Chapter 1 Flashcards
Equity Securities
What is a security?
Any investment product that can be exchanged for value and involves risk.
What is required in order for an investment to be considered a security?
It must be readily transferrable between two parties and the owner must be subject to the loss of some or all of the invested principal.
True or false: If the product is not transferrable, or does not contain risk, it is not a security,
True.
The term equity is synonymous with the term ___________.
Stock.
Equity or stock creates a(n) ________________________ with the issuing company.
Ownership relationship
Once an investor has purchased stock in a corporation they become a(n) __________ of that corporation.
Owner
The corporation sells off pieces of itself to investors in the form of _________ in an effort to raise ______________________.
Shares, working capital.
True or false: An equity is not perpetual.
False
What does something being “perpetual” mean?
There is no maturity date for the shares and the investor may own the shares until they decide to sell them.
True or false: Most corporations use the sale of equity as their main source of business capital.
True.
All publicly traded companies must issue _______ stock before they may issue any other type of equity security.
Common.
What are the two types of equity securities?
Common stock and preferred stock
What is authorized stock?
The maximum number of shares that a company may sell to the investing public in an effort to raise cash to meet an organization’s goals.
How is the number of authorized stock determined?
Arbitrarily (randomly) at the time of corporation.
True or false: If the corporation wants to sell more shares than is authorized, the shareholders must approve an increase in the number of authorized shares.
True.
What is issued stock?
Stock that has been authorized for sale and that has actually been sold to the investing public.
True or false: Once shares have been sold to the investing public, it is possible for them to not be counted as issued shares in the future depending on ownership or subsequent repurchase.
False
What are the reasons that additional authorized shares may be issued?
(1) To pay a stock dividend
(2) Expand current operations
(3) Exchange common shares for convertible preferred or convertible bonds
(4) To satisfy obligations under employee stock options or purchase plans
What is outstanding stock?
Stock that has been sold or issued to the investing public that actually remains in the hands of the investing public.
What is treasury stock?
Stock that has been sold to the investing public that has subsequently been repurchased by the corporation.
True or false: Treasury stock does not receive dividends, nor does it vote.
True.
Why would a corporation elect to repurchase its own shares?
(1) To maintain control of the company
(2)
