Chapter 1: Intro to the Securities Industry Flashcards
Outstanding Shares
Issued Stock - Treasury Stock
Or
Stock in the hands of the public
Long Position
Buys/Owns a security
Expect it to go up (bullish)
Short Position
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)
Covering (your short position)
When you buy the stock back and pay the broker after “selling short”
Par Value for Common Stock
Doesn’t Matter
Par Value for Preferred Stock
100 dollars
Par Value for a bond
1000 dollars
What determines market value (value stock can be sold on the open market)
Supply and Demand
More Buyers than Sellers in market
Pushes price of stock up
More sellers than buyers in market
Causes price of stock to go down
Trade Date
The date a trade is executed (not when money is paid and received)
Regular Way Settlement (always assume this is the settlement option)
T+2 (Trade date plus two business days)
Buyer must pay/seller must deliver security (settlement)
“Always assume T+2”
Regulation T Settlement
Reg T is trade date plus 4 (T+4)
Blue Chip Stock (IBM)
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
Dividends are paid…
Quarterly
Growth Stock (Amazon)
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
Emerging Growth Company
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
Cyclical Stock (Auto Manufacturers the most notable)
Stock heavily affected by normal business and economic cycles.
Rise and fall along with the rise and fall of the economy
Counter Cyclical Stock (precious metals such as gold) (retailers like Walmart)(temp employment agencies)
Stocks that move in the opposite direction of the economy
Defensive/ Non-Cyclical Stock (Tobacco, Utilities, Food Companies, Pharma Companies, Auto Repair companies)
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
Utility Stocks
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)
High Leverage refers to…
Debt
Special Situations Stocks
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
American Depositary Receipts (ADRs)
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
Stock Split must be approved by…
Board of Directors
Shareholders
Transfer agent maintains…
the accounting of shareholders who are entitled to a split or dividend an who aren’t
Stock Split
of outstanding shares are increased decreasing the price of each stock but the proportionate equity ownership does not change
Reverse Split (Stock Consolidation)
Decrease # of outstanding shares and increase the price of each share of stock
Can be a sign of trouble in company
Formula for…# of rights needed to purchase new share
Outstanding Shares/New Shares
Market Premium when it comes to warrants
Intrinsic value of a warrant
Dilution of shares
Total outstanding shares increase which decreases EPS
Warrants/Subscription Warrants/ WTS (sweetener)
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
Subscription Rights/Preemptive Rights/ “Rights”
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
Rights per share of stock owned
One right per share
Inverse Reaction
If interest rates go up the market price of outstanding preferred stocks and bonds will go down CAUSING yields to rise
Rights Offering only exists on…
Common stock
Preferred Stock
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
Dividends are paid on..and not on…
Common Stock
Preferred Stock
Mutual Fund Shares
American Depositary Receipts
(NOT WARRANTS OR BONDS)
Payments made on bonds are.. and why
Interest!! because a bond is not an equity security it’s a debt security
Interest on Bonds is paid
Semi-Annually
Declaration date
Date dividend is declared by board of directors
Record Date
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
Payable Date
Date the dividend is actually paid
Date creates a taxable event for the investor and creates tax liability in that year
Declaration, Record, and Payable Dates are set by (Dividends)
BOD
Board of Directors
Ex-Dividend Date is set by..
Stock Exchange for listed stocks
FINRA for OTC stocks
Ex-Dividend Date (Ex = Without) and exception is…
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
To make it so money must be paid on order execution date the execution must be marked as a “———“ (usually the exception)
Cash Transaction
DERP Dates
Declaration, Ex Dividend, Record, Payable
Ex Date is one day before the (for regular way transactions)
Record Date
Current Yield Formula
Annual Dividend / Current Market Price = current yield (%)
Current Yield (Dividend Yield)
The measurement of the annual % rate of return you receive from investing in a stock
Due Bill
Statement of money owed used to adjust for incorrect dividend payments
REITs ARE…
REITS (not investment companies and not mutual funds and not limited partnerships)
Equity REITs
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
Mortgage REITs
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)
Hybrid REITS
Combination of Equity and Mortgage REITS
IRS rules for REITS regarding qualifying for tax exemption at the trust level (avoids double taxation due to not paying the corporate tax)
Payout at least 90% of income to shareholders
Have at least 75% of assets in real estate related activities
Accredited Investor
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
In what are depreciation write offs given to investors and losses are passed through to investors
Limited Partnership
Dividend Paid By REITS are taxed at..
Individuals Ordinary income tax rate
Qualified dividends are taxed at…
15%
REITS Earnings Come From
The difference between rental income and interest paid on borrowed money
REITS move how in relation to stocks and bonds
In the opposite direction (inversely)
Limited Partnership is also known as
A Direct Participation Program (and vice versa)
REIT Index ETF
Invests in multiple REITS increasing an investors diversification
Private REITS are not registered with
The SEC
Direct Participation Programs/ Investments in Limited Partnerships
Investments which allow the investor certain tax advantages
General Partner is also called…
A Sponsor Or Manager
Adjusted Basis is important to a limited partner because..
Limited partners can never write off more than their “adjusted basis” on taxes
At Risk Investment is (and formula)
Initial dollar amount originally put in
But REALLY
Initial Cash Investment PLUS any recourse loans
Recourse Loan (highly leveraged DPPs usually have these)
Loan for which investor is held personally responsible
Non-Recourse Loans
Do not hold investor personally responsible but the investment property is accepted as collateral
Conduit theory (limited partnership)
Income and expenses flow through to limited partners
Limited Partners in a limited partnership are issued what form for tax purposes
K-1 tax form
Biggest Disadvantage of a Limited Partnership
Lack of Liquidity
Must find a seller yourself and even if you do it has to be approved by general partner
What is not considered when purchasing a DPP or Limited Partnership?
The financial condition of other limited partners
Types of “Alternative Investments” or “Non-Correlated Assets” aside from DPPs
1) Real Estate
2) Futures on Commodities
3) Private Equity
4) Derivatives
Order of Asset Distributions Upon liquidation
- Taxes
- Secured Debt
- Unsecured Debt
- Preferred Stockholder
- Common Stockholder
T
D (2)
S (2)
Main Advantages of DPPS
- Income and expenses flow through to partners
- For limited partners the capital risk is limited to their cash investment
- Capitol costs can be depreciated
- They provide some diversification and are professionally managed
Direct Participation Program
A program which allows investors certain tax advantages for the underlying asset
Callable Preferred Stock
Preferred stock that may be called/redeemed by the issuer at a set premium over the par value after a specified date
With a DPP what decreases the investors cost basis
- Distribution of property to the partners in a partnership
- Partnership losses
- Non-deductible partnership expenses
- Depletion deductions for oil and gas partnerships
Street Name
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
Limited Partners
Liability is limited to the amount of their “at risk” investment in the entity
Disadvantages of DPPs
- Lack of Liquidity
- Limited partners have no control of management
- General partners have unlimited liability
4 reasons a company repurchases own stock
- increase EPS
- To finance future acquisitions
- To provide stock for employee stock option plans
- To fight a takeover attempt
Participating Preferred Stock
Preferred Stock with dividends that are fixed as to a minimum but not a maximum amount
Registered Form of Stock
A certificate is issued in the shareholders name and recorded on the issuers books
General Partners
Manage the DPPs, General Partnerships, and Limited Partnerships
Treasury Stock Features
- Doesn’t Vote
- Doesn’t count towards EPS
- Doesn’t receive dividends
- Is recorded on balance sheet as a deduction from issued shares
Convertible Preferred Stock
Can be converted to common stock at the option of the shareholder
Cumulative Preferred Stock
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
