Chapter 1 Study Questions

Question 1

A firm must apply to become one of these

Answer 1

Member

Question 2

Compensated by a commission in securities transactions.

Answer 2

Broker

Question 3

Compensated by a markup/markdown in securities transactions.

Answer 3

Dealer

Question 4

Someone controlling or controlled by a member firm.

Answer 4

Associated Person (AP)

Question 5

ABC company has authorized 1 million shares of common stock. It issued 800,000 shares 1 yr ago. It then purchased 200,000 shares for its treasury. How many shares of ABC stock are outstanding?

Answer 5

issued stock - treasury stock = outstanding stock

800,000 - 200,000 = 600,000

ABC Company has 600,000 shares of common stock outstanding.

Question 6

Number of shares that a corporation is permitted to issue

Answer 6

Authorized Stock

Question 7

Dollar amount assigned to a security by its issuer

Answer 7

Par Value

Question 8

Hypothetical net worth of each share of common stock

Answer 8

Book Value

Question 9

Equity securities in the hands of the public

Answer 9

Outstanding Stock

Question 10

What represents ownership (equity) in a company?

Answer 10

Common Stock and Preferred Stock

Question 11

Stockholders’ preemptive rights include the right to

Answer 11

maintain proportionate ownership interest in the corporation.

Question 12

At the annual meeting of ABC Corporation, 5 directors are to be elected. Under a cumulative voting system, an investor with 100 shares of ABC would have a total of?

Answer 12

500 votes to be cast in any way the investor chooses for 5 directors. Cumulative voting benefits the small investor.

Question 13

What is the basic formula for a balance sheet?

Answer 13

Assets = Liabilities + Net worth

Question 14

Name two disadvantages of investment in common stock compared with fixed income securities (like bonds)?

Answer 14

No assurance of return, and lower priority of income payment.

Question 15

Which type of stock has the highest stated rate of dividend (all other factors being equal)?

• Participating
• Straight
• Cumulative
• Callable

Answer 15

“Callable”, because when the stock is called, dividend payments are no longer made. To compensate for that possibility, the issuer must pay a higher dividend.

Question 16

Which of the following types of preferred stock is most influenced by the price of an issuer’s common stock?

• Participating
• Straight
• Convertible
• Callable

Answer 16

Convertible.

Question 17

Name 2 types of preferred stock might pay a dividend higher than that printed on the certificate?

Answer 17

Cumulative preferred and Participating preferred.

Question 18

In what way does preferred stock differ from common stock as an investment?

Answer 18

Greater sensitivity to interest rate fluctuation.

Question 19

What is the priority of dividend payments made by a corporation of the following?

• Common dividend
• Dividends in arrears paid to cumulative shares.
• Stated dividends paid to all preferred shares.

Answer 19

1. Dividends in arrears paid to cumulative shares.
2. Stated dividends paid to all preferred shares.
3. Common dividend.

Question 20

Calculate dividend yield (current yield) for the following:

“RST stock has a market value of $50. Total dividends paid during the yr were $5.

Answer 20

$5 / $50 = 10

10% = Dividend Yield

Question 21

ADR’s (American Depository Receipts) are used to facilitate…

Answer 21

the domestic trading of foreign securities.

Question 22

The owner of an ADR (American Depository Receipt) is likely to receive…

Answer 22

Both dividends and capital gains or losses.

Question 23

Describe a “call”?

Answer 23

The buyer has the right to buy, the seller of the call has the obligation to sell.

Question 24

Describe a “put”?

Answer 24

The buyer has the right to sell, the seller of the put has the obligation to buy.

Question 25

What is “bullish”?

Answer 25

When an investor buys shares “long” the stock (act of buying), and expects the stock to increase in price. Buy low, sell high.

Question 26

What is “bearish”?

Answer 26

When an investor sells shares he has borrowed, with the intent of buying them back at a lower price in the future for return to the owner. This is also known as a “short” sale. Sell high, buy low.