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Series 7 > Chapter 1: Equity Securities > Flashcards

Chapter 1: Equity Securities Flashcards

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Series 7 Top-off Exam flashcards
1
Q

New York Stock Exchange (NYSE)

A

An auction market where buyers and sellers are matched by a specialist who maintains a fair and orderly market for a particular set of stocks.

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2
Q

Designated Market Maker

A

The specialist on an exchange that matched buyers and sellers of stocks, while maintaining a fair and orderly market for them.

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3
Q

Over-The-Counter Market (OTC)

A

An interdealer market linked by computer terminals to FINRA members across the country. There is no physical location, and traders do not transact business face to face as they do on stock exchange floors.

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4
Q

Equity

A

The excess value of assets over the value of liabilities (the company’s net worth)

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5
Q

Equation: Net Worth

A

Net Worth = Assets - Liabilities

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6
Q

Equation: Assets

A

Assets = Liabilities + Net Worth

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7
Q

Preferred Stock

A

Represents equity in a company, but usually does not have the same voting rights or appreciation potential as common stock. It pays a fixed, semiannual dividend instead. It is also paid back first over common stock if the company declares bankruptcy. Price fluctuations tend to occur for changes in interest rates rather than business prospects. An exception is if the company’s credit rating changes dramatically.

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8
Q

Common Stock can be classified as:

A

Authorized; Issued; Outstanding; and Treasury.

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9
Q

Authorized Stock

A

A specific number of shares the company has authorization to issue or sell. This is laid out in the company’s original charter. They do not normally sell the entire amount, just enough to raise funds for foreseeable future. To sell more than authorized, company charter must be amended via stockholder vote.

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10
Q

Issued Stock

A

Stock that has been authorized and distributed to investors.

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11
Q

Unissued Stock is usually saved for:

A
  • Raising new capital for expansion
  • Paying stock dividends
  • Providing stock purchase plans for employees
  • Providing stock options for corporate officers
  • Exchanging common stock for outstanding convertible bonds or preferred stock.
  • Satisfying the exercise of outstanding stock purchase warrants.

Note: Unissued stock does not carry the rights and privileges of issued shares and is not considered in determining a company’s total capitalization.

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12
Q

Outstanding Stock

A

Any shares that the company has issued but has not repurchased. The stock is currently investor owned.

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13
Q

Treasury Stock

A

Stock that a corporation has issued, and then repurchased from the public. Treasury stock can basically be used in the same ways as unissued shares, and does not provide the company with voting rights or its own dividends.

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14
Q

Reasons a company would buy back its stock:

A
  • Increase Earnings Per Share (if Operating Income remains the same)
  • Have an inventory of stock available to distribute as stock options, or fund employee pension plans.
  • Use for future acquisitions.
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15
Q

Common Stock: Par Value

A

Arbitrary value the company gives the stock in the company’s articles of incorporation and has no effect on the stock’s market price. This is meaningless for investors.

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16
Q

Common Stock:

  • Capital in Excess of Par
  • Paid-in Surplus
  • Capital Surplus
  • Paid-in Capital
A

When a company sells a stock, it is the money received exceeding Par Value, and is recorded on the corporate balance sheet.

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17
Q

Common Stock: Book Value

A
  • A measure of how much a common stockholder could expect to receive for each share if the corporation were liquidated.
  • The difference between the value of a corporations tangible assets and it’s liabilities divided by the number of the shares outstanding. Usually differs substantially from a stock’s market value.
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18
Q

Common Stock: Market Price

A

The price that an investor must pay to buy the stock. It is influenced by a company’s business prospects and the consequent effect on supply and demand of shares.

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19
Q

3 Common Stock Values

A
  1. Par Value = an arbitrary value
  2. Book Value = current liquidation price of a share
  3. Market Value = supply and demand value
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20
Q

Common Stock: Voting Rights

A
  • Elect Board of Directors
    Issues at annual meetings such as:
    1. Issuance of convertible securities
    2. Substantial changes such as mergers or acquisitions.
    3. Declarations of stock splits (forward & reverse)

CAN NEVER VOTE ON DIVIDEND RELATED ISSUES

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21
Q

Statutory Voting

A

Allowed to cast one vote per share for each item on the ballot. (Benefits the large investor)

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22
Q

Cumulative Voting

A

Allowed to allocate their total votes in any manner they choose. (Benefits the small investor)

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23
Q

Proxy

A

A form of absentee ballot. Once a proxy ballot has been returned to a company it can be cancelled if the stockholder attends the meeting, authorizes a subsequent ballot, or dies.

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24
Q

Proxy Solicitation

A

When a company sends out proxies for a specific meeting. Company must provide detailed information about the proposals to be voted on. It must be submitted to the SEC for approval before being sent out.

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25
Q

Proxy Contest

A

When a proxy vote could change the control of the company. All participants involved in the contest must register with the SEC or face criminal charges, including anyone providing unsolicited advice to stockholders how to vote. Brokers who advise customers are not considered participants.

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26
Q

Class B Common Stock

A

Usually means that it does not have a voting right, unlike Class A stock. This allows a company to raise additional capital while maintaining management control and continuity and not dilute voting power.

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27
Q

Preemptive Rights

A

Gives investors the right to maintain a proportionate interest in a company’s stock.

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28
Q

Antidilution Provision

A

When a corporation raises capital through the sale of additional common stock, it may be required by law or corporate charter to offer the securities to its common stockholders before the general public.

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29
Q

Common Stock: Limited Liability

A

Protects stockholders from having to pay a corporation’s debts in bankruptcy.

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30
Q

Forward Stock Split

A

Increases the number of shares and reduces the price without affecting the total market value of shares outstanding.

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31
Q

Reverse Stock Split

A

Decreases the number of shares and increases the price without affecting the total market value of shares.

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32
Q

Long

A

Buy low and sell high

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33
Q

Short Sale

A

When an investor sells shares before they own them, then buys them back at a lower price at a later date.

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34
Q

Capital Appreciation

A

An increase in the market price of shares.

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35
Q

Property Dividend

A

Shares paid out as a dividend but are tied to a subsidiary company or a product sample.

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36
Q

Who is likely to pay a stock dividend?

A

These are normally paid out by companies that would like to reinvest their earnings into research and development. Tech, aggressive growth, and new companies are examples.

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37
Q

Capital Gain

A

When you buy a stock low and sell it high. Once it is sold it is called a “realized gain”

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38
Q

When are capital gains on stocks taxable?

A

Only after they are “realized”, meaning after the stock is sold at a capital gain.

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39
Q

Dividend Taxes

A

When you receive a dividend, you must pay taxes on them. An exception is corporations, who receive a 70% exclusion on dividend income received.

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40
Q

Long investors potential loss

A

Limited to what he invested

41
Q

Short selling investors potential loss

A

Theoretically unlimited because there is no limit to how high a stock’s price can go.

42
Q

Advantages of Preferred Stock over Common Stock

A
  • When dividends are declared, owners of preferred stock receive them before common stockholders.
  • If a corporation goes bankrupt, they have a priority claim over common stock on the assets remaining about creditors have been paid.
43
Q

Adjustable-Rate Preferred Stock

A

Preferred Stock that issue dividends that are tied to the rates of other interest rate benchmarks, such as treasury bill and money market rates. They can be adjusted semiannually.

44
Q

Reset Date

A

The date of the dividend adjustment in the case of an adjustable rate.

45
Q

Straight Preferred (Noncumulative)

A

Missed dividends are not eventually paid to the holder.

46
Q

Cumulative Preferred

A

Missed dividends accumulate on the company’s books until they can pay them. When the company can resume full payments of dividends, they receive their current dividends plus the total accumulated dividends.

47
Q

Convertible Preferred

A

The owner of the preferred stock is able to convert each preferred share for shares of common stock. A convertible preferred’s price tends to fluctuate much more in line with the common stock, because it can be converted. It is often issued with a lower stated dividend rate.
-Converting will increase the total number of common shares outstanding, which decreases earnings per common share and may decrease the common stock’s market value.

48
Q

Participating Preferred

A

Offers it’s owners a share of corporate profits that remain after all dividends and interest due other securities are paid. This percentage is noted on the stock certificate.

49
Q

Callable Preferred

A

Preferred Stock that a company can buy back from investors at a stated price after a specified date. This allows companies to replace high dividend obligations with lower ones.

50
Q

Are stock dividends taxable?

A

No, just like stock splits they are not taxable. The only tax effect of a stock dividend is o reduce the investor’s cost basis per share.

51
Q

Current Yield

Dividend Yield

A

The annual dividend (normally 4 times the quarterly dividend) divided by the current market value of the stock.

52
Q

Round-Lot Number of Shares

A

Share amounts easily divisable by 100. Share’s that are prices above $175 per share can be in volumes of less than 100 and still be considered Round-Lot

53
Q

Odd-Lot Number of Shares

A

Share amounts that are not easily divisable by 100, such as 4 shares or 99 shares.

54
Q

Main Items that a Stock Certificate Identifies

A

Company’s name, number of shares, investor’s name, and CUSIP number.

55
Q

CUSIP number

A

Committee on Uniform Securities Identification Procedures. It is a universal security identification number. Each issue of common stock, preferred stock, corporate bond, and municipal bond has its own number to track it if it is lost of stolen, and for trade confirmations.

56
Q

Stock Power

A

A document that is used to duplicate the back of a stock certificate for transfer purposes. The registered owner must sign either the stock certificate or the Stock Power to transfer it. Must be guaranteed by a member firm or commercial bank.

57
Q

Transfer procedure of a stock

A

A Transfer and a Registration of a stock are two distinct functions that, by law, can not be performed by a single person or department operating within the same institution.

58
Q

7 main Transfer Agent responsibilites

A
  1. Ensuring that it’s securities are issued in the correct owners name. 2. Cancelling old and issuing new certificates. 3. Maintaining records of ownership. 4. Handling problems relating to lost, stolen, or destroyed certificates. 5. Distributing additional shares in the event of a stock split. 6. Issuing new shares in the event of a reverse split. 7. Issuing checks back to beneficial owners in the case of a fractional share during stock splits/reverse splits.
59
Q

Stock Split changes

A

Par value will change, as well as the market value of a stock. When a stock split happens the customer will receive shares directly from the transfer agent. The investor will also receive stickers to put on existing certificates to change its par value.

60
Q

Registrar

A

A state entity that, unlike the transfer agent, must be independent of the transfer agent. Any stock or bond transaction that requires registration and issuance of new certificates is routed through the state registrar and then transfer agent. They also ensure that companies do not have more shares outstanding than have been authorized, and certifies that a bond represents a legal debt of the issuer. It preforms these tasks by auditing the issuer’s transfer agent.

61
Q

NASDAQ stands for

A

National Association of Securities Dealers Automated Quotation System

62
Q

3 NASDAQ market tiers

A
  1. Nasdaq Global Select Market
  2. Nasdaq Global Market
  3. Nasdaq Capital Market
63
Q

Nasdaq Global Select Market

A

Has initial listing standards both financial and with regard to liquidity that are the highest of any other market. Anticipated to compete directly with the NYSE

64
Q

Nasdaq Global Market

A

Formerly the Nasdaq National Market. The largest of the three tiers. These OTC stocks have high interest and appeal. Many are eligible to trade on an exchange like Global Select Market, these company opt to be OTC instead.

65
Q

Nasdaq Capital Market

A

Formerly the Nasdaq Smallcap Market. Name change reflects the capitalization of the issuers included in this market tier.

66
Q

OTCBB

A

Over the counter Bulletin Board. This is where stocks that do not qualify for NASDAQ listing are found.

67
Q

Electronic OTC Pink

A

A place for stocks that do not qualify for Nasdaq listing. Disseminated from OTC Markets Group, Inc.

68
Q

Dividend Department

A

Collects and distributed cash dividends for stocks held in street name. Also handles interest payments, stock dividends, stock splits, rights offerings, warrants, and any special distributions.

69
Q

Dividend Disbursing Agent (DDA)

A

They make the appropriate distributions or transfers to the broker/dealer. If it is a stock split the transfer agent does this.

70
Q

Declaration Date

A

Must notify FINRA or the appropriate exchange at least 10 business days before the record date.

71
Q

Ex-Dividend Date

A

2 business days before the record date. A customer must purchase the stock 3 business days before the record date to qualify for the dividend. This is also the date that the stock’s price is reduced by the amount of the dividend.

72
Q

When is the buyer of a stock considered the owner?

A

On the settlement date, NOT the trade date.

73
Q

Record Date

A

Stockholders of record on this date receive the dividend distribution.

74
Q

Payable Date

A

3-4 weeks after the record date. This is the date the dividend disbursing agent sends dividend checks to all stockholders whose names appear on the books as of the record date.

75
Q

Cash Trades

A

These settle on the same day, so they go to ex-dividend on the day after the record date because no lag occurs between the trade date and the transaction settlement.

76
Q

DERP (in reference to dividend dates)

A

Declaration > Ex > Record > Payable

77
Q

Which of the four dividend dates are determined by FINRA or the exchange, instead of the BOD?

A

Ex-Date

78
Q

Due Bill

A

A printed statement showing a buyer’s right to a dividend. This is used in the case that, for whatever reason, the wrong party in the transaction receives the dividend. The buyers firm would send a due bill to the seller’s firm demanding remittance of the dividend.

79
Q

Preemptive Rights

A

Entitles existing stockholders to maintain their proportionate ownership in a company by buying newly issued shares before the company offers them to the general public.

80
Q

Rights Offering

A

Allows stockholders to purchase common stock below the current market price. These rights are valued separately from the stock and trade in the secondary market during subscription period.

81
Q

3 things a stockholder who receives rights may do

A
  1. Exercise the rights to buy stock by sending the rights certificates and check for the required amount to the rights agent.
  2. Sell the rights and profit from their market value (They are also negotiable securities.
  3. Let the rights expire and lose their value.
82
Q

Subscription Right

A

Certificate representing a short-term (30-45 days) privilege to buy additional shares of a corporation. One right is issued per common share outstanding.

83
Q

Terms of a Rights Offering

A

Describe how many new shares a stockholder may buy, the price, the date the new stock may be issued, and the final date for exercising the rights.

84
Q

Standby Underwriting

A

An underwriter buys all unsold shares from the issuer and then resells them to the general public. This is sometimes done when current stockholders do not subscribe to all the additional stock.

85
Q

Warrant

A

Certificate granting its owner the right to purchase securities from the issuer at a specified price (normally higher than current MP). This is a long-term instrument giving the investor a choice at a future date. Typically 5 year life. After issue they are detachable from the security and can trade separately.

86
Q

When are warrants given normally?

A

Typically they are added as “sweeteners” in connection with other securities such as Bonds or Preferred Stock in order to make those securities more attractive. After issuance they are detachable and can trade separately.

87
Q

American Depository Receipts (ADRs)

A

Facilitate the trading of foreign stocks in the US markets. An ADR is a negotiable security that represents a receipt for shares of stock in a non-US Corporation, usually between 1-10 shares. Bought and sold in US securities markets like stocks.

88
Q

ADR owner rights

A

Most of the rights of common stockholders normally do.
Right to receive dividends when delcared.
Generally no voting rights.
Right to exchange the ADRs for the foreign shares that represent. (Done by returning ADR to depository bank which cancels the shares and delivers the held underlying stock.

89
Q

Taxes on ADRs

A

In most countries a withholding tax on dividends is taken at the source. This would be a foreign income tax. This may be taken as credit against any US income taxes owed by the investor.

90
Q

Currency Risk (ADRs)

A

Because ADRs represent shares of stocks in other countries, investors have the risk that one currency could decline in its exchange rate with the US dollar. Dividends are declared in foreign currency but are payable in US Dollars.

91
Q

Sponsored ADRs (AKA American Depository Shares, ADSs)

A

All exchange-listed ADRs are sponsored. Issuers that sponsor ADRs provide holders with financial statements in English.

92
Q

REIT (Real Estate Investment Trust)

A

A Company that manages a portfolio of real estate investments in order to earn profits for shareholders. Normally traded publicly and serve as a source of long term financing for real estate projects. Shareholders receive dividends from investment income or capital gains distributions.

93
Q

How can a REIT avoid being taxed?

A

Subchapter M of Internal Revenue Code: A REIT can avoid being taxed as a corporation by having atleast 75% of total investment assets in real estate, deriving at least 75% of gross income from rents or mortgage interest, and distributing 90% or more of its net investment income to its shareholders.

94
Q

Equity REIT

A

A REIT that owns property.

95
Q

Mortgage REIT

A

A REIT that owns mortgages on property.

96
Q

Hybrid REIT

A

A REIT that owns both property, and mortgages on property.

97
Q

Reasons an investor might hold REITs in their portfolio

A
  1. REITs allow investors the opportunity to invest in real estate without incurring the degree of liquidity risk historically associated with real estate. The trade on exchanges and OTC.
  2. REITs can provide some hedge to price movements in other equity markets. Typically have a negative correlation to stock prices.
  3. REITs provide a reasonable expectation of income from dividends and capital appreciation due to the appreciation of the assets and trust holds.
98
Q

REIT Risks

A
  1. Investor has no direct control over the portfolio and relies on professional management to make all purchase and sale decisions. The quality of the portfolio lies with the quality of the manager.
  2. Problematic loans within mortgage REITs can cause decreases in income flow and diminish capital returns.
  3. Dividends paid by the trusts do not meet the requirement of qualified dividends and therefor are taxable at full ordinary income tax rates.

Series 7 (2 decks)

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