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SIE > Chapter 2 Equity Securities > Flashcards

Chapter 2 Equity Securities Flashcards

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SIE Exam flashcards
1
Q

What is the maximum loss for a corporate stockholder?

A

The value of the investment in the company (Limited Liability)

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2
Q

How much is in a round lot?

A

100

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3
Q

Which type of security must all corporations issue?

A

Common Stock must be issued
- Preferred stock and bonds are optional

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4
Q

What are some characteristics of Treasury Stock?

A
  • It has been issued but has been repurchased by the issuing company, so its not longer outstanding.
  • It does not have voting rights and does not receive dividends.
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5
Q

What are Authorized Shares?

A

The maximum number of shares a corporation’s charter states that the issuer is permitted to sell

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6
Q

What are issued shares?

A

Shares that have been sold to investors.

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7
Q

What are Outstanding Shares?

A

Shares of stock that are in possession of investors.

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8
Q

What is Market Value?

A

Market Value is the most direct measure of a stock’s worth since it represents the liquidation or purchase price of the stock and is determined by supply and demand.

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9
Q

What is cumulative voting?

A

They have a better chance of gaining representation on the board because the maximum number of votes is multiplied by the open seats.

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10
Q

What is the Declaration Date?

A

The day BOD ANNOUNCES the company will PAY dividends to SHAREHOLDERS

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11
Q

What is the Ex-dividend Date?

A

The security BEGINS to trade without the value of the dividend in the stock price. The ex-dividend date is 1 business day before the record date (R-1)

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12
Q

What is the Record Date?

A

The date on which an investor must own the stock to receive the dividend. This date is set by the board of directors.

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13
Q

What is the Payable date?

A

The date the company PAYS DIVIDENDS.

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14
Q

What are stock splits used for?

A

-To make the price more marketable & attractive
- To boost share price to maintain listing on a stock exchange.

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15
Q

What type of stock is interest rate sensitive?

A

Preferred Stock is interest rate sensitive. There is an inverse relationship between its value and interest rates

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16
Q

What is Straight Preferred Stock?

A

Its when the stock pays a dividend as stated on the certificate as a dollar amount or percent of par value

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17
Q

What is Cumulative Preferred Stock?

A

Allows the holder to make up any missed payments

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18
Q

What is Participating Preferred Stock?

A

Potentially allows to earn extra dividends above and beyond the stated dividend. Must be declared by BOD

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19
Q

What is Convertible Preferred Stock?

A

Allows the owner to EXCHANGE preferred shares for a fixed number of common shares at a specified price (conversion price)

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20
Q

Parity Price Equation?

A

Preferred Market Price/Conversion Ratio = Parity
- Multiply by 100

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21
Q

What is Callable Preferred Stock?

A

-Issues have the right to BUY BACK the shares at a specified price, after a certain time, and cancel stock. This would force the investor to sell the stock back at the SPECIFIED price.
-Usually when interest rates are low

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22
Q

Current Dividend Yield Equation

A

Annual cash flow / current market price

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23
Q

What an American Depositary Receipt (ADR)?

A

Purchase shares of foreign corporations in the U.S. securities markets with U.S. dollars

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24
Q

What is Stock Rights?

A
  • Allows the holder the ability to purchase stock at a discounted price.
  • Expires in 1 to 2 months
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25
Q

What is Preemptive rights?

A

allow existing common stockholders to maintain their proportionate ownership in the company.
-Short Term

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26
Q

What are Warrants?

A

Ability to BUY a specified number of shares at a predetermined price and on a specified FUTURE DATE.
- Price above the current market value
- Long term

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27
Q

What’s an Option?

A

This is a LEGAL financial contract between two parties

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28
Q

Options Contract

A

Gives the right to buy or sell 100 shares of a specific stock at the strike price.

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29
Q

What’s a Holder/Buyer/Long an Option

A

Has the right to buy or sell shares of a specific stock and is said to be in a long position because they own the option.

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30
Q

Call Contract

A

The right to BUY a specific Stock/Writer must must SELL the specific stock and is said to be in short position

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31
Q

Put Contract

A

The right to SELL a specific stock/Writer must BUY a specific stock at strike price

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32
Q

Covered

A

A option writer that owns the same amount or more of the underlying security is said to be covered

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33
Q

What is in-the-money?

A

If the market price is higher than the exercise (strike) price.
- Has Intrinsic Value

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34
Q

What is Out-of-the-Money

A

When market price is lower than exercise price.

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35
Q

The CBOE VIX measures?

A

The S&P 500 Volatility

36
Q

What does DIJA VXD measure?

A

Measures NASDAQ volatility

37
Q

What does Bond Volatility measure?

A

it measures duration.

38
Q

Horizontal Merger?

A

Where 2 companies offering similar products in the same industry combine to gain a larger share of the market

39
Q

Vertical Merger?

A

2 different companies merge. Typically the two companies combined would make a more efficient business.

40
Q

What is a tender offer?

A

Corp offers to purchase some of the shares currently held by investors at a premium.

41
Q

What is an exchange offer?

A

Offers shareholders the option of trading in their common stock shares for another security such as a bond or preferred stock

42
Q

What position do Bullish speculators tend to choose?

A

Bullish speculators will buy calls or sell puts

43
Q

What position does Bearish speculators tend to choose?

A

Bearish speculators will sell calls or buy puts

44
Q

XYZ Corporation pays a quarterly dividend of $0.50 and has a current market price of $50. What is the dividend yield?

A

4%
Dividend Yield=Annual dividend / Current Market Price
2/50=.04

45
Q

What is noncumulative stock?

A
  • Pays a dividend as stated on the certificate as a dollar amount or percent of par value ($100).
  • Does not need to make up any missed payments
46
Q

What is Regulation T?

A

Regulates the extension of credit from the broker-dealer to customers for margin accounts. Margin accounts allow approved customers to borrow cash and/or securities from the broker-dealer

47
Q

What is the Conversion Ration formula?

A

par value/conversion price

48
Q

What is a Hedge Strategy?

A

An investor would buy (long) an option contract with a short stock position. If the stock price declines investor will purchase at the reduced market price.

49
Q

What is an Income Strategy?

A

Short Stock with a long call
All income strategies involve a short options contract.

50
Q

What’s a Long Put option?

A

This is to buy a put option, typically in anticipation of a decline in the underlying asset.

51
Q

What is required to be forwarded to customers by member firms carrying accounts that hold equities?

A

Annual reports, Proxies and related materials, and Information statements sent to the member by the issuer

52
Q

The market price of common stock will be influenced by which of the following?

A

The expectation for future earnings of the company

53
Q

Define Bullish Investor

A

Bullish Investors anticipate that stock prices will go up.

54
Q

What are Equity Securities?

A
  • Evidence of ownership
  • Limited Liability
55
Q

What is Common Stock?

A

Authorized shares // Issued shares // Treasury shares // Outstanding Shares

56
Q

What are Authorized Shares?

A

Max number of shares permitted by charter

57
Q

What are issued shares?

A

Shares sold to the public

58
Q

What are Treasury Shares?

A

Shares purchased back by the issuer
- No voting & Dividends

59
Q

What are outstanding Shares?

A

Shares in POSSESSION of investors.

60
Q

What is Market Price?

A

Price determined by supply and demand

61
Q

What is Book Value?

A

Liquidation Value

62
Q

What are common shareholder rights?

A

They are preemptive rights that can:
- vote on company related changes

63
Q

What is Statutory Voting?

A

One Vote = per share
Mainly benefits larger stockholders

64
Q

What is Cumulative Voting?

A

You can allocate the total number of votes.
- can benefit smaller investors

65
Q

What does additional stock dividend do to the cost basis?

A

Additional stock will only reduce the per share price
Cost basis will remain the same.

66
Q

What is the Declaration Date?

A

When board announces dividend

67
Q

What is the Ex-Dividend Date?

A

One business day BEFORE the RECORD DATE
Day when stock trades without the dividend in stock price
(R-1)

68
Q

What are stock splits?

A

It reduces stock price per share to make it more marketable

(Number of shares) x (first number) / (second number)

69
Q

What are buybacks?

A

Corporation may buy back their stock in the secondary market

70
Q

What are tender offers?

A

offers to purchase shares at a premium

Must notify SEC

71
Q

What are exchange offers?

A

A type of tender offer
Exchange common shares for bonds

72
Q

What are the characteristic of Preferred stock?

A

Fixed Income
Interest Rate Sensitive
Represents ownership
Non-voting stock

73
Q

What is Straight Preferred Stock?

A

Just regular preferred stock

74
Q

What is cumulative Preferred stock?

A

Back dividends owed the holder plus the current year dividend must be sent to the holder before a common share receives a dividend

75
Q

What is participating Preferred Stock?

A

Can participate in EXTRA DIVIDENDS
EXTRA dividend is declared by BOD

76
Q

What is CONVERTIBLE preferred Stock?

A

Convert Preferred Stock into common shares

77
Q

What is Callable Preferred Stock?

A

Gives the ISSUER right to buy back the stock
Typically when interest rates DROP

78
Q

Whats an ADR?

A

Helps facilitate the trading of a foreign security in the U.S. Market

79
Q

What are rights?

A

Short Term (30 Days)
Below the current market value

80
Q

Whats an option contract?

A

Deal between two people
1 person writes and sells for a Premium (Short)
Buyer pays the premium (LONG)

81
Q

WHo is the buyer?

A

He pays a PREMIUM to buy the RIGHT (BUY OR SELL STOCK) to do something later

82
Q

What is bullish?

A

You think the stock price is going to go up

83
Q

What is Bearish?

A

Believes the price will go down

84
Q

What is a call option?

A

Holder / Owner is long the contract (Bearish)
writer / seller is short the contract (Bullish)

85
Q

What is a Put Option?

A

Has the right to sell 100 shares @ strike price (Bearish)

Writer / seller is short (Bullish)

SIE (12 decks)

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