Series 7 Study Guide Lesson 2

This is series 7 study guide lesson 2 and this is the first episode where were going to really get into the meat and potatoes of the basics of the securities industry and securities. In this episode, we're going to be talking about common stock. First of all, if you look at company's balance sheet there's going to be an asset, a liability and an equity section.

The common stock side of the equation is in the equity section. Common stock is the equity of a company. If you're a common stockholder, you own a portion of the company. Common stock is issued by the corporation and it’s also issued by investment companies. When a company goes and does the charter for itself, it will register with the state. In the state registration which is found in the articles of incorporation, it will state that the company is authorized to issue X number of shares. It will usually state what is the par value of those shares are. It can be a par or no par stock. Typically, a company will have either a no par stock which means there is no intrinsic value to the stock or a very low par value.

Par value is simply the stated value of the company stock on the company's balance sheet. For instance, let's say a company issues stock at $10 a share yet the par value on the stock is one dollar. On the balance sheet you will see issued stock at par at one dollar and paid in excess of par value of nine dollars. This is very common. The par value is set low primarily because of the different state regulations involving the taxation of corporations. Some states charge a tax based on the par value of the stock. It really depends on the state where the company is operating in and as to what they can and cannot do. The state in which a company is chartered also determines what they can and can't do.

If you have a multiple-choice question which asks what would be one reason why you have a low par value on a stock. The answer to that is because the taxation of the various states might tax the par value at a certain rate and by lowering the par value it reduces the tax to the corporation.

 

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