Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Series 7- Passed with 83% > Chapter 1- Equity securities 10-15 questions > Flashcards

Chapter 1- Equity securities 10-15 questions Flashcards

1
Q

What two sides are the investment world divided into?

A

Owners (stock or equity) and Lenders (Bonds or Debt)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a security?

A

An investment that represents either ownership stake or a debt stake in a company.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Debt Security

A

Acquired by purchasing a company’s bonds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Debt Investment

A

Loan to a company in exchange for interest income and the promise to repay the loan at a future maturity date.

DOES NOT CONFER OWNERSHIP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Stock Exchange

A

Auction market where buyers and sellers are matched by a specialist (Designated Market Maker) who maintains a fair and orderly market for a particular set of stocks.

Example: New York Stock Exchange

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Over the counter market

A

Normal place for a stock and bond to be sold

Interdealer market linked by computer terminals to FINRA member firms across the country. No physical location, all done online.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Stocks vs Bonds

A

Stock represents equity/ownership

Bonds are a loan to a company

A company discloses the composition of its total capitalization (equity and debt) on Balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Balance Sheet

A

Summarizes company’s

Assets- what the company owns (includes property, inventory etc)

Liabilities- what company owes, accounts payable (current bills)

Equity- Excess of value of assets over value of liabilities (company net worth)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Net Worth

A

Assets - Liabilities = Net worth

Assets= Net Worth - Liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Stockholders

A

Stockholders have purchased a share of ownership in the company’s net worth

Being a stockholder entitled you to company profits and dividends and an equal vote

Select Board of Directors, which allows them to have some say in company management, but not day to say activities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Preferred Stock

A

Normally pays a fixed, semiannual dividend and has priority claim over common stock

Does not usually have same boring rights or appreciation potential

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Authorized Stock

A

Specific number of shares available to issue or sell

Laid out in the company’s original charter

Charter is amended through stockholder vote if company decides to sell more

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Issued Stock

A

Has been authorized and distributed to investors at some point

A partial amount of initial authorized stock is usually left unissued for future fund raising, stock dividend, employee stock purchase plans, convertible bonds and stock purchase warrants

Unissued is not considered in total cap

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Outstanding stock

A

Any shares issued and not repurchased by the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Treasury stock

A

Issued stock that has been repurchased by the company from the public.

Can be held, reissued or retired

Does not carry voting rights or the right to receive dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Reasons why a company would buy back stock

A

Increase EPS (should increase as long as operating income remains the same)

Inventory to distribute a stock option, fund a pension plan and so on

Or to use for further acquisition (funding)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Par value

A

Meaningless figure

Arbitrary figure company gives the stock in company’s articles of incorporation and has no effect on the market price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Paid in capital

A

Money received exceeding the par value recorded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Book Value

A

How much a stockholder should expect to receive if company was liquidated

(Tangible assets -liabilities) / shares outstanding

Usually is different from market value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Market Value

A

Most common sign of market value is the market price

Influenced by a company’s business prospects and the consequent effect on supply and demand

Good future earnings possibility means demand will rise the price above book value

Most meaningful to investor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Common stockholder voting rights

A

Able to elect Board of Ds

Vote on policies such as:
Issuance of convertible securities or additional common stock

Substantial changes of the business, such as mergers and acquisitions

Declarations of stock splits

DO NOT VOTE ON DIVIDENDS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Statutory Voting

A

One vote per share owned for each item on ballot

Board candidate only needs a simple majority

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Cumulative voting

A

Stockholders can allocate in any manner they choose

Benefits the smaller stockholder

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Proxy Voting

A

Form of absentee voting for those who cannot attend annual meeting

Can be cancelled if a stockholder attends the meeting, authorizes a different proxy or does

Companies send Proxies out in a proxy solicitation. Exact details on the vote must be provided and reviewed by SEC.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Proxy Contest
Proxy where control in the company could change All persons involved must register with SEC Includes people who give UNSOLICITED advice
26
Non voting common stock
May be issued but not in same class as voting common shares Usually called class b
27
Antidilution Provision
Requires a company to offer those who own stock a chance to buy newly issued shares Also referred to as the stockholders preemptive right to purchase enough shares to maintain same ownership control
28
Inspection Rights
Ability to receive annul financial statements and lists of stockholders.
29
Forward Stock Split
Increases number of shares, reduces price per share on market while maintaining an investors market value Total market value before and after split is the same To find new amount of shares in a 5:4 split: 100 x 5 = 500 / 4 = 125 (new share amount) Percentage decrease in price will always be less than the percent increase in shares In a 2:1, shares increase by 100% but price is decreased by 50%
30
Reverse Split
Investors own fewer shares but they are worth more Price will always increase faster than shares decrease in this case Written 1:2, 1:3 etc Increases eps and market value
31
Long position
Purchasing shares with intent of selling at higher cost Bull
32
Short position
Borrowing shares to sell now with intent of buying back at a lower price Bear
33
Capital Appreciation
When the market price for shares increase
34
Income
Usually takes shape in a cash dividend, stock dividend or property dividends (shares in a subsidiary or product) Company's looking to reinvest earnings usually issue stock dividends
35
Dividend taxation
Generally are taxed at income rate Corporations get a 70% exclusion for dividends paid to them
36
Market Risk
Chance that a stock will decline in price at a time the investor needs his money Short investor has unlimited market risk
37
Senior Securities
Company debt and preferred shares Common stock are junior securities
38
Is preferred stock an equity or debt security?
Both. Equity because it represents ownership in the corporation Debt because it is usually issued as a fixed income security with a fixed dividend. (Receives dividend first) Usually moves with interest rates in value rather than business prospectus. Mostly no voting.
39
Preferred stocks fixed dividend
Par Value is almost always $100 Usually, preferred stock is Id'd by its dividend rate Payment has to be approved by BOD and is not guaranteed
40
Adjustable-Rate Preferred
Preferred stock issued with an adjustable interest rate. Usually tied to a benchmark rate such as tbills and money market rates Reset Date- Date when a dividend is reset
41
Preferred stock features
Very rare to be able to vote No maturity date is usually set Fluctuates in price more like a debt instrument Interest rates fall with price rises (inverse relationship, happens in bonds too)
42
Straight preferred
No special features outside of dividend Missed dividends are not paid to holder
43
Cumulative preferred
Brings in arrearages If company does not pay dividend in one period, it will pay it later
44
Convertible preferred
Ability to exchange preferred for common Preset amount at which the stock can be converted Price fluctuates with common price due to the conversion possibility Usually lower stated dividend
45
Participating preferred
Participates in profits of a company at a specific percentage in addition to fixed dividends Written: XYZ 6% preferred participating 9% Additional 3% dividend is possible in good years
46
Callable preferred
Company can buy back the preferred stock at a specified date and price. Dividends and conversion rights generally cease on call date. Higher dividend is paid during time period Company usually pays a premium for the privilege to call
47
Dividends
Distributions of a company's profits to its stockholders Issued by the BOD Cash dividends are usually distributed by check or put auto into brokerage account if still in street name (brokerage firms name Stock dividends are not usually paid by growth company's as they look to retain their earnings to feed growth. Market price declines and total market value holds NOT TAXABLE CHANGES COST BASIS OF SHARES TO AN AVERAGE OF REMAINING SHARES AND DOLLAR AMOUNT
48
Current Yield
Current (dividend) Yield= Annual dividend / current market value REMEMBER TO USE ANNUAL DIVIDEND
49
Round vs odd lot
Round = divisible by 100 Odd = fewer than 100 shares Unless value is $175 plus, in which there are no odd lots
50
CUSIP
Committee on Uniform Securities Id procedures On common, preferred, corporate bond, and municipal bonds Used in trade confirmations
51
Stock Power
Form that simulates the signing over of a security Member firm or commercial bank must authenticate Stocks can be transferred, assigned, or sold
52
Transfer Agent Role
Ensures it's issued in correct name Cancel old and issue new certificates Maintain ownership record Handling problems Also distributed new shares in stock split
53
Registrar
Registrars are independent and issue new securities Must make sure there are not more issues stocks than authorized
54
PE Ratio
Ratio of stocks current price to its most recent 12 month earnings per share
55
High and Low
High and low price is reported for the day
56
Nasdaq
Over the counter stocks that have both national and global interest are traded on the NASDAQ Three different tiers 1. Nasdaq Global Select (stringiest in regards to both financial and liquidity) 2. Nasdaq global Market (Largest of three tiers, high interest and appeal stocks) 3. Nasdaq Capital Market (SmallCap Market)
57
Dividend Disbursing Process
When a BOD approves a dividend payment, it also sets the payment date and dividend record date. Must notify FINRA at least 10 business days before record date Ex-date is usually posted by FINRA or the exchange 2 business days before record date Buyer not considered owner until settlement date for dividends only Payable Date- when the dividend disbursing agent send out dividend to those on record, 3 to 4 weeks after Cash trades settle on the same day so they go exdividend the day after the record date
58
DERP (tip for dividends)
Declaration Ex Record Payable DRP is determined by company
59
Stock Dividends and Splits
25% or more distribution requires special handling Ex date for 25% or more and 5for 4 or better is first business day following payable date
60
Due Bill
If a settlment lasts longer, send due bill to get the dividend from seller
61
Preemptive rights and Rights offering
Preemptive right is ability to maintain proportional ownership Rights offering allows investors to buy stock at below market price or sell their rights to buy for a gain (valued separate) One right is issued for each common stock share outstanding, may take multiple rights to purchase a share Record date for a rights offering is 30 days after declaration. Will usually have a 30-45 day window to purchase shares
62
Value of a right formula
Market price - subscription price / number of rights to purchase 1 share + 1 Market price= 41 Subscription per share= 30 Number of rights to purchase 1 share= 10 41-30/11 = $1 value of right If asked cum rights must add the one, if ex then find value by doing without 1
63
Standby by underwriting
If all shares do not sell then an investment banker will buy on a firm commitment basis, and sell them to public
64
Warrant
Certificate that grants an opportunity to buy securities from issuer at a specific price at later date Usually have a life of two to five years Usually attached as sweetener to make preferred stock and bonds more attractive, can be sold separately
65
American depository receipts
Facilitate trading of foreign stocks in US Market Between 1-10 shares per receipt Foreign branches of US banks issue, a custodian (foreign bank) holds the securities represented Generally do not have voting rights, but receive dividends Currency risk is taken on in addition to other market risk when investing in ADRs Exchange listed ADRs are sponsored Subject to foreign withholding tax that can be netted against US tax
66
REIT
Reits are organized as trusts where investors buy shares REITs must have at least 75% of assets in real estate, 75% of income from rent or mortgages and distribute 90% of net investment income to shareholders
67
Equity REIT vs Mortgage REIT
ER- Own property MR- Own mortgages on property Hybrids hold both
68
Why trade in REITs?
Lowers liquidity risk associated with real estate Historically, real estate prices have had a negative correlation to stock prices. Providing a hedge to the market Reasonable expectations of income
69
Formula for calculating rights
CMV - subscription / number of rights to purchase +1
70
Note on ADRs
Foreign governments commonly charge income tax to a foreign security
71
What is the formula to find the price of a right?
Market price - subscription / Number of rights required to buy +1 Before exdate After exdate Market price - subscription price / Number of righte
72
A corporation assumes the least risk when obtaining funds
Through a sale of preferred stock
73
What is a warrant
A warrant grants its owner the right to purchase shares at a later date for a specific price Usually offered as a sweetener in connection with other securities Have a life of five years
74
Which bank issued an ADR
Foreign branch of a domestic bank
75
OTC round lot
1 round lot on the OTC is equal to 1 share if price is over $175
76
Registrars are not in charge of
Cancelling old shares or transfering shares into the new owners name
77
REITs do not flow through their
Losses
78
Which preferred stock allows the holder to reduce risk of inflation
Convertible
79
Basis point
.01% or .0001 per $1

Series 7- Passed with 83% (19 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions