Ch 11 Equities And Derivatives Flashcards
Treasury stock
Stock the issuer (company) bought back
Ie number of outstanding won’t equal the number issued. Treasury shares reduce outstanding shares.
Issued stock - treasury stock = outstanding stock
Secondary offering from treasury stock diluted ownership for existing shareholders
Common vs preferred shares voting rights
Common votes on:
Who sits on the board
Whether new shares are listed
Stock splits
NOT whether dividends are paid (board decides that)
Preferred votes on:
Nothing
3:2 split
Shareholder gets 3 shares for every 2 they have
eg 100 shares becomes 150
Types of preferred stock features
Preferred stock is best for people wanting income typically (dividends)
Non cumulative: investor is only entitled to the current divided (ie if company doesn’t issue a dividend, you never get it)
Cumulative: investor is paid unpaid dividends in arrears (eg id consent doesn’t issue a dividend, you get it before common stock dividends are paid)
Callable
Participating: investor pay receive additional dividends paid to common stock holders based on profits
Convertible: investor can convert to common shares
Preemptive rights vs warrants
Preemptive: like a temporary stock option (4-6 weeks usually) given to existing shareholders which allows them to buy stock at a lower price to maintain ownership %. They’re also traded on the exchange so shareholder can sell but will then be diluted. If you let it expire, your ownership share is diluted.
Warrants: Give holder the ability to buy stock. Exercise price is above current market value. Used by companies to sweeten the deal to lower the interest on a corporate bond. They typically are long term which is what can make them attractive. Traded on exchange separately from the bond.
American depositary receipts (ADRs)
Foreign company that is priced in US dollars and pays dividends in US dollars. still have currency risk.
It allows investors to eliminate the expense and pain of exchanging currency
They can be unsponsored (BD can just create a trust with that company’s stock in it and handle exchanges) or sponsored (issued in cooperation with the foreign company.
Sponsored trades on exchange and unsponsored is OTC
Broker vs dealer
Broker: just facilitates the trade and collects a fee so no risk assumed
Dealer: dealer actually buys the security from a customer who wants to sell. They own the securities so they assume the risk of price change. They charge a markup to the price
Designated market maker (DMM)
Monitors trading on centralized exchanges like NYSE
Aka specialist
Dark pools
Provided a liquidity for large institutional investors and high frequency traders to limit the impact on the market. Quotes are not visible to the public
Bulletin board vs pink market
Bulletin is a place to trade OTC shares. Companies must file the standard SEC reports. More risky than exchange trades
Pink market is similar but no reporting requirement so more risky. Used for “penny stocks”. Due to higher risk, penny stocks must be suitable and customer must sign written approval
Market makers
BDs that are acting in dealer aka principal capacity (eg for Goldman sacs or JP Morgan)
Subject to SRO rules (aka FINRA)
Be ready to buy shares in lots of 100
NASDAQ quotes
Eg
Bid = 20.00 is price willing to buy
Ask = 2010 is price willing to sell
9x8 means willing to buy 900 at that price and sell 800 at that price
Inside market: the biggest bid price and lowest sell price
Types of orders
Market: customer wants to buy or sell at whatever the best price available is. All they specify is what security and how many share
Limit: customer only wants to buy or sell at a certain price pr better. They specify the security, price, and size (how many shares). Can be a sell limit or a buy limit
Stop (loss) order: used like an insurance policy to limit the damage. Can do a buy stop order (activated at stop price or lower) or sell stop order (activates at stop price or higher). Triggers at the specified price but It may be executed higher or lower than that because it depends on the first price after the trigger price.
When a stop order is activated, it becomes a market order so it feasibly could buy or sell at any price. When a stop limit order is activated, it becomes a limit order so it may not ever execute aka transact.
Sell stop order: used to hedge long position. Eg, If stock drops to 20 or below, triggers and becomes a market order and sells at 18.
Buy stop order: used to hedge short position by limiting loss or protect profit on a short sale. Eg if price rises above 45, sell.
Stop limit order: similar to a stop order except that once activated, it may not be executed (aka becomes a limit order rather than a market order)
Stop order: once activated, executed immediately
American vs European exercise style vs capped
American: options that can be exercised anytime
European: options that can only be exercised on day of expiration
Capped: options that are exercised automatically if value of underlying security hits a specific price
Straddles
Long straddle: buying a call and a put
Short straddle: selling a call and a put
Both are of same underlying security with same expiration month and strike price
Legged into the position is when you have one option and add another to make a multiple option position
All options are of 100 shares
Break even: when calculating break even, need to consider the title premium of both the call and the put
Futures and forwards
Both are contacts to buy or sell a commodity at a later date
Futures: standard sized quantity, traded in exchange, can be offset. Do not need to be exercised. Buyer is obligated to take delivery
Forwards: variable quantity based on negotiation, OTC traded, personal and cannot be offset ie cannot get out of it once you get in
Cyrpto regulation
Crypto itself is not considered a security so it’s not regulated
Options of crypto currencies are considered securities so they are regulated
Stablecoins
Cryptocurrencies but are pegged to other assets
May be secured by physical assets like cash or gold
Used to facilitate trading other cryptocurrencies basically a safe place to keep your money while you trade crypto
Affiliated directors
Someone who serves as an executive and on the board
Order of liquidation
Secured creditors (eg bonds)
Admin expense claims (wages, lawyer, etc)
General creditors (eg debentures)
Subordinated debt
Preferred stockholders
Common stockholder
Voting by proxy
A shareholder giving someone else the right to vote the shares for them
Ex dividend date
The date the stock will trade without its dividend
One business day prior to record date
Swap contracts
Type of derivative
Two parties agree to exchange cash flows based on different financial instruments
Most common is interest rate swap where one party agrees to pay a fixed interest rate and another party pays then a variable rate of interest
Settled on a net basis
Intrinsic value and option premium
The amount an option is in the money. Disregards the premium entirely. Can never be negative.
Premium = intrinsic value + time value
Time value is greatest for an option that is furthest out from expiration. As expiration gets closer, time value gets close to or equal to zero
Delta
The amount an option premium will change with each dollar of stock price change. It will be close to +/-100% in the money and close to 0 out of the money
Gamma
measures rate of change of delta for every $1 change in stock price. Helps solve the issue that delta isn’t constant
Theta
Measures rate that time value decreases
As options move closer to expiration, time value decreases (time value decay).
Soft vs hard commodities
Soft: corn wheat soybeans coffee sugar livestock. Grain futures sold in bushels of 5000
Had: things that are mined like gold silver coal and copper
