Which of the following is INCORRECT regarding stocks? Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.
a Stockholders are the residual claimants of a corporation’s profits.
b An SEO occurs when a company issues shares in the stock market for the very first time.
c Short-selling occurs when an investor sells a stock she doesn’t own.
d Dividend-paying companies typically pay them on a quarterly basis.
e Market capitalization refers to the total value of a company’s stock.
The correct answer and explanation is:
Correct Answer: b) An SEO occurs when a company issues shares in the stock market for the very first time.
Explanation (300 words):
This statement is incorrect because it confuses two important terms in the stock market: Initial Public Offering (IPO) and Seasoned Equity Offering (SEO).
An IPO (Initial Public Offering) refers to the very first time a private company offers its shares to the public and becomes a publicly traded entity. This is a significant event for any company, often signaling growth, expansion, and the need for capital. During an IPO, investors get the opportunity to buy shares in the company for the first time, and the company becomes listed on a stock exchange.
On the other hand, an SEO (Seasoned Equity Offering) happens after a company has already gone public. In an SEO, a company that is already publicly traded issues additional shares to raise more capital. This is not the first time the company is offering stock to the public—hence the term “seasoned.”
Let’s now verify the correctness of the other options:
- a) Stockholders are the residual claimants of a corporation’s profits – This is true. After all expenses, debts, and obligations are paid, the remaining profits belong to shareholders.
- c) Short-selling occurs when an investor sells a stock she doesn’t own – Correct. In short-selling, the investor borrows shares to sell, aiming to buy them back later at a lower price.
- d) Dividend-paying companies typically pay them on a quarterly basis – Also true. Most companies that issue dividends do so every quarter.
- e) Market capitalization refers to the total value of a company’s stock – Correct. Market cap is calculated by multiplying the share price by the total number of outstanding shares.
Thus, option b is the only incorrect statement, making it the correct answer to the question.