Equities Flashcards
Def of common stock
Represents ownership (equity) in a publicly traded corporation
What are dividends?
cash /stock share payments that a company distributes to its shareholders
Benefits of stock investing
LT return, risk reduction, marketability, additional variables
What are stockholder rights?
Stock certificate, voting rights (to elect board of directors/major issues), buy/sell, preemptive right, information per Securities Act of 1933, receive cash dividends
What are the classes of shares?
Class A: similar to preferred stock, pays cash divs and sold to public to raise capital; but investors might have no/diminished voting power; Class B: Voting stock held by management w/ no/reduced cash divs, as payment for founding/reorganizing corporation, can give total control of firm without investing money
Div types
Cash: Declaration date (quarterly), Ex-dividend date/stock must be purchased by to receive div (2 days prior to record date), Record date, Payment Date; Stock: common stock acct increase by par value x # new shares, remainder of increase go into capital contributed in excess of par account, total book value of stockholders’ equity is kept the same by reducing retained earnings
Par value
Specified amount on issued shares when corporation is first chartered; carried in a separate account/titled as common stock, which equals # of shares outstanding x par value per share. For equity security, par is usually a small amount with no relationship to market price, except for preferred stock, where par is used to calculate div payments
Book value
Net worth of company divided by # shares outstanding
Book value of equity
Cumulative Retained Earnings + Capital contributed in excess of par + Common stock
What are the stock markets?
Primary: IPO/where shares are initially sold from the company to dealer
Secondary: Exchanges ie NYSE, AMEX and OTC
Third: Securities that are listed in an exchange but trading in another exchange
Fourth: Direct trading of exchange listed securities among investors (cheaper and anonymous)
Classifications of Common Stock
Blue Chip Stocks: common stocks issued by large companies with solid dividend growth eg Apple (NASDAQ:AAPL) and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).
Growth Stocks: issued by companies that have sales and earnings growth well above the industry average. Earnings are retained and ploughed back into the company: eg Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX), and Tencent Holdings (OTC:TCEHY).
Income Stocks: more mature firms that pay a relatively high dividend with little increase in earnings eg utility company stocks such as American Water Works (NYSE:AWK) and Brookfield Infrastructure Partners (NYSE:BIP).
Value Stocks: some intrinsic value-even blue chip stocks can be classified as value for a brief period of time, depending on the stock’s current situation.
Speculative Stocks: risky, as it is difficult to forecast the company’s future profits. Many of these stocks are traded on the OTC market.
Cyclical Stocks: issued by companies whose earnings tend to move with the economy and include producers of durable goods such as washing machines and cars.
Defensive Stocks: earnings that are not affected by swings in the economy. In some cases they are inverse and perform better during downturns eg producers of consumer goods such as beer, cigarettes and food products.
Large, Mid and Small Caps. Refer to the size of the firm issuing the stock, and, more specifically, to the level of its capitalization or market value. Larger companies are perceived as more conservative.
Preferred stock
Only receives stipulated dividend
Preferred stockholder rights
Similar to common except they have preferential rights to earnings and assets
Preferred stock characteristics
Par Value: dividend rights and call prices are usually stated in terms of the par value.
Call Feature: The cash dividend guarantee of preferred stock increases the issuing corporation’s vulnerability to adverse conditions and reduces its financial flexibility. Therefore, a company may want to exercise its call option if it is able to do so.
Redemption: Nearly every issue of preferred stock is redeemable in one way or another. Most issues have either a sinking fund or a call provision that permits the issuer to purchase the shares before they mature.
Conversion Provision: Some issues of preferred stock allow the issuer to encourage investors to convert their preferred stock into common stock by making it profitable for the investor. The main reason that issuers want to redeem or convert to common shares is if interest rates decline after the preferred stock is issued.
Maturity: Some preferred stocks have maturity dates similar to fixed-income securities.
Warrants?
Aka stock purchase warrants, they give the holder the option to purchase shares at an exercise price, which is usually higher than the prevailing market price; but the value fluctuates along with the underlying stock and can be sold in a secondary market
Rights?
Aka subscription warrants are issued to give existing stockholders preemptive right to subscribe to a new issue of common stock before the general public. Each share receives one right and typically have a short life of 2-10 weeks. Exercise price is typically set below the stock market’s price at issuance as opposed to above for a warrant.
Dow Jones Industrial Average (DJIA)
Price weighted index of 30 stocks of large companies, only blue chip stocks
Standard & Poor’s 500 Stock Composite Index (S&P 500)
Diversified common stock investing than the DJIA, with broader representation of large companies, value weighted/capitalization weighted
What type of preferred stock pays shareholders missed dividends first?
Cumulative preferred stock gives the owner the right to accumulate dividend payments skipped due to financial problems.
What common stocks are issued by large companies with solid dividend growth records?
Blue chip stocks like Apple (NASDAQ:AAPL) and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B)
Dividends are paid to shareholders that hold the stock on the ________ date.
Record
Types of Preferred Stock
Cumulative: Gives owners the right to “accumulate” dividend payments skipped due to financial problems. When the company resumes paying dividends, owners receive their missed payments (dividends in arrears) first.
Non-Cumulative:Do not give their owners back payments for skipped dividends.
Participating: Entitled to a fixed rate of cash dividends. They may receive higher than normal dividend payments if the company turns larger than expected profits.
Convertible: May be converted into a specified number of shares of common stock at the option of the holder.
Adjustable-Rate: Issued with adjustable-rate rather than fixed rates of cash divided.
Money Market Preferred: (MMPS) is reissued with a new cash dividend rate typically every 7 weeks. They are offered in large denominations because they are targeted at large corporate investors.
3 Types of Indices
- Cap weighted index: Price of stock x total shares outstanding
- Price weighted, eg Dow series and Nikkei 225
- Equally Weighted, limited to Value Line Indices
Identify the type of preferred stock that pays shareholders missed dividends first.
Cumulative
Gives owners the right to “accumulate” dividend payments skipped due to financial problems. When the company resumes paying dividends, owners receive their missed payments (dividends in arrears) first.
Owners of ______________ preferred stock are entitled to a fixed rate of cash dividends.
Owners of participating preferred stock are entitled to a fixed rate of cash dividends. They may receive higher than normal dividend payments if the company turns a larger than expected profit.
