Chapter 1, Day 4 Flashcards
How are qualified dividends taxed for ordinary income earners versus high-income earners?
Qualified dividends are taxed at 15% for ordinary income earners and 20% for high-income earners.
What is the tax implication for stock dividends when received by investors?
Stock dividends are not taxed until the investor sells the shares.
What is “selling dividends” and why is it considered a violation?
Selling dividends is recommending stock purchases solely based on pending dividends, creating urgency; it’s a violation because it misleads investors and may cause financial harm.
What role does the dividend disbursement agent play in the dividend distribution process?
The agent distributes dividends to shareholders of record, often sending dividends to broker dealers when securities are held in street name.
What is a warrant, and how does its subscription price compare to the market price of the common stock when issued?
A warrant allows the holder to buy common stock at a subscription price, which is usually above the market price when issued.
How long can a warrant typically last compared to a stock right?
A warrant can last up to 10 years, much longer than a right, which usually lasts up to 45 days.
In what three ways can an investor obtain warrants?
(1) Through units during an IPO, (2) Attached to bonds as sweeteners, (3) Buying warrants on the secondary market.
What are the possible outcomes for a warrant before expiration?`
A warrant can be exercised, sold, or expire worthless if the stock price is below the subscription price at expiration.
What are American Depositary Receipts (ADRs) and what rights do holders have?
ADRs represent ownership of foreign shares held in U.S. banks; holders can vote and receive dividends.
What is the primary risk associated with owning ADRs?
Currency risk—if the foreign currency weakens relative to the U.S. dollar, dividends and sale proceeds decrease.
What is the custodian bank’s function in issuing ADRs?
It holds the foreign shares, guarantees their availability, and issues ADRs to generate U.S. investor interest without requiring costly foreign company registration.
How do Global Depositary Receipts (GDRs) differ from ADRs?
GDRs are issued by international depositories for global trading (outside the U.S.), while ADRs trade within U.S. markets.
What are the IRS requirements for a Real Estate Investment Trust (REIT) to avoid corporate tax?
A REIT must (1) receive 75% of its income from real estate and (2) distribute at least 90% of taxable income to shareholders.
What are two major risks associated with investing in non-traded REITs?
(1) Lack of liquidity and (2) high fees (up to 15% commissions and expenses not exceeding 10% of the offering price).
What are the key characteristics of limited partners in a limited partnership?
They invest capital, have liability limited to their investment, receive benefits, cannot manage operations, but may vote to change objectives or remove the general partner.
