Chapter 2 Equity Securities Flashcards
What is the maximum loss for a corporate stockholder?
The value of the investment in the company (Limited Liability)
How much is in a round lot?
100
Which type of security must all corporations issue?
Common Stock must be issued
- Preferred stock and bonds are optional
What are some characteristics of Treasury Stock?
- 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.
What are Authorized Shares?
The maximum number of shares a corporation’s charter states that the issuer is permitted to sell
What are issued shares?
Shares that have been sold to investors.
What are Outstanding Shares?
Shares of stock that are in possession of investors.
What is Market Value?
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.
What is cumulative voting?
They have a better chance of gaining representation on the board because the maximum number of votes is multiplied by the open seats.
What is the Declaration Date?
The day BOD ANNOUNCES the company will PAY dividends to SHAREHOLDERS
What is the Ex-dividend Date?
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)
What is the Record Date?
The date on which an investor must own the stock to receive the dividend. This date is set by the board of directors.
What is the Payable date?
The date the company PAYS DIVIDENDS.
What are stock splits used for?
-To make the price more marketable & attractive
- To boost share price to maintain listing on a stock exchange.
What type of stock is interest rate sensitive?
Preferred Stock is interest rate sensitive. There is an inverse relationship between its value and interest rates
What is Straight Preferred Stock?
Its when the stock pays a dividend as stated on the certificate as a dollar amount or percent of par value
What is Cumulative Preferred Stock?
Allows the holder to make up any missed payments
What is Participating Preferred Stock?
Potentially allows to earn extra dividends above and beyond the stated dividend. Must be declared by BOD
What is Convertible Preferred Stock?
Allows the owner to EXCHANGE preferred shares for a fixed number of common shares at a specified price (conversion price)
Parity Price Equation?
Preferred Market Price/Conversion Ratio = Parity
- Multiply by 100
What is Callable Preferred Stock?
-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
Current Dividend Yield Equation
Annual cash flow / current market price
What an American Depositary Receipt (ADR)?
Purchase shares of foreign corporations in the U.S. securities markets with U.S. dollars
What is Stock Rights?
- Allows the holder the ability to purchase stock at a discounted price.
- Expires in 1 to 2 months
What is Preemptive rights?
allow existing common stockholders to maintain their proportionate ownership in the company.
-Short Term
What are Warrants?
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
What’s an Option?
This is a LEGAL financial contract between two parties
Options Contract
Gives the right to buy or sell 100 shares of a specific stock at the strike price.
What’s a Holder/Buyer/Long an Option
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.
Call Contract
The right to BUY a specific Stock/Writer must must SELL the specific stock and is said to be in short position
Put Contract
The right to SELL a specific stock/Writer must BUY a specific stock at strike price
Covered
A option writer that owns the same amount or more of the underlying security is said to be covered
What is in-the-money?
If the market price is higher than the exercise (strike) price.
- Has Intrinsic Value
What is Out-of-the-Money
When market price is lower than exercise price.
The CBOE VIX measures?
The S&P 500 Volatility
What does DIJA VXD measure?
Measures NASDAQ volatility
What does Bond Volatility measure?
it measures duration.
Horizontal Merger?
Where 2 companies offering similar products in the same industry combine to gain a larger share of the market
Vertical Merger?
2 different companies merge. Typically the two companies combined would make a more efficient business.
What is a tender offer?
Corp offers to purchase some of the shares currently held by investors at a premium.
What is an exchange offer?
Offers shareholders the option of trading in their common stock shares for another security such as a bond or preferred stock
What position do Bullish speculators tend to choose?
Bullish speculators will buy calls or sell puts
What position does Bearish speculators tend to choose?
Bearish speculators will sell calls or buy puts
XYZ Corporation pays a quarterly dividend of $0.50 and has a current market price of $50. What is the dividend yield?
4%
Dividend Yield=Annual dividend / Current Market Price
2/50=.04
What is noncumulative stock?
- 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
What is Regulation T?
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
What is the Conversion Ration formula?
par value/conversion price
What is a Hedge Strategy?
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.
What is an Income Strategy?
Short Stock with a long call
All income strategies involve a short options contract.
What’s a Long Put option?
This is to buy a put option, typically in anticipation of a decline in the underlying asset.
What is required to be forwarded to customers by member firms carrying accounts that hold equities?
Annual reports, Proxies and related materials, and Information statements sent to the member by the issuer
The market price of common stock will be influenced by which of the following?
The expectation for future earnings of the company
Define Bullish Investor
Bullish Investors anticipate that stock prices will go up.
What are Equity Securities?
- Evidence of ownership
- Limited Liability
What is Common Stock?
Authorized shares // Issued shares // Treasury shares // Outstanding Shares
What are Authorized Shares?
Max number of shares permitted by charter
What are issued shares?
Shares sold to the public
What are Treasury Shares?
Shares purchased back by the issuer
- No voting & Dividends
What are outstanding Shares?
Shares in POSSESSION of investors.
What is Market Price?
Price determined by supply and demand
What is Book Value?
Liquidation Value
What are common shareholder rights?
They are preemptive rights that can:
- vote on company related changes
What is Statutory Voting?
One Vote = per share
Mainly benefits larger stockholders
What is Cumulative Voting?
You can allocate the total number of votes.
- can benefit smaller investors
What does additional stock dividend do to the cost basis?
Additional stock will only reduce the per share price
Cost basis will remain the same.
What is the Declaration Date?
When board announces dividend
What is the Ex-Dividend Date?
One business day BEFORE the RECORD DATE
Day when stock trades without the dividend in stock price
(R-1)
What are stock splits?
It reduces stock price per share to make it more marketable
(Number of shares) x (first number) / (second number)
What are buybacks?
Corporation may buy back their stock in the secondary market
What are tender offers?
offers to purchase shares at a premium
Must notify SEC
What are exchange offers?
A type of tender offer
Exchange common shares for bonds
What are the characteristic of Preferred stock?
Fixed Income
Interest Rate Sensitive
Represents ownership
Non-voting stock
What is Straight Preferred Stock?
Just regular preferred stock
What is cumulative Preferred stock?
Back dividends owed the holder plus the current year dividend must be sent to the holder before a common share receives a dividend
What is participating Preferred Stock?
Can participate in EXTRA DIVIDENDS
EXTRA dividend is declared by BOD
What is CONVERTIBLE preferred Stock?
Convert Preferred Stock into common shares
What is Callable Preferred Stock?
Gives the ISSUER right to buy back the stock
Typically when interest rates DROP
Whats an ADR?
Helps facilitate the trading of a foreign security in the U.S. Market
What are rights?
Short Term (30 Days)
Below the current market value
Whats an option contract?
Deal between two people
1 person writes and sells for a Premium (Short)
Buyer pays the premium (LONG)
WHo is the buyer?
He pays a PREMIUM to buy the RIGHT (BUY OR SELL STOCK) to do something later
What is bullish?
You think the stock price is going to go up
What is Bearish?
Believes the price will go down
What is a call option?
Holder / Owner is long the contract (Bearish)
writer / seller is short the contract (Bullish)
What is a Put Option?
Has the right to sell 100 shares @ strike price (Bearish)
Writer / seller is short (Bullish)
