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

Chapter 1- Equity securities 10-15 questions Flashcards

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Series 7 Top-off Exam flashcards
1
Q

What two sides are the investment world divided into?

A

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

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2
Q

What is a security?

A

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

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3
Q

Debt Security

A

Acquired by purchasing a company’s bonds.

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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

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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

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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.

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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

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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)

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9
Q

Net Worth

A

Assets - Liabilities = Net worth

Assets= Net Worth - Liabilities

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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

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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

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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

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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

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14
Q

Outstanding stock

A

Any shares issued and not repurchased by the company

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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

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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)

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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

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18
Q

Paid in capital

A

Money received exceeding the par value recorded

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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

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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

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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

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22
Q

Statutory Voting

A

One vote per share owned for each item on ballot

Board candidate only needs a simple majority

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23
Q

Cumulative voting

A

Stockholders can allocate in any manner they choose

Benefits the smaller stockholder

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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.

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25
Q

Proxy Contest

A

Proxy where control in the company could change

All persons involved must register with SEC

Includes people who give UNSOLICITED advice

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26
Q

Non voting common stock

A

May be issued but not in same class as voting common shares

Usually called class b

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27
Q

Antidilution Provision

A

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

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28
Q

Inspection Rights

A

Ability to receive annul financial statements and lists of stockholders.

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29
Q

Forward Stock Split

A

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%

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30
Q

Reverse Split

A

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

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31
Q

Long position

A

Purchasing shares with intent of selling at higher cost

Bull

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32
Q

Short position

A

Borrowing shares to sell now with intent of buying back at a lower price

Bear

33
Q

Capital Appreciation

A

When the market price for shares increase

34
Q

Income

A

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
Q

Dividend taxation

A

Generally are taxed at income rate

Corporations get a 70% exclusion for dividends paid to them

36
Q

Market Risk

A

Chance that a stock will decline in price at a time the investor needs his money

Short investor has unlimited market risk

37
Q

Senior Securities

A

Company debt and preferred shares

Common stock are junior securities

38
Q

Is preferred stock an equity or debt security?

A

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
Q

Preferred stocks fixed dividend

A

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
Q

Adjustable-Rate Preferred

A

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
Q

Preferred stock features

A

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
Q

Straight preferred

A

No special features outside of dividend

Missed dividends are not paid to holder

43
Q

Cumulative preferred

A

Brings in arrearages

If company does not pay dividend in one period, it will pay it later

44
Q

Convertible preferred

A

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
Q

Participating preferred

A

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
Q

Callable preferred

A

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
Q

Dividends

A

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
Q

Current Yield

A

Current (dividend) Yield= Annual dividend / current market value

REMEMBER TO USE ANNUAL DIVIDEND

49
Q

Round vs odd lot

A

Round = divisible by 100

Odd = fewer than 100 shares

Unless value is $175 plus, in which there are no odd lots

50
Q

CUSIP

A

Committee on Uniform Securities Id procedures

On common, preferred, corporate bond, and municipal bonds

Used in trade confirmations

51
Q

Stock Power

A

Form that simulates the signing over of a security

Member firm or commercial bank must authenticate

Stocks can be transferred, assigned, or sold

52
Q

Transfer Agent Role

A

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
Q

Registrar

A

Registrars are independent and issue new securities

Must make sure there are not more issues stocks than authorized

54
Q

PE Ratio

A

Ratio of stocks current price to its most recent 12 month earnings per share

55
Q

High and Low

A

High and low price is reported for the day

56
Q

Nasdaq

A

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
Q

Dividend Disbursing Process

A

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
Q

DERP (tip for dividends)

A

Declaration
Ex
Record
Payable

DRP is determined by company

59
Q

Stock Dividends and Splits

A

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
Q

Due Bill

A

If a settlment lasts longer, send due bill to get the dividend from seller

61
Q

Preemptive rights and Rights offering

A

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
Q

Value of a right formula

A

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
Q

Standby by underwriting

A

If all shares do not sell then an investment banker will buy on a firm commitment basis, and sell them to public

64
Q

Warrant

A

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
Q

American depository receipts

A

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
Q

REIT

A

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
Q

Equity REIT vs Mortgage REIT

A

ER- Own property
MR- Own mortgages on property
Hybrids hold both

68
Q

Why trade in REITs?

A

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
Q

Formula for calculating rights

A

CMV - subscription / number of rights to purchase +1

70
Q

Note on ADRs

A

Foreign governments commonly charge income tax to a foreign security

71
Q

What is the formula to find the price of a right?

A

Market price - subscription
/
Number of rights required to buy +1
Before exdate

After exdate
Market price - subscription price
/
Number of righte

72
Q

A corporation assumes the least risk when obtaining funds

A

Through a sale of preferred stock

73
Q

What is a warrant

A

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
Q

Which bank issued an ADR

A

Foreign branch of a domestic bank

75
Q

OTC round lot

A

1 round lot on the OTC is equal to 1 share if price is over $175

76
Q

Registrars are not in charge of

A

Cancelling old shares or transfering shares into the new owners name

77
Q

REITs do not flow through their

A

Losses

78
Q

Which preferred stock allows the holder to reduce risk of inflation

A

Convertible

79
Q

Basis point

A

.01% or .0001 per $1

Series 7- Passed with 83% (19 decks)

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