Chapter 1 - Equity Securities Flashcards
Common Stock
Represents fractional ownership in a corporation. Owners of common stock have certain rights, including the right to vote, the right to receive declared dividends, and the right to sell their shares.
Main Reasons for investing
Make a profit from your investments through 1) Dividends or 2) capital increase in the stock value
Risk Reward Potential of Investing
Unlimited upside potential
Can only lose what you invest
Shareholders Rights
1) to receive a stock certificate
2)Inspect certain (income sheet and balance statement) corporate books but not all
3) Receive dividends if they are declared
4) receive a portion of the companies assets if the company is dissolved
5) Vote on board members and important matter
Voting methods
Regular- 1 vote per share per candidate (benefits larger shareholders
Cumulative (block) - 1 vote per share times the number of directors being voted on. Can be distributed in any way the individual wants (benefits minority share holders)
Shareholders do not have the right to…
1) A dividend if one was not declared by the board
2) demand or vote on the dissolution of the company
3) To vote for officers or senior management of the company
Advantages of Common Stock
Best hedge against inflation
Greatest potential for long-term capital appreciation
Negative impact on common stock
Higher taxes
Rising Interest rates
Decrease in GDP
High Unemployment rate
Positive impacts on common stock
Lower taxes
Falling interest rates
Increasing GDP
Low unemployment rate
Authorized Stock
Represents the maximum number of shares a company may legally create for issuance. These terms are included in the Articles of Incorporation.
Issued Stock
Stock taken from the authorized stock and sold to the public
Treasury Stock
Stock that a corporation issued to the public but has repurchased. It is considered issued, but not outstanding. It cannot vote or share in dividends
Reasons Companies buy back stock
1) increase Earnings per share
2) to finance future acquisitions
3) Provide stock for employee stock option plans
4) to fight a takeover attempt
Outstanding Shares
Issued stock-treasury stock = issued stock
votes
receives dividends
are used to calculate Earnings per share
Long Position
You think the price will increase so you buy the stock
Short Position
You think the price will decrease so you borrow the stock, sell it and later repurchase it at a lower rate and return it
Trade Date
The date on which a securities transaction occurs between two parties.
Regular Way Settlement
SEC Rule 15c6-1 provides for regular way settlement on the 2nd business day after trade date for common stocks, corporate bonds, municipal bonds, and most Federal Agency issues.
Regulation T Settlement
Reg T is the regulation of the Board of Governors of the Federal Reserve System that covers customer cash and margin accounts and the extension of credit by broker-dealers.
Blue Chip Stocks
Stock issued by a nationally known company that has a good reputation for quality of management, products, and services. Blue Chip Stocks are expected to pay dividends in good times and in bad times. They will generally maintain about a 50% Dividend Payout Ratio.
Growth Stock
A stock whose earnings are expected to grow faster than the earnings of an average company. A growth stock normally pays very little in dividends (low dividend payout ratio) and earns a high rate of return.
Cyclical Stock
A stock that is susceptible to fluctuation related to various different cycles. The most common cycle would be the business cycle, with the stock increasing in value as the business cycle expands and the stock decreasing in value as the business cycle contracts.
ie. auto manufactures
steel companies
Appliance manufactures
Housing Companies
Paper Company
Tool and die manufacturers
