Corporate Stock Transactions

🏢 Equity - Corporate Stock Transactions

The Big Picture: Your Slice of the Company Pie

Imagine a giant pizza. The whole pizza is a corporation—a big company owned by many people. When you buy stock, you’re buying a slice of that pizza. The more slices you own, the bigger your share of the company!

This guide will teach you everything about how companies share their “pizza” with owners, and how money flows back and forth between the company and its shareholders.

🏛️ Corporation Overview

What is a Corporation?

Think of a corporation like a club with special powers. This club:

• Can own things (buildings, computers, trucks)
• Can owe money (loans, bills)
• Can make money (selling products)
• Lives on even if the original owners leave

The magic part? If the club gets into trouble, the members (shareholders) only lose what they paid for their membership (their stock). They don’t have to pay the club’s debts from their own piggy banks!

Key Features of a Corporation

How Corporations Are Born

graph TD
    A["People want to start a company"] --> B["File paperwork with the state"]
    B --> C["State approves: Issues Charter"]
    C --> D["Corporation is born!"]
    D --> E["Issue stock to first owners"]

Example: Sarah, Tom, and Maya want to start “Happy Bakery Inc.” They file papers with the state, get approved, and the corporation is created. They each get 1,000 shares of stock—now they’re shareholders!

📜 Common Stock

What is Common Stock?

Common stock is like being a regular member of the pizza club. You get:

• Voting rights (you help decide big things)
• A share of profits (when the company makes money)
• But you’re last in line (if the company closes, you get paid after everyone else)

The Two Values of Stock

Every stock has two special numbers:

1. Par Value - A tiny number printed on the stock certificate. It’s like the “official” price, but it doesn’t mean much today. Usually just $1 or even $0.01!

2. Market Value - What people actually pay for the stock. This is the real price!

Example:

• Happy Bakery stock has a par value of $1
• But people are paying $25 per share on the stock market
• The market value ($25) is what matters!

Why Common Stock is Called “Common”

It’s the most common type of stock! Most shareholders own common stock. They’re the regular members, not the VIP members.

⭐ Preferred Stock

What is Preferred Stock?

Preferred stock is like being a VIP member of the pizza club. You get special treatment:

• First in line for dividends (you get paid before common stockholders)
• First in line if company closes (you get your money back before common stockholders)
• Usually NO voting rights (you don’t get to pick leaders)

Common vs. Preferred: The Comparison

Types of Preferred Stock

Cumulative Preferred: If the company skips a dividend, they owe you! It adds up.

Example: ABC Corp has cumulative preferred stock paying $5 per year. They skip Year 1 and Year 2. In Year 3, before common shareholders get anything, preferred shareholders must receive: $5 + $5 + $5 = $15!

Non-Cumulative Preferred: If they skip a dividend, too bad. It’s gone forever.

🎫 Issuing Stock

What Does “Issuing Stock” Mean?

When a company issues stock, it’s like printing new pizza slices and selling them. The company gets money, and buyers get ownership!

Issuing Stock at Par Value

Example: Happy Bakery issues 1,000 shares with $1 par value at $1 each.

The company records:

• Cash increases by $1,000 (money coming in!)
• Common Stock increases by $1,000 (new ownership created)

Cash (+$1,000) = Common Stock (+$1,000)
Assets go up = Equity goes up

Issuing Stock Above Par Value

This is more common! People usually pay MORE than par value.

Example: Happy Bakery issues 1,000 shares ($1 par value) at $25 each.

The company receives: 1,000 × $25 = $25,000

Here’s how it’s recorded:

• Cash: +$25,000 (total money received)
• Common Stock: +$1,000 (1,000 shares × $1 par value)
• Additional Paid-In Capital: +$24,000 (the extra amount!)

graph TD
    A["Investor pays $25,000"] --> B{Split into two parts}
    B --> C["Common Stock: $1,000<br>Par Value portion"]
    B --> D["Additional Paid-In Capital: $24,000<br>Extra premium"]

Think of it this way: Par value is like the “face value” on money, but Additional Paid-In Capital is the “bonus” investors were willing to pay!

🏦 Treasury Stock

What is Treasury Stock?

Imagine the pizza club decides to buy back some of its own slices. Those slices are now held by the club itself—that’s treasury stock!

Treasury stock = Company’s own stock that it bought back

Why Would a Company Buy Back Its Stock?

1. To reward remaining shareholders (fewer slices = each slice is worth more!)
2. To give employees (stock bonuses)
3. To prevent a takeover (keep control)
4. Stock price is low (company thinks it’s a good deal!)

How Treasury Stock Works

Example: Happy Bakery buys back 100 of its own shares at $30 each.

The company:

• Spends Cash: $3,000 (100 × $30)
• Gets Treasury Stock: $3,000 worth

Treasury stock is a negative in the equity section. It reduces total equity!

graph TD
    A["Before Buyback"] --> B["Total Equity: $100,000"]
    C["Buy Back Stock"] --> D["$3,000 spent"]
    D --> E["After Buyback"]
    E --> F["Total Equity: $97,000<br>Treasury Stock: -$3,000"]

Important Treasury Stock Rules

• Treasury stock has NO voting rights
• Treasury stock receives NO dividends
• It’s like the slices are “frozen” until the company uses them again

💵 Cash Dividends

What is a Dividend?

A dividend is the company saying: “We made money! Here’s your share!”

It’s like the pizza club had a great month selling pizzas, so they give each member some of the profit.

Three Important Dates

How Cash Dividends Work

Example: Happy Bakery declares a $2 dividend per share. There are 10,000 shares.

Total dividend = 10,000 × $2 = $20,000

On Declaration Date:

• Company now OWES this money
• “Dividends Payable” (liability) increases by $20,000
• “Retained Earnings” (equity) decreases by $20,000

On Payment Date:

• Cash goes out: $20,000
• Dividends Payable goes away: $20,000

graph TD
    A["Declaration Date<br>Jan 15"] --> B["Company owes $20,000<br>Dividends Payable created"]
    B --> C["Record Date<br>Jan 30"]
    C --> D["Check who owns stock"]
    D --> E["Payment Date<br>Feb 15"]
    E --> F["Cash sent to shareholders!"]

🎁 Stock Dividends and Stock Splits

Stock Dividends: Free Extra Slices!

Instead of giving cash, the company gives more stock!

Example: Happy Bakery declares a 10% stock dividend. You own 100 shares.

You receive: 100 × 10% = 10 extra shares!

Now you have 110 shares. But here’s the catch: everyone got more shares, so each share is worth a little less. It’s like cutting your pizza slice into smaller pieces—you have more pieces, but the same amount of pizza!

Small vs. Large Stock Dividends

Stock Splits: The Big Divide

A stock split is when the company says: “Let’s cut all slices in half!”

Example: Happy Bakery does a 2-for-1 stock split.

• Before: You had 100 shares at $50 each = $5,000 total
• After: You have 200 shares at $25 each = $5,000 total

Same pizza, more slices, smaller slices!

Why Do Stock Splits?

• Make shares cheaper so more people can buy them
• A $500 share might feel expensive, but a $50 share feels affordable!
• No change in total value—just more pieces

graph TD
    A["Before Split<br>100 shares × $50 = $5,000"] --> B["2-for-1 Split"]
    B --> C["After Split<br>200 shares × $25 = $5,000"]
    D["Same total value!"]

📊 Retained Earnings

What is Retained Earnings?

Retained earnings is like the company’s savings account. It’s all the profit the company made over the years that it KEPT instead of giving to shareholders.

Retained Earnings = All Profits - All Dividends Paid

Where Does Retained Earnings Come From?

graph TD
    A["Company Makes Money<br>Net Income"] --> B{What to do with profits?}
    B --> C["Pay Dividends<br>Give to shareholders"]
    B --> D["Keep It<br>Retained Earnings"]
    D --> E["Use for growth!<br>New equipment, buildings, hiring"]

Example of Retained Earnings Growth

Year 1:

• Net Income: $50,000
• Dividends Paid: $10,000
• Added to Retained Earnings: $40,000

Year 2:

• Beginning Retained Earnings: $40,000
• Net Income: $75,000
• Dividends Paid: $15,000
• Ending Retained Earnings: $40,000 + $75,000 - $15,000 = $100,000

The Retained Earnings Statement

Retained Earnings vs. Cash

Important: Retained Earnings is NOT the same as cash!

A company can have $1,000,000 in retained earnings but only $50,000 in cash. Why? Because they used their profits to buy equipment, buildings, and inventory!

Think of it like this: You saved $500 from your allowance (retained earnings), but you bought a bike with $400 of it. You only have $100 cash left, but you still “retained” $500 worth of value!

🎯 Putting It All Together

The Equity Section on the Balance Sheet

When you look at a company’s balance sheet, you’ll see something like this:

The Journey of a Dollar Through Equity

graph TD
    A["Investor buys stock for $25"] --> B["Company receives $25"]
    B --> C{Par value vs. premium}
    C --> D["$1 goes to Common Stock"]
    C --> E["$24 goes to Additional Paid-In Capital"]
    F["Company earns profit"] --> G["Increases Retained Earnings"]
    G --> H{Board decides}
    H --> I["Pay Dividends to shareholders"]
    H --> J["Keep in Retained Earnings for growth"]

🌟 Key Takeaways

1. Corporations are like clubs that protect their members and can live forever
2. Common Stock = Regular membership with voting rights
3. Preferred Stock = VIP membership, first in line for money
4. Issuing Stock = Selling new slices of the company pie
5. Treasury Stock = Company buying back its own slices
6. Cash Dividends = Sharing profits with owners
7. Stock Dividends/Splits = More slices, same pie
8. Retained Earnings = Company’s savings from past profits

🎉 You Did It!

You now understand how corporations share ownership and handle money with their shareholders. From issuing new shares to paying dividends, from buying back stock to building up retained earnings—you’ve got the whole picture!

Remember: Every time you see a company’s stock price or hear about a dividend, you now know the story behind those numbers. That’s the power of understanding equity!