What is Half Stock?
Half stock is an equity security sold at a par value that is 50% of the market value. The two types of equity where half stocks are found are common stock and preferred stock.
A half stock acts just like its counterpart, regular common or preferred stock, except it is sold at 50% the normal price. Par value is more important in dividend-paying stocks because of the dividend yield. This leads to the general rule of thumb that most half stocks are preferred shares.
For common stock, par value is often a small and inconsequential number, such as one cent.
- Half stock is an equity security that is sold at par value that is 50% of the security’s market value.
- Half stocks are more common among preferred shares.
- Preferred shares are a type of stock that shares characteristics of both debt and equity instruments.
What are Preferred Shares?
Preferred shares, otherwise known as preferred stock, are a type of stock that shares properties with both debt and equity instruments. They can be bought in halves. The properties shared with a standard equity instrument would be the capital appreciation component.
Debt instruments share the income component with preferred shares, and this income component can be provided in several different styles.
Below are the different types of preferred shares:
1. Cumulative Preferred Shares
Cumulative preferred shares are a type of preferred stock with a provision stipulating all cumulative preferred shareholders must be the first to receive any missed dividend payments in the past.
If dividend payments were missed in the past, they must be paid to cumulative preferred shareholders before other equity holders receive payment. The instruments generally have a fixed dividend yield based on the stock’s par value.
2. Non-Cumulative Preferred Shares
Non-cumulative preferred shares are a type of preferred stock that does not owe any missed payments. They generally have a fixed dividend yield based on the stock’s par value.
The primary advantage of non-cumulative preferred shares is that when a company decides to pay a dividend, non-cumulative preferred shares will have priority of payment over common shareholders.
3. Participating Preferred Stock
Participating preferred stock provides a specific dividend paid prior to payments paid to common stockholders. In the case of a firm defaulting on debt and having their assets liquidated, holders of preferred stock have priority above common stock.
4. Non-Participating Preferred Stock
Non-participating preferred stock is preferred stock that pays a specific dividend percentage, meaning that there is a maximum amount of distributions paid to these types of stockholders.
The primary advantage of non-participating preferred stock is that these stockholders are entitled to payment before common stockholders.
What is Different about Common Stock?
Common stock is a stake in the company that demonstrates ownership of a corporation. Investors in common stock can contribute to the company’s operations by helping elect a competent board of directors, and they can provide input regarding company policy.
However, when a company is being liquidated during bankruptcy, common shareholders have the right to the company’s assets after all bondholders, preferred shareholders, and other debt holders have been paid in full.
What is Dividend Yield?
Dividend yield is a percentage that expresses the dividend payout as a proportion of share price. The par value is the amount the dividend will be paid on.
For example, if the par value of a stock is $1,000 and the annual dividend is 7%, then the issuer must pay $70 per year to the preferred stockholder.
Half Stock Example
Consider a preferred share with a market value of $10. If an investor has the opportunity to purchase a half stock of the particular preferred share, they will be able to purchase the share for $5. Ultimately, the lower part value will result in a higher dividend yield.
CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)™ certification program, designed to transform anyone into a world-class financial analyst.
In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful: