assets – Total liabilities) / Outstanding shares
• Unstable, constantly changing

• Market value
• Defined by demand & supply, often fluctuate
• Capitalization = Market Price x Number of Outstanding Shares

Security Analysis 7
 Different kinds of stock?
Based on capitalization

• Small, Mid & Large cap stock

• The criteria of small, medium or large capitalization depend on each market and
change over time

• Large stock (blue chip): Shares of large enterprises with large market
capitalization and influence on the general stock index in the market
• Small stocks (penny): Shares of small businesses, with low value, have no
influence on the general stock index on the market

Security Analysis 8
 Common stocks
Pros & cons of common stocks

Benefits Risk
• Have voting rights • Might not receive or unstable dividend
• Could be authorized to another person to • Receive income (dividends) after other
represent the shareholders at the General components
Meeting of Shareholders • The last priority is to receive assets when
• Preemptive right to buy additional shares the company is liquidated
to avoid dilution of ownership
• Receive dividend
• Capital gain

Security Analysis 9
 Preferred stocks
Characteristics of preferred stocks

• Is considered a representative certificate of ownership of the company

• No maturity date (payback is not required)
• Most have a dividend-to-par ratio or a fixed amount of annual dividends
• Usually issued without voting or preemptive rights
• Receive dividends and assets (when the company is liquidated) after creditors but
before shareholders holding common shares

Security Analysis 10
 Preferred stocks
Characteristics of preferred stocks

• Some preferred shares have adjusted or cumulative dividend rates:

• Adjustable preferred: associated with a certain interest rate
• Cumulative preferred: this year pays dividends for the previous year if the previous year does
not receive dividends due to lack of cash

• Convertible preferred
• Convert to common stocks at a certain rate.
• Lower dividend rate

Security Analysis 11
 Preferred stocks
Some other characteristics of preferred stocks

• Callable preferred
• The issuer has the right to buy back at a certain price at a certain time
• Dividend rate is higher than other preferred shares
• The recovery price is usually higher than the face value
• Recovery to avoid paying high dividends, recover when the interest rate is low
• Shareholders have the right not to resell, but normally when the term is due to revoke, the
other terms such as a high dividend rate or conversion right become invalid -> Encourage the
shareholder to resell

Security Analysis 12
 Preferred stocks
Some other characteristics of preferred stocks

• Sinking fund
• Help for the revocation of the preferred share
• The issuer places money in a separate account dedicated to recover preferred shares

• Preferred guarantee share (guaranteed stock)

• Dividend payments are guaranteed by another company

• Preferred shares can have many properties at the same time

Security Analysis 13
 Preferred stocks
Different kinds of preferred stocks

• Voting preference
• More votes than common shares, same rights as common shares but not transferable

• Dividend preference
• Dividend rate = Fixed + Bonus (higher than common stocks and stable)
• No right to vote, attend the meeting, or nominate

• Refund preference
• Refund contributed capital at any time according to the request of the owner or regulation
• The same rights as common stocks but no right to vote, attend the meeting, or nominate

• Other incentives (prescribed by the company's charter)

Security Analysis 14
Security Analysis 15
 Stock split
Nature of stock split

• Split stocks to get more shares.

• Example: four-for-one split means if you own 1 old stock -> own 4 new shares after splitting

• After splitting, "all" shares are reduced by proportion: par value, book price,
market price of the share. However, the total market value before and after the
split did not change

• Often splits when stock price reach a certain "threshold" that hinders trading on
secondary market.

Security Analysis 16
 Stock split
Example of stock split

• Example: Company X has 1 million shares in circulation, par value 10,000 VND /
share (total listed value is 10 billion VND) and the current market price is
100,000 VND / share.
• The company splits shares by the ratio of 1: 2 (meaning that 1 old share will
receive 2 new shares)
• => The total number of new shares is 2 million shares, par value 5,000 VND /
share, the total listed value is still 10 billion dong, but the market price of new
shares will fluctuate at 50,000 VND / share

Security Analysis 17
 Reserve split
Nature of reverse split

• Opposite process with stock split

• Purpose: to increase stock price (increase EPS)
• Total market value before and after reverse split remains unchanged
• Example: company Y has 6 million shares in circulation, par value 10,000 VND / share, total
listing value is 60 billion VND and the market price is at 12,000 VND / share.
• To prevent the company's share price from falling below its par value, the company
consolidates the shares at the ratio of 3: 1
• => The total number of new shares of the company is 2 million shares, par value 30,000
VND / share and the market price of new shares will fluctuate around 36,000 VND / share

Security Analysis 18
 Dividends
What is dividend?

• A form of company profit sharing based on ownership ratios

• Ratio and form of dividend payment is decided by the Board of Directors
• Dividends are only distributed when there is profit or from retained earnings

Security Analysis 19
 Dividends
Different methods to pay dividend?

• Cash dividends
• Is the most common form, pay shareholders money quarterly, semi-annually or annually
• Investors tend to prefer companies with a history of stable dividends

• Stock dividends
• Issue shares to pay dividends instead of cash -> Constant ownership ratio
• The purpose is to save cash to develop and still satisfy shareholders
• Theoretically, after dividends, stock prices tend to decrease, but the total market value before
and after dividends does not change.

• Property dividend
• Divide shares of another company owned by the company as dividends

Security Analysis 20
 Dividends
What is dividend?

• Declaration date: The Board of Directors announces the payment of dividends

• Cum-Dividend date: the last day the stock buyer is entitled to the dividend
• Ex-Dividend date - effective date (Ex-Dividend date): date of determination of
shareholders entitled to dividend; Those who hold the shares before this date are
entitled to receive dividends
• Record date: the date the company closes the list of individuals to receive
dividends

Security Analysis 21