Chapter 1 Flashcards
(30 cards)
Security
An Investment that represents either an ownership stake or debt stake
Common Stock
Equity in a corporation
Preferred Stock
Represents equity in a corporation but usually does not have the same voting or appreciation potential as common stock. Normally pays a fixed dividend usually quarterly, and has priority claims over common stock. No right to maintain a percentage of ownership when new shares are issued.
Capital Appreciation
An increase in the market price of a security
Stock Dividend
Additional shares of common stock in the Issuing company. More shares– price per shares drops. Same overall value.
Property Dividends
Payment via shares in a subsidiary company, or in company products
Limited Liability
In the event of bankruptcy, when corporate assets are not adequate to meet corporate obligations, the stockholders personal assets are not at risk
Market Risk
The chance that a stock will decline in price
Business Risk
Possibility of decline in the company’s earnings
Low priority Dissolution
If a company enters bankruptcy, the holders of its bonds and preferred stock have priority over common stock holders.
Straight (Noncumulative) preferred Stock
Has no special features beyond the stated dividend. Missed dividends are not paid to the stockholder
Cumulative Preferred Stock
Accrues payments due its shareholders in the event dividends are reduced or suspended
Callable Preferred
A company can buy back from investors at a stated price after a specified date. Higher dividend rate and premium call price are ways to compensate holder.
Convertible Preferred
Owner can exchange the shares for a fixed number of shares common stock in issuing corporation. Usually lower dividend rate due to this advantage. Note– since preferred stock is linked to value of common stock , the convertible preferred price tends to fluctuate in line with that of common stock.
Adjustable Rate Preferred
Issues with adjustable (variable) dividend rates. Usually tied to rates of other interest benchmarks )T-bills, money market rates, etc.). Since payment adjusts to current interest rates, price is relatively stable.
Nonqualified Stock Options (NSOs)
Employee Stock Option– Treated as a form of compensation. When exercised, the different between current market price and strike price is reported as wages on tax returns of the employer and employee. Employee taxed ordinary income tax instead of capital gains. Company gets tax write off as salary expense.
Incentive Stock Options (ISOs)
Employee Stock Option– No tax consequence to employer. If stock purchased through exercise is held at least two years after grant and one year after exercise date, profits are reported as long term capital gains tax. 10 Year limit for exercise.
Difference between market value at purchase and strike price is a preference item in calculating alternative minimum tax.
Restricted Securities
Restricted from immediate resale. Cannot sell until having held for certain period of time (Usually six months). Volume restrictions also apply to affiliates of issuer.
Control Stock
Stock held by control person. Always has volume limits. Purchases and sales must be reported to SEC
Control person
Corporate director, an office, a large stockholder (10% or more of voting stock) or immediate family member of the preceding residing in the same home
SEC Rule 144
Mechanism for reporting sale or control stock and restricted stock
American Depository Receipts (ADRs)
A negotiable security that represents a receipt for shares of stock in a non-US corporation. Facilitate the trading of foreign stocks in US markets. ADRs are bought/sold in USD. Dividends also paid in USD. ADR may represent several shares of underlying security or fractional shares in underlying security. Do not have preemptive rights.
Currency Risk
The exchange rate in foreign currency investment security is denominated could decline in value against USD.
Emerging Markets
Markets in less developed countries
