Chapter 11 Part 3

Question 1

This type of stock appeals to investors who want

Answer 1

higher, more secure income than common stocks typically provide but also want the potential for capital appreciation, usually offered by common stocks. The trade-off is that convertible issues often have a lower dividend rate than other types of preferred, since the shareholder has the option to convert.

Question 2

Warrants are another type of equity security that corporations may issue. Companies typically issue warrants in connection with

Answer 2

an offering of preferred stock or a bond as part of a unit, in order to give investors an added incentive to purchase these issues

Question 3

A warrant gives the holder the right to

Answer 3

purchase shares of the company’s common stock at a specified price (exercise price), usually higher than the current market price, in the future. However, unlike stock rights, warrants do not expire for a number of years after issuance. Three to five years is the most common period with some warrants issued with perpetual lifespans—-with no expiration

Question 4

Usually, warrants can he detached from the securities with which they were originally issued and

Answer 4

sold separately. If the stock later increases in price, the investor will be in a position to realize a profit

Question 5

An American Depositary Receipt is a

Answer 5

receipt for shares of the stock of a foreign company that have been deposited in a U.S. bank overseas. The purpose of ADRs is to facilitate trading in foreign securities in the United States. Investors can purchase and sell this type of security on U.S. exchanges or in the over-the-counter markets in the same way that they can purchase other securities. Thus, ADRs enable U.S. investors to diversify their portfolios

Question 6

An investor will purchase an ADR with

Answer 6

U.S. dollars

Question 7

Dividends are declared in the currency of the

Answer 7

issuing company, but payable in U.S. dollars-there is no need for the investor to go through the process of exchanging the dividend. However, based on conversion from the foreign currency to the U.S. dollar, the investor is exposed to exchange- rate risk

Question 8

market capitalization

Answer 8

value of all the company’s outstanding common shares

Question 9

Large-capitalization (large-cap) stocks

Answer 9

More than $5 billion

Question 10

Middle-capitalization (mid-cap) stocks

Answer 10

Between $1 billion and $5 billion

Question 11

Small-capitalization (small-cap) stocks

Answer 11

Less than $1 billion

Question 12

Large-cap companies, often referred lo as

Answer 12

blue-chip stock, have a market capitalization of more than $5 billion. These companies are usually well-established and have a long, steady history of profits and paying dividends, and a reputation for good management. Examples include IBM, Coke, and Disney. Their stock is traded on the New York Stock Exchange and other national exchanges

Question 13

Mid-cap companies have a market capitalization from $1 billion up to $5 billion. Mid-cap companies are usually viewed as

Answer 13

less risky than other kinds of stocks. Similar to large-caps, mid-cap companies are more established, as compared to small-cap and micro-cap companies

Question 14

Small-cap companies are generally companies with equities of

Answer 14

newer, less established companies than mid-cap or large-cap stocks. Small-caps are more volatile than large- or mid-cap stocks but also often include companies that arc growing faster and have more potential for capital appreciation

Question 15

micro-cap companies

Answer 15

One additional category includes companies with the smallest capitalizations of all publicly traded companies. These small issues are known as micro-cap companies and have a market capitalization of $50 million and less. They usually also have a low price per share and are extremely volatile and risky

Question 16

income stocks are stocks of companies that

Answer 16

pay greater-than-average dividends to their shareholders. These stocks attract investors who are seeking current income, particularly retired investors. Most public utility companies have traditionally been considered income stocks, although this is changing somewhat as the utility industry is deregulated. Preferred stock would also be a consideration if the client’s objective were steady income

Question 17

Growth Stocks

Answer 17

Companies in the growth categmy are companies whose sales and earnings are growing faster than the economy at large. These companies often reinvest most of their earnings in order to keep expanding and pay little or no dividends to their shareholders. Growth stocks are riskier than other stocks but also offer greater potential for capital appreciation

Question 18

Emerging growth stocks represent companies that are in the

Answer 18

“early stages of development. They are generally small- or micro-cap companies with new products or services. Theoretically, companies at this stage of their corporate life cycle
have the most potential for fast and dramatic growth, but they also tend to be very volatile, with pronounced price fluctuations, both up and down”

Question 19

Penny stocks are

Answer 19

low-priced, speculative stocks that sell for $5 or less per share and do not trade on a traditional exchange or Nasdaq. Because these stocks arc so volatile, brokers that sell them must comply with a special set of rules and regulations