Chapter 1 - Equity securities

Question 1

another word for equity?

Answer 1

stock

Question 2

types of securities

Answer 2

common stock
preferred stock
bonds
mutual funds
variable annuities
variable life insurance
options
rights
warrants
ETFs/ETNs
real estate investment trusts
CMOs

Question 3

types of nonsecurites

Answer 3

whole life insurance
term life insurance
IRAs
retirement plans
fixed annuities
prospectus
confirmations

Question 4

another word for debt

Answer 4

bonds

Question 5

two typs of stock

Answer 5

common and preferred

Question 6

what is the corporate timeline for a stock

Answer 6

1. authorized
2. issued
3. outstanding
4. treasury

Question 7

Additional authorized shares may be issued in the future to:

Answer 7

Pay a stock dividend
Expand current operations
Exchange common shares for convertible preferred or convertible bonds
To satisfy obligations under employee stock options or purchase plans

Question 8

Authorized stock

Answer 8

It is the maximum number of shares that a company may sell to the investing public in an effort to raise cash to meet the organization’s goals
The number of shares is arbitrarily determined and is set at the time of incorporation
A corporation may sell all or part of it’s authorized stock
If they want to sell more than the authorized amount, the shareholders must approve an increase in the number of authorized shares

Question 9

Issued stock

Answer 9

Stock that has been sold to to the investing public
The number of authorized shares typically exceeds the total number of issued shares so that the company can sell additional shares in the future to meet its needs
Once they have been sold to the public, they will be counted as issued shares, regardless of their ownership or subsequent repurchase by the corporation
NOTE: the total number of issued shares may never exceed the number of authorized shares

Question 10

Outstanding stock

Answer 10

It is stock that actually remains in the hands of the investing public
EXAMPLE:
XYZ corporation has 10,000,000 shares authorized and has sold 5,000,000 shares to the public during its initial public offering. In this case, there would be 5,000,000 shares of stock issued and 5,000,000 shares outstanding

Question 11

Treasury stock

Answer 11

Stock that has been sold to the investing public, but then repurchased by the corporation
The corporation may elect to reissue the shares or it may retire the shares that it holds in treasury stock
It does not receive dividends, nor does it vote

Question 12

a corporation may elect for treasury stock because

Answer 12

Maintain control of the company
Increase earnings per share
Fund employee stock purchase plans
Use shares to pay for a merger or acquisition

Question 13

formula for treasury stock

Answer 13

Issued stock - outstanding stock = treasury stock

Question 14

once the shares are issued they will always be counted as?

and the only thing that changes is?

Answer 14

issued shares

the number of outstanding shares and the number of treasury shares

Question 15

Book value

Answer 15

It is the theoretical liquidation value of the company
It is found by taking all of the company’s tangible assets and subtracting all of its liabilities

Question 16

book value formula

Answer 16

Total book value / total number of outstanding common shares

Question 17

If the company sells additional shares to raise capital, they must first do what?

Answer 17

offer new shares to existing shareholders

Question 18

Preemptive rights means?

Answer 18

This means an investor has the right to maintain their percentage interest in the company

Question 19

existing shareholders have preemptive rights to purchase new shares how?

Answer 19

at a discount to the current market value for up to 45 days which is known as subscription price

Once the subscription price is set, it remains constant for 45 days while the price of the stock is moving up and down

Question 20

There are 3 possible outcomes for a right:

Answer 20

Exercised
-The investor decides to purchase the additional shares and send in the money along with the rights to receive the additional shares
Sold
-The rights have value and of the investor does not want to purchase the additional shares, they may be so0ld to another investor who would like to purchase the shares
Expire
-The rights will expire when no one wants to purchase the stock. This will only occur when the market price of the share has fallen below the subscription price of the right and the 45 days has elapsed

Question 21

Cum rights

Answer 21

It is a situation where once the rights offering has been declared, the company’s common stock will trade with the right attached
Happens between declaration date and ex date
After the ex date the stock will trade without the rights attached or will trade ex rights

Question 22

what happens to the value of the common stock on the ex-rights date?

Answer 22

will be adjusted down by the value of the right

Question 23

During the rights offering each share will be issued how many rights?

Answer 23

one right

Question 24

Cum rights formula

Answer 24

Question 25

Ex-rights date formula

Answer 25

Question 26

Shareholders are part owners of the company so they have the say on how the company is run and can vote on what?

Answer 26

Election of the board of directors
Issuance of bonds or additional common chars
Stock splits
Mergers and acquisitions
Major changes in corporate policy

Question 27

Two methods of voting

Answer 27

Statutory
In the example of voting for board of directors, it requires that the votes be distributed evenly among the candidates for who the investor wishes to vote
Cumulative
In the example of voting for the board of directors, it allows the shareholders to cast all of their votes in favor of one candidate if they choose to do so.
This method is said to favor the smaller investor for this reason

Question 28

A stockholder’s liability is limited to what?

Answer 28

the amount of money inverted in the stock.
They can not be held liable for any amount past their invested capital

Question 29

Ownership of common stock is created by a stock certificate which includes:

Answer 29

Name of the issuing company
Number of shares owned
Name of the owner of record
CUSIP number

Question 30

to Transfer or sell the shares the owner must do what?

Answer 30

The owner must endorse the stock certificate or sign a power of substitution known as a stock or bond power
Signing the certificate or a stock or bond power makes the securities transferable into the new buyers name

Question 31

Transfer agent is what ?

Answer 31

It is a company that is in charge of transferring the record of ownership from one party to another which includes:
Cancels old certificates registered to the seller
Issues new certificates to the buyer
Maintains and records a list of stockholders
Maintains and records a list of stockholders
Ensures that the shares are issued to the correct owner
Locates lost or stolen certificates
Issues new certificates in the event of destruction
May authenticate a mutilated certificate

Question 32

The registrar is what?

Answer 32

It is a company responsible for auditing the transfer agent to ensure that the transfer agent does not erroneously issue more shares than are authorized by the company

Question 33

CUSIP numbers stands for what?
and what are they?

Answer 33

Stands for “Committee on Uniform Securities Identification Procedures issues

They are the numbers that are printed on the stock or bond certificate to help identify the security

May also appear on trade confirmations

Question 34

In the event of bankruptcy or liquidation, after all the other security holders have been paid, common stockholders have the right to what?

Answer 34

receive their proportional interest in residual assets
For this reason common stockholders is the most junior security

Question 35

Why do people buy common stock?

Answer 35

For capital appreciation

Question 36

dividend yield or the current yield is what?

Answer 36

The amount of income the investor is paid each year is relative to what the investor has paid, or will pay for the stock

Question 37

Current yield formula

Answer 37

Current yield = annual income / current market price

Question 38

DRIP stands for what?

what is it?

Answer 38

Dividend reinvestment program

Some investors may elect to have their shares enrolled in this program
The dividend received by the shareholders will be used to purchase additional shares of the corporation
Investors will be liable for the taxes on the dividend and the amount of the dividends reinvested will be added to their cost base for tax purposes
As long as the company pays a dividend the investor will have more shares of the company at the end of each year

Question 39

What are the risks of owning common stock?

Answer 39

Can fall in value even if its a great company
Dividends may be stopped
The corporation is in no way obligated to pay a dividend to stockholders
Junior claim or corporate assets
Last person to get paid if the company gets liquidated

Question 40

How does someone become a stockholder?

Answer 40

Purchase shares directly from company when the stock is offer to the public directly
Investor to investor transactions

Question 41

Important dates regarding transactions which are done for a “regular way” settlement

Answer 41

• Trade Date
  
  • When the order is actually executed
  • May not be executed the same day it was placed
• Settlement date
  
  • The buyer of the security actually becomes the owner of record on the settlement date
  • Buyer and seller names are updated on the security
  • Two business days after trade date which is known as T+2
    
    • For all stock, preferred stock, corporate bonds, and municipal bonds
  • Government bonds and options settle the next business day following the trade date
• Payment date
  
  • Its the day when the buyer of the security has to have the money to the brokerage firm to pay for the purchase
  • T+4
    
    • For common stock, preferred stock, corporate bonds, municipal bonds
  • Regulated by the Federal Reserve Board under Regulation T of the Securities Exchange Act of 1934
• Violation
  
  • If the customer fails to pay for the purchase within the four business days allowed, the customer is in violation of Regulation T
    
    • Resulting with the firm to “sell out” and freeze the customer’s account
    • Customer is responsible for any loss that may occur as a result of the sell out and the brokerage firm may sell out shares of another company in the customer’s account to pay for the loss
  • 90 day probation
    
    • Before 90 days are up
      
      • Customer must deposit money up front for any purchases
    • After 90 days are up
      
      • Customer considered to have reestablished good credit and then can conduct business as usual

Question 42

Preferred stock means?

Answer 42

• Its an equity security with a fixed income component
• They are an owner of the company like common stock, but includes fixed income generated through semiannual dividends
• Corporations must pay the dividend
• Growth is not achieved through investing in preferred shares

Question 43

Par Value of preferred stock?

Answer 43

• What the dividend is based on
• $100 unless otherwise stated
• Express the dividend as a percentage of par value for preferred stock
• EXAMPLE
  
  • How much would the following investor receive in annual income from the investment in the following preferred stock?
  • An investor buys 100 shares of XYZ 9% preferred.
  • $100 x 9% = $9 per share x 100 = $900

Question 44

Payment of dividends for preferred stock?

Answer 44

• Must be paid before any dividends are paid to common shareholders

Question 45

Distribution of assets for preferred stock?

Answer 45

• If a corporation liquidates or declares bankruptcy, the preferred shareholders are paid prior to any common shareholder

Question 46

is preferred stock perpetual?

Answer 46

• They have no maturity date
• They can be held as long as they want or until the shares are called by the company under a call feature

Question 47

is preferred stock voting?

Answer 47

• Most is nonvoting
• Sometimes they may receive voting rights if the corporation misses several dividend payments

Question 48

is preferred stock Interest rate sensitive?

Answer 48

• Their price will be more sensitive to changes in interest rates than the price of their common stock counterparts
• If interest rates decline
  
  • Preferred stock value tends to increase
• If interest rates rise
  
  • Preferred stock tends to fail
• This is known as inverse relationship

Question 49

types of preferred stock?

Answer 49

• Straight / Noncumulative
  
  • Has no additional features
  • Holder is entitled to the stated dividend rate and nothing else
  • If corporation is unable to pay the dividend it is not owed to the investor
• Cumulative preferred
  
  • Protects the investor in cases when the corporation is having financial difficulties and con not pay the dividend
  • Dividends accumulate until the corporation is able to pay them
  • EXAMPLE
    
    • XYZ has an 8% cumulative preferred stock outstanding. It has not paid the dividend this year or for the prior three years. How much of XYZ cumulative preferred be paid per share before the common stockholders are paid a dividend?
    • The dividend has not been paid this year nor for the previous three years, so the holders are owed four years’ worth of dividends or:
    • 4 x $8 = $32 per share
• Participating preferred
  
  • They are entitled to receive the stated preferred rate as well as additional common dividends
• Convertible preferred
  
  • Allows the preferred stockholder to convert or exchange their preferred shares for common shares at a fixed price known as the conversion price
  • EXAMPLE
    
    • XYZ has issued a 4% convertible preferred stock which may be converted into common stock at $20 per share. How many shares may the preferred stockholder receive upon conversion?
    • Number of shares = par / conversion price (CVP)
    • $100/$20 = 5
    • The investor may receive five common shares for every preferred share
• Callable preferred
  
  • Only benefits the company and not the investor
  • It allows the corporation to call in or redeem the preferred shares at their discretion or after some period of time has expired
  • Most of these can not be called in the first few years after issuance
    
    • This is know as call protection
  • Many callable preferred stock may be called at a premium price above par
  • Main reason for this to happen
    
    • To eliminate the fixed dividend payments
    • Sell new preferred stock with lower dividend rate when interest rates decline
  • More likely to be called when interest rates decline

Question 50

Types of dividends

Answer 50

• Cash
  
  • Most common form (one that the test focuses on)
  • They get sent out in the form of a check
  • If the stock is held at a brokerage firm the check will be credited to the investors account
  • “Street name”
    
    • Securities held in the name of the brokerage firm
  • FORMULA
    
    • Amount of shares x dividend to be paid
• Stock
  
  • This is done if the corporation wants to reward shareholders but wants to reserve cash
  • Each investor will receive additional number of shares based on the number of shares they own
  • The market price of the stock will decline after the stock dividend is distributed to reflect the fact that there are now more shares outstanding, the the total market value of the company will remain the same
  • FORMULA
    
    • Number of shares x amount of stock dividend to be paid

Question 51

Dividend distribution

Answer 51

• Can not discriminate who receives dividends
• Investor do not need to notify the company if they are entitled to dividend because it will be sent automatically
• New purchasers may not be entitled to dividend depending when the stock was purchased

Question 52

Dividend distribution process

Answer 52

• Declaration date
  
  • The day the board of directors decides to pay a dividend to common stockholders of record
  • Starting point for the entire dividend process
  • The company must notify FINRA at least 10 business days prior to record date
• Ex-dividend date (aka “ex date”)
  
  • First day when purchasers of the security are no longer entitled to receive the dividend that the company has declared for payment
  • Also explained as the first day when the stock trades without (ex) the dividend attached
  • Based on the record date determined and announced by the corporation’s board of directors
  • Because it takes 2 business days for a trade to settle, the ex date is always 1 business day prior to the record date
• Record date
  
  • This is when the investors must have their name recorded on the stock certificate in order to be entitled to receive the dividend that was declared by the board of directors
  • The investor would have had to purchase the stock before the ex-dividend date in order to be an owner of record on the record date
  • This date is determined by the corporation’s board of directors and is used to determine the shareholders that will receive the dividend
• Payment date
  
  • This is the day when the corporation actually distributes the dividend to shareholders and it completes the dividend process
  • Controlled and set by board of directors and usually 4 weeks following the record date

Question 53

On the ex-dividend date the stock is now doing what?

Answer 53

• trading without the dividend attached and new purchasers will not receive the dividend that has been declared for payment
  
  • As a result the stock price will be adjusted down by the dividend amount on the ex-dividend date

Question 54

Taxation of dividends

Answer 54

• All qualified dividends are taxed at a rate of 15% for ordinary income earners and a set rate of 20% for high-income earners
• A key to determine which rate applies will be the investor’s marginal tax rate
• If a question ON THE TEST asks about an investor who is in a high tax bracket such as 39%, the 20% rate will apply for the year the dividend is received
• NOTE: dividends are NOT taxed until the investor sells their shares

Question 55

Selling dividends is ok?

Answer 55

• Violation!
• Using a pending dividend as a means to create urgency on the part of the investor to purchase the stock is a prime example of this type of violation

Question 56

Dividend disbursement process

Answer 56

• The corporation’s dividend disbursement agent will send dividends to the shareholders of record on the record date
• Most investors have their securities held in the name of the broker dealer (aka street name)
  
  • In this case the dividend goes to the broker dealer
  • Then distributed to the shareholders

Question 57

what is a warrant?

Answer 57

• It is a security that gives the holder the opportunity to purchase common stock
• Like a right, the warrant has a subscription price
  
  • BUT the subscription price on a warrant is always above the current market value of the common stock when the warrant is originally issued
• Warrant has a much longer life than a right
• May have up to 10 years to purchase the stock at the subscription price
  
  • The longer life is what makes this valuable, even though the subscription price is higher than the market price of the common stock when the warrant is issued

Question 58

How do people get warrants?

Answer 58

• Units
  
  • Many times corporations will issue warrants to people who have purchased their common stock when it was originally sold to the public during its initial public offering (IPO)
  • A common share that comes with a warrant attached to purchased an additional common share is known as a “unit”
• Attached to bonds
  
  • Companies will attach warrants to their bond offerings as a “sweetener” to help market the bond offering
    
    • This may allow the bond to be issued with a lower coupon rate
• Secondary market
  
  • Can be purchased just like common stock
• Possible outcomes of a warrant
  
  • Exercised or sold
  • Expire if the stock price is below the warrant’s subscription price at its expiration

Question 59

warrants VS rights

term?

subscription price?

trading?

Who?

Answer 59

Question 60

ADRs

Answer 60

American depositary receipts

• It is the trading of foriegn securities in the US markets
• Is a receipt that represents the ownership of the foreign shares that are being held abroad in a branch of the US bank
• Between 1-10 chares of the foriegn stock
• Holder may request delivery of the forieng shares
• Have the right to vote
• Right to receive dividends

Question 61

currency risk of ADRs?

Answer 61

• If the currency of the country decline relative to the US dollar
  
  • The holder will receive fewer US dollars when a dividend is paid since it is paid in the foreign currency to a custodian bank
    
    • The bank will convert the dividend to US dollars
  • Holder will receive less in US dollars when the security is sold

Question 62

• Functions of the custodian bank issuing ADRs

Answer 62

• Issued and guaranteed by the bank that holds the foreign securities on deposit
• They are the registered owner of the forieng shares
• They must guarantee that the foreign shares remain in the bank as long as the ADRs remain outstanding
• Foreign corporations want to use ADRs because
  
  • Its a way of generating US interest in their company
  • Allows them to avoid the long and costly registration process for their securities

Question 63

GDR

Answer 63

Global depository receipts

• Similar to ADR but is issued by an international depository
• Allows underlying shares of trade globally in many different countries and markets
• They do not trade in the US

Question 64

REITs

Answer 64

Real estate investment trusts

• It is a special type of equity security
• They are organized for the specific purpose of buying, developing, or managing a portfolio of real estate
• They are organized as a corporation or as a trust
• Publicly traded REITs will trade on the exchanges or OTC markets just like stocks
• Organized as a conduit for the investment income generated by the portfolio of real estate

Question 65

REITs are taxed how?

Answer 65

• They are entitled to special tax treatment under the IRS code subchapter M.
  
  • A REIT will not pay taxes at the corporate level if:
    
    • It receives 75% of its income from real estate
    • It distributes at least 90% of its taxable income to shareholders
  • If these requirements are met:
    
    • Income will be allied to flow through the shareholders and will be taxed at their rate
    • dividends of shareholders will be taxed as ordinary income
  • NOTE: REITs do not pass through losses or expenses to shareholders, only income

Question 66

• An investor will choose to invest in a REIT because:

Answer 66

• The greater liquidity provided by the REIT and the quality of the property manager

Question 67

Non-traded REITs

Answer 67

• Lack liquidity
• Have high fees
  
  • As much as 15% of the per share price
  • Commissions and expense which can not exceed 10% of the offering price
• Can be difficult to value
• Investors are attracted by the high yields of these investments
• Holding periods can be 8 years or more and opportunities to liquidate the investments may be very limited
• Distributions themselves may be based on the use of borrowed funds and may include a return of principal which may be adversely impacted and cause the distributions to be vulnerable to being significantly reduced or stopped all together
• Distributions may exceed cash flow and the amount of the distributions (if any) are at the discretion of the Board of Directors
• Must distribute 90% of the income to shareholders and must file annual reports (10-Ks) and quarterly reports (10-Qs) with the SEC
• Broker dealers who sell these securities must provide investors with a valuation of the REIT within 18 months of the closing of the offering of shares

Question 68

DPP and LP are what?

Answer 68

Direct participation programs and limited partnerships

• They are entities that allow income expenses, gains, losses and tax benefits to be passed through to the investors
• Generally no secondary market for these

Question 69

Limited partnerships are what?

Answer 69

• Allows the economic events of the partnership to flow through to the partners
• These events include:
  
  • Income
  • Gains
  • Losses
  • Tax credits
  • Deductions

Question 70

two types of limited partnerships?

Answer 70

• Limited partners
  
  • Put up the investment capital
  • Losses are limited to their investment
  • Receive the benefits from the operation
  • May vote to change the objective of the partnership
  • May vote to switch or remove the general partner
  • May sue the general partner if they do not act in the best interest of the partnership
  • may never exercise any management or control over the limited partnership
    
    • Doing so would jeopardize their limited status and they may be considered a general partner
• General partners
  
  • It is a person or corporation that manages the business and has unlimited liability for the obligations of the partnership business
  • Buy and sell property for the partnership
  • Receive compensation for managing the partnership
  • Enter into legally binding contracts for the partnership
  • Must maintain financial interest of at least 1!
  • They may NOT:
    
    • Commingle funds of the general partner with the funds of the partnership
    • Compete against the partnership
    • Borrow from the partnership

Question 71

how is the partnership level taxed?

Answer 71

• There are no tax consequences at the partnership level
  
  • To qualify for the preferential tax treatment, a DPP or LP must avoid at least two of the six characteristics of a corporation which are:
    
    • Continuity of life
    • Profit motive
    • Central management
    • Limited liability
    • Associates
    • Freely transferable interest
  • Some can not be avoided:
    
    • Associates
    • Profit motive
  • Easiest two to avoid:
    
    • Continuity of life
    • Freely transferable interest
  • The LP can put a termination date on the partnership and substitute limited partners may not be accepted or may only be accepted once the general partner has agreed

Question 72

what will will be one of the main points detailed in the partnership agreement?

Answer 72

Powers and limitations of the general partner’s authority

Question 73

Before forming the limited partnership, the general partner will have to do what?

Answer 73

• file a certificate of limited partnership in the state in which the partnership is formed which will include:
  
  • Name and address of the partnership
  • A description of the partnership’s business
  • The life of the partnership
  • Size of limited partner’s investments (if any)
  • Conditions for assignment of interest by limited partners
  • Conditions for dissolving the partnership
  • Conditions for admitting new limited partners
  • The projected date for the return of capital if one is set
• Change to any of these conditions must be updated on the certificate within 30 days

Question 74

Most limited partnerships will be offered to investors through a what?

Answer 74

• private placement
  
  • If so, they receive a private placement memorandum
  • Only offered to accredited investors, BUT a few limited partnerships will be offered to the public through a standard public offering
    
    • If so, they receive a prospectus

Question 75

If partnership is sold through a syndicator?

Answer 75

• The syndicator is responsible for filing the partnership documents
• Maximum fee received is limited to 10% of the offering

Question 76

If a secondary market develops for a partnership?

Answer 76

• It will be known as a master limited partnership or MLP
• All investors will complete the partnership’s subscription agreement which will include:
  
  • A power of attorney appointing the general partner
  • A statement of the prospective limited partner;s net worth
  • A statement regarding the prospective limited partner’s income
  • A statement from the prospective limited partner that they understand and can afford the risks related to the partnership

Question 77

Types of limited partnerships

Answer 77

Question 78

Tax reporting for DPPs

Answer 78

• They are either limited partnerships or as Subchapter S corporations
  
  • These allow for flow-through of income and losses and the DPP has no tax consequences
• DPP will only report the results of its operations to the IRS
• Responsibility for paying any taxes due rests with the partners or shareholders
• They allow the losses to flow through to the investors
• Losses can only be used to offset the ordinary income
• Investors should NOT purchase these simply for the tax benefits BUT they should purchase them to earn a return
• If it has been formed to simply get the tx benefits they may be subject to strict penalties
  
  • Like owe back taxes, fines, or be prosecuted for fraud

Question 79

• Investors should analyze the key features of the partnership to ensure that the partnership’s objectives meet their investment objectives, like:

Answer 79

• Economic viability of the program
• Tax considerations
• Management’s ability
• Lack of liquidity
• Time horizon
• Whether it is a blind pool or a specific program
  
  • Blind pool is a partnership in which less than 75% of the assets that the partnership is going to acquire have been identified
  • Specific program is more than 75% of the assets that the partnership is going to acquire have been identified
• Internal rate of return
  
  • Is discounted present value of its projected future cash flow

Question 80

DPP and LP - Tax deductions VS. Tax credits

Answer 80

• Tax deductions that are generated by partnerships are used to lower the investor’s taxable income
• Tax credit results in a dollar-for-dollar reduction in the amount of taxes due from the investor

Question 81

2 types of loans that a partnership may take out:

Answer 81

• Nonrecourse loan
  
  • If the partnership defaults, the lender has no recourse to the limited partners
• Recourse loan
  
  • In the event of the default, the lender can go after the limited partners for payment
  • This can increase the investor’s cost base

Question 82

Partners must monitor their cost base and adjust it for:

Answer 82

• Cash or property contributions to the partnership
• Recourse loans
• Any cash or property received from the partnership
• Investors are responsible for any gain on the sale of their partnership interest in excess of their cost basis

Question 83

Dissolving a partnership

Answer 83

• Will terminate on the date set forth in the agreement, unless terminated earlier
• May dissolve if a majority of the limited partners vote for its dissolution
• If the partnership terminates its activities:
  
  • The general partner must cancel the certificate of limited partnership and liquidate the partnership assets
  • The priority of payment will be as follows
    
    • Secured lenders
    • General creditors
    • Limited partners’ profits first, then return of investment
    • General partner for fees first, then profits, then return of capital

Question 84

an investor in a limited partnership is subject to what kind of risk?

Answer 84

• both liquidity risk and legislative risk. The investor may not be able to liquidate their interest when they need to and the government may change tax laws relating to their investment. As a result, an investor should not have more than 10% of their portfolio in limited partnerships