Chapter 1

Question 1

When a corp issues, or sells fewer shares than the total number authorized , it normally reserves the unissued shares for future needs such as:

Answer 1

• To raise additional capital
• issue stock dividends
• exchanging common stock for outstanding convertible bonds or preferred stock

Question 2

Includes any shares that a company has issued and are in the hands of investors

Answer 2

Outstanding stock

Question 3

= # Outstanding Shares x CMP

Answer 3

Market Capitalization
For example:

XYZ company has 1 million outstanding shares and the current market price per share is $50

what is XYZ’s market cap?

Market Cap = 1 million x $50 = $50 million

Market capitalization is widely used by investors and analysts to determine the size and value of a company.

Question 4

are usually declared by a company’s board of directors and approved by its shareholders.

• Paid Quarterly
• Normally distributed by check or automatically deposited into a brokerage account in street name
• Taxed as ordinary income in the year in which they are received

Answer 4

Cash Dividends

Question 5

when a company wishes to reinvest it’s profits for business purposes, what might it declare?

Answer 5

Stock dividends

Net result of this dividend is shareholders hold more ownership in a company but each share costs less than what they originally paid per share, this becomes their “new cost basis”

Question 6

Adjusted cost per share =

Answer 6

New cost basis

Question 7

Define DERP

Answer 7

Declaration, ex-dividend, record, and payable

Question 8

An investor must be listed as a shareholder on this date in order to receive the dividend payment

Answer 8

Record date

Question 9

On the _____, the dividend disbursing agent (transfer agent) sends dividend checks to all stockholders whose names appear on the books as owners of record.

Answer 9

Payable date

The transfer agent’s main responsibilities include maintaining accurate records of shareholder ownership, issuing and cancelling shares, and distributing dividends and other payments to shareholders

Question 10

Authorized stock that has been sold to investors

Answer 10

Issued stock

Question 11

To qualify as a ________, an individual must hold an account with a broker-dealer (BD) for at least one year and must have made a deposit of funds or securities into the account. Additionally, the individual must have made at least three penny stock purchases of different issuers on different days.

Answer 11

established customer

Question 12

type of dividend payment that does not meet the requirements for favorable tax treatment under the Internal Revenue Code. (IRS)

• are taxed as ordinary income.

Answer 12

Nonqualfied dividends

The main difference between qualified and nonqualified dividends is how they are taxed. Qualified dividends are taxed at the long-term capital gains tax rate, which is generally lower than the ordinary income tax rate. Nonqualified dividends, on the other hand, are taxed at the same rate as the shareholder’s ordinary income, which can be higher than the capital gains tax rate.

Question 13

True or false?

A customer must purchase the stock two business days before the record date to qualify for the dividend

Answer 13

True

remember, the ex-dividend date is 1 day before the record date. And stocks settle T+2

Question 14

Enjoy numerous benefits such as:

• Voting rights
• limited liability
• hedge against inflation (via Capital Appreciation)

Answer 14

Common shareholders

Question 15

Is freely transferable to anyone who wants to buy it or receive it as a gift

Answer 15

Common stock

Question 16

Allows a stockholder to cast one vote per share owned, for each item on a ballot, such as candidates for the board of directors

Think voting related to issues “on the books”

Answer 16

Statutory voting

Question 17

Allow stockholders to allocate their total votes in any manor they choose

Answer 17

Cumulative voting

is often used in shareholder elections for boards of directors and in other types of elections where a large number of votes are cast, as it allows minority shareholders to have a stronger voice in the election outcome

Question 18

Common shareholders have the right to receive an audited set of financial statements of the company’s performance each year in the form of a _____ . which is normally made part of the annual report

Answer 18

10k

Question 19

Have the preemptive right to maintain their proportionate share of ownership in the corporation

Answer 19

Common shareholders

Question 20

Chance that a stock may drop in price

Answer 20

Market risk

Question 21

This means that if an investor buys a stock on or after the __________, they are not entitled to receive the upcoming dividend payment.

Answer 21

The ex-dividend date, also known as the ex-date

Question 22

Entitles existing stockholders to maintain their proportionate ownership shares in a company by

buying newly issued shares before they are offered to the public

• This offering is good for 30-45 days

Answer 22

Preemptive rights

Question 23

The subscription period Is typically ________ days

Answer 23

30 to 45 days

Question 24

are securities that are issued to existing shareholders of a company giving them the right, but not the obligation, to purchase additional shares of the company’s stock at a discounted price.

Answer 24

Rights certificates

The rights certificates themselves are often tradable in the secondary market.

Question 25

Certificate granting its owner the right to purchase securities from the issuer at a specific price sometime in the future

• often issued with a price above the current market price.

Answer 25

Warrants

are usually issued by the company itself, or by a third party, and are often attached to bonds or other securities as a sweetener to increase the investment’s appeal.

are considered a form of equity and can be traded separately from the underlying stock.

Question 26

is a SEC regulation that governs the resale of restricted securities, such as holding period requirements and manner of sale.

Answer 26

Rule 144

Question 27

are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer.

• Typycally provided to investors through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing “seed money” or start-up capital to the company.
• Subject to Rule 144
• are often referred to as legended certificates.

Answer 27

Restricted stock

Question 28

Refers to the shares of a company that are owned by a group of investors, often insiders (Affiliates) such as directors, officers, or large shareholders, who own or control more than 10% of the issuer’s voting stock.

Answer 28

Control stock

Question 29

Families will aggregate (add up) their positions with these shares to determine the percentage of ownership

Answer 29

Control stock

This can be important for determining if the family meets certain ownership thresholds, such as the 10% threshold for being considered an affiliate shareholder.

Question 30

If you want to sell your restricted or control securities to the public, you must meet the applicable conditions set forth in

Answer 30

Rule 144

Question 31

This form determines the number of shares the control person may sell over a 3-month period

Answer 31

Form 144

For securities held for less than 6 months, the volume limitation is the greater of

1% of the outstanding shares of the issuer, or
The average weekly trading volume over the most recent 4 weeks.

Question 32

The discounted price that shareholders are offered on the additional new shares

Answer 32

Rights or subscription price

Question 32

The ____, is one business day before the date of record

Answer 32

Ex Dividend Date

• set by a regulator (exchange or FINRA)

Question 33

Dividends from this security are converted to U.S. dollars after paying taxes in the securities home country.

Answer 33

American depositary receipts. (ADRs)

This makes the security more risky than say a domestic investment. As it’s value is linked to the stability of the foreign countries currency

• The foreign taxes withheld are credited towards the shareholders home country tax obligations.

Question 34

This stock has no voting rights or preemptive rights.

• Has a fixed-rate of interest

Answer 34

Preferred stock

Question 35

Tax rate on _____ dividends is 0%, 15%, or 20% depending on your taxable income and filing status

Answer 35

Qualified dividends

Question 36

The howey test is a four part test that defines a security as

Answer 36

1. An investment of money made into
2. A common enterprise
3. With the expectation of profit
4. Through the efforts of a third party

Question 37

Is considered a commodity, not a security

Answer 37

Crypto Currency

Question 38

Which of the following would most likely require shareholder approval?

A. Declaring a dividend
B. Firing the CEO
C. Hiring a new CFO
D. Changing the corporations name

Answer 38

D. Changing the corporation’s name.

Declaring a dividend and the hiring and firing of senior executives is well within the board’s power.

Question 39

All Big Company, Inc., an NYSE listed manufacturer of large objects, has declared a 50-cents-a-share dividend payable next month. All Big also has options available for trade. The actual ex-dividend date will be declared by ?

A. The OTC
B. The NYSE
C. FINRA
D. The CBOE

Answer 39

B. The NYSE

the ex-dividend date is set by the market center where trades will likely take place.

The fact that all big has listed options is not relevant to the question.

Question 40

Which of the following securities would likely provide the greatest potential for capital appreciation?

A. A preferred stock
B. A US Treasury STRIP
C. A common stock
D. A convertible bond

Answer 40

C. common stock

Bonds and preferred stocks are better suited for conservative investors because each is primarily an income investment and has limited growth prospects.

Question 41

________, also known as Rights - entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public.

• are valued seperately from the stock
• trade in the secondary market

Answer 41

Preemptive rights

Question 42

Under Rule 144, which of the following sales are subject to volume limitations on the number of shares sold?

I. Control person selling registered stock held for one year

II. Control person selling registered stock held for 2 years

III. Non-affiliate selling registered stock held for one month

IV. Non-affiliate selling registered stock held for more than 6 months

Answer 42

I & II

Control persons (insiders/affiliates) are always subject to volume limitations

Registered shares sold by non-affiliates have no Rule 144 filing requirement

Question 43

American liquidators corporation has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares in order to accomplish this, they would

A. Offer warrants to existing shareholders

B. Suggest that existing shareholders go to the market and double their existing position

C. Offer stock rights to existing shareholders

D. Perform a stock split

Answer 43

C. Offer stock rights to existing shareholders

Remember preemptive rights and stock rights are the same. Warrants are long-term and normally attached to a fixed income offer. Neither the stock split nor investors buying in the market generates capital for the company.

Question 44

features

• fixed income from dividends
• prior claim ahead of common stock
• convertible feature when executed sacrifices income in exchange for potential appreciation

Risks

• purchasing power risk (due to inflation)
• interest rate risk (inverse relation to market rates)
• business difficulties (leading dividend risk) and even bankruptcy (leading to loss of principle)

Answer 44

Preferred stock

Question 45

is a type of preferred stock that does not accumulate any missed dividends.

Answer 45

Noncumulative

Question 46

____ preferred are issued with variable dividend rates. Such dividends are usually tied to interest rate benchmarks such as: Treasury bills and money market rates. It can be adjusted as often as quarterly.

• because the payment adjust to current interest rates, the price of the stock remains relatively stable

Answer 46

Adjustable-rate preferred

Test Topic Alert

• for investors looking for income through preferred stocks, this would be their least appropriate choice

Question 47

_______ preferred stock. Allows the owner to exchange the shares for a fixed number of shares of the issuing corporations common stock.

• generally issued with a lower stated dividend rate in exchange for capital appreciation potential.

Answer 47

Convertible preferred stock

Question 48

Your client holds ADRs of daikon motors, ink. An automobile manufacturer based in Asia. All of the following are true about the position except.

A. They were received dividends in US dollars

B. The security may be traded in US markets

C. They have the same voting rights as an owner of the common stock

D. They have the right to request the underlying common shares be issued to them directly

Answer 48

C.

Remember that ADRs are issued by a depository bank and the bank is the registered owners of the shares. Depository banks are not required to pass voting proxies through to their ADR holders

Question 49

For this election cycle, big trucks inc. has three open board seats. Big trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares. A big trucks he has

A. 900 votes you can divide any way he wants among the three seats

B. No voting rights

C. 300 votes each for the open seats

D. 300 votes total to spread among the three open seats

Answer 49

B. Your customer owned preferred stock. Preferred stock carries no voting rights.

Question 50

In 2011, RST corporation had both common stock and $100 par value 4% non-cumulative preferred stock outstanding. The preferred, like the common stock, pay dividends on a quarterly basis. Because of financial difficulties, the company stop paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay quarterly dividend to the preferred stockholders of

A. $1.00

B. $4.00

C. $17.00

D. $20.00

Answer 50

A. $1.00

In the case of a non-cumulative preferred stock, skipped dividends are forever lost.

So when the company is able to pay a dividend, as is always the case, it must pay the current preferred dividend before paying to the common shares.

The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4 annually would be $1 an amount that must be paid before the quarterly common dividend can be paid.

Question 51

Every publicly traded corporation is required to have a transfer agent and a registrar. The primary distinction between the two is:

A. They’re not different —- they perform the same function

B. The registrar keeps the record of all stock and bond holders

C. The transfer agent transmits the payment for securities from the purchaser to the seller in all secondary market trades

D. The transfer agent ensures that dividend payments go out to all registered owners of record on the payable date

Answer 51

D.

This is one of the functions of a Transfer Agent. Registrars make sure that a company does not issue more shares than authorized in the charter.

Question 52

Make sure that a company does not issue more shares than authorized in the charter.

• responsible for issuing and cancelling certificates, maintaining records of the issuance and cancellation of securities, and ensuring that the correct number of shares are outstanding.

Answer 52

Registrars

Question 53

One of the more attractive features of common stock is that:

A. One cannot lose more than one’s investment

B. The stockholders have the right to vote on quarterly dividends

C. The stock holders have the right to choose officers

D. Any of the above?

Answer 53

A. You cannot lose more than you’ve put at risk. A common stockholder cannot be held liable for any debts of the corporation, therefore they have limited liability.

Question 54

When the market price of a company in common stock has reached triple digits ($100 or above), the board of directors may elect to declare which of the below to make the shares more affordable?

 - A. Reverse stock split

   B. Stock split

   C. A stock dividend

   D. Any of the above?

Answer 54

B. Stock split

Splitting a stock provides each shareholder with more shares and the CMV (current market value) of the stock will decline proportionally. Because of the reduced price in the market, it becomes more ‘affordable’

Question 55

When a corporate board announces a 10% stock dividend, shareholders know they will be receiving:

A. More shares

B. Money

C. Both of the above

D. Neither of the above

Answer 55

A.

Stock dividends are not cash dividends – they are dividends in the form of additional shares

Question 56

Certain securities are marginable under Regulation T of the Securities & Exchange Act of 1934 except:

A. Listed stocks

B. Options

C. Nasdaq stocks

D. All of the above are marginal under Reg T

Answer 56

B.

Regulation T does not permit margin under normal circumstances on option contracts

Question 57

A customer wishes to liquidate 100 shares of ABC common at the market. If the current inside market is 904.78 - 905.57, The client’s transaction will occur disregarding commissions and other charges at:

A. 904.78

B. 905.57

C. At the last transaction price prior to entering this order

D. At a price agreed to between the firm and the customer

Answer 57

A. The best (inside) bid is the price at which a clients liquidation (sell) order will be executed.

Question 58

A market maker is obligated

A. To maintain subject quotes during trading hours

B. To maintain an honor firm quotes during trading hours

C. To buy no less than one round lot from a customer at its ask price

D. To sell no less than one round lot to a customer inside the spread

Answer 58

B.

Market making firms post firm quotes during the trading day at which they are obligating themselves to do business with other firms as well as retail customers.

Question 59

The spread between bid and offer

A. Typically gets wider as the volume increases

B. Typically gets narrower as the volume increases

C. Is entirely up to the firm which is making a market in the stock

D. Is generally fixed for the training day

Answer 59

B.

Think after-market trading

The more active the market, the wider the spread (think auction market)

Question 60

The so-called 5% policy pertains to

A. Markups on retail OTC transactions excepting new issues

B. Commissions on NYSE trades exclusively

C. Markups, mark downs and commissions on retail, secondary market trades in municipal bonds

D. None of the above

Answer 60

A.

The FINRA markup markdown and commission policy does not apply to new issues as well as municipal bonds — MSRB has its own such policy?

Question 61

When a corporation announces that it is seeking additional equity capital through a sale of additional authorized but unissued shares:

A. This is a secondary distribution

B. This is a primary distribution

C. This is an IPO

D. This is a split offering

Answer 61

B.

Anytime a company is selling NEW previously unissued shares from their authorized shares. Maximum, those shares are NEW — primary distribution means the shares being sold are new, never before issued , not previously owned by anyone

Fucking new

Question 62

Considered a share of a company’s profit therefore are not tax deductible

• Not a legal obligation

Answer 62

Dividends

It’s important to note that not all companies pay dividends and the decision to pay dividends is at the discretion of the company’s management and board of directors. Additionally, the amount and frequency of dividends can change over time, and there is no guarantee that a company will continue to pay dividends in the future.

Question 63

Cost of borrowing money

• payment is a legal obligation
  
  • therefore, tax deductible
• provides a tax shield

Answer 63

Interest

Question 64

What is the difference between issued versus outstanding stock?

Answer 64

In simple terms, issued stock is the theoretical maximum number of shares that a company can issue, while outstanding stock is the actual number of shares that are in circulation and available for trading.

Question 65

Take note

Answer 65

The owner of an ADR may request that the depositary bank cancel the ADR and send them the underlying foreign shares

Question 66

Take note

Answer 66

If an unaffiliated individual owns 7% of the voting stock of XYZ, that person is not a control person. However, if that person’s spouse owns 4% of the voting stock, then both would be considered control persons.

in other words, if there is a 10% or more interest held by immediate family members, then all those family members owning voting stock are control persons.

Question 67

occurs when a company divides each existing share of its stock into several new shares.

• total number of shares increases but the total value of all shares taken together remains the same.
• Can be forward or reverse

Answer 67

Stock Split

Question 68

Take note

Answer 68

In a forward split, the number of shares will increase and the price per share will decrease. Note that the cost basis per share will decrease as well.

A forward can be either even say: 2 for 1, or uneven, say: 3 for 1 or 5 for 4.

In a split, whether even or uneven the calculation is the same.

Take the original number of shares - say 100 worth $60 a share, multiple that by the first number in the sequence say 5 for 4 - therefore 100 x 5 = 500. Divide this by 4 and your total number of shares

now divide the original market value - $6000/125 = $48 is your new cost basis per share.

Question 69

This results in an increase in the stock price, but does not change the total value of a shareholder’s investment.

Answer 69

Reverse stock split

Often used by companies with low stock prices that are facing delisting from stock exchanges due to failing to meet the exchange’s minimum price requirements.

Question 70

an investor owns 100 shares at $5 per share. Therefore, the total position value is $500
(100 x $5 =$500)

Assume a 1:4 reverse split. What is the new number and value of shares?

Answer 70

100 x 1= 100/4 = 25. The new number of shares is 25.

$500/25 = $20. The new per share value is $20.

Question 71

Test topic alter

If you remember that there are more or fewer shares at a lower or greater value as a result of the split depending on whether it is forward or reverse split, you might be able to answer the question without using math

Answer 71

At the time of a stock dividend or split, there is no tax event; there are no tax implications.

The cost basis per share will change, and this may have an effect when the shares are sold, but not until then.

To state it one more time: there are no tax implications at the time of a stock dividend or split.