103-3 Equity & Managed Assets Flashcards
Disadvantage of issuing equity instead of debt from the standpoint of the issuing corporation
Dividends are not tax deductible for income-tax purposes, wheres bond interest is tax deductible
Stock’s par value
The specified value of the stock on the stock certificate or corporate charter
Wash Sale
Occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities
Shareholder of record
Any owner who is listed as such on the record date
Record date
First business day after the ex-dividend date
Ex-dividend date
The first date on which a security is traded that a buyer is not entitled to receive a previously declared dividend
Dates to know for dividend payment
Day 1: to receive dividend, last chance to be owner
Day 2: ex-dividend date
Day 3: record date
Dividend reinvestment plans (DRIPs)
The shareholder is entitled to purchase the additional shares directly from the issuer paying little or no commission and often at a discount to market price
Most companies permit investors in these plans to add money along w/ the reinvested dividend
Stock dividend
A dividend paid to shareholders of record in the form of additional shares of company stock, rather than in cash
The market price of each share of stock should decrease on a basis relative to the stock dividend
Receipt of the stock dividend is generally not taxable for federal income tax purposes
The stockholder’s basis per share of stock is adjusted downward to reflect the stock dividend
Stock split
The par value of each share of stock is reduced, and the # of shares is increased proportionately
Reverse stock split
The company reduces the total # of shares outstanding
Companies typically do this to increase the price of the outstanding shares, thereby making the company less likely to be delisted by an exchange and more attractive to potential investors
Rights
Aka subscription rights
Issued by a corporation that plans to raise funds by issuing new stock to the public
Normally, each current shareholder is given 1 right for each share of stock
Rights usually are only for a few weeks
Stockholders may purchase the company’s stock below the current market price
Warrants
Essentially long-term, customized call options used to purchase the stock of the underlying corporation
On issuance, exercise price higher than market price
Guarantee, for a small premium, the opportunity to buy stock at a fixed price during a particular period of time
Warrants are often issued in conjunction w/ new bond issues or preferred stock issues to make them more attractive to buyers
Preferred stock
Has characteristics of both a bond and common stock
Like a bond, shareholders of preferred stock receive dividends each year equal to a stated % of the par value of the stock
Like a common stock, a shareholder of a preferred stock is not guaranteed the payment of the dividend
Large corporations the most prominent purchasers of preferred stock because of favorable tax treatment
Sensitive to IR changes
Country risk
A composite of all the risks of investing in a particular country
American depositary receipts (ADRs)
Trust receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank
An alternative to direct investing in foreign companies or mutual funds
Denominated and pay dividends in U.S. dollars
Exchange rate risk not completely eliminated because dividends are declared in local currency then converted to U.S. dollars
Dividends paid are taxed to the investor as ordinary income in the year earned
Net Asset Value (NAV)
Mutual funds must calculate the NAV of fund shares at least once per business day because purchase and redemption prices are based on the NAV
Fund’s NAV = assets (cash + current value of securities) - liabilities
NAV per share = fund’s NAV / # of shares outstanding
3 Methods to Calculate Basis for Mutual Funds
1) Specific Identification Method: generally the most favorable to the investor (i.e., result in the highest cost basis and least tax due)
2) Average Cost Method
3) First in, first out (FIFO): least favorable, the method used by the IRS in the event that the investor-taxpayer cannot identify the specific shares or use the average cost method
Closed-end fund
Shares trade in the same manner that publicly traded stocks trade
The manager does not have to worry about cash redemptions (as w/ a MF), which in turn, may permit the manager to invest in less liquid securities
Unit Investment Trust (UIT)
Type of investment company whose units are sold in the secondary market but not on the major exchanges
Unmanaged, or passively managed, funds because professional managers initially select the securities to be included in the portfolio and then hold those securities (usually bonds) until they mature
UIT investors generally purchase units (instead of shares) sold at NAV + commission
Separately managed account
An account comprising a diversified portfolio of individual securities managed by a professional money manager
Exchange-traded fund (ETF)
Because they mimic indexes, ETFs typically have lower annual expenses than mutual funds
They also have lower turnover of assets than mutual funds and are, as a result, more tax efficient
Usually passively managed and attempts to track a specific index (e.g., S&P 500 Index) or sector within the index
The price of the fund shares is based on the value of the underlying securities; thus, this price may or may not be equal to the NAV, which is calculated every business day, of the fund because of supply and demand for the shares
Indexing
Investing in index mutual funds or ETFs, is indicative of an investor who believes in passive portfolio management
Index funds tend to be distinguished by their low administrative costs and low turnover of existing assets
Hedge fund
Usually structured as a partnership w/ the GP acting as the investment manager and investors constituting the LP’s
Unlike a MF manager, whose compensation depends on the amount of assets under management, a hedge fund manager is paid on the basis of fund performance and commonly owns a significant % of the fund’s shares
Risks associated w/ hedge funds:
- Leverage
- Short selling
- Higher risk investments
- Lack of transparency
