Equities

Question 1

What does a corporate charter do?

Answer 1

Establishes par value, sets the number of authorized shares, and may contain an anti-dilutive covenant.

Question 2

What are the four classifications of common stock?

Answer 2

Authorized, issued, treasury, and outstanding stock.

Question 3

What is authorized stock?

Answer 3

Number of shares stated in the corporate charter that the company is authorized to sell.

Question 4

What is issued stock?

Answer 4

Shares that have been sold by the company to investors.

Question 5

What is treasury stock?

Answer 5

Issued shares subsequently repurchased by the company.

Question 6

What is outstanding stock?

Answer 6

Issued shares that are held by investors.

Question 7

What are benefits of owning common stock?

Answer 7

Capital appreciation, dividend income, hedge against inflation, and liquidity.

Question 8

What are risk of owning common stock?

Answer 8

Market risk (systemic). Business, principle, or financial risk (nonsystematic). Price volatility and dividends not guaranteed.

Question 9

What do outstanding shareholders vote on?

Answer 9

Important policy matters, issuance of additional common stock or convertible securities, and the board of directors (BOD)

Question 10

Explain a stock split.

Answer 10

Increases the shares and reduces the price. May make the stock more attractive to a wider base of potential buyers.

Question 11

Explain reverse stock split.

Answer 11

Decreases the shares and increases the price. May enhance the company’s image to investors or prevent delisting from an exchange due to too low of a market price.

Question 12

What is the statutory voting method?

Answer 12

One vote for each share = total votes allowed per director seat.

Question 13

What is the cumulative voting method?

Answer 13

One vote for each share times the number of open seats = total votes allowed.

Question 14

What does the transfer agent do?

Answer 14

Maintains the shareholder list and handles all mailings.

Question 15

What does the registrar do?

Answer 15

Oversees the actions of the transfer agent and maintains the integrity of the shareholder list.

Question 16

What are the three types of dividends?

Answer 16

Cash, stock, and property.

Question 17

What is the cash dividend timeline?

Answer 17

Declaration date (BOD), Ex-Date (FINRA), Record date (BOD), Payment date (BOD).

Question 18

Purchasing stock prior to the ex-date (cum-dividend)

Answer 18

Buyer is entitled to the dividend.

Question 19

Purchasing stock prior to the ex-date but does not settle until after record date (mishandled)

Answer 19

Seller receives the dividend with a due bill and owes the dividend to the buyer.

Question 20

Purchasing a stock on or after the ex-dividend date (ex-dividend)

Answer 20

Seller receives the dividend. Stock is being purchased without the right to receive the upcoming dividend. Stock’s price reduced by the amount of the dividend prior to the marker opening.

Question 21

Preferred stock receives preference over common stock regarding what?

Answer 21

Dividends and liquidation priority.

Question 22

Characteristics of a preferred stock.

Answer 22

Par value of either $25, $50, or $100 (Assume $100). Fixed income security and cash dividends paid semi-annually. Does not offer growth potential. Inverse relationship between price and interest/dividend rates. May be callable or convertible. Generally, no voting rights or pre-emptive rights.

Question 23

Straight Preferred Stock (noncumulative)

Answer 23

Missed dividends are lost.

Question 24

Cumulative Preferred Stock

Answer 24

Dividends accumulate in arrears and must be paid in full any previous missed dividends before any other type of preferred (or common) stock can be paid current year dividends.

Question 25

Types of preferred stocks.

Answer 25

Straight, cumulative, convertible, callable, participating (performance), and adjustable rates.

Question 26

Benefits of preferred stock.

Answer 26

Fixed income from dividends. Prior claim in liquidation. Less volatile than common stock. May be convertible.

Question 26

Benefits of preferred stock.

Answer 26

Fixed income from dividends. Prior claim in liquidation. Less volatile than common stock. May be convertible.

Question 27

Rick of preferred stock.

Answer 27

No claim to missed dividends (except cumulative), interest rate (market) risk, inflation risk, and may be callable.

Question 28

What are stock (subscription) rights?

Answer 28

Issued to existing shareowners as part of a rights offering by the company.

Question 29

Characteristics of stock rights.

Answer 29

Right to buy additional stock at a pre-set exercise price within a set period of time. Expire usually in 30-45 days. Exercise price is set below the current market price (intrinsic value).

Pre-emptive right. Enables current shareholders the opportunity to purchase enough shares to maintain their proportionate ownership. Each common shareholder receives one right per share owned.

Company establishes the number of rights necessary to purchase each additional share of common stock
The number of rights to buy one new share = ratio of outstanding shares to the additional shares to be issued

Owner of rights can choose to
Subscribe to the offering (exercise)
Handled through a rights agent
Sell their rights in the secondary market
Let them expire

Question 30

What are warrants?

Answer 30

Long term right to buy additional stock at a pre-set price within a set period of time.

Question 31

Characteristics of a warrant.

Answer 31

1. Long term right to buy additional stock at a pre-set price within a set period of time
   a. Typically issued with 5-year expirations
   b. Exercise price is set above the current market price (issued without intrinsic value)
   c. Their value is based on the potential for a future price increase (time value)
2. Attached to a bond or preferred stock offering as a “sweetener” and sold together as a “unit”
   a. Increases the marketability of the bond or preferred stock
   b. Allows issuer to sell the bond or stock with a lower interest/dividend rate
3. Owner of warrant may exercise, sell, or let expire

Question 32

What are American Depositary Receipts (ADRs)

Answer 32

1. Facilitate U.S. citizens owning interest in foreign shares
   a. Registered with SEC and trade in U.S. markets like stock
2. Issued by a foreign branch of a commercial U.S. bank
   a. Bank buys a foreign company’s shares (bank is the registered owner NOT the ADR holder)
   b. ADRs represent a receipt for shares of the foreign stock held by the bank
   1) One ADR unit can be equal to, less than one, or greater than one foreign share of stock

Question 33

Types of ADRs.

Answer 33

a. Sponsored (also called American depositary shares or an ADSs)
1) Foreign company sponsors the issue (incudes providing financial statements in English)
2) Eligible to trade on exchanges
b. Non-sponsored
1) No participation from the foreign issuer
2) Trade OTC

Question 34

ADR holder rights.

Answer 34

a. Similar rights to that of an owner of common stock except usually without voting rights
b. Currency risk
1) Dividends declared in foreign currency but converted by the bank and paid in U.S. dollars
Dividends are net of foreign withholding tax
Foreign taxes paid by the ADR holder may be taken as a credit on their U.S. tax return