Chapter 5: Equity Securities Flashcards
Equity Security
Represent an ownership interest in a trust or company
Common Stock
-Shares that represent ownership in the company
-Have a claim to any residual cash
-Limited liability
Preferred Stock
-Higher claim on earnings and assets to a company
-Limited or no voting rights
-Received dividends before common shareholders
-Dividends are often fixed
Corporation
Business organization that operates as a legal entity separate from its owners and which the law treats as an individual
Debt Financing
Raising funds through borrowing
Advantage of Debt Financing
Shareholders’ control is not affected and retain full control of the company
Disadvantage of Debt Financing
Company has to pay fixed charges even if it is not doing well financially
Equity Financing
Getting funds by selling ownership in the company in the form of shares
Stock Issue
Raising funds by offering securities
Share Buyback
Company repurchases own shares
Rights of Common Shareholders
-Right to Inspect Corporate Documents
-Evidence of Ownership
-Transfer of Ownership
-Participation in Corporate Earning
Right to Inspect Corporate Documents
Can investigate admin and financial records but have to ask for governing documents or financial statements
Evidence of Ownership
Stock certificates show ownership; includes purchase date, number of shares owned, ID, and signatures
Transfer of Ownership
Stockholders can sell their shares without any restriction from the company unless subject to restrictions
Participation of Corporate Earning
Share in gains if company produces a profit
Statutory Voting
Allows investors to vote based on how many shares they have
Cumulative Voting
Number of shares is multiplied by number of director seats available
Restricted Securities
Acquired privately in an unregistered manner from the issuing company or affiliate
Lock-Up Agreement
Ensures that company insiders do not sell their shares for a set period of time
How long do lock-up agreements typically last?
90-180 days
Investment Letter
Establishes that the securities are being bought for a minimum duration of time and are not for resale
Restricted Stock
Shares issued to the employees as part of their pay but cannot be transferred until certain terms and conditions are met
What are the two types of restricted stock?
Units and Awards
Restricted Stock Units
Grants a given number of shares to an employee in the future
Restricted Stock Awards
Grant of company’s stock in which recipient’s rights in stock are restricted until shares are vested or lapse in restrictions
Controlled Stock
Shares owned by major shareholders of a publicly held company
Who typically owns controlled stocks?
Affiliates
Rule 144: Restricted Stock
Holding period of 6 months; Afterwards, no sale restrictions
Rule 144: Controlled Stock
Holding period of 6 months; Afterwards, sale limitations still apply
American Depository Receipt (ADR)
Certificate that represents a specific number of shares of a foreign company’s stock
Sponsored ADR
Legal association is established between ADR and foreign company, where foreign company assumes expenses related to issuing the security
Unsponsored ADR
Issued by a depository bank without the involvement or participation of a foreign company
Blue Chip Stock
Shares of large companies with well-known brands and successful track records
Growth Stock
Shares of companies that are expected to grow at a significant rate, typically above average
Income Stock
Regular and steady income, mostly dividends over a period of time, with low risk exposure
Defensive Stock
Reliable, stable earnings and consistent returns, even in economic crisis
Cyclical Stock
Price is affected by the economy
Noncumulative Preferred Stock
Dividend does not accumulate, paid at a set rate
Cumulative Preferred Stock
Accumulate dividends each year until paid
Callable Preferred Stock
Issuer has the right to redeem stock at a preset price after a set period of time
Participating Preferred Stock
Preferred shareholders must share additional dividends with common shareholders
Convertible Preferred Stock
Gives the option to convert to a specified number of common stock shares
Preemptive Rights
Allow existing shareholders to purchase additional shares before the company offers them to other investors during a new round of financing
Shareholders’ Right to Maintain Percentage Ownership
Allows stockholders to maintain their percentage of ownership of the shares
Percentage Ownership
Number of shares divided by outstanding shares
Discount
Amount that share price is lower than the net asset value
Short-Term
Involves stocks that are traded on a frequent basis
How long is the holding period for short-term trading stocks?
< 1 year
Tradable
Shares that are fully paid and duly issued
Warrant
Derivative issued by a company that gives buyers the right to purchase a company’s stock at a certain price before an expiration date
Put Warrant
Allows holders to sell the underlying security at a fixed price
Call Warrant
Allows investors to purchase the intrinsic asset or share of common stock at a fixed price
FINRA 2261
Directs the disclosure of financial information to customers
Under FINRA 2261, what are members required to do?
Make important information available to customers and other members in the members’ most recent balance sheet
SEC Rule 10b-18
Reduces liability for companies when they repurchase common stock
