Common and Preferred Stocks Flashcards
Authorized Stock
Maximum number of shares a corporation may issue
Treasury Stock
Shares that have been purchased by the corporation (stock buy-back). Does NOT pay dividends and holds NO voting rights
Outstanding Stock [equation]
Authorized Stock - Treasury Stock
Stated Value (Par Value)
$1
Preemptive Right
Right to maintain proportionate ownership. Mechanism used to engage in preemptive rights is a Rights Offering
True or False: Rights are short term and are exercisable over Current Market Price
False: Short term and exercisable UNDER Current Market Price
(remember: Rights = less than CMP [discount], Warrants = greater than CMP [premium])
What are shareholders able to access within the corporate books?
3x 10Qs and 1x 10K
(remember: 10Q = Quarterly Reporting, 10K = Annual Reporting)
Statutory Voting vs. Cumulative Voting
Statutory: 500 shares = 500 votes (protects majority/larger share holders)
Cumulative: 500 shares x # board seats (protects minority/smaller share holders)
Theoretical liqudation value is also know as…
Book value
Penny Stock
Non-NASDAQ over the counter (OTC) stock under $5
True or False: Penny Stocks send out monthly statements
True
True or False: Penny Stocks do not require suitability statements for new customers
False: REQUIRED
Establish Customer
Has established funds with a BD for at least 1 year or has conducted at least 3 transactions
Preferred Stock
Reflects as a fixed income vehicle that has preferential treatment to Common Stock
Preferred Stock is senior to Common Stock in … and …
Dividends and Liquidation
Cumulative Preferred Stock
Goes into arears when the issuer misses dividends
Non-Cumulative Preferred Stock
Does NOT go into arears when the issuer misses dividends
Preferred Stock Par Value
$100
Participating Preferred Stock
Gives holders the ability to participate in excess earnings beyond stipulated amount
(bad in downtrends)
Convertible Preferred Stock
Gives holders the ability to switch status from Preferred Stock holder to Common Stock holder
Convertible Preferred Stock: Conversion Ratio [equation]
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)
Parity [equation]
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)
Call risk is associated with a…
Declining interest rate environment
Call Protection consists of…
Time and Price
Adjustable Rate
Moves against the Base Rate (standard: LIBOR + 200 bps)
True or False: Preferred Stock holders are senior in dividends to Common Stock holders
True
Rights vs. Warrants
Rights are ST and exercisable below Current Market Price
Warrants are LT and exercisable above Current Market Price
Anti-Dilution Agreement
Right to give Rights holders the first right of refusal
Electronic exchanges/auction markets are best characterized as…
Order-driven markets
(ie. NYSE)
ECNs and OTCs are best characterized as…
Negotiated/Quote-driven markets
(ie. NASDAQ, Bulletin Board)
Dark Pools allow participants to trade…
Anonymously
ADRs
American Depository Receipts - foreign securities traded in domestic markets
(ie. Nintendo)
ADRs are subject to what kind of risk?
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)
Capital Gains Tax Treatment
ST Gains (hold for 12 months or less): Ordinary Income Tax Rate
LT Gains (hold for more than 12 months): Taxed at 20% maximum
How much are you able to offset earned income on realized losses?
$3,000
Non-Qualified Dividends are taxed at…
Ordinary Income Tax Rates
(remember: non-qualified dividends are ST = Ordinary Income Tax Rate)
True or False: Cash Dividends are not taxable.
False: Cash Dividends are taxable
(remember: cash dividends = paid income = always taxable)
Wash Sales
IRS rule states that you must wait at least 30 days to buy back a sold security
Conversion to Common Stock is TAXABLE / NOT TAXABLE
Not Taxable
True or False: Stock Dividends are not taxable.
True
(remember: stock dividends = not paid out in cash = not taxable)
Stock Dividend and Adjusted Cost Basis [equation]
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)
Inherited Securities Cost Basis
Also known as “Step Up Basis” - Market Value at death of original holder
Gifted Securities Cost Basis
Recipient (Gifted) assumes Cost Basis of the Donor (Gifter)
IRS automatically imposes … if you haven’t held good records
First-In, First-Out (FIFO)
LIFO
Last-In, First-Out - sells last-bought shares first
Identified Shares
Choose either FIFO or LIFO - good when you can identify tax optimization
