LEMMA
Most of these people are licensed to offer mutual funds only. They cannot andshould not be offering advice on individual stocks, other than proffering an opinion.Evaluate their recommendations carefully, especially their proprietary funds. Manytimes their fund fees are higher than rates you could get elsewhere.
TECHNOLOGY AND THE DAY TRADERTo many the term “day trader” conjures up visions of crowded areas where peopleyell and make funny hand signals. Not so. A day trader is a person who buys andsells stocks or options intraday, looking more for quick profits than long-term capital appreciation. Some will “scalp” for a quarter point or a half, while others may bein a position for several days. Again, advances in technology and a change in thelaw have given rise to a new type of player: Welcome the day trader!Shortly after the 1987 stock market crash, the Nasdaq needed to offer faster executions during periods of heavy trading. The Small Order Execution System(SOES) was developed to allow the faster execution of buys and sells for the retailinvestor (the term “retail” applies to any orders up to 1,000 shares). In essence, anyorders placed over the SOES system are executed very quickly.
TRUSTING YOUR BROKERThe world of brokers is in many ways similar to that of physicians or attorneys:there are specialists and generalists. The more experienced you become as an investor, the more you’ll naturally seek out the specialist or more sophisticated brokerage firm. Never, ever just plunk your hard-earned money down to the first brokeryou meet without first evaluating the broker’s experience and competency.Finding a good broker is a lot like buying a used car:Caveat emptor . . . let the buyer beware!
1. Assess your needs and financial goals. What kind of broker is best for you?The person with $100 a month to invest will need a much different broker thanthe couple who have saved for 40 years and now want to put their millions towork. Perhaps you fall somewhere in between these two extremes. How muchare you going to start with, and how long will you commit it to the market?2. Ask around. Who are your friends and associates at work using? Are theirgoals and current conditions similar to yours? Informal surveys can helpyou find a good broker as well as avoid an unscrupulous one. It pays to do alittle research.3. Look for a philosophical match. When you’re considering a broker, find outwhat his (or her) philosophy is regarding stocks and bonds. Is he/she a buyand-hold fan or does he/she espouse taking a profit if conditions warrant?Are your goals in sync with this style and temperament?
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4. If you’re going to make all the investment decisions yourself, first determinethe quality of a firm’s research. You’ll probably need outside research sourcesas well, but you can easily overdo it. Make sure you know what the firm offers, and what it doesn’t. Then scout around for the gaps in your information.5. Verify accessibility. How accessible does your broker need to be for you? If thebroker you choose is with an online brokerage, how easy is it to get to speak tohim or her? Are you comfortable speaking to any broker who might happen topick up the phone? The investor who needs one’s hand held a lot should determine just exactly how the brokerage system works prior to funding an account.6. Pay attention. This may be hard to believe, but there are a few bad apples inthis business, and you need to be able to determine if you’re being sold a billof goods in order to generate commissions.7. Learn all you can as you invest. Your broker may not stay with you forever,and the responsibility for financial success is ultimately yours.8. Set limits. When do you decide that this just isn’t working? How do you decide when your relationship with a broker is over? Unauthorized trades,poor investment selections, churning of your account to generate trades, recommendations that aren’t suitable for your risk profile and financial goals—if you feel you’re consistently being taken advantage of, run (don’t walk) toa broker that better fills your needs.9. Written complaints get attention. If ever you find yourself in the unfortunateposition of gross dissatisfaction, a written complaint to the brokerage firm’sbranch manager and/or the broker is taken very seriously. This generallyclears things up. If you still do not receive satisfaction, a written complaintto the National Association of Securities Dealers (NASD) will definitelybring resolution to any misunderstandings or genuine wrongdoing. Be surethis course is taken only as a last resort.10. Review all statements for accuracy. Check the firm’s statements for claritybefore you open the account, and accuracy afterward. Brokers are humanbeings and they make mistakes—and seldom in your favor!11. Be on the lookout for hidden fees and charges. The fine print on the back ofthe account application details charges and other restrictions that may affectyou later, after you’ve opened the account. If it’s an online firm, is there ahigher charge for limit orders? Does it cost more to speak with a live humanbeing? Is there a charge to distribute funds, send and/or receive wire transfers, or a monthly fee to have an “open” account?12. Know your allies. A broker is not a Certified Financial Planner unless it saysso on his or her card. While most brokers can structure a long-term strategyfor that portion of your investable funds, they generally are not very expertin overall financial planning. This limitation holds true for a CFP as well;they typically aren’t too proficient at picking stocks.
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SOLVING THE BROKER DILEMMA
Finding the right broker can be an arduous process. Perhaps the most important partof the relationship can be summed up in one word: trust. Whoever you end up choosing, you are trusting them with your money and inherently the future financial securityof both you and your family. Be choosy. Keep searching until you find a brokerage firmthat offers you the services you need at a price you can live with. Regardless of howconvenient online brokerages have become, I must admit a certain fondness for actualhuman contact when it comes to putting my money where my mouth is.
ROADMAP TO SUCCESSWhat is your level of competence? Check one classification that best describes yourlevel of expertise:________________
________
________
Beginner: Possessing little or no knowledge of the stock market, or verylimited at best.Intermediate Level: An investor that has been in the market for at leastone year. Obviously this can vary. If you’ve been trading six or moretimes a month for the past six months it would be safe to assume you’veescaped novice status, but still have a long way to go.Advanced: If you’re in this category, you more than likely:• Have been through a minimum of one bear market.• Have been trading two or more years, or have made 100 trades• Read a financial daily, like Investor’s Business Daily or the Wall StreetJournal, more than casually.• Have a nodding acquaintance with options and how they work.• Have more than one brokerage account.Expert/Professional: You know who you are. You know the best placesfor information, the best brokerage firms to trade with, and the bestnewsletters that fit your style. You’ve evolved into a trader who is workingon the finer points of trading, sharpening your edge.
After determining the one best category that describes your experience and comfortlevel, look at the following chart to find your category.Objective
Course of ActionThe Beginning Investor
Let the SearchBegin!
Call various brokerage firms in your area, or ask someone youknow (and trust) who they use, and why. Do not call duringmarket hours (9:30–4:00 EST).• Let the broker know your level of experience (none to darn little).• Be prepared to disclose how much you plan to invest (will itbe one lump sum deposit or do you want to make regulardeposits into an account and have him/her invest it as you goalong?)After identifying two to three prospective brokers (do not fall inlove with the first one you meet!), and having set anappointment with each, have your questions ready.
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Determine theHow long has he (or she) been a broker? What size are his orexperience of theher accounts? Ask questions, but respect brokers’ time, so theyprospective broker. don’t become reluctant to take your calls!MutualUnderstanding
Does the prospective broker have the patience to teach as wellas recommend?• Did he or she ask a lot of questions to better understand yourrisk profile and financial goals?• Did he or she answer your questions to your satisfaction?
Follow-Up
After your meeting(s), a course of action was (hopefully) discussed.• Did the broker follow through in a timely manner? (This onealone will weed them out.)• Did you understand and feel comfortable with “the next step”?• Note! Unless your circumstances warrant extensive taxplanning and/or estate issues, taking this to your accountantor attorney is a waste of their time and yours.
Full Service
When starting out, you want to be able to read research reports,as much as time allows. It’s your money and you areultimately responsible!
Easy-to-ReadStatements
Not a big requirement, but it eases the frustration level. If youdon’t understand them, call your broker and ask for a detaileddescription.
Full Disclosure
Find out any and all costs, including but not limited to:• Trade costs• Market versus limit orders• Options and spreads• Online versus speaking with a real person• Wire transfer fees (incoming and outgoing)
Now you have the • Fill out “new account” form. This is simple. Either it’s abroker and it’s timequalified or a nonqualified account. (An IRA, a 401(k), orto open the account!Keogh plan is a qualified plan. Your broker will tell you ifyou’re not sure.)• Write a check, or wire transfer funds to your new account.This is very similar to opening a bank account. Like a bank,it’s insured (SIPC, or Security Insurance ProtectionCorporation in most cases). SIPC does not guarantee againstinvestment losses, but they do protect you if the brokeragefirm goes belly-up.• As soon as the funds are in the account, you’re ready to trade!When you have•opened the account •and have fundsinvested:
Does your broker follow the game plan initially discussed?If you’re unhappy or have concerns, will the broker take thetime to meet with you, either in person or at a prearrangedtime so that you’re not interrupted?
Make sure that you: • Don’t call your broker incessantly, unless you’re interested inmaking a trade. Calling for quotes is acceptable (duringmarket hours), but don’t chitchat. The broker works onstraight commission (usually); so try not to waste his or hertime.
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SOLVING THE BROKER DILEMMA• Don’t get offended if you speak with his or her assistant moreoften than the broker. (This is just the broker protecting his orher time for the more critical tasks.)• If you want to make a trade, say so when you call. You’ll beput through faster.
Fee-Based AssetManagement
You may be a candidate for this type of asset management.Fee-based asset management (or wrap accounts) has grownin popularity over the years. (One well-known firm has evenoffered flat fee investing, where you pay X amount of moneyfor unlimited trades for one year.) It’s called fee-basedbecause the broker or money manager is compensated on apercentage of the account’s value, usually paid out quarterly.The more money that is in the account, the less thepercentage. I like it because it takes away the need for thebroker having to call you with every trade idea that comesdown the path. Then, on some sort of regular basis, youevaluate the progress and see if that broker/manager getsto keep the account. Most people with substantial accountsgo this route because it’s safer. Watch CNBC orBloomberg, and you’ll see a parade of managers beinginterviewed. You can evaluate past performance figures first,then decide if you want to hire that person or firm. Thesepeople can either be affiliated with a brokerage firm or beindependent entities who place their trades through adiscount broker.
Brokers are oftenA broker may or may not have this title, because there’s acalled Registeredseparate test that’s required. Just because they have this titleInvestment Advisers. doesn’t mean their judgment is flawless. The same cautionaryflags exist. Ask around. For this type of account, it isn’t unusualto go beyond the city limits to get the company or person youwant.Margin tradingcomes with risk.
When you’re learning, you’re doing so with your money—notthe broker’s! Therefore, avoid buying on margin, no matter howsafe the trade is described as being. The broker that insists ontrading with margin is a broker you should fire on the spot.Remember, you can always fire your broker, and your brokercan fire you as well!The Intermediate Investor
If you already have •a broker, and you’rerelatively happy,whip out thescorecard and seehow his (or her)•ideas are treatingyour portfolio!•
Commissions: Do commission totals exceed 1% to 2% of thesize of your account, annualized? If so, are your returnscommensurate with the increased transaction costs? (If youraccount is up net 20% and your commissions are 6%, hey,you’re on the right track!)Where are the trade ideas coming from?—the broker’spersonal research or the firm’s analysts?Are your calls being returned in a timely manner?
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• Are there trades occurring without your consent and priorknowledge? Unauthorized trades are a serious transgression.• How are you doing with your broker? Here’s how youmeasure:Take your account balance on the date you first deposited it.(Let’s say it was $10,000.)What is it worth today, net of all transaction costs? (Let’s sayit’s worth $12,000.)Subtract the smaller number from the bigger number:$12,000–$10,000$ 2,000Divide your answer by the original amount: $2,000/$10,000 =20%.Measure that number against the S&P 500 (known as thebroad market, the benchmark against which all are judged.If you’re beating it, congratulations. If not, and it’s a widedisparity, recheck your strategy.If your returns stink, or for some reason you’re dissatisfied,take your statement to another broker for evaluation.Match thoseconfirmations withthe statements!
Do you really believe that brokerage firms are infallible?• Be sure to check that the price, number of shares, and the stock,bond, or option are correct, and the commission is what youexpected.• File your statement separately from your confirmations.
Finding a Brokerby Word of Mouth
• A good broker takes time to find, so never stop asking whoother people use.• Chances are good that another broker will have taken theinitiative to contact you via a cold call or civic affiliationslike Kiwanis or the Lions’ Club. Build a relationship beforeyou need your broker. Besides, having another person’s inputisn’t a bad idea.The Advanced Investor
Constantly monitor • Length of time in the trade.your trades by• Gain or loss average. Keep your losses low, and let thosekeeping accuratewinners run.records of:• Portfolio asset allocation—cash, stocks, bonds; in stocks,what percentage is in aggressive growth to conservative,blue-chip companies.• Costs (commissions) as a percentage of your overall account.• If you’re trading your own account, just how hard are youworking (and at what cost) to beat the market? If you’re notbeating it, it’s time to rethink your strategy.• Keep your trade ledger or journal either next to yourcomputer or where you open your business mail.
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SOLVING THE BROKER DILEMMA
How much ofyour researchcomes from onebrokerage firm?
If you’re relying on one firm to keep you abreast of marketconditions, that’s no different from listening to one radio stationto keep abreast of the music world. At the very least be able todefine the current hot sectors you need to be in, and the ones tostay away from. I’m not talking about day trading or even weektrading. If you fit most of these descriptions, you’re taking anactive role in the management of your finances, and that’s good(most of the time).
Do you keep aclose eye on thetrades in youraccount?
Being advanced means you’ve likely built a solid relationshipwith a broker (or two), and there’s an understanding that ifsomething needs to be done (on the sell side), just do it.Sometimes you want the broker to catch a good idea (if it’sreally good) without your authorization. That’s okay, but be veryclear as to the parameters of discretionary trading. Brokeragefirms have limited power of attorney documents that need to beexecuted prior to this type of arrangement. This is not an areafor the naive, especially if the use of margin is involved. Listen,people change when money’s on the line, and if catching goodtrades, means more commissions to the catcher, watch out! Thiskind of stuff can get out of hand, and fast.
How is yourportfolioperforming?
• Are you beating the S&P 500? If so, how much risk are youtaking to beat it?• How are the expenses (commissions) doing in order tooutperform the market? if they’re higher than 1% to 2%, youbetter be bringing in pretty good numbers!• Have you varied from your original objective?
Discount Brokers
• Be sure to look closely at fees! (Transaction costs vary widelyfrom the low-low advertised price.) It pays big time to readthe fine print for detailed disclosures of all costs.• Check their statements too for clarity. Some are as clear asSanskrit.• Opening an account with this kind of firm is no different thanwith a full-service broker. Have the firm send you anapplication or, if possible, stop into a local office.
Research Basics
Increasingly you’ll want and need to widen your investmentknowledge, and research is a major part of this.• The Wall Street Journal, Barron’s, and Investor’s BusinessDaily are the places to start. Pick one and go. (I like Investor’sBusiness Daily—just a personal preference.)• Magazines—Forbes, Fortune, Money, SmartMoney, and ahost of others—will go in depth more than the daily papers do.
Online Brokers
As with the discount firms and the full-service companies,online brokers have a lot to offer, but you have to research theirservices very carefully before venturing into this arena.• Is there ease of use and accessibility to a live broker?• System failures and long hold times when phoning directlyare just a few of the potential pitfalls that await you.
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Things to Consider • Surf the financial sites and online brokers before you begin.When Going OnlineGet familiar with the Internet prior to putting money at risk.• Setting up an online account is no different than with abricks-and-mortar firm. Fill out the application and send inthe money.Online Research
• Find one or two newsletters you like and that comerecommended by other investors.• Take as many free trial offers as possible, and soon you’ll bea walking encyclopedia of what’s good and what’s junk.• Focus on a small market niche; start small, then branch outafter you’re comfortable.• Keep a notebook for your research.
The Expert/Professional InvestorFor you the name of the game is education and fine-tuning. If you’remaking most or all of the decisions in your portfolio, theinformation you’re receiving must be spot-on accurate.Service andCommissions
Evaluate what you are paying for versus what you’re getting.• Higher commissions should mean greater service, as well asa very good broker.• How easy is it to get through to your broker?
Online Accessibility • Is your brokerage firm’s web site down more than up?• Is it reliable, fast, and easy to navigate?• Can you reach the broker on the phone without being put onhold forever?Stay Competitive!
What are you reading to stay competitive and on a level playingfield with other traders? Here is a list of web sites andpublications I visit or read regularly:• Investor’s Business Daily: “Don’t read it, use it.” I do.• Optionetics.com (www.optionetics.com): A wealth of usefulinformation and articles.• Quote.com (www.quote.com): Excellent articles, news, andcharts. I use it constantly.• BigCharts.com (www.bigcharts.com): One of the bestcharting sites on the Net.• The Street.com (www.thestreet.com): Top-notch marketcommentary.• Bloomberg.com (www.bloomberg.com/markets/index.html):Not as flashy as CNBC, but I like this one a lot.• CNBC (www.cnbc.com): The online business news giant.
3The World of Stocks
Current, up-to-the-minute information on stocks just wasn’t available to the individual investor in the pre-Internet age. It seemed the brokerage community and others on the inside knew things well ahead of the public at large. Information flowedthrough a number of hands before reaching the populace, thus assuring a dependency on the brokerage firms for accurate investment information. Times havechanged, thanks to the Internet. These days, you can receive scads of information—investment newsletters, stock-split alerts, index analyses, market watches, newsalerts, and portfolio summaries—via e-mail or by just surfing the more than 10,000financial web sites. But easy access to information and the emergence of more than100 online brokerages has increased, rather than decreased, the complexity of theinvestment selection process. The overwhelming task of becoming a savvy onlineinvestor is generating a tougher learning curve than ever before.This chapter introduces the basic parameters of individual stocks. To makemoney in the stock market, you have to know what you’re looking for and what todo with this knowledge once you find it. So just how do you filter out the unimportant stuff? You start by gaining a strong understanding of stock basics.Learning to trade is a cumulative experience. Successful tradersnever stop being actively involved in the learning process.
WHAT IS A COMPANY?Webster’s Dictionary defines a company as “a number of persons united for the samepurpose; either in private partnership or a business concern.” I like this definition because it cuts to the chase: A company is unified by a central purpose. Determining60
WHAT IS A STOCK?
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this purpose is an excellent way to get the general picture of a company’s motivation for doing business. If this purpose tangibly relates to the present and futureneeds of the consumer, then the company’s stock has a good chance of surviving. Itis important to remember that researching a company is more than just gathering abunch of small details. Successful investors strive to combine these details with thebig picture to create a whole vision of the company in question from the top downand the bottom up.Determining how a company’s business relates to long-termbusiness trends worldwide is akin to recognizing its growthpotential. Long-term growth is the key to a company’s success.
In their most basic form, there are two kinds of companies: private and public.The main difference between the two is that stock in a private company is not tradedon an organized stock exchange. Hence, it is quite difficult to assess a private company’s value. If a small private company is growing by leaps and bounds, it requiresan influx of capital to keep up with rising demands. To generate this money, a company may decide to become a public company.Private company: A company that may or may not issue private stock and isnevertheless not publicly traded.Public company: A company that issues stock to be traded on the public market.
WHAT IS A STOCK?Stock is another name for the shares, or partial ownership, of a corporation. If youwish to buy a stock, you do so by purchasing fractional units of ownership calledshares. A share’s value is the result of a multitude of factors. Discerning whether theprice of a share is moving—either up or down—is the crux of the investing game.There are two kinds of shares: common and preferred. The differences between thetwo are outlined in Figure 3.1.Ultimately, the choice between common and preferred shares comes down to risk.If you want a more limited risk-reward situation, then preferred shares are the way togo. But the majority of investors buy stock for the growth opportunities they provide,and are therefore willing to assume the inherent risks that accompany them.Perhaps the most defining aspect of common stock is determined by its place inthe time line of company development. In many ways, a company is a living entity.From birth to old age, it passes through a number of stages that control its dailymovements. To become acquainted with a company, it is vital to know whichgrowth phase the company is in. The stages of growth are fivefold and are akin tothe stages of human development. Figure 3.2 details the characteristics a companyshows in each stage of development.
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THE WORLD OF STOCKS
Common Shares• Common shares offer largerpotential rewards thanpreferred shares;shareholders share the risein stock price more quicklythan preferred shares.• If a common stock declinesin price, shareholders sharethese losses, and the valueof their shares may dropdramatically.• Although shareholders ofcommon stock are eligibleto receive dividends,companies are notobligated to distribute aportion of the profits backto the commonshareholders (i.e., they donot offer investorsguaranteed performanceresults).Figure 3.1
Preferred Shares• Preferred shares are a hybrid between bondsand common stock. Because of their hybridnature, their prices act like neither the firm’sbonds nor the common stock prices. Themore bondlike it is, the more it will mirror thebond pricing; the more like common stock itis, the more closely it follows the pricechanges of the common stock.• The particular features of any one preferredstock are spelled out in the legalese of theissuance, as determined by management andapproved by the common stockholders.• Features of preferred shares may or may notinclude such criteria as:– Guaranteed dividends at regular intervals—cumulative or noncumulative.– Limited dividend amount, which does notrise in relation to a company’s profits.– Voting inferiority (or superiority) to commonstock depending on the specific agreement.– Possible convertibility into common stock orbonds.
Common versus Preferred Shares
There is actually another stage, often referred to as the “skateboard effect,” whichtakes place when the mature company reinvents itself. My favorite example of thisphenomenon is Arm & Hammer (CHD). This old-line company had been selling baking soda to America’s families for years, relying on population growth and increasedinterest in cooking to spur growth and earnings. However, by the late 1950s/early1960s, prepared and packaged foods were coming into vogue and Arm & Hammer’ssales were dwindling. When the odor-absorbing attributes of baking soda werepointed out to the marketing department, a clever ad campaign was developed to convince Americans to buy the yellow box, open it, leave it in the refrigerator for a monthor so, and then simply throw it away. Of course, the ads never pointed out that theodor-absorbing capabilities were directly related to the exposed surface area, and thatit would do just as much good to sprinkle a little on a flat plate and after a few weeksjust throw that small amount away. Probably 90% to 95% of good product was beingthrown out each time. The marketing campaign was so clever that the company’ssales bounced back. Today, Arm & Hammer has branched out into a multitude of baking soda–based products including toothpaste, carpet cleaners, and detergent. An oldline company that was rapidly losing sales is now back on the upside, and its growthcurve looks like a skateboard jump—hence the skateboard effect.
WHAT IS A STOCK?
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CompanyDevelopment CyclesHumanand ExamplesCorrelation
StockCharacteristics
Private company
Birth
• Fundamentals are not easily discerneddue to private nature of vital statistics.• Stock has limited availability, privately placed.• Risk is generally quite high due to requirementsfor operating capital, lack of revenue.
Initial publicoffering(new stock that’snever been traded)biz.yahoo.com/ipo
Childhood
• Stock performance characteristics are notavailable (no technical analysis available).• Initial excitement (hype) can artificially booststock price.• An IPO is subject to acceptance by theinvestment community and integration of itstechnology into marketplace (when applicable).• Profitability may be years in coming for startups.• Long-established companies, privately heldfor years, represent favorable situation due tostrengthened balance sheet and existing namerecognition.
Early-stage growth Adolescence •companyAmazon.com (AMZN)Verity (VRTY)•Red Back (RBAK)•
Companies in this stage usually reinvest all oftheir profits back into the company to promotesuccessful growth.These companies rarely (if ever) pay dividendsto their shareholders.Stocks in this stage are considered aggressiveinvestments, but have the potential for majorgains (and substantial losses).• This is an absolutely critical “make it or breakit” time for the development of a company.
Successful growthcompanyMicrosoft (MSFT)Sony (SNE)Micron (MU)
Adulthood
Mature companyOld ageGeneral Electric (GE)Ford (F)Procter & Gamble (PG)
Figure 3.2
Stages of Development
• Once a company evolves to the point where itcan start paying out a percentage of its profitsto shareholders in the form of dividends, itmoves into its adulthood.• Although it still needs to reinvest most of itsprofits back into the company, it has paid itsdues to create a successful infrastructurefostering consistent growth.• Once a company hits full maturity, a largerpercentage of its profit is consistently paid outas dividends to shareholders.• It’s hard to teach an old dog new tricks—mature companies have to fight just as hard tostay in the game.
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THE WORLD OF STOCKS
WHAT IS A STOCK CERTIFICATE?A stock certificate is a legal document and can be used to transfer ownership ofstock shares. Once you have purchased shares of stock, the company issues you astock certificate (see Figure 3.3). The certificate includes important information pertaining to stock ownership: the stock’s issuer, the shareholder’s name, the corporateseal, and the number of shares it represents. Each certificate is identified by a registration number assigned by the Securities and Exchange Commission, which makesit harder to sell stolen certificates.Another number you’ll find is assigned by the Committee on Uniform SecuritiesIdentification Procedures, called the CUSIP number. Par value is still another number that can be found on the stock certificate. It represents a dollar amount assignedto a security when first issued. For stocks, par (also known as face value or principal) is usually a small dollar amount that bears no relationship to the security’s market price. In other words, it’s not that much! Par value does not represent the priceyou paid for the shares.Originally, the par value was an estimate of what the company should be worth.That number was used as a guideline for pricing the shares of stock. Even today,when a new corporation is formed, state law generally requires the first shares ofstock to be sold at, or above, par value. After the first sale, market pricing takes overand the next sale can be at any price, even below par value. In addition, statescharge corporations a franchise tax each year based on the value of the company.
Figure 3.3
Stock Certificate (Source: Coca-Cola Co.)
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This value is often determined by the par value times the number