Chapter 1 - Equity Securities

Question 1

What is a Security?

Answer 1

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

Question 2

What is authorized stock?

Answer 2

Maximum number of shares that a company can sell

Question 3

What is issued stock?

Answer 3

Issued stock is the stock that has actually been sold to investors, and can never exceed the number of authorized shares

Question 4

What is outstanding stock?

Answer 4

Outstanding stock is stock that is currently held by the investing public

Question 5

What is treasury stock?

Answer 5

It is stock that was issued but was then repurchased by the company

Issued stock - outstanding stock = Treasury stock

Question 6

What are preemptive rights?

Answer 6

The right of an investor to maintain their percentage ownership in the company is known as preemptive rights

Question 7

How are pre-emptive rights of an investor ensured?

Answer 7

Preemptive rights are ensured through a rights offering. The investor has 45 days to purchase new shares at discount called the subscription price

Question 8

What are the 5 major things common stockholders may vote on?

Answer 8

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

Question 9

What is the difference between statutory and cumulative voting? Consider a n election of board of director as an example:

Answer 9

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

Question 10

Who is the transfer agent and what do they do?

Answer 10

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

Question 11

What are trade date, settlement date, and payment date?

Answer 11

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

Question 12

What is the par value of preferred? stock

Answer 12

100 unless otherwise stated

Question 13

Do preferred shares have voting rights generally?

Answer 13

No.

Question 14

What are the differences between noncumulative and cumulative preferred shares?

Answer 14

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

Question 15

What is participating preferred stock?

Answer 15

Owner’s of participating preferred stock get the preferred dividend and the common stock dividend

Question 16

How is the number of common shares received determined for convertible preferred stock?

Answer 16

Number of shares = par/share price

Question 17

What is callable preferred stock and why might it be issued?

Answer 17

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

Question 18

Describe the declaration Date, ex-dividends date, record date, and payment date

Answer 18

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

Question 19

How are dividends taxed?

Answer 19

Qualified dividends are taxed at 15% for ordinary income earners and a set rate of 20% for high income earners

Question 20

What is a warrant, and how does its subscription price differ from a rights offering?

Answer 20

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

Question 21

What are American depositary receipts?

Answer 21

ADRs are a receipt that represent the ownership of between 1 and 10 foreign shares, and are held in a us bank abroad

Question 22

How do REITs avoid paying taxes?

Answer 22

Receives 75% of its income from Real Estate

It distributes at least 90% of its taxable income to shareholders

Question 23

Are limited partners allowed to exercise management over the partnership?

Answer 23

No

Question 24

What % of financial interest must the general partner maintain in the partnership?

Answer 24

1%

Question 25

What are the two easiest characteristics of a corporation to avoid in order to receive preferential tax status?

Answer 25

• Continuity of life, by stating a termination date on the partnership
• freely transferable interests by not allowing substitute limited partners