Chapter 4 - Equity Securities - 4.75% Flashcards
Should an investment advisor recommend individual equities or managed products?
It depends on several factors -
- The client’s willingness to invest in individual equity securities.
- The dollar value allocated to equities and the need for diversification.
- The investment advisor’s access to timely, accurate research on individual equities.
- The desire to control the timing of taxable transactions.
Explain common shares.
Common shares are issued by a corporation and represent ownership interest in the corporation. Corporations issue common shares to - raise capital, pay dividends without using cash by issuing stock dividends, buy other companies without using cash and meet the obligations of a convertible security.
Common shareholders have one vote per share usually.
What does it mean if a stock is trading ex-dividend?
If a stock is trading ex-dividend, it means that the buyer will not receive the declared dividend for shares traded on or after this date.
Explain preferred shares.
Preferred shares do not represent an ownership interest in the issuing company. They are characterized by their par value and dividend rate. The share holders have a claim on the company’s assets equal to the shares par value. They are also entitled to a fixed dividend payment subject to the discretion of the board of directors. Some preferred shares are cummulative, which means that dividends that are not paid out accrue and must be paid before the company pays a dividend on its common shares.
As long as dividends are paid to preferred shareholders as scheduled, these shareholders have no voting rights. But if a stated number of dividend payments are omitted, then the preferred shares receive voting privileges.
Explain Canadian Stock Markets.
There are three stock exchanges in Canada, two of which are owned by the TMX Group:
• The Toronto Stock Exchange (TSX)
• The TSX Venture Exchange, including NEX
• The Canadian National Stock Exchange (CNSX)
In Canada, securities of what are generally referred to as senior issuers are listed on the TSX. Securities listed on the TSX consist mostly of common shares, with some
preferred shares, real estate investment trusts, and a limited number of debentures.
Securities of junior issuers are listed on the TSX Venture. These companies are mainly emerging firms. If a company in this category grows successfully, it can obtain a listing on a senior exchange such as the TSX.
Companies are classified as senior or junior based on factors such as the company’s tangible assets, cash on hand, and profitability. Compared with senior issuers listed on the TSX, junior companies listed on the TSX Venture Exchange are not required to have as many tangible assets, as much cash on hand, or the same degree of profitability.
Companies that fall below the TSX Venture Exchange’s listing standards can trade on NEX. NEX is a separate board of the TSX Venture Exchange that started in August 2003. Companies that were formerly listed on the TSX or Venture are eligible to list on NEX. The NEX listing allows companies to maintain a listing within the TMX Group as they work on improving their business prospects. A NEX listing also allows investors to continue trading these companies’ shares.
On May 7, 2004, the Ontario Securities Commission recognized the CNSX (formerly CNQ) as a stock exchange. CNSX positions itself as a low-cost alternative to “traditional stock exchanges”. As of August 2013, 201 securities were listed on CNSX. Securities listed on CNSX are mainly common shares along with some government bonds and structured products.
Explain US Stock Markets.
The New York Stock Exchange is arguably the most recognized stock exchange in the world. Part of NYSE Euronext, there are roughly 3,200 mid- and large-capitalization companies on the NYSE . Canadian companies such as Barrick Gold interlist their common shares on both the NYSE and the TSX.
In addition, some non-U.S. issuers list American Depositary Shares (ADSs) on the NYSE. (The term American Depositary Receipt – ADR – is sometimes used interchangeably with ADS. Technically, an ADR is the certificate that represents ownership of the underlying
company’s shares, whereas an ADS is the security that is actually traded.) An ADS is a security issued by a U.S. depositary (usually a trust company) representing ownership interest in the securities of a foreign company. The relationship between the price of the ADS and the price of the issuer’s securities on its home exchange depends on the exchange rate and on how many of
the issuer’s underlying securities are represented by each ADS (it can be one, more than one, or
less than one).
The National Association of Securities Dealers Automated Quotation system (NASDAQ) lists approximately 2,700 companies. Stocks listed on the NASDAQ range from start-ups to large, well-established companies, such as Microsoft and Intel.
What type of equity analysis involves the examination of historical market data in the hope of finding and profiting from price patterns? A. Macroeconomic analysis. B. Technical analysis. C. Horizon analysis. D. Fundamental analysis.
B is correct.
Technical analysis is the process of analyzing historical market action to determine probable future trends. Market action encompasses three primary sources of information available to a technical analyst: price, volume and time.
Which of the following statements about preferred shares is false?
A. Preferred shares tend to be classified as debt securities because of their fixed claim on company assets and their fixed dividend rate.
B. As long as scheduled dividend payments are made, preferred shareholders have no voting rights.
C. The maximum amount preferred shareholders receive if a company goes bankrupt is the shares’ par value.
D. Preferred share prices tend to rise when interest rates go up and fall when interest rates go down.
D is correct.
Because of their fixed claim on company assets and their fixed dividend rate, preferred shares are sensitive to interest rates. Like most debt securities, their prices tend to fall when interest rates go up and rise when interest rates go down. (Option d. says the exact opposite.)
What type of dividend might be paid only when a company has unusually favourable financial circumstances? A. Regular. B. Stock C. Preferred D. Extra
D is correct.
Extra dividends are those that may be paid because of unusually favourable circumstances and may not be repeated. Extra dividends are normally paid by companies that have a lot of cash on hand and no opportunities to invest in ongoing or new business ventures.
Which statement regarding American Depository Shares (ADS) is true?
A. ADS shares always carry exchange rate risk.
B. Transaction costs for ADS shares are higher than for those underlying shares bought in the foreign market itself.
C. One ADS share always represents one share of the underlying security.
D. ADS shares are issued by a non-US issuer.
A is correct.
An ADS is a security issued by a U.S. depositary representing ownership interest in the securities of a foreign company. The relationship between the price of the ADS and the price of the issuer’s securities on its home exchange depends on the exchange rate and on how many of the issuer’s underlying securities are represented by each ADS.
Which statements are true about underpriced and over priced stocks?
I. Underpriced stocks should be bought since they will increase in price.
II. Overpriced stocks should be bought since they will increase in price.
III. Underpriced stocks should be sold since they will decrease in price.
IV. Overpriced stocks should be sold since they will decrease in price.
I and IV only.
Using the results of industry and company analysis, equity analysts try to determine the true, or intrinsic, value of a stock. When the forecast intrinsic value is compared with the market price of the stock, analysts may deem the shares to be mispriced. In this case, analysts usually assume that the stock will eventually trade at its intrinsic value, and will establish a target price for the stock over some future investment horizon.
Firm XYZ has recently announced that it will pay a dividend of $0.20 per share to holder of record as of Thursday October 20. If the ex-dividend date is Tuesday October 18, determine the client(s) who will receive the dividend.
I. Client A who bought the share on October 19.
II.Client B who sold the share on October 18.
III. Client C who bought the share on October 17.
II and III only.
Shareholders of record on the dividend record date receive dividends on the payment date. Because stock trades settle three business days after the trade date, stocks begin to trade ex-dividend on the second business day before the record date. If a stock is trading ex-dividend, it means that the buyer will not receive the declared dividend for shares traded on or after this date.
Chris is the grandson of the founder of ABC Co. and owns 1,000 common shares of ABC Co. which give him 50 votes per share. What type of voting shares does Chris own?
A. Restricted voting common shares.
B. Subordinated voting common shares.
C. Multiple voting common shares.
D. Split voting common shares.
C is correct.
Multiple voting common shares entitle shareholders to more than one vote per share. In most cases, the company’s founding family owns the majority of a company’s multiple voting shares, effectively giving the family control of the company.
You can buy shares of BC Semiconductors on both the TSX and the NASDAQ. Which of the following terms is used to describe a listing on two or more stock exchanges? A. Stock split. B. Interlisting. C. Stock swap. D. Backdoor listing.
B is correct.
Canadian companies such as Barrick Gold Corp. interlist their common shares on more than one exchange, which often leads to increased liquidity for shareholders.
Which of the following statements regarding Canadian stock markets is true?
A. Junior issuers tend to be listed on the TSX.
B. CNSX is a new over-the-counter market for emerging companies in Canada.
C. Companies that fall below the ongoing standards of the CNSX will be relegated to NEX.
D. The TSX has more stringent listing requirements than the TSX Venture Exchange.
D is correct.
When compared to senior issues listed on the TSX, junior companies listed on the TSX Venture Exchange have lower listing requirements, such as lower amounts of tangible assets, less cash on hand, and less (or no) profitability.
