Chapter 1 - Equity Securities Flashcards
What is a Security?
An investment product that can be exchanged for value and involves risk
Must be readily transferable and the owner must be subject to the loss of principal
What is authorized stock?
Maximum number of shares that a company can sell
What is issued stock?
Issued stock is the stock that has actually been sold to investors, and can never exceed the number of authorized shares
What is outstanding stock?
Outstanding stock is stock that is currently held by the investing public
What is treasury stock?
It is stock that was issued but was then repurchased by the company
Issued stock - outstanding stock = Treasury stock
What are preemptive rights?
The right of an investor to maintain their percentage ownership in the company is known as preemptive rights
How are pre-emptive rights of an investor ensured?
Preemptive rights are ensured through a rights offering. The investor has 45 days to purchase new shares at discount called the subscription price
What are the 5 major things common stockholders may vote on?
1, election of board of directors 2. Issuance of bonds or additional common shares 3, stock splits 4. Mergers and acquisitions 5. Major changes in corporate policy
What is the difference between statutory and cumulative voting? Consider a n election of board of director as an example:
Under the statutory method, your votes must be distributed evenly among the candidates for whom you wish to vote
For cumulate method, you can stack/distribute your votes however you’d like
Who is the transfer agent and what do they do?
The transfer agent is the company responsible for transfer ing stock from One party to the other
- Cancels old certificates registered to the seller
- issues new certificates registered to the buyer
- maintains a record of owners
What are trade date, settlement date, and payment date?
Trade date is the day the trade is executed,
Settlement date is two days after trade date and is the day the owner becomes the owner of record
Payment date is the day the buyer has to have the money in their brokerage account to pay for the purchase
What is the par value of preferred? stock
100 unless otherwise stated
Do preferred shares have voting rights generally?
No.
What are the differences between noncumulative and cumulative preferred shares?
If a company is having Financial difficulties and is unable to pay its dividend, the cumulative feature allows dividends to accumulate.
If the dividend on a cumulative preferred stock is missed, it is still owed to the shareholder
What is participating preferred stock?
Owner’s of participating preferred stock get the preferred dividend and the common stock dividend
How is the number of common shares received determined for convertible preferred stock?
Number of shares = par/share price
What is callable preferred stock and why might it be issued?
Callable preferred stock is the only stock that benefits the company, as the call feature enables the company to buy back the shares at a predetermined price typically a premium above par
Describe the declaration Date, ex-dividends date, record date, and payment date
The declaration date is the day the dividend is announced
The ex-dividend date is the day purchasers of the stock are no longer entitled to the dividend payment
The record date is the day you must own the stock by in order to receive the dividend payment
The payment date is the day the dividend is actually distributed
How are dividends taxed?
Qualified dividends are taxed at 15% for ordinary income earners and a set rate of 20% for high income earners
What is a warrant, and how does its subscription price differ from a rights offering?
A warrant is a right given to an investor or employee by the company itself that allows them to purchase stock at a predetermined price
Unlike the case of a rights offering, the subscription price of a warrant is higher than the current price of the common stock
What are American depositary receipts?
ADRs are a receipt that represent the ownership of between 1 and 10 foreign shares, and are held in a us bank abroad
How do REITs avoid paying taxes?
Receives 75% of its income from Real Estate
It distributes at least 90% of its taxable income to shareholders
Are limited partners allowed to exercise management over the partnership?
No
What % of financial interest must the general partner maintain in the partnership?
1%
What are the two easiest characteristics of a corporation to avoid in order to receive preferential tax status?
- Continuity of life, by stating a termination date on the partnership
- freely transferable interests by not allowing substitute limited partners
