Security Analysis

I quickly skimmed over Graham's Security Analysis today, and I had previously thought that I knew a decent amount about investing. However, he mentioned things such as preferred stock, common stock, high-end bonds. Are these old terms that aren't used any more, or else could you define them.

Ex. If I bought stock in google, is that common or preferred stock (I thought there was only one kind)?

[Warren Whitmore]

You probably bought the common. Try reading "The Interpretation of financial statements" by Benjamin Graham before you take on Security analysis.

[Sniper]

Preferred Shares

[buffett]

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I had previously thought that I knew a decent amount about investing. However, he mentioned things such as preferred stock, common stock

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I'm seriously not trying to put you down, I'm just trying to be straight with you....
This is very basic accounting terminology, and you shouldn't be investing until you're comfortable with these and many other terms you can find in a basic college accounting textbook. Accounting is the language of business, and you should have at least a functional fluency in this language before entering the marketplace.

[DesertCat]

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Stockholders’ equity:

Class A and Class B common stock, $0.001 par value: 9,000,000 shares authorized at December 31, 2004 and September 30, 2005, 266,917, and 290,215 shares issued and outstanding, excluding 7,605 and 4,326 shares subject to repurchase at December 31, 2004 and September 30, 2005

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GOOG doesn't have preferred stock, most companies don't. What it has is two classes of common stock, one class has more voting rights so that if the company sells more shares, the founders retain the class with all the voting rights to ensure they won't be outvoted. Ala what Hugh Hefner did with Playboy.

Preferred stock usually has rights to regular dividends, gets its money back before common in case of liquidation, and sometimes has the right to convert into common.

Sounds like a very low-risk investment...meaning you must not invest in many of them if you have such a high ROI, correct (talking to DesertCat)?

[DesertCat]

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Sounds like a very low-risk investment...meaning you must not invest in many of them if you have such a high ROI, correct (talking to DesertCat)?

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Not sure I understand the question?

You get something like 25-30% ROI a year, no?

And preferred stocks don't get that sort of returns do they?

Edit: Basically, do you buy preferred stock often?

[DesertCat]

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You get something like 25-30% ROI a year, no?

And preferred stocks don't get that sort of returns do they?

Edit: Basically, do you buy preferred stock often?

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No, I've only bought one. Ben Graham has warned about preferreds, since they usually don't have voting rights and company management usually manages the company for the common stock's benefit. I.e. management usually has options for common, so they won't care about your preferred. And unlike bonds, they aren't secured, so if a liquidation or bankruptcy happens, preferred gets paid before common, but after all other debts.

The one I'm in is a special high risk/high reward kind of situation. It's a biotech company that has shut down it's existing business, but still has around $20M in cash, no debt other than it's preferred. Management is trying to sell the company and/or technology. The 2m shares of preferred is owed $20M. So the preferred has $10 per share "liquidation preference". And the common shares are worthless in liquidation, but might be worth something in a sale or purchase of another business.

I've been able to buy the preferred shares for $3.75. My risk is the company burns the remaining $20m trying to launch another business. In that case I'll have to dump my shares for whatever I can get. My hope is they decide to liquidate, and then I'll get close to $10 (probably $6-$8 after liquidation expenses). They are still paying interest, I get 15 cents every three months. And in this case, the board of directors has three members who own large amounts of preferred, so I'm really betting they'll overcome the natural inclination of mgmt to try to create value for the common at the expense of the preferred.

So you can see this is major exception for me, as I never buy preferreds. Preferreds are usually viewed as safer than common stocks, since they provide income and have a little more safety, but offer less upside. We'll see if this "exception" works out, if it doesn't, I'm unlikely to try this again.