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SIE Study Prep > Chapter 1: Intro to the Securities Industry > Flashcards

Chapter 1: Intro to the Securities Industry Flashcards

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1
Q

Outstanding Shares

A

Issued Stock - Treasury Stock

Or

Stock in the hands of the public

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2
Q

Long Position

A

Buys/Owns a security

Expect it to go up (bullish)

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3
Q

Short Position

A

Borrows stock from a broker-dealer and sells it at high price (100 shares)

Then when it drops replaces the 100 shares with the cheaper priced shares and keeps the difference

Expect the market to decline (Bearish)

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4
Q

Covering (your short position)

A

When you buy the stock back and pay the broker after “selling short”

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5
Q

Par Value for Common Stock

A

Doesn’t Matter

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6
Q

Par Value for Preferred Stock

A

100 dollars

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7
Q

Par Value for a bond

A

1000 dollars

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8
Q

What determines market value (value stock can be sold on the open market)

A

Supply and Demand

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9
Q

More Buyers than Sellers in market

A

Pushes price of stock up

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10
Q

More sellers than buyers in market

A

Causes price of stock to go down

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11
Q

Trade Date

A

The date a trade is executed (not when money is paid and received)

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12
Q

Regular Way Settlement (always assume this is the settlement option)

A

T+2 (Trade date plus two business days)

Buyer must pay/seller must deliver security (settlement)

“Always assume T+2”

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13
Q

Regulation T Settlement

A

Reg T is trade date plus 4 (T+4)

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14
Q

Blue Chip Stock (IBM)

A

Issued by nationally known company with a reputation for quality management, products, and services

Pay Dividends in good times and bad times

Maintains 50% dividend payout ratio

Investment objective is: capital appreciation and regular dividend income

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15
Q

Dividends are paid…

A

Quarterly

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16
Q

Growth Stock (Amazon)

A

Issued by a company that is expected to have above average increases in revenues and earnings

Investment objective is: capitol appreciation

Little or no dividend resulting in low dividend yield and shareholder equity increases (money goes back into growth of company)

High price/earnings ratio

High Volatility

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17
Q

Emerging Growth Company

A

Fast growing company with total annual gross revenues of less than 1.07 billion during its most recently completed fiscal year

High risk, high return, high failure

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18
Q

Cyclical Stock (Auto Manufacturers the most notable)

A

Stock heavily affected by normal business and economic cycles.

Rise and fall along with the rise and fall of the economy

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19
Q

Counter Cyclical Stock (precious metals such as gold) (retailers like Walmart)(temp employment agencies)

A

Stocks that move in the opposite direction of the economy

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20
Q

Defensive/ Non-Cyclical Stock (Tobacco, Utilities, Food Companies, Pharma Companies, Auto Repair companies)

A

Stocks issued by a company that is resistant to normal business cycles and stock market fluctuations

Stable and consistent year after year

Even when money is tight these are things you will always buy

DOES NOT include steel companies such as auto manufactures or tool and die manufacturers

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21
Q

Utility Stocks

A

Issued by companies that provide electric, gas, and water

1) Offer above average Dividends but less capitol appreciation compared to growth stocks
2) highly leveraged (debt) because customers are dependent
3) changes in interest rates will have more of an effect on common stock
4) high level of debt = High cost of operations (interest goes up the cost of operations goes up)

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22
Q

High Leverage refers to…

A

Debt

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23
Q

Special Situations Stocks

A

Stocks that are undervalued and their price can increase in value suddenly due to a number of reason such as

1) New Management
2) new popular product
3) discovery of natural resource on property

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24
Q

American Depositary Receipts (ADRs)

A

Receipts traded in the US for foreign stocks

Held in bearer form by an American bank in the foreign country

An ADR can represent a ratio or fractional ownership of the foreign ordinary shares

1) NO voting
2) Dividends paid in US dollars
3) Taxed as a security and gains & losses are reported on IRS Form 1099b

Not issued as callable

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25
Q

Stock Split must be approved by…

A

Board of Directors

Shareholders

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26
Q

Transfer agent maintains…

A

the accounting of shareholders who are entitled to a split or dividend an who aren’t

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27
Q

Stock Split

A

of outstanding shares are increased decreasing the price of each stock but the proportionate equity ownership does not change

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28
Q

Reverse Split (Stock Consolidation)

A

Decrease # of outstanding shares and increase the price of each share of stock

Can be a sign of trouble in company

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29
Q

Formula for…# of rights needed to purchase new share

A

Outstanding Shares/New Shares

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30
Q

Market Premium when it comes to warrants

A

Intrinsic value of a warrant

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31
Q

Dilution of shares

A

Total outstanding shares increase which decreases EPS

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32
Q

Warrants/Subscription Warrants/ WTS (sweetener)

A

Long term option to buy stock at a specified price from the issuing company

Ex. IPO= 20 a share with a 10 year warrant to buy stock at 30 a share no matter how high the price goes

NO DIVIDENDS
Issue by corporation is Voluntary
Mainly Debentures

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33
Q

Subscription Rights/Preemptive Rights/ “Rights”

A

Short-Term privilege granted by a corporation to existing common shareholders which gives them the opportunity to subscribe to a proportionate number of newly issued shares at a lower price than the public offering price before the public can purchase new shares

Max maturity of 90 days

One right for each share of common stock they hold

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34
Q

Rights per share of stock owned

A

One right per share

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35
Q

Inverse Reaction

A

If interest rates go up the market price of outstanding preferred stocks and bonds will go down CAUSING yields to rise

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36
Q

Rights Offering only exists on…

A

Common stock

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37
Q

Preferred Stock

A

A stock that has priority over common stock in receiving dividends and sharing assets if corporation is dissolved

Has characteristics of an equity and fixed income security

Fixed Income
No Voting
Less Volatile/ Less Appreciation

38
Q

Dividends are paid on..and not on…

A

Common Stock
Preferred Stock
Mutual Fund Shares
American Depositary Receipts

(NOT WARRANTS OR BONDS)

39
Q

Payments made on bonds are.. and why

A

Interest!! because a bond is not an equity security it’s a debt security

40
Q

Interest on Bonds is paid

A

Semi-Annually

41
Q

Declaration date

A

Date dividend is declared by board of directors

42
Q

Record Date

A

Date the corporation closes the updating of the stock record book

Persons names who appear in this book on this date will be sent dividend

43
Q

Payable Date

A

Date the dividend is actually paid

Date creates a taxable event for the investor and creates tax liability in that year

44
Q

Declaration, Record, and Payable Dates are set by (Dividends)

A

BOD

Board of Directors

45
Q

Ex-Dividend Date is set by..

A

Stock Exchange for listed stocks

FINRA for OTC stocks

46
Q

Ex-Dividend Date (Ex = Without) and exception is…

A

The day where if you buy a stock on or after you will not receive a dividend payment

Or

Date Stock begins to trade without dividend

Business Day Before Ex Date to participate in dividend

Exception: Ex-Date for Cash Transactions is the business day AFTER the the record date

47
Q

To make it so money must be paid on order execution date the execution must be marked as a “———“ (usually the exception)

A

Cash Transaction

48
Q

DERP Dates

A

Declaration, Ex Dividend, Record, Payable

49
Q

Ex Date is one day before the (for regular way transactions)

A

Record Date

50
Q

Current Yield Formula

A

Annual Dividend / Current Market Price = current yield (%)

51
Q

Current Yield (Dividend Yield)

A

The measurement of the annual % rate of return you receive from investing in a stock

52
Q

Due Bill

A

Statement of money owed used to adjust for incorrect dividend payments

53
Q

REITs ARE…

A

REITS (not investment companies and not mutual funds and not limited partnerships)

54
Q

Equity REITs

A

Buy the buildings (equity positions) with money from shareholders and pay shareholders income from the rents received and the capitol gains when they property is sold

55
Q

Mortgage REITs

A

DO NOT BUY ANYTHING

take the money that they receive from shareholders and lend that money to building developers

Then pass interest income on to shareholders

HIGHLY LEVERAGED (Debt)

56
Q

Hybrid REITS

A

Combination of Equity and Mortgage REITS

57
Q

IRS rules for REITS regarding qualifying for tax exemption at the trust level (avoids double taxation due to not paying the corporate tax)

A

Payout at least 90% of income to shareholders

Have at least 75% of assets in real estate related activities

58
Q

Accredited Investor

A

An investor that has had an earned income that has exceeded 200,000 over the last two years and who reasonable expects the same for this year

Or

Investor with a networth over 1 million excluding the value of the persons primary residence. Alone or together with a spouse

59
Q

In what are depreciation write offs given to investors and losses are passed through to investors

A

Limited Partnership

60
Q

Dividend Paid By REITS are taxed at..

A

Individuals Ordinary income tax rate

61
Q

Qualified dividends are taxed at…

A

15%

62
Q

REITS Earnings Come From

A

The difference between rental income and interest paid on borrowed money

63
Q

REITS move how in relation to stocks and bonds

A

In the opposite direction (inversely)

64
Q

Limited Partnership is also known as

A

A Direct Participation Program (and vice versa)

65
Q

REIT Index ETF

A

Invests in multiple REITS increasing an investors diversification

66
Q

Private REITS are not registered with

A

The SEC

67
Q

Direct Participation Programs/ Investments in Limited Partnerships

A

Investments which allow the investor certain tax advantages

68
Q

General Partner is also called…

A

A Sponsor Or Manager

69
Q

Adjusted Basis is important to a limited partner because..

A

Limited partners can never write off more than their “adjusted basis” on taxes

70
Q

At Risk Investment is (and formula)

A

Initial dollar amount originally put in

But REALLY

Initial Cash Investment PLUS any recourse loans

71
Q

Recourse Loan (highly leveraged DPPs usually have these)

A

Loan for which investor is held personally responsible

72
Q

Non-Recourse Loans

A

Do not hold investor personally responsible but the investment property is accepted as collateral

73
Q

Conduit theory (limited partnership)

A

Income and expenses flow through to limited partners

74
Q

Limited Partners in a limited partnership are issued what form for tax purposes

A

K-1 tax form

75
Q

Biggest Disadvantage of a Limited Partnership

A

Lack of Liquidity

Must find a seller yourself and even if you do it has to be approved by general partner

76
Q

What is not considered when purchasing a DPP or Limited Partnership?

A

The financial condition of other limited partners

77
Q

Types of “Alternative Investments” or “Non-Correlated Assets” aside from DPPs

A

1) Real Estate
2) Futures on Commodities
3) Private Equity
4) Derivatives

78
Q

Order of Asset Distributions Upon liquidation

A
  1. Taxes
  2. Secured Debt
  3. Unsecured Debt
  4. Preferred Stockholder
  5. Common Stockholder

T
D (2)
S (2)

79
Q

Main Advantages of DPPS

A
  1. Income and expenses flow through to partners
  2. For limited partners the capital risk is limited to their cash investment
  3. Capitol costs can be depreciated
  4. They provide some diversification and are professionally managed
80
Q

Direct Participation Program

A

A program which allows investors certain tax advantages for the underlying asset

81
Q

Callable Preferred Stock

A

Preferred stock that may be called/redeemed by the issuer at a set premium over the par value after a specified date

82
Q

With a DPP what decreases the investors cost basis

A
  1. Distribution of property to the partners in a partnership
  2. Partnership losses
  3. Non-deductible partnership expenses
  4. Depletion deductions for oil and gas partnerships
83
Q

Street Name

A

The security is registered on the issuers books in the name of the broker dealer that is holding the stock for the benefit of the client

84
Q

Limited Partners

A

Liability is limited to the amount of their “at risk” investment in the entity

85
Q

Disadvantages of DPPs

A
  1. Lack of Liquidity
  2. Limited partners have no control of management
  3. General partners have unlimited liability
86
Q

4 reasons a company repurchases own stock

A
  1. increase EPS
  2. To finance future acquisitions
  3. To provide stock for employee stock option plans
  4. To fight a takeover attempt
87
Q

Participating Preferred Stock

A

Preferred Stock with dividends that are fixed as to a minimum but not a maximum amount

88
Q

Registered Form of Stock

A

A certificate is issued in the shareholders name and recorded on the issuers books

89
Q

General Partners

A

Manage the DPPs, General Partnerships, and Limited Partnerships

90
Q

Treasury Stock Features

A
  1. Doesn’t Vote
  2. Doesn’t count towards EPS
  3. Doesn’t receive dividends
  4. Is recorded on balance sheet as a deduction from issued shares
91
Q

Convertible Preferred Stock

A

Can be converted to common stock at the option of the shareholder

92
Q

Cumulative Preferred Stock

A

All current and overdue dividends must be paid before dividends for common shareholders can be declared

Overdue dividends are referred to as dividends in arrears

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