'Incorporation'

The process of legally declaring a corporate entity as separate from its owners. Incorporation has many
advantages for a business and its owners, including:
1) Protects the owner's assets against the company's liabilities
2) Allows for easy transfer of ownership to another party
3) Achieves a lower tax rate than on personal income
4) Receives more lenient tax restrictions on loss carry forwards
5) Can raise capital through the sale of stock
Incorporation involves drafting an "Articles of Incorporation", which lists the primary purpose of the
business and its location, along with the number of shares and class of stock being issued, if any.
Incorporation will also involve state-specific registration information and fees.

'Retained Earnings'
Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the
company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on
the balance sheet.
The formula calculates retained earnings by adding net income to (or subtracting any net losses from)
beginning retained earnings and subtracting any dividends paid to shareholders:
Retained Earnings (RE) = Beginning RE + Net Income - Dividends
Also known as the "retention ratio" or "retained surplus".

Corporate governance
Corporate governance broadly refers to the mechanisms, processes and relations by which corporations
are controlled and directed.[1] Governance structures and principles identify the distribution of rights and
responsibilities among different participants in the corporation (such as the board of directors, managers,
shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and
procedures for making decisions in corporate affairs.[2] Corporate governance includes the processes
through which corporations' objectives are set and pursued in the context of the social, regulatory and
market environment. Governance mechanisms include monitoring the actions, policies, practices, and
decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are
affected by attempts to align the interests of stakeholders. [3][4] Interest in the corporate governance
practices of modern corporations, particularly in relation to accountability, increased following the highprofile collapses of a number of large corporations during 20012002, most of which involved accounting
fraud; and then again after the recent financial crisis in 2008.
Principles of Corporate Governance

Rights and equitable treatment of shareholders:[18][19][20] Organizations should respect the

rights of shareholders and help shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating information and by encouraging
shareholders to participate in general meetings.

Interests of other stakeholders:[21] Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board:[22][23] The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size and
appropriate levels of independence and commitment.

Integrity and ethical behavior:[24][25] Integrity should be a fundamental requirement in choosing

corporate officers and board members. Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:[26][27] Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and safeguard the
integrity of the company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have access to clear, factual
information.

Types of Capitalization
The study of capitalisation involves an analysis of three aspects:

i) amount of capital
ii) composition or form of capital
iii) changes in capitalisation.
Capitalisation may be of 3 types. They are over capitalisation, under capitalisation
and fair capitalisation. Among these three over capitalisation is likely to be of
frequent occurrence and practical interest.

Over Capitalisation:

Many have confused the term over-capitalisation with abundance of capital and under-capitalisation
with shortage of capital. It becomes necessary to discuss these terms in detail. An enterprise becomes
over-capitalised when its earning capacity does not justify the amount of capitalisation.

Over-capitalisation has nothing to do with redundance of capital in an enterprise. On the other hand, there
is a greater possibility that the over-capitalised concern will be short of capital. The abstract reasoning
can be explained by applying certain objective tests. These tests require the comparison between the
different values of the equity shares in a corporation. When we speak in terms of over-capitalisation we
always have the interest of equity holders in mind.

There are various standards of valuing corporation or its equity shares:

Par value:

It is not the face value of a share at which it is normally issued, i.e., at premium nor at discount, it is static
and not affected by business oscillations. Thus it fails to reflect the various business changes.

Market Value:

It is determined by factors of demand and supply in a stock market. It is dependent on a number of

considerations, affecting demand as well as supply side.

Book Value:

It is calculated by dividing the aggregate of the proprietary items like share capital, surplus and
proprietary reserves by the number of outstanding shares.

Real Value:

It is found out by dividing the capitalised value of earnings by the number of outstanding shares. Before
the earnings are capitalised, they should be calculated on an average basis. It may be pointed out at this
place that longer the period cover by the study, the more representative the average will be the period
should normally cover all the phase of business cycle, i.e., good, bad, and indifferent years. Some
authors compare the par value of the share with the market value and if par value is greater than the
market value they regard it as a sign of over-capitalisation.

Par value > Market value

The comparison of book and real values of shares is a better test in the sense that the book value gives
an idea about the companys past career i.e., how it had fared during the last few years, and its strength
is determined by its reserves and surplus.

Real value is a study of the working of company in the light of the earning capacity in the particular line of
business. It takes into account not only the previous earnings or earning capacity of a concern but relates
the earnings to the general earning capacity of other units of the same nature. It is a scientific and logical
test.

Book Value = Real Value (Fair capitalisation)

Book Value > Real Value (Over-capitalisation)

Book Value < Real Value (Under capitalisation)

Causes of over-capitalization:

The following are the cases for over-capitalisation:

i) Promotion with inflated asset:

The promotion of a company may entail the conversion of a partnership firm or a private company into a
public limited company and the transfer of assets may be at inflated prices which do not bear any relation
to the earning capacity of the concern. Under these circumstances, the book value of the corporation will
be more than its real value.

ii) The incurring of high establishment or promotion expenses (ex: good will, patent rights) is a potent
cause of over-capitalisation. If the earnings later on do not justify the amount of capital employed, the
company will be over-capitalised.

iii) Inflationary conditions:

Boom is a significant factor for making the business enterprises over-capitalised. The newly started
concern during the boom period is likely to be capitalised at a high figure because of the rise in general
price level and payment of high prices for the property assembled. These newly floated concerns as well
as the reorganised and expanded ones find themselves over-capitalised after the boom conditions
subside.

iv) Shortage of capital:

The shortage of capital is also a contributory factor of over-capitalisation, the inadequacy of capital may
be due to faulty drafting of the financial plan. Thus a major part of the earnings will not be available for the
shareholders which will bring down the real value of the shares.

v) Defective depreciation policy:

It is not uncommon to find that many concerns are over-capitalised due to insufficient provision for
depreciation/replacement or obsolescence of assets. The efficiency of the company is adversely affected
and it is reflected in its reduced profit yielding capacity.

vi) Liberal Dividend Policy:

If corporations follow liberal dividend policy by neglecting essential provisions, they discover themselves
to be overcapitalized after a few years when book value of their shares will be higher than the real value?

vii) Taxation Policy:

Over-capitalisation of an enterprise may also be caused due to excessive taxation by the Government
and also their basis of calculation may leave the corporations with meagre funds.
Effects of over capitalisation:

Over-capitalisation affects the company, the shareholders and the society as a whole. The confidence of
Investors in an over-capitalised company is injured on account of its reduced earning capacity and the
market price of the shares which falls consequently. The credit-standing of a corporation is relatively poor.

Consequently, the credit-standing of a corporation is relatively poor. Consequently, the company may be
forced to incur unwieldy debts and bear the heavy loss of its goodwill In a subsequent reorganization. The
Shareholders bear the brunt of over capitalization doubly. Not only is their capital depreciated but the
income is also uncertain and mostly irregular. Their holdings have little value as collateral security.

An over-capitalised company tries to increase the prices and reduce the quality of products, and as a
result such a company may liquidate. In that case the creditors and the Labourers will be affected. Thus it
leads to the misapplication and wastage of the resources of society.
Corrections for over-capitalisation:

Overcapitalization can be rectified if the following steps are taken:

1. Reorganisation of the company by selling shares at a high rate of discount.

2. Issuing less interested new debentures on premium in place of old debentures.

3. Redeeming preference shares carrying high dividend

4. Reducing the face value (par value) of shares.

Under-Capitalisation:

Generally, under-capitalisation is regarded equivalent to the inadequacy of capital but it should be

considered as the reverse of over-capitalisation i.e. it is a condition when the real value of the corporation
is more than the book value.

The following are the causes for under-capitalization:

1. Underestimation of earnings:

Sometimes while drafting the financial plan, the earnings are anticipated at a lower figure and the
capitalisation may be based on that estimate; if the earnings prove to be higher the concern shall become
under-capitalised.
2. Unforeseeable increase in earnings:

Many corporations started during depression find themselves to be under-capitalised in the period of
recovery or boom due to unforeseeable increase in earnings.

3. Conservative dividend policy:

By following conservative dividend policy some corporations create adequate reserves for depreciation,
renewals and replacements and plough back the earnings which increase the real value of the shares of
those corporations.

4. High efficiency maintained:

By adopting latest techniques of production many companies improve their efficiency. The profits being
dependent on the efficiency of the concern will increase and, accordingly, the real value of the corporation
may exceed its book value.
Effects of under-capitalisation:

The following are the effects of under-capitalisation:

1. Causes wide fluctuations in the market value of shares.

2. Provoke the management to create secret reserves.

3. Employees demand high share in the increased prosperity of the company.

Different Types of Stocks and Stock Classifications
Common Stock
Common stock is as it sounds, common. When people talk about stocks they are usually referring to
common stock, and the great majority of stock is issued is in this form. Common stock represent
ownership in a company and a claim on a portion of that companies profits (dividends). Investors can also
vote to elect the board members who oversee the major decisions made by management.
Historically, common stock has yielded higher returns than almost all other common investment classes.
In addition to the highest returns, common stock probably also carries the highest risk. If a company goes
bankrupt, the common shareholders will not receive money until the creditors, bondholders and preferred
shareholders are paid.
This risk can be greatly reduced by owning many different well established companies (diversification)
that have solid financial statements and a history of strong earnings.
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesnt come with the
same voting rights. With preferred shares, investors are usually guaranteed a fixed dividend. Recall that
this is different than common stock, which has variable dividend payments that fluctuate with company
profits. Unlike common stock, preferred stock doesnt usually enjoy the same appreciation (or depreciation

in market downturns) in stock price, which results in lower overall returns. One advantage of preferred
stock is that in the event of bankruptcy, preferred shareholders are paid off before the common
shareholder (but still after debt holders).
I like to think of preferred stock as being somewhere in between bonds and common stock. It shares
similarities with both. As a result, I wouldnt hold preferred stock. I dont really see any reason to forego
the growth potential of common stock, or the additional safety provided by bonds. For me, its a hybrid that
doesnt belong in my portfolio.
What are the different types of stocks?
There are two main types of stocks: common stock and preferred stock. Common stock is, well,
common. When people talk about stocks they are usually referring to this type. In fact, the majority
of stock is issued is in this form.
Do common stocks pay dividends?
One way profit is distributed to the shareholders is through dividends, which are often paid in cash from
the company's earnings. Dividends are usually paid on a quarterly basis. Common stockholders never
know the value of their dividends in advance, while preferred stockholders receivedividends at a fixed
rate.
What are stocks and shares?
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on
the company's assets and earnings. As you acquire more stock, your ownership stake in
the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing
What is the meaning of corporate stock?
The stock (also capital stock) of a corporation constitutes the equity stake of its owners. It represents
the residual assets of the company that would be due to stockholders after discharge of all senior claims
such as secured and unsecured debt
Watered stock is an asset with an artificially-inflated value. The term is most commonly used to refer to a
form of securities fraud common under older corporate laws that placed a heavy emphasis upon the par
value of stock.
What is a Preferred Stock?
DEFINITION of 'Preferred Stock' A class of ownership in a corporation that has a higher claim on the
assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out
before dividends to common stockholders and the shares usually do not have voting rights
What is a preference share?
Company stock with dividends that are paid to shareholders before common stock dividends are paid out.
In the event of a company bankruptcy, preferred stock shareholders have a right to be paid company
assets first. Preference shares typically pay a fixed dividend, whereas common stocks do not
Do preference shares have voting rights?

Preferred stock generally has a dividend that must be paid out before dividends to common stockholders
and the shares usually do not have voting rights. The precise details as to the structure
of preferred stock is specific to each corporation.

Types
In addition to straight preferred stock, there is diversity in the preferred stock market. Additional types of
preferred stock include:

Prior preferred stockMany companies have different issues of preferred stock outstanding at
one time; one issue is usually designated highest-priority. If the company has only enough money to
meet the dividend schedule on one of the preferred issues, it makes the payments on the prior
preferred. Therefore, prior preferreds have less credit risk than other preferred stocks (but usually
offers a lower yield).

Preference preferred stockRanked behind a company's prior preferred stock (on a seniority
basis) are its preference preferred issues. These issues receive preference over all other classes of
the company's preferred (except for prior preferred). If the company issues more than one issue of
preference preferred, the issues are ranked by seniority. One issue is designated first preference, the
next-senior issue is the second and so on.

Convertible preferred stockThese are preferred issues which holders can exchange for a
predetermined number of the company's common-stock shares. This exchange may occur at any
time the investor chooses, regardless of the market price of the common stock. It is a one-way deal;
one cannot convert the common stock back to preferred stock. A variant of this is the anti-dilutive
convertible preferred recently made popular by investment banker Stan Medley who structured
several variants of these preferred for some forty plus public companies. In the variants used by Stan
Medley the preferred share converts to either a percentage of the company's common shares or a
fixed dollar amount of common shares rather than a set number of shares of common. [7] The intention
is to ameliorate the bad effects investors suffer from rampant shorting and dilutive efforts on
the OTC markets.

Cumulative preferred stockIf the dividend is not paid, it will accumulate for future payment.

Exchangeable preferred stockThis type of preferred stock carries an embedded option to be

exchanged for some other security.

Participating preferred stockThese preferred issues offer holders the opportunity to receive
extra dividends if the company achieves predetermined financial goals. Investors who purchased
these stocks receive their regular dividend regardless of company performance (assuming the

company does well enough to make its annual dividend payments). If the company achieves
predetermined sales, earnings or profitability goals, the investors receive an additional dividend.

Perpetual preferred stockThis type of preferred stock has no fixed date on which invested
capital will be returned to the shareholder (although there are redemption privileges held by the
corporation); most preferred stock is issued without a redemption date.

Putable preferred stockThese issues have a "put" privilege, whereby the holder may (under
certain conditions) force the issuer to redeem shares.

Monthly income preferred stockA combination of preferred stock and subordinated debt.

Non-cumulative preferred stockDividends for this type of preferred stock will not accumulate if
they are unpaid; very common in TRuPS and bank preferred stock, since under BIS rules preferred
stock must be non-cumulative if it is to be included in Tier 1 capital.[8]

Supervoting stocka "class of stock that provides its holders with larger than proportionate voting
rights compared with another class of stock issued by the same company." [9] It enables a limited
number of stockholders to control a company. Usually, the purpose of the super voting shares is to
give key company insiders greater control over the company's voting rights, and thus its board and
corporate actions. The existence of super voting shares can also be an effective defense
against hostile takeovers, since key insiders can maintain majority voting control of their company
without actually owning more than half of the outstanding shares. [10]

Why would a stock have no par value?

People often get confused when they read about the "par value" for a stock. One reason for this is that the
term has slightly different applications depending on whether you are talking about equity or debt.
In general, par value (also known as par, nominal value or face value) refers to the amount at which a
security is issued or can be redeemed. For example, a bond with a par value of $1,000 can be redeemed
at maturity for $1,000. This is also important for fixed-income securities such as bonds or preferred
shares because interest payments are based on a percentage of par. So, an 8% bond with a par value of
$1,000 would pay $80 of interest in a year.
It used to be that the par value of common stock was equal to the amount invested (as with fixed-income
securities). However, today most stocks are issued with either a very low par value (such as $0.01 per
share) or no par value at all.
You might be asking yourself why a company would issue shares with no par value. Corporations do this
because it helps them avoid a liability to stockholders should the stock price take a turn for the worse. For

example, if a stock was trading at $5 per share and the par value on the stock was $10, theoretically, the
company would have a $5-per-share liability.
Par value has no relation to the market value of a stock. A no par value stock can still trade for tens or
hundreds of dollars - it all depends on what the market feels the company is worth.
Par Value for Stock
Par value is the price at which a company's shares were initially offered for sale. The intent
behind the par value concept was that prospective investors could be assured that an
issuing company would not issue shares at a price below the par value.
DEFINITION of 'Par Value'
The face value of a bond. Par value for a share refers to the stock value stated in the corporate charter.
Par value is important for a bond or fixed-income instrument because it determines its maturity value as
well as the dollar value of coupon payments. Par value for a bond is typically $1,000 or $100. Shares
usually have no par value or very low par value, such as 1 cent per share. The market price of a bond
may be above or below par, depending on factors such as the level of interest rates and the bonds credit
status. In the case of equity, par value has very little relation to the shares' market price.

What is no par value stock?

No par value stock is shares that have been issued without a par value listed on the face of
the stock certificate. Historically, par value used to be the price at which a company initially
sold its shares. There is a theoretical liability by a company to its shareholders if the market
price of its stock falls below the par value for the difference between the market price of the
stock and the par value
Companies set the par value as low as possible in order to avoid this theoretical liability. It is
common to see par values set at $0.01 per share, which is the smallest unit of currency.
Some states allow companies to issue shares with no par value at all, which eliminates the
theoretical liability payable by the issuer to shareholders. If common stock has no par value,
a company prints "no par value" on the face of any stock certificates that it issues.
When a company has no par value stock, there is effectively no minimum baseline from
which to price the stock, so the price is instead determined by the amount that investors are
willing to pay, based on their perceived value of the issuing entity; this may be based on a
number of factors, such as cash flows, the competitiveness of the industry, and changes in
technology.

When a company sells no par value stock to investors, it debits cash received, and credits
the common stock account. If a company had instead sold common stock to investors that
had a par value, then it would credit the common stock account up to the amount of the par
value of the shares sold, and it would credit the additional paid-in capital account in the
amount of any additional price paid by investors in excess of the par value of the stock.
DEFINITION of 'Voting Shares'
Shares that give the stockholder the right to vote on matters of corporate policy making as well as who will
compose the members of the board of directors.
If I own a stock in a company, do I get a say in the company's operations?
You don't get a direct say in a company's day-to-day operations, but, depending on whether you
own voting or non-voting stock, you may have a hand in shaping its board of directors and deciding on
special issues.
Voting Stock If the stock you own is a voting stock and you're a shareholder on record when a decision
must be made through a vote, you have a right to vote on the issue. The right to vote for a member on the
board of directors or on a specific business decision is similar to the right to vote for a U.S. senator or on a
political issue in a plebiscite: you don't have to vote if you don't want to, and you don't really get a direct
say in daily government operations (although you do vote on the people that do). The one main difference
between voting as a citizen and voting as a shareholder is that if, as a shareholder, you choose not to
submit your vote, there is the possibility that a default choice will be made regardless of your true desires.
Be sure carefully to read the fine print on the proxy form sent to you.
Non-Voting Stock A non-voting stock doesn't allow you to participate in votes affecting shareholders
and the company. These types of shares are created so that investors who forfeit the right to have a say in
the direction of the company are able to participate in the company's profitability and success.
Not all companies offer these two different types of stock, and not all types of voting stock have the same
voting rights. If you are interested in playing a part (albeit a very small one) in the decision making
processes of a company, make sure you buy the right type of stock.

Founders' shares
Issued to the originators of a firm, these shares (stock) normally do
not receive any return until dividend payable to common stock holders (ordinary
share holders) is paid out. However, these shares are entitled to all of the remaining
(after tax) profits, no matter how much.

Redeemable shares.

These are shares issued on terms that the company will, or may, buy them back at some future date. The
date may be fixed (e.g. that the shares will be redeemed five years after they are issued) or at the
directors' discretion. The redemption price is often the same as the issue price, but need not be. This can
be a way of making a clear arrangement with an outside investor.
They may also be redeemable at any time at the company's option. This often done with non-voting
shares given to employees so that, if the employee leaves the company his shares can be taken back at
their nominal value. There are statutory restrictions on the redemption of shares. The main
requirement, like a buy-back, being that the company may only redeem the shares out of accumulated
profits or the proceeds of a fresh issue of shares (unless it makes a permissible
capital. Preference shares are often redeemable

What is treasury stock?

Treasury stock is a corporation's previously issued shares of stock which have been
repurchased from the stockholders and the corporation has not retired the repurchased
shares. The number of shares of treasury stock (or treasury shares) is the difference
between the number of shares issued and the number of sharesoutstanding. Since the
treasury shares result in fewer shares outstanding, there may be a slight increase in the
corporation's earnings per share.
Treasury Stock is also the title of a general ledger account that will typically have a debit
balance equal to the cost of the repurchased shares being held by the corporation. (Some
corporations use the par value method instead.) The cost of the treasury stock purchased
with cash will reduce the corporation's cash and the amount of its total stockholders' equity.
The shares of treasury stock will not receive dividends, will not have voting rights, and
cannot result in an income statement gain or loss. The shares of treasury stock can be sold,
retired, or could continue to be held as treasury stock.