Chapter 1 : Equity Securities

Question 1

Capital Gain

Answer 1

Profit for selling shares for more than purchased

Question 2

Share Holder Rights

Answer 2

1. Stock Certificate
2. Inspect Certain Books - Balance Sheet & Income Statement
3. Dividends Declared by Board
4. Order of Asset Distributions
5. Vote

Question 3

Regulatory / Statutory Voting

Answer 3

One Vote Per Share Per Director
Benefits Large Holders

Question 4

Cumulative Voting

Answer 4

One Vote Per Share X Number of Directors
Benefits Minor Holders

Question 5

Best Hedge Against Inflation

Answer 5

Common Stock

Question 6

Greatest Potential for Long Term Capital Appreciation

Answer 6

Common Stock

Question 7

Authorized Stock

Answer 7

Max number of shares allowed to be sold - regulated by corporate charter

Question 8

Issued Stock

Answer 8

Sold to public in the primary distribution

Question 9

Treasury Stock

Answer 9

Stock Re-Purchased by Company
Does not vote / no dividends / not used in EPS

Question 10

Outstanding Shares

Answer 10

Shares issued and held by shareholders
Only shares that vote & receive dividends
Used to calculate earnings per share

Question 11

Outstanding Stock Calculation

Answer 11

Issued Stock - Treasury Stock = Outstanding Stock

Question 12

Blue Chip Stock

Answer 12

Nationally Known Company
Dividend issued in good and bad times
50% dividend payout ratio
Good for capital appreciate and dividend income

Question 13

Growth Stock

Answer 13

High % retained earnings
Pay little to no dividend
High price/earning ratio
High Volatility

Question 14

Emerging Growth Company

Answer 14

Total annual assets less than 1.07 billion
High Risk
High Return
High Failure

Question 15

Cyclical Stock

Answer 15

Rise and fall with economy
Examples : Auto Manufactures / Steel / Appliance Manufacturing / Housing / Paper Company / Tool and Dye Manufacturing

Question 16

Countercyclical Stock

Answer 16

Stock moves in the opposite of the economy
Examples: Gold / Temp Agency / Budget Retailers
“Put the gold on the counter”

Question 17

Defensive Non/Cyclical Stock

Answer 17

Note Defense Industry
Stable and Consistent
Tabacco / Pharma / Utilities / Auto Repair / Food

Question 18

Utility Stock

Answer 18

Pays above average dividends
75% Payout or more
Less capitol appreciation
Highly leveraged = Customer Dependent
Changes in Interest rate changes price

Question 19

American Depository Receipts
(ADR)

Answer 19

Traded in USA for Foreign Stock
Held in bearer form by American bank in foreign country
Can represent ratio or fractional ownership
no voting priv
Dividends paid in US dollar
Gains and loss reported on IRS form 1099B
Not issued as callable
“No foreign calling”

Question 20

Dividend Per Share
Calculation

Answer 20

Dividend Paid / Outstanding Shares = Dividend Per Share

Question 21

Dividend Payout Ratio
Calculation

Answer 21

Dividend Per Share (DPS) / Earnings Per Share (EPS) = Dividend Payout Ratio (%)

Question 22

Retained Earnings would indicate?

Answer 22

An increase in retained earnings would result in an increase to shareholder equity on the balance sheet

Question 23

Price to Earnings Ratio
Calculation

Answer 23

Market Price / Earnings Per Share(EPS) = Price to Earnings Ratio

Question 24

Average P/E Ratio

Answer 24

20-25 Times Earnings
High P/E Higher Future growth potential
Low P/E Lower growth potential or company undervalues
Company with no P/E = loosing money

Question 25

Stock Split Information

Answer 25

Par Decreases Proportionally to Split Shareholders must vote and approve split Transfer agent maintains accounting

Question 26

2:1 Stock Split 1:2 Reverse Stock Split

Answer 26

2:1 Stock split increases # of outstanding shares 1:2 Decreased the # of outstanding shares

Question 27

Stock Split Math Example

Answer 27

3:2 Stock Split 100 Shares at $10 per 3/2 x 100/1 = 300/2 = 150 Price Per Share 100 x 10 = 1000 1000/150 = $6.67 150 @ $6.67

Question 28

Derivatives

Answer 28

Securities that derive their value from the value of the underlying stock

Question 29

Warrants

Answer 29

Want to No Dividend Can be perpetual Frequently with Debentures

Question 30

Rights

Answer 30

Have to / Obligated 1 Right per share Max 90 Days

Question 31

Rights Calculation

Answer 31

Outstanding Share / New shares = Number needed to purchase new shares

Question 32

Preferred Stock

Answer 32

Equity Security = Ownership Sensitive to Interest Rates Fixed income security = Dividend is fixed % of par or fixed dollar amount No Preemptive Rights / No Voting Priv Most are issued as callable

Question 33

Dividends

Answer 33

Paid On - Common Stock / Preffered Stock / Mutual Funds Not Paid On - Warrants / Bonds Fully Taxable = Federal State and Local Level Normally Paid Quarterly

Question 34

Declaration Date

Answer 34

Declared by Board

Question 35

Ex-Dividend Date

Answer 35

Date stock trades without dividend Normally day before record date Determined by exchange listed stock / FINRA

Question 36

Record Date

Answer 36

Dividend sent to names on record of this date

Question 37

Payable Date

Answer 37

Date the dividend is paid out

Question 38

D ERP

Answer 38

Declaration date Ex- Dividend date Record date Payable date

Question 39

Dividend Entitlement

Answer 39

Must buy / own the stock at least one business day before the Ex Date

Question 40

Current Yield Calculation

Answer 40

Annual Dividend / Market Price = Current Yield (%)

Question 41

REITS

Answer 41

Invest in Income Producing Property *Not Residential Mortgages*

Question 42

Types of REITS

Answer 42

Equity - Actually Buy Property Mortgage - Lend money to investors (Highly leveraged) Hybrid - Both

Question 43

REITS Require

Answer 43

Payout at least 90% At least 75% real estate activities Can avoid double taxaction if meets requirments (avoids corporation taxation)

Question 44

REITS Not

Answer 44

NOT Direct Participation Programs NOT Limited Partnerships