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Series 7 > Common and Preferred Stocks > Flashcards

Common and Preferred Stocks Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Authorized Stock

A

Maximum number of shares a corporation may issue

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2
Q

Treasury Stock

A

Shares that have been purchased by the corporation (stock buy-back). Does NOT pay dividends and holds NO voting rights

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3
Q

Outstanding Stock [equation]

A

Authorized Stock - Treasury Stock

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4
Q

Stated Value (Par Value)

A

$1

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5
Q

Preemptive Right

A

Right to maintain proportionate ownership. Mechanism used to engage in preemptive rights is a Rights Offering

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6
Q

True or False: Rights are short term and are exercisable over Current Market Price

A

False: Short term and exercisable UNDER Current Market Price
(remember: Rights = less than CMP [discount], Warrants = greater than CMP [premium])

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7
Q

What are shareholders able to access within the corporate books?

A

3x 10Qs and 1x 10K
(remember: 10Q = Quarterly Reporting, 10K = Annual Reporting)

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8
Q

Statutory Voting vs. Cumulative Voting

A

Statutory: 500 shares = 500 votes (protects majority/larger share holders)
Cumulative: 500 shares x # board seats (protects minority/smaller share holders)

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9
Q

Theoretical liqudation value is also know as…

A

Book value

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10
Q

Penny Stock

A

Non-NASDAQ over the counter (OTC) stock under $5

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11
Q

True or False: Penny Stocks send out monthly statements

A

True

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12
Q

True or False: Penny Stocks do not require suitability statements for new customers

A

False: REQUIRED

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13
Q

Establish Customer

A

Has established funds with a BD for at least 1 year or has conducted at least 3 transactions

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14
Q

Preferred Stock

A

Reflects as a fixed income vehicle that has preferential treatment to Common Stock

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15
Q

Preferred Stock is senior to Common Stock in … and …

A

Dividends and Liquidation

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16
Q

Cumulative Preferred Stock

A

Goes into arears when the issuer misses dividends

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17
Q

Non-Cumulative Preferred Stock

A

Does NOT go into arears when the issuer misses dividends

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18
Q

Preferred Stock Par Value

A

$100

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19
Q

Participating Preferred Stock

A

Gives holders the ability to participate in excess earnings beyond stipulated amount
(bad in downtrends)

20
Q

Convertible Preferred Stock

A

Gives holders the ability to switch status from Preferred Stock holder to Common Stock holder

21
Q

Convertible Preferred Stock: Conversion Ratio [equation]

A

When given the Conversion Price, establish the Conversion Ratio
Par / Conversion Price = Conversion Ratio (in shares)
(remember: Preferred Stock Par = $100, Bond Par = $1,000)

22
Q

Parity [equation]

A

Value of Convertible Security (Common or Preferred Stock) / Conversion Ratio
(ie. if you bought a Preferred Stock at $120 and you are able to convert it into 5 Common Stock shares, Parity/Cost Basis of Common Stock = $120 / 5 = $24)

23
Q

Call risk is associated with a…

A

Declining interest rate environment

24
Q

Call Protection consists of…

A

Time and Price

25
Q

Adjustable Rate

A

Moves against the Base Rate (standard: LIBOR + 200 bps)

26
Q

True or False: Preferred Stock holders are senior in dividends to Common Stock holders

A

True

27
Q

Rights vs. Warrants

A

Rights are ST and exercisable below Current Market Price
Warrants are LT and exercisable above Current Market Price

28
Q

Anti-Dilution Agreement

A

Right to give Rights holders the first right of refusal

29
Q

Electronic exchanges/auction markets are best characterized as…

A

Order-driven markets
(ie. NYSE)

30
Q

ECNs and OTCs are best characterized as…

A

Negotiated/Quote-driven markets
(ie. NASDAQ, Bulletin Board)

31
Q

Dark Pools allow participants to trade…

A

Anonymously

32
Q

ADRs

A

American Depository Receipts - foreign securities traded in domestic markets
(ie. Nintendo)

33
Q

ADRs are subject to what kind of risk?

A

Currency Risk
(remember: anything foreign/international is subject to Currency Risk due to exchange rates. ADRs are traded in currency of the home country and settled in USD)

34
Q

Capital Gains Tax Treatment

A

ST Gains (hold for 12 months or less): Ordinary Income Tax Rate
LT Gains (hold for more than 12 months): Taxed at 20% maximum

35
Q

How much are you able to offset earned income on realized losses?

A

$3,000

36
Q

Non-Qualified Dividends are taxed at…

A

Ordinary Income Tax Rates
(remember: non-qualified dividends are ST = Ordinary Income Tax Rate)

37
Q

True or False: Cash Dividends are not taxable.

A

False: Cash Dividends are taxable
(remember: cash dividends = paid income = always taxable)

38
Q

Wash Sales

A

IRS rule states that you must wait at least 30 days to buy back a sold security

39
Q

Conversion to Common Stock is TAXABLE / NOT TAXABLE

A

Not Taxable

40
Q

True or False: Stock Dividends are not taxable.

A

True
(remember: stock dividends = not paid out in cash = not taxable)

41
Q

Stock Dividend and Adjusted Cost Basis [equation]

A

1) Calculate Total Cost Basis (Shares * Cost Basis)
2) Calculate Additional Shares (Shares * % Stock Dividend)
3) Calculate Adjusted Cost Basis (Cost Basis / [Shares + Additional Shares])
ie. If you buy 100 shares of AAPL at $50/share (CB) and AAPL declares 10% stock dividend…
1) 100 * $50 = $5,000 (Total Cost Basis)
2) 100 * 10% = 10 shares (Additional Shares)
3) $5,000 / (100 + 10) = $5,000 / 110 = $45.45 (Adjusted Cost Basis)

42
Q

Inherited Securities Cost Basis

A

Also known as “Step Up Basis” - Market Value at death of original holder

43
Q

Gifted Securities Cost Basis

A

Recipient (Gifted) assumes Cost Basis of the Donor (Gifter)

44
Q

IRS automatically imposes … if you haven’t held good records

A

First-In, First-Out (FIFO)

45
Q

LIFO

A

Last-In, First-Out - sells last-bought shares first

46
Q

Identified Shares

A

Choose either FIFO or LIFO - good when you can identify tax optimization

Series 7 (8 decks)

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