Chapter 3/4/5 Flashcards
What is the progression of a company’s shares from the time of incorporation to the point at which the corporation may choose to purchase its shares in the open market.
- Shares get authorized: Once the original number of shares is set, it can be changed only by a majority vote of the stockholders and by revising the corporate charter
- Shares get issued: Shares that are sold to the public.
- Treasury stock: When a firm repurchases some of the issued shares.
- Most corporations issue fewer shares than what’s authorized in order to keep a certain amount of stock available for future use.
Outstanding shares
Shares that have been issued to the public minus treasury stock
What are the rights of common shareholders?
- Right to inspection: Stockholders have the right to inspect certain books and records of the company, including the stockholders’ list and the minutes of stockholders’ meetings.
- Right to vote: Each shareholder gets an amount of votes equal to the shares they own.
- Right to receive dividends
- Right to evidence of ownership: Shareholders have the right to receive at least 1 certificate as proof of ownership.
- Right to transfer: Stockholders have the right to freely transfer their shares by selling them, giving them away, or bequeathing them to heirs. However, there are some shares that are not freely transferable. These are called restricted stock.
- It’s important to remember that shareholders vote on whether the corporation may execute a stock split, but NOT on whether the corporation should pay cash and/or stock dividends. Dividend decisions are made by the BOD
Statutory voting vs cumulative voting.
Statutory voting: A corporate voting procedure where each shareholder gets one vote per share.
Cumulative voting: lets shareholders weight their votes toward particular candidates and improves minority shareholders’ chances of influencing voting outcomes.
Lock-up agreement
For certain investors who own restricted securities, a lock-up agreement dictates the amount of time that pre-IPO investors must wait before selling their shares after the company has gone public. The lock-up period also restricts or limits the supply of shares being sold in the market.
Control securities
Control securities are those held by an affiliate of the issuing company that were purchased in the secondary market. Control persons may include officers, directors, or other insiders (those with more than 10% ownership) and their respective family members.
Rule 144
regulates the sale of restricted securities and control (affiliated) securities.
- Under Rule 144, the maximum amount of securities that a control person of an exchange-listed company may sell over any 90-day period is the greater of 1% of the total shares outstanding or the average weekly trading volume during the four weeks preceding the filing.
True or false: for the restricted securities of a reporting company the purchaser must generally hold the securities for six months before he can dispose of them?
True
True or false: Under Rule 144, a person that intends to sell either restricted or control securities must notify the SEC by filing Form 144 at the time the sell order is placed with the broker-dealer?
True, once notification is made, the SEC provides a 90-day period during which the securities may be sold. If the securities are not sold during this period, an amended notice must be filed.
- A notification IS NOT required if the amount of the sale doesn’t exceed 5,000 shares or securities with a value that doesn’t exceed $50,000
Blue-Chip stocks
Shares of well-established, financially robust companies with a long history of stable earnings, a solid reputation and a strong market presence.
Growth stock
An issue of a company whose sales, earnings, and share of the market are expanding faster than the general economy and the industry average.
- Typically these companies pay little to no dividends.
Defensive stocks
Shares of companies that are resistent to recessions (firms w/ inelastic demands).
Defensive stock IS NOT the same as a defense stock.
Income stock
Shares of companies that pay higher-than-average dividends in relation to their market price.
Cyclical stocks
Stocks that are associated with companies whose earnings fluctuate with the business cycle.
American Depositary Receipts (ADRs)
ADRs facilitate the trading of foreign stocks in the United States. An ADR represents a claim to foreign securities while the actual underlying shares are held by U.S. banks located overseas. ADRs exist becuase many foreign companies do not want to list their shares directly on U.S. stock exchanges.
Brokers buy foreign shares on the respective foreign exchanges. These shares are then delivered to a custodian. A depository bank then issues a receipt to the broker. These receipts are traded on U.S. stock exchanges or OTC markets. ADRs can pay dividends.
Sponsored vs unsponsered ADRs
Sponsored: the foreign company whose stock underlies the ADR pays a depositary bank to issue ADR shares in the U.S. This is a way for foreign companies to access U.S. capital markets.
Unsponsored: the foreign company doesn’t pay for the cost associated with trading in the U.S.; instead, a depositary bank issues the ADR. These are often not liquid.
Cumulative PS
A type of PS to where if the firm misses a dividend payment, all payments missed ust be paid before common shareholders receive dividends.
Participating PS
PS holders that can receive a special dividend if a firm does especially well and the common dividend exceeds a certain amount.
Callable PS
PS that can be repurchased by the firm at a set price at a certain point in the future. The call price is usually higher than the firms par value.
Convertible PS
PS that can be converted to common stock after a certain date. The trade off is that the preferred dividends will be lower in this case than for normal PS.
Conversion ratio
The # of common shares that a convertible PS holder receives if the PS is converted.
Calculation: par value of PS ÷ conversion price
- PS can also be callable.
Difference between options and warrants
Options are listed on an exchange and traded from investor to investor.
Warants are issued by the company itself.
Preemptive rights
When a firm issues additional shares, preemptive rights give existing shareholders the option to purchase new shares before they are offered to the public. If existing shareholders participate in the new offering, they’re shares won’t be diluted but if they don’t they will. Each investor has the preemptive right to buy one new share for every existing share they own.
- An investor can trade there preemptive rights.
Warrant
A derivative that give the right, but not the obligation, to buy or sell a security at a certain price before expiration. The price at which the underlying security can be bought or sold is referred to as the exercise price or strike price. A warrent’s subscription price is usually set at a higher price than the current market price.
FINRA Rule 2261
If requested, a member firm is required to make available for inspection by a regular customer the information related to the firm’s financial condition as disclosed in its most recent balance sheet. The balance sheet may be delivered to a customer in either physical or electronic form.
FINRA Rule 2262
A brokerage firm that has a control relationship with the issuer of any security is required to disclose this fact to its customers.
Two situations in which a control relationship exists are if the member firm is a publicly traded company or if it’s a subsidiary of a publicly traded company.
SEC Rule 10b-18
To minimize the possibility of manipulation, the SEC has created this rule, which controls how an issuer or any affiliates may purchase its own stock in the secondary market. This rule is designed to mitigate a firm buying its own stock to boost its price.
- Some of the legitimate reasons for issuers to purchase their own stock in the open market include for stock buyback plans or for funding employee stock purchase plans
- The SEC will assume no manipulation if:
1. * Only one broker-dealer is used to place bids and make purchases during any trading session.
2. Issuers do not purchase their own stock within the first or last 30 minutes of the trading day. If the stock is actively traded, the rule changes to 10 minutes.
3. The price may not be higher than the highest independent bid or the last independent transaction price, whichever is higher.
4. The amount of stock purchased on any single day is limited.
Preemptive rights example:
A company with 1,000,000 shares outstanding is planning to issue an additional 100,000 shares. If a rights offering is being conducted and an investor owns 20,000 shares, how many additional shares will her current ownership allow her to purchase?
(100,000 ÷ 1,000,000) = 10%
20,000 * .1 = 2,000
Cumulative voting example:
A company has six candidates who are running for four available positions on its board of directors. If the company is using cumulative voting, what’s the maximum number of votes that a shareholder can cast for one candidate if she owns 500 shares?
500 shares * 4 candidates = 2,000 total votes
Leverage financing
Raising capital through debt
Leveraged issuer
When a firm has more debt than equity
How to determine the amount of interest an investor will receive on a bond annually?
Multiply the par value * the coupon rate.
BONDS USUALLY PAY INTEREST SEMI-ANNUALLY. One of the payments will be on the day of maturity (just in a prior year) and one will be six months from then.
Traditionally, bonds pay interest on the 1st or 15th of the month to ease paperwork issues. However, newly issued bonds pay interest from the dated date (the date from which interest begins to accrue), which may not fall on the 1st or 15th. For this reason, the very first coupon on a newly issued bond may be for more or less than the traditional six-month period as the issuer tries to get synchronized with the 1st or 15th payment date. If the first coupon is for more than six months, it’s referred to as a long coupon; if the first coupon is for less than six months, it’s referred to as a** short coupon**.
Accrued interest
Since bond interest is paid semiannually, a bondholder who sells a bond between interest payments is usually entitled to the interest earned during the period when he still owned the bond.
Zero coupon bond
Bonds that receive no periodic interest and are sold at a discount. When the bond matures a large lump sum is made.
Usually, the longer the zero-coupon bond’s maturity, the deeper its discount will be from par value.
True or false: Bond issuers often issue a lot of bonds at the same time to different customers?
True
Term vs serial bond issuance
Term issuance: If all of the bonds in an offering are due to mature on the same date
Serial issuance: parts of an offering will mature sequentially over several years, it’s referred to as a serial bond issue.
True or false: with serial bond issues, an investor has to purchase bonds that all mature at different times?
False, with serial issues, an individual investor could purchase a quantity of bonds that mature at the same time or, if she wants, she could purchase bonds with different maturities.
True or false: Most of the time, bonds are sold initially at par?
True, but although most bonds are initially sold at par value, as time goes by, these bonds may trade in the market at prices that are less than or more than par. A bond that’s sold for less than its par value is selling at a discount, while a bond that’s sold for more than its par value is selling at a premium.
- A bond’s price is usually stated as a % of par.
Credit risk
Measures the likelihood that a bond issuer may default. Moody’s, S&P, and Fitch measure credit risk by providing bond ratings.
- Issuers that are considered high credit risks must pay a higher rate of interest in order to induce investors to purchase their bonds.
- Generally, if a company is perceived as becoming more risky, the prices of its bonds will fall; however, if a company is viewed as improving, its bond prices tend to rise.
True or false: Traditionally, corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and bonds trade in increments of 1/32 of a point?
True
This just means that bonds aren’t a whole # % of par most of the time.
How do movements in interest rates affect bond prices?
if interest rates rise, the price of existing bonds will fall since the demand for existing bonds that offer lower interest rates will decline. If interest rates fall, the price of existing bonds will rise since they’re worth more than a new bond issued with a lower coupon.
What are the 3 measurments for determining a bond’s yield?
- Nominal yield= coupon rate
- Current yield= annual interest ÷ current market price
- YTM= effective return
