Chapter 1 (Individual Securities - Equities) Flashcards
What is a Security?
An intangible financial asset that may be bought, sold, or gifted between persons. It may be represented by a paper certificate or held in an electronic record.
The Howey Test
A security is
1) . An investment of money made into
2) . a common enterprise
3) . with the expectation of profit
4) . through the efforts of a third party
Examples of Securities
Stocks Options Mutual Funds Jumbo CD's Depository Receipts Units in an investment Bonds, Notes, and Debentures (all types of debt)
Are Cryptocurrencies a security or a commodity?
Cyrptocurrencies are a commodity
What are the 4 CLASSES of Common Stock?
Authorized
Issued
Outstanding
Treasury
What is an Authorized Stock?
Corporations are formed through the preparation of a corporate charter. The corporate charter specifies the number of shares the company is authorized to issue. It is a decision made by the founders of the business. A company does not issue all the authorized shares. It issues enough of them to raise sufficient capital for its expected needs. The company may sell the remaining authorized shares in the future or use them for other purposes. If the company want s to issue more shares than are authorized, the charter must be amended through a stockholder vote.
What is an Issued Stock?
Issued stock is authorized stock that has been sold to investors. Those investors have bought the stock and the company has received the money. When a corporation issues, or sells, fewer shares than the total number authorized, it normally reserves the unissued shares for future needs, including
1). raising new capital for expansion
2). paying stock dividends
3). exchanging common stock for outstanding convertible bonds or preferred stock
Authorized but unissued stock does not carry the rights and privileges of issued shares and is not considered in determining a company’s total capitalization
What is Outstanding Stock?
Outstanding stock includes any shares that a company has issued and are in the hands of investors. Sometimes, owners of the stock will donate it to the company. However the company gets it back, that stock is no longer outstanding.
Treasury Stock
Treasury stock is stock a corporation has issued and subsequently reacquired. The corporation can hold this stock indefinitely or can reissue or retire it. Treasury stock does not carry the rights of outstanding common shares, such as voting rights and the right to receive dividends. Analysts are only concerned with outstanding shares.
What are the 4 TYPES of Common Stock
Large Cap Stock
Mid Cap Stock
Small Cap Stock
Penny Stock
What are Penny Stocks?
A penny stock is an unlisted security trading at less than $5 per share.
Penny Stock Cold-Calling Rules
The customer must sign and date this suitability statement before any initial penny stock trade may be placed. In addition, the BD must disclose
1) . the name of the penny stock
2) . the number of shares to be purchased
3) . a current quotation
4) . the amount of commission that the firm and the representative received.
What kinds of customers are exempt from suitability statements?
Established customers
1) . has held an account with the BD for at least one year (and has made a deposit of funds or securities) or
2) . has made at least three penny stock purchases of different issuers on different days
What are the 3 ways Dividends may be paid?
Cash Dividends
Stock Dividends
Product Dividends
What are Cash Dividends?
When declared, cash dividends are typically paid quarterly and are taxed in the year they were distributed.
What are Stock Dividends?
The net result is that the shareholder now owns more shares after the distribution, but the cost per share is adjusted downward. The stock dividend itself is not taxable, but the adjusted cost per share will impact the tax consequences when the shares are sold.
What are Product Dividends?
Though rare, some companies will pay a dividend by sending a sample of the company’s product to shareholders.
How may Cash Dividends be Taxed?
Qualified or Non-Qualified
The maximum tax rate on qualified dividends is specified by current IRS tax code and will depend on the investor’s income tax bracket. The higher the investor’s income tax bracket, the higher the tax on qualified dividends will be, up to the specified maximum.
