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Canadian Securities Course VO1 > Chapter 8: Equity securities > Flashcards

Chapter 8: Equity securities Flashcards

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SIE Exam flashcards
1
Q

Why common share capital is called venture capital or risk capital?

A

Because if the business fails, the common shareholders may lose their entire investment.

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2
Q

What are the characteristics of common shares?

A
  1. Weak Position on asset claims in case of bankruptcy
  2. Dividends
  3. Evidence of ownership (shares are often registered in street certificate form which means in the name of securities firm rather than the owner -> more readily transferable to a new owner)
  4. Clearing and settlement (by computer by CDS)
  5. Trading units (traded in uniform lot sizes on stock exchange)
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3
Q

What is the standard trading unit?

A

Is a unit whose size has uniformly been decided upon by the exchanges (usually stocks is 100 shares)

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4
Q

What is odd lot?

A

trading in size that is less than a standard trading.

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5
Q

What is the benefits of share?

A
  1. capital gain
  2. right of dividends.
  3. voting right including elect director, approve financial statements and auditor’s report.
  4. favourable tax treatment in Canada of dividend and capital gain
  5. right to receive copy of annual and quarterly report.
  6. right to examine documents
  7. right to question management at the meeting
  8. limited liability
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6
Q

What is the risk of common shares?

A
  1. dividend is not obligatory
  2. little influence over daily operation
  3. can be volatile
  4. last position in claiming assets in case of bankruptcy
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7
Q

What is capital appreciation?

A

an increase in value of company’s assets, including the value of its common shares

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8
Q

What is the relationship between the value of common shares and retained earning?

A

when retained earning increase, the value of common share may increase .

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9
Q

What may lead to the increase of the common share’s value?

A
  1. retained earning increase

2. increase profit and dividend payments}

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10
Q

What is regular dividend?

A

A specific amount that companies put aside to pay common share dividends each year

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11
Q

What is extra dividend?

A

Extra dividend that some companies may pay at the end of fiscal year (might not repeated next year)

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12
Q

How dividends transfered to investors?

A
  1. If the shares are registered in the name of owner, dividend payment cheques are mailed directly to the owners.
  2. For shared registered in street certificate form, dividend are made to securities firm and then they credit it to investors’ account
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13
Q

What is the dividend record date?

A

The date that all shareholders recorded are entitled to the declared dividend (usually 2 to 4 weeks before the payment date)

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14
Q

What is ex-dividend shares?

A

The share that is traded without dividend.

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15
Q

What is cum dividend?

A

shares are sold with dividend

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16
Q

When is the ex-dividend date?

A

one business day before dividend record date.

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17
Q

What is the last day of stock trades cum dividend?

A

is the second business day before the dividend record date (the day before the first ex-dividend date)

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18
Q

If the date settled is June 11, traded date is June 9, is it cum or ex dividend?

A

Cum

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19
Q

If the date settled is June 16, traded date is June 2, is it cum or ex dividend?

A

ex

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20
Q

What is dividend reinvestment plan?

A

Companies give option to shareholders to purchase of additional shares of the company. reinvested dividend are taxable like ordinary cash dividends.

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21
Q

How dividend reinvestment plan is conducted?

A

made on open market under direction of a trustee. Participating shareholders are periodically receive statement showing the number of shares bought under this plan and the price. The company uses authorized dividends to purchase additional shares in bulk to pays lower commission -> investors pay less commission -> more money to reinvest.

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22
Q

What is dollar cost averaging?

A

The shareholders that participate in dividend reinvestment plan can acquire a regular and gradually increasing share position in the company at a reduced average cost per unit. (because the company purchase additional shares in bulk).

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23
Q

Which company often pay stock dividends?

A

by rapidly growing companies

  • stock dividends are recorded on retained earnings in the same fashion as cash dividends in the company’s statement.
  • treated like cash dividends for tax purposes.
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24
Q

What is restricted shares?

A

give the shareholder the right to participate to an unlimited degree in the earnings of a company and in its assets on liquidation, but they do not carry full voting rights

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25
Q

How many categories of restricted shares are there?

A
  1. Non-voting shares carry no right to vote, except in certain limited circumstances.
  2. subordinate voting shares carry a right to vote, if another class of shares is outstanding and those shares carry a greater voting right on a per share basis.
  3. restricted voting shares carry a right to vote, subject to a limit or restriction on the number or percentage of shares that may be voted by a person, company or a group
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26
Q

What is the rules 56-501 of Ontario Securities commission about?

A

IA should be able to identify restricted shares and understand their implication. IA should also compare the differences to clients.

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27
Q

What are the regulation of stock exchange about restricted shares?

A
  1. must be identified by the appropriate restricted share term
  2. Disclosure documents (must describe the restriction)
  3. must be identified in the financial press with a code
  4. Dealer and advisor must properly describe restricted shares
  5. Trade confirmations must identify restricted shares
  6. Holder must be given notice of shareholders’ meeting, must be invited and allowed to speak.
  7. Minority approval is required for any corporate action that would result in the creation of new restricted shares.
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28
Q

What is important idea about stock split?

A

the investment value of your holdings would remain unchanged

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29
Q

What is consolidation?

A

reverse stock split

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30
Q

When a company do consolidation?

A

when their shares have fallen in value to level that they are in danger of being delisted by the stock exchange and hoping for better position to raise capital.

31
Q

Characteristic of preferred shares?

A
  1. fixed dividend payments
  2. are considered fixed-income security
  3. rank behind creditors in claiming assets
  4. rank before common shares in case of bankruptcy
32
Q

What is pari passu?

A

when the rank of various outstanding preferred share issues is equal to asset and dividend entitlement.

33
Q

What is the characteristic of dividend of preferred shared?

A
  1. entitled to a fixed dividend
  2. dividend are not obligatory, only payable if the board of directors declared. (some companies provide that no dividends are paid to common shareholders until the preferred shareholders have received full payment)
  3. Directors have right to defer the declaration of preferred dividends indefinitely. (this will lose investor’s confidence)
  4. when interest rate decline, preferreds would increase in price but corporate earnings would have no effect.
  5. Dividend rate is prime important.
34
Q

Why company issue preferred shares?

A
  1. No maturity date, no assets are seized if dividend payment is omitted.
  2. Companies has problem issuing bond such as assets are already mortgaged, too much debt, …
  3. Market condition is not good for selling common shares.
35
Q

Why investors buy preferred shares?

A
  1. mostly by income-oriented investors.
  2. individual investors want to take advantage of dividend tax credit
  3. institutional attracted to the preferential tax treatment of preferreds
36
Q

What are the features of preferred shares?

A
  1. Cumulative feature (unpaid dividends accumulate in arrears, all arrears must be paid before common dividend got paid or preferreds are redeemed). (not all preferred shares have this feature)
  2. Non-cumulative preferreds.
  3. Callable feature (price must not exceed par value + small premium)
  4. Non-callable preferreds (rarely used).
  5. Voting privileges (virtually all preferreds are non-voting, however, after a stated number of preferred dividends have been omitted, it is common practice to assign voting privileges to the preferreds.
  6. Purchase fund (is advantageous to preferred shareholders, when shares’ price go down, the fund will make effort to buy specified amounts of securities for redemption. preferreds with a purchase fund have potential built-in market support)
  7. sinking fund (attempt to retire shares in the open market when the shares trade at or below a stipulated price)
37
Q

What is straight preferreds?

A

With no additional features.

38
Q

What is the characteristics of straight preferreds?

A
  1. greater safety than common shares and less than debt
  2. For individuals, tax advantage through dividend tax credit
  3. for corporations, tax advantage through preferred dividends received from taxable candian companies on tax-exempt basis.
  4. No voting privileges
  5. No maturity
  6. less marketable than common shares
  7. limited potential for price appreciation
39
Q

What is Convertible preferred shares?

A

holder can convert to some other class of shares (usually common) at a predetermined price and for a stated period of time. (Some issuers may issue preferreds where both the holder and the issuer have conversion privileges)

40
Q

How convertible preferred share works?

A

Conversion terms are normally set specified convert ratio. The preferreds price is set at a modest premium (usually 10% to 15% or dollar amount which will be compensate by high yield over time) above the converted value (to discourage an early conversion) , which would defeat the purpose of the convertible offering. conversion privileges expire after a stated period (usually 5-12 years from issue)

41
Q

When a company want to issue convertible preferreds?

A
  1. when a straight preferred is difficult to sell
  2. when a high level of dividend coverage is lacking (dividend on a convertible is often less than that of a comparable straight preferred)
42
Q

What are the characteristics of convertible preferreds?

A
  1. two-way security (the holder is in a more secure position than the common shareholder, and can get a capital gain)
  2. higher yield than common shares.
  3. right to obtain common shares without commission.
  4. lower yield than a comparable straight preferred.
  5. sometimes convert into less (or more) than a standard trading unit of common shares, which in turn may
    be more difficult to sell than a standard trading unit.
  6. revert to straight preferreds when the conversion period expires.
43
Q

What is retractable preferred?

A

can force the company to buy back retractable preferreds for cash on a specified date, at a specified price. (can have two or more retraction dates) .

44
Q

What is soft retractable preferred?

A

refers to those retractables where the redemption value may be paid in cash or in common shares, generally at the election of the issuer.

45
Q

What are the characteristics of retractable preferreds?

A
  1. The shorter the time interval to the retraction date, the less vulnerable the stock’s market price is to increases in interest rates.
    2, They provide a capital gain if purchased at a discount from the retraction price and subsequently tendered at
    the retraction price.
  2. Increase price when interest rates decline sufficiently.
  3. They do not retract automatically
46
Q

what is floating-rate preferred shares (variable-rate

preferred)?

A

pay dividends in amounts that fluctuate to reflect changes in interest rates

47
Q

When a company issue floating-rate preferred shares?

A
  1. when a straight preferred is hard to sell and the issuer does not want to make the issue convertible or retractable.
  2. when the issuer believes that interest rates will not go much higher than the rate on the new issue date.
48
Q

What is the disadvantage of convertible shares?

A

can dilute shareholder equity

49
Q

What is the disadvantage of retractable shares?

A

shareholders can force redemption in inopportune time.

50
Q

What is delayed floating-rate features (fixed floater)?

A

entitle the holder to a fixed dividend for a predetermined period, after which the dividend becomes variable.

51
Q

What is the characteristics of floating-rate share?

A
  1. higher income if interest rates rise, but lower income if interest rates fall.
  2. market price is less sensitive to changes in interest rates.
52
Q

what is foreign-pay preferred shares?

A

receiving dividends in a currency other than

Canadian funds

53
Q

What is the characteristics of foreign-pay preferred shares?

A
  1. Value of share and dividend depends on exchange rate.

2. it is eligible for the dividend tax credit.

54
Q

What are other types of preferred share?

A
  1. participating preferred shares (certain rights to a share in the earnings of the company over and above)
    their specified dividend rate.
  2. deferred preferred shares ( dividend pay on a preset maturity date, with the dividend premium (difference between two value) which is cumulative amount equal to the dividends that would have been paid. The dividend premium is not eligible for the dividend tax credit. The advantage is that investors can defer taxes paid on income until a later date. The shares are also attractive for investors who want to receive compounded growth in a registered account)
55
Q

What is stock indexes (averages)?

A
  1. are indicators used to measure changes in a representative grouping of stocks.
  2. is a time series of numbers used to calculate a percentage change of this series over any period
    of time.
56
Q

How to calculate stock indexes value?

A

Most stock indexes are value-weighted and are derived by using the total market value of all stocks used in the index relative to a base period. The total market value of a stock is found by multiplying its current price by the number of shares outstanding. (Within a stock index, each stock has a relative weight based on the stock’s market capitalization)
(V2-V1)/V1 * 100

57
Q

What is the purpose of stock index?

A
  1. overall performance and directional moves in the stock market.
  2. Enable portfolio managers and other investors to measure their portfolio’s performance.
  3. Create index mutual funds.
  4. Serve as underlying interests for options, futures, and exchange-traded funds.
58
Q

What is stock average?

A

is the arithmetic average of the current prices of a group of stocks designed to represent the overall market or some part of it. In contrast to a market-weighted stock index, stocks in an average are equally weighted items and always the same. However, stock averages are price weighted, which means that movements in the average are tied directly to changes in the prices of the variousstocks included in the average. This occurs because some prices are higher than others and will naturally have a greater influence on the average as a whole.

59
Q

What are the stock indexes in Canada market?

A
  1. S&P/TSX Composite index
  2. S&P/TSX 60 Index
  3. S&P/TSX Venture Composite Index
60
Q

What is S&P/TSX Composite index?

A
  • A stock’s weight within the index changes if its price or the number of shares outstanding changes
  • Stocks are classified by 11 different industry sectors , based on the Global Industry Classification Standard (GICS)
  • Based on market capitalization, some sectors are weighted more heavily than others. (EX: Financials and Energy account for more than half of the weight on the index. However, Health Care, Utilities, and Information Technology account for approximately 5% combined)
61
Q

What is GICS?

A

is Global Industry Classification Standard (GICS) which was developed jointly by S&P and MSCI (Morgan Stanley Capital International Inc.) for use in all their indexes and is accepted worldwide.

62
Q

What are 11 Sectors of the S&P/TSX Composite Index?

A
  1. Consumer Discretionary
  2. Consumer Staples
  3. Materials
  4. Energy
  5. Real Estate
  6. Financials
  7. Communication Services
  8. Health Care
  9. Utilities
  10. Industrials
  11. Information Technology
63
Q

What is the distinction between point changes and percentage changes?

A

Based on the starting level of 250 for an index, for example, a 1% change in the index is equivalent to
2.5 index points. As indexes move up and down, the percentage change is a more accurate reflection of market performance than net point changes. (Also because of the difference currency between indexes)

64
Q

What is S&;P/TSX 60 Index?

A

The S&P/TSX 60 Index includes the 60 largest companies that trade on the TSX as measured by market
capitalization and is broken down into 11 sectors that cover all S&P/TSX Index subgroups. All stocks listed on this index must also be included in the S&P/TSX Composite Index.

65
Q

What is S&P/TSX Venture Composite Index?

A
  • Managed by Standard &Poor’s, it is a market capitalization-based index of for companies listed on the TSX Venture Exchange.
  • The index does not have a fixed number of companies, and is revised quarterly based on specific criteria for inclusion and maintenance policies.
  • Condition:
    + incorporated under Canadian federal, provincial or territorial jurisdictions
    + represent a relative weight of at least 0.05% of the total index market capitalization.
    + must be listed on the TSX Venture Exchange for at least 12 full calendar months as of the effective date of the quarterly revision.
66
Q

What are the US stock market indexes?

A
  1. THE DOW JONES INDUSTRIAL AVERAGE
  2. THE S&P 500
  3. The NYSE Composite index
  4. NYSE MKT Composite Index
  5. The NASDAQ Composite Index
  6. The Value Line Composite Index
67
Q

What is the dow jones industrial average?

A
  • 30 blue chip stocks on New York Stock Exchange.
  • The DJIA is calculated by adding the prices of each of the 30 issues in the average and dividing by a specially
    calculated divisor. (The divisor was initially the number of stocks in the average—originally 14 (12 railways and
    2 industrials). Because of obvious distortion through stock splits (a 2-for-1 split would mean a $100 share would become $50 in the average after the split), the divisor was adjusted downward for each split.
  • It is important to view the DJIA in perspective (so few stocks so not truly represent whole market. Since all are blue chip with low risk it tends to underperform the whole market over long term. And day-today changes may appear more dramatic than they actually are. Also, because it is price weighted, when a higher-priced stock rises, it may distort the average.)
68
Q

What is the S&P 500?

A
  • based on a large number of industrial stocks, some financial stocks, some utility stocks, and a smaller number of transportation stocks.
  • weighted in the index by their market capitalization so more heavily weighted stocks have a greater effect on the value of the index.
  • is the main gauge for measuring the investment performance of institutional investments in the United States
69
Q

What is The NYSE Composite index?

A
  • a market capitalization index that includes all the listed common equities on the New York Stock Exchange.
70
Q

What is NYSE MKT Composite Index?

A
  • This market-weighted index is based on all the stocks listed on the NYSE MKT exchange. (a leading exchange for small cap companies)
71
Q

What is The NASDAQ Composite Index?

A
  • market-weighted index of more than 3,000 stocks that are traded over the counter.
  • dominated by smaller capitalization companies.
    ( Its market capitalization is about 30% of the NYSE market capitalization)
72
Q

What is The Value Line Composite Index ?

A
  • composite index of about 1,600 stocks that are listed on the NYSE, NASDAQ, NYSE MKT, and the TSXcalculated
  • taking an average of the daily percentage change in each stock within the index with equal weighted.
  • the broadest available barometer of all the U.S.
73
Q

What are the international index and average?

A
  1. Nikkei Stock Average (225) Price Index (This is the Tokyo Stock Exchange average. is updated every 15 seconds.)
  2. The FTSE 100 Index (This index consists of the 100 largest listed companies listed on the London Stock
    Exchange. It is calculated using the market capitalization of the stock and is recalculated on a minuteby-minute basis.)
  3. The DAX Performance Index (The DAX consists of 30 major Frankfurt Stock Exchange blue-chip stocks and is the most widely followed index on the German securities market. The index is weighted by market capitalization)
  4. The CAC 40 Index (The CAC 40 Index is based on 40 of the largest 100 companies listed on the Paris Stock
    Exchange. It is calculated on a market capitalization basis.)
  5. The Swiss Market Index (The Swiss Market Index (SMI) is Switzerland’s blue-chip index. The index is made up of 20 of the largest and most liquid stocks on the Swiss market, ranked by market capitalization.)
74
Q

What is subordinate voting?

A

Subordinate voting shares are shares in a company which has another class of shares which have greater voting rights on a per share basis.

Canadian Securities Course VO1 (13 decks)

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