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

Chapter 1: Intro to the Securities Industry Flashcards

(92 cards)

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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
Stock Split must be approved by…
Board of Directors Shareholders
26
Transfer agent maintains…
the accounting of shareholders who are entitled to a split or dividend an who aren’t
27
Stock Split
of outstanding shares are increased decreasing the price of each stock but the proportionate equity ownership does not change
28
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
29
Formula for…# of rights needed to purchase new share
Outstanding Shares/New Shares
30
Market Premium when it comes to warrants
Intrinsic value of a warrant
31
Dilution of shares
Total outstanding shares increase which decreases EPS
32
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
33
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
34
Rights per share of stock owned
One right per share
35
Inverse Reaction
If interest rates go up the market price of outstanding preferred stocks and bonds will go down CAUSING yields to rise
36
Rights Offering only exists on…
Common stock
37
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
38
Dividends are paid on..and not on…
Common Stock Preferred Stock Mutual Fund Shares American Depositary Receipts (NOT WARRANTS OR BONDS)
39
Payments made on bonds are.. and why
Interest!! because a bond is not an equity security it’s a debt security
40
Interest on Bonds is paid
Semi-Annually
41
Declaration date
Date dividend is declared by board of directors
42
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
43
Payable Date
Date the dividend is actually paid Date creates a taxable event for the investor and creates tax liability in that year
44
Declaration, Record, and Payable Dates are set by (Dividends)
BOD Board of Directors
45
Ex-Dividend Date is set by..
Stock Exchange for listed stocks | FINRA for OTC stocks
46
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
47
To make it so money must be paid on order execution date the execution must be marked as a “———“ (usually the exception)
Cash Transaction
48
DERP Dates
Declaration, Ex Dividend, Record, Payable
49
Ex Date is one day before the (for regular way transactions)
Record Date
50
Current Yield Formula
Annual Dividend / Current Market Price = current yield (%)
51
Current Yield (Dividend Yield)
The measurement of the annual % rate of return you receive from investing in a stock
52
Due Bill
Statement of money owed used to adjust for incorrect dividend payments
53
REITs ARE…
REITS (not investment companies and not mutual funds and not limited partnerships)
54
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
55
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)
56
Hybrid REITS
Combination of Equity and Mortgage REITS
57
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
58
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
59
In what are depreciation write offs given to investors and losses are passed through to investors
Limited Partnership
60
Dividend Paid By REITS are taxed at..
Individuals Ordinary income tax rate
61
Qualified dividends are taxed at…
15%
62
REITS Earnings Come From
The difference between rental income and interest paid on borrowed money
63
REITS move how in relation to stocks and bonds
In the opposite direction (inversely)
64
Limited Partnership is also known as
A Direct Participation Program (and vice versa)
65
REIT Index ETF
Invests in multiple REITS increasing an investors diversification
66
Private REITS are not registered with
The SEC
67
Direct Participation Programs/ Investments in Limited Partnerships
Investments which allow the investor certain tax advantages
68
General Partner is also called…
A Sponsor Or Manager
69
Adjusted Basis is important to a limited partner because..
Limited partners can never write off more than their “adjusted basis” on taxes
70
At Risk Investment is (and formula)
Initial dollar amount originally put in But REALLY Initial Cash Investment PLUS any recourse loans
71
Recourse Loan (highly leveraged DPPs usually have these)
Loan for which investor is held personally responsible
72
Non-Recourse Loans
Do not hold investor personally responsible but the investment property is accepted as collateral
73
Conduit theory (limited partnership)
Income and expenses flow through to limited partners
74
Limited Partners in a limited partnership are issued what form for tax purposes
K-1 tax form
75
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
76
What is not considered when purchasing a DPP or Limited Partnership?
The financial condition of other limited partners
77
Types of “Alternative Investments” or “Non-Correlated Assets” aside from DPPs
1) Real Estate 2) Futures on Commodities 3) Private Equity 4) Derivatives
78
Order of Asset Distributions Upon liquidation
1. Taxes 2. Secured Debt 3. Unsecured Debt 4. Preferred Stockholder 5. Common Stockholder T D (2) S (2)
79
Main Advantages of DPPS
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
Direct Participation Program
A program which allows investors certain tax advantages for the underlying asset
81
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
82
With a DPP what decreases the investors cost basis
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
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
84
Limited Partners
Liability is limited to the amount of their “at risk” investment in the entity
85
Disadvantages of DPPs
1. Lack of Liquidity 2. Limited partners have no control of management 3. General partners have unlimited liability
86
4 reasons a company repurchases own stock
1. increase EPS 2. To finance future acquisitions 3. To provide stock for employee stock option plans 4. To fight a takeover attempt
87
Participating Preferred Stock
Preferred Stock with dividends that are fixed as to a minimum but not a maximum amount
88
Registered Form of Stock
A certificate is issued in the shareholders name and recorded on the issuers books
89
General Partners
Manage the DPPs, General Partnerships, and Limited Partnerships
90
Treasury Stock Features
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
Convertible Preferred Stock
Can be converted to common stock at the option of the shareholder
92
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

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