1. Stock Features and Markets

2. Voting Rights Stockholders elect directors at an annual meeting
General idea: One share, one vote
Two voting procedures
Cumulative voting: Directors are elected all at once
Straight voting: Directors are elected once a time
Cumulative voting permit minority participation, but straight voting “freezes out” minority shareholders
Corporate democracy is thus very different from our political democracy.
With corporate democracy, the “golden rule” prevails: Whosoever has the gold makes the rules.
The exact mechanism for electing directors differs across companies.
Directors are elected at an annual meeting by shareholders who are present and entitled to vote
Directors hire management to carry out their directives

3. Two Voting Procedures
A corporation has 2 shareholders: Smith with 20 shares and Jones with 80 shares. Both want to be a director, but Jones does not want Smith. 4 directors to be elected.
Cumulative Voting
Smith has 80 votes and Jones has 320 votes
Jones must cast at least 81 votes for each of the 4 candidates to preclude Smith to be a director
Straight Voting
Each time, Smith has 20 votes and Jones has 80 votes.
Jones elects all 4 directors
If cumulative voting is mandatory, staggered elections are often used to minimize its impact
In states where cumulative voting is mandatory, devices have been worked out to minimize its impact or say to protect the interest of shareholders with majority shares. With staggered elections, only a fraction of the directorship are up for election at a particular time. Staggering makes it more difficult for a minority to elect a director when there is cumulative voting because there are fewer directors are to be elected at one time.
Staggering provide “institutional memory” – continuity on the board of directors. This may be important for corporation with significant long-range plans and projects.

4. Shareholder Rights Proxy voting Classes of stock
The grant of authority by a shareholder to someone else to vote him or her shares
Classes of stock
Classes are created with unequal voting shares
A primary reason for creating multiple classes of stock has to do with control of the firm
Large companies have hundreds of thousands or even millions of shareholders. Shareholders can come to the annual meeting and vote in person, or they can transfer their right to vote for another party. Management always tries to get as many proxies as possible transferred to it. If shareholders are not satisfied with the management, an “outside” group of shareholders can try to obtain votes via proxy. They can vote by proxy in an attempt to replace management by electing enough directors. – Proxy Fight.
Some firms have more than one class of common stock. Ford Motor Company: Class B common stock is not public traded, but held by Ford family interests and trusts. It has 40% of the voting power, but it represents less than 10% of total number of shares outstanding. Google: Class A shares are held by the public, and each share has one vote. Class B shares are held by company insiders, and each share has more than 10 votes. Google’s funders and managers control the company.
The subject of unequal voting rights is controversial in US, and idea of one share, one vote has a strong following and a long history. Shares with unequal voting rights are quite common in UK and elsewhere around the world.

5. Other Rights Share proportionally in dividends paid
Share proportionally in remaining assets during liquidation
Vote on matters of great importance, such as a merger
Preemptive right
New stock first offered to existing shareholders before to the general public
A preemptive right means that a company that wishes to sell stock must offer it to the existing shareholders before offering it to the general public. The purpose is to give shareholders the opportunity to protect their proportionate ownership in the corporation.

6. Preferred Stock Features
Dividends
Must be paid before dividends can be paid to common stockholders
Can be deferred
Most preferred dividends are cumulative
Unpaid dividends are not a liability
In the event or liquidation, corporation assets must be distributed to preferred stockholders before to common stockholders
Preferred stock generally does not carry voting rights

7. New York Stock Exchange (NYSE)
A secondary auction market
Merged with Euronext in 2007
NYSE Euronext merged with the American Stock Exchange in 2008
Members (License Holders)
Designated market makers, DMMs
Floor brokers
Supplemental liquidity providers (SLPs)
Operational goal: Attract and process order flow
The primary purpose of auction market is to match those who wish to sell with those who wish to buy. It is used to have a physical location like wall street. Securities broker arrange transactions between investors, matching investors wishing to buy securities with investors wishing to sell securities. The broker behaves like an intermediary that connects buyer and seller. They work in the auction market. The distinctive characteristics of security brokers is they do not buy or sell securities for their owe accounts. Facilitating trades by others is their business. They make profit by brokerage fee.
Euronext is the first integrated cross-board exchange. It includes markets in Belgium, France, Ireland, the Netherlands, Luxembourg, Portugal, and United Kingdom. NYSE Euronext becomes the world’s first global exchange, with trading occurring 21 hours each business day. Further expansion occurred in 2008 when NYSE Euronext merged with AMEX.
To buy and sell securities on the floor of the exchange, you must have a trading license, which costs $40,000 per year in Prior to 2006, the exchange members were said to own “seats” on the exchange. DMM is the dealer who maintains a two-side market and posts and updates bid and ask prices. It is also know as “specialists”. DMM ensures there are always buyers and sellers available, thereby promoting market liquidity. The job of floor brokers is to execute trades for customers, with an emphasis on getting the best price possible. They are generally employees of large brokerage firms like Merrill Lynch, the wealth management of Bank of America. The interaction between DMM and floor brokers are the key to nonelectric trading on the NYSE. SLPs are essentially investment firms that agree to be active participants in stocks assigned to them. Their job is to regularly make a one-side offer – offering to either buy or sell. They trade for their own accounts, so they do not represent customers. SLPs do not operate on the floor of NYSE.
The goal of NYSE is generate as much liquidity as possible, which make it easier for ordinary investors to quickly buy and sell at prevailing prices.

8. Floor Activities DMM Floor Broker A Floor Broker B “Crowd” Customer A
Order to buy
Order flow means the flow of customers orders to buy and sell stocks.
The customers of the NYSE are the millions of individual investors and tens of thousands of institutional investors (banks, insurance companies, funds) who place their orders to buy and sell shares in NYSE-listed companies.
Order to Sell
Customer A
Customer B

9. NASDAQ Computer-based quotation system
Computer network and no physical location
Multiple market makers
Three levels of information access
Level 1 – price quotations
Level 2 – view insider quotes
Level 3 – update quotes, market makers only
Large portion of technology stocks
NASDAQ relies multiple market markers for actively traded stocks. Inside quotes are the highest bid quotes and the lowest asked quotes for a NASDAQ-listed security. It includes Microsoft and Intel.
Electronic Communications Networks provide direct trading among investors. Developed in late 1990s. ECN orders transmitted to NASDAQ