Corporate Securities Introduction Flashcards
What defines a “security” and what are the different types?
On the Series 7 it is important to remember the definition of a security is one that has actually been registered in the states in which it will be offered. Sometimes the Security is exempt from registration.
- Common Stock
- Mortgage Backed Securities
- Options
- Debt Issues llike bonds
- Collateralized Mortgage Obligations
- Warrants
Define:
security
What are the different types?
A Security means it has actually been registered in the states in which it will be offered.
Note: On the Series 7 it is important to remember this requirement. Sometimes the Security is exempt from registration.
Six Types:
- Common Stock
- Mortgage Backed Securities
- Options
- Debt Issues llike bonds
- Collateralized Mortgage Obligations
- Warrants
What is the liquidation order of a company if company goes out of business and forced to liquidate assets?
- IRS gets paid first
- Secured Bondholders
- Unsecured Bonds
- Creditors such as vendors
- Preferred Shareholders
- Common Shareholders
It’s important to note the stockholder is the last person paid in a liquidation. The equity holder exchanges appreciation potential for security of investment.
This has important implications for the relative safety of investments and will be important to know for evaluating appropriate investments for particular customers.
What is the liquidation order of a company if company goes out of business and forced to liquidate assets?
The liquidation order would be:
- IRS gets paid first
- Secured Bondholders
- Unsecured Bonds
- Creditors such as vendors
- Preferred Shareholders
- Common Shareholders
Note: It’s important to note that stockholders are the last paid in a liquidation. The equity holder has exchanged appreciation potential for security of investment.
What is the riskiest type securities investing?
Common stock is the riskiest. This is because the shareholder is paid last in the event of a corporate liquidation.
What is the riskiest type of securities investing?
**Common Stock **
Common Stock is riskiest because the shareholder is paid last in the event of a corporate liquidation.
What is capitalization?
This is the actual process of raising funds in the public market. When you think of vanilla investment banking, this is the process a company goes through to make the issue available to the public. Depending on the type of security this process can vary widely.
Note: This is not market capitalization which is the value of a companies outstanding stock.
What is:
Capitalization
Capitalization is the actual process of raising funds in the public market.
When you think of vanilla investment banking, this is the process a company goes through to make the issue available to the public. Depending on the type of security this process can vary widely.
Note: This is not “market capitalization,” which is the value of a company’s outstanding stock.
What are the basic features of common stock?
- Could pay a dividend although not guaranteed.
- Very liquid in the secondary (Think stock exchange) market
- Represents ownership in the company
- No liability for the average investor if the company or employees are engaged in illegal activity.
What is a CUSIP number?
Think of a CUSIP number as a bar code for a common stock. It is is a unique identifier that helps identify a security and its owner in the event a stock certificate is lost.
This is more imporant in the electronic world where few certificates are actually issued.
What does negotiability mean with respect to common stock?
The owner of a common stock has the right to do whaterver they want with that secruity such as give the stock away, sell it, transfer it to a trust. Anything at all.
What does stock power mean?
Stock Power is similar to power of attorney. It allows the owner of a stock the ability to sell the security without signing individual certificates.
This is almost unheard of today but sometimes still pops up on the series 7 Exam. It today’s computerized world it is usually within the agreements signed to set up the account.
What is a stock charter?
The charter is important for the common shareholder because it contains the detail of how many shares can be sold to the public. Note that during the process of taking a company public and issuing the shares, the board may authorize only a portion of the authorized shares.
The charter also contains all relevant information on a company, who are the officers, and other basic identifying information.
What is Par Value for common equity?
Par value is an arbitrary number assiged to the value of the securities as issue but has no real meaning or importance.
On the exams you may see questions about par value; just know that it can be any number and doesn’t impact issuance or stock price in any way.
What is the capital surplus of a company?
This is the difference between the market capitalization of all the outstanding stock (not authorized stock) and the stated par value of the stock on the company’s charter. Since par value is an arbitrary number, capital surplus is also fairly meaningless but does come up on the exam from time to time.
Define shareholders equity.
This is a simple formula:
Total Assets - Total Liabilities = Shareholders Equity
This is a quick way to see what the stockholders would be left with in the event of a liquidation.
Define Book Value
Book value is only an estimation of what the company would be worth if they decided to cease operations and sell all assets. The book value is the total asset component of the stockholders equity formula
Define Offering Price
When a company goes public, investment bankers purchase the stock from the company and then make them available to trade on the secondary market. The offering price is the price the stock will be offered to the public.
Note that the market price of a stock will vary widely from the offering or IPO price depending on the public demand for the security at issuance.
What are shares called that have been authorized by the board of directors to be sold to the public?
“authorized, issued, and outstanding” shares is a phrase you should remember for the exam because it is distinct from Treasury Stock
Treasury Stock: Shares that have been repurchased by the company and hold no voting or dividend rights.
What is the difference between authorized and outstanding shares?
This will be important on the exam and is usually always tested.
Authorized shares represents the number of shares the board has authorized to be issued but does not mean all those shares are actually trading in the market. Shares can be authorized but remain unissued, or not trading publicly. Outstanding shares are those that have been both authorized and acutally issued to the public.
When a company repurchases its own shares in the marketplace, it purchases them from outstanding shares. Those shares then become treasury stock
What are the two sides of a stock price quote?
Bid - Ask
The two prices at which a stock is currently trading. The ask or offered price is the price a dealer is “asking” for that stock or where the customer can buy it. The customer buys on the offered side of the price and the dealer sells at that price.
The bid is where a dealer is willing to buy shares from the public. Naturally this will always be less than the ask price.
What is the payout ratio of a common stock?
This is the relationship between earnings per share and the dividends paid to the shareholders if the board has actually declared a dividend.
High growth companies that reinvest earnings into the company may declare no divdend and therefore not have a payout ratio.
Other companies such as utility companies that have traditionally offered higher dividends will naturally have higher payout ratios.
The payout ratio of a stock could be used to asses risk for suitability purposes as stocks that are safer tend to have higher payout ratios.
How are dividends paid?
Dividends can either be paid in cash, stock or a mix of both. In some cases, a company can declare its products as dividends and issue it to all their shareholders.
What are the Three Critical Dates for Dividend Distributions?
- When the board of directors authorizes a dividend to be paid, that is called the declaration date.
- The company secretary will count all the stockholders on a certain day and make those individuals eligible for the declared divident. This is called the record date.
- The date the checks are mailed electronically deposited into an account is called the payable date.
