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Posted by Aex on August 20, 2008, 9:55 am
I'm a first time poster who wants to learn the basics of stock
analysis.
How does a governmet bailout wipe out stockholders? Are Fannie and
Freddie really on thin ice financially?
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Posted by John A. Weeks III on August 20, 2008, 10:41 am
In article
> I'm a first time poster who wants to learn the basics of stock
> analysis.
>
> How does a governmet bailout wipe out stockholders? Are Fannie and
> Freddie really on thin ice financially?
There are several ways that the stockholders can lose.
1) the company can file for bankruptcy, resulting in the value
of the stock to go to zero, and the courts canceling dividends
and eliminating entire classes of stock.
2) the firm can get new investors. They invest by buying
stock. The existing stock goes down in value because it has
been diluted with the new stock. In addition, reverse splits
are common, such as 10,000 to 1 reverse. That means that
someone who owned 1000 shares now only owns 1/10 of a share.
3) the firm simply doesn't perform, so the forces of supply
and demand push the stock price down into the penny stock
range, and then the firm is eventually delisted from any
major exchange.
-john-
--
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John A. Weeks III 612-720-2854 john@johnweeks.com
Newave Communications http://www.johnweeks.com
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Posted by Aex on August 21, 2008, 8:10 am
Thanks for your replies! They were really helpful!
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Posted by Tad Borek on August 21, 2008, 2:05 pm
Aex wrote:
> I'm a first time poster who wants to learn the basics of stock
> analysis.
>
> How does a governmet bailout wipe out stockholders? Are Fannie and
> Freddie really on thin ice financially?
Since your interest is stock analysis, I'd suggest getting an
intro-level finance textbook and learning about balance sheets - how to
analyze a company's capital structure (the ways they raise the money
they need to operate). Once you understand that you'll have a much
better idea of why raising capital can be detrimental to current
stockholders, and the circumstances where existing stock can become
worthless or nearly so.
Cliffs notes version: Whether you're talking about a small local
business, or a publicly traded company like IBM, all money-raising falls
into two categories: equity and debt. Equity is common stock and
preferred stock, and the holders of that stock collectively own the
company, taking on the risks of its failure as an owner would. Debt is
borrowing, done mostly by issuing bonds. Lenders (including bond owners)
are not owners of the company, rather they have a contractual kind of
relationship with fixed terms (such as: lend $10k for 5 years at 7%
interest). These "creditors" do not take on the same risks as owners,
and are treated differently if the company goes bankrupt.
If capital is erode due to losses, a company needs to find new capital
to continue operating. And it only has those two broad options: equity
and debt. If the new capital is common stock, that dilutes existing
shareholders (e.g. doubling the stock outstanding means a former owner
of 1/5th of the company now owns 1/10th of it). And distressed companies
can't always raise capital by selling stock, because investors aren't
willing to buy it - if they are, it's often on lousy terms (high
dilution of prior shareholders). If the new capital is in the form of
bonds, that should be better for shareholders, unless it happens in
bankruptcy - where typically old stock is canceled and only creditors
get anything.
Exactly how Fannie/Freddie recapitalize remains to be seen but as Elle
said these are tough companies to begin your stock analysis with. Their
financial statements have been in limbo for years, and their balance
sheets are unusually complicated. Heck, Capital Research & Management
(which manages American Funds mutual funds) was one of the biggest
owners of these stocks, owning over 20% of each late last year. If their
team of highly-trained expert analysts couldn't see the risks, what hope
does a beginner have?
-Tad
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
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| Similar Threads | Posted | | Fannie & Freddie | September 8, 2008, 9:34 pm |
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| Where to View Freddie Mac Trades? | October 8, 2008, 3:25 pm |
| Any Site That Graphs Freddie Mac Bond Trades? | October 30, 2008, 2:40 pm |
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