Equities Flashcards
Name six types of equity securities.
6 things
- Common stock
- Preferred stock
- Rights offerings
- Warrants
- American Depository Receipts
- Direct Participation Programs
Term for when a company makes no claims about the intrinsic worth of their stock and defers to the market value.
No Par Value
Worth of no par stock as assigned by issuing companies directors - strictly for accounting purposes.
Stated Value
Arbitrary value the company gives the stock in their articles of incorporation.
Par Value
Formal document stating you own a certain block of shares in a company.
Stock certificate
Firm retained by a corporation or mutual fund to maintain records about shareholders. Also ensures that stock certificates presented for transfer are properly cancelled and new ones issued to the new owner.
Transfer agent
Documents names of all shareholders and number of shares they own.
Registrar
The means by which ownership of a security is passed from one party to another.
Transfer procedures
Signature used to legally transfer a security, whether interest rate option or personal check.
Endorsement
Bank guarantee that an options writer has the options underlying securities on deposit and that they are ready for delivery if the option is exercised.
Escrow receipt
Simple ownership interest in a publicly traded organization.
Common stock
The four rights of common stock holders.
- Transfer ownership by sale or gift.
- Inspect company books, records, and shareholder meeting minutes.
- Preemptive rights (Maintain proportionate share of ownership by purchasing proportionate share of new stock)
- Vote on company affairs themselves or by proxy
Order in which funds are distributed in case of liquidation of the company
- Bondholders
- Preferred shareholders
- Common stockholders
Type of stock that is strong, stable, mature, and has a history of consecutive quarterly dividends and good credit history.
Blue Chip stock
Type of stock that has a strong potential for improving profits faster than it has to pay back debts.
Growth stock
Stock of young firms that are new in the industry but have good growth prospects. May be high risk.
Emerging growth stock
Mature company with high dividend yield and few prospects for growth or diversification.
Income stock
Stocks that move with the broader market, and are often more volatile. They may outpace market in expansion but whipsaw during contraction.
Cyclical stock
Example- automotive industry
These stocks do better in bear markets where investors are looking for safe investments.
Countercyclical/Defensive
Example- Food, healthcare, defense industries
Stocks that an investor believes will rise quickly in the market.
Speculative
Taxable payment declared by companies directors and paid to shareholders.
Dividends
Type of stocks most likely to pay dividends.
Blue chip and defensive
True/False
Dividends may be paid as more stock.
True
Security that no longer carries the right to receive the most recently declared dividend.
Ex-dividend
Ex-dividend date
Two business days before the record date.
What is a stock split?
When the company believes the price is too high, they will split the stocks.
What is a reverse stock split?
When the company believes the price is too low, they will consolidate the stocks.
Class of ownership that has a higher claim on the assets and earnings than common stock.
Preferred stock
Characteristics of preferred stock
3 things
- Dividend must be paid before those to common stockholders
- Usually there are no voting rights.
- Have priority over common stockholders in liquidation event.
Name the five types of preferred stock
- Cumulative
- Participating
- Convertible
- Callable
- Adjustable rate
What is cumulative stock?
If dividends are suspended, current and arrears dividends will be paid upon resumption prior to common stock dividends.
Offers a share of profits in addition to dividends after all dividends and interest due are paid.
Participating preferred stock
What is convertible preferred stock?
Gives the holder the option to exchange for share of common stock. Will have a lower stated dividend due to this option.
What is callable preferred stock?
Can be repurchased by the issuer at an agreed upon price and after a certain date.
What is adjustable rate preferred stock?
The dividends will vary with some benchmark, typically the T-bill rate. They can be adjusted as often as semi-annually.
Right to purchase security at a specified price from the issuer. Lower interest will be paid due to this right.
Warrants
American Depository Receipts
Issued by US banks and represent a share of foreign stock in the US exchange.
Enable investors to have an immediate claim on an enterprises cash flow and tax benefits, typically as a passive investment.
Direct Participation Programs
Three main benefits of limited liability corporations
- Pass through taxation
- Liability is generally limited to amount invested
- Management structure and ownership is flexible
Three drawbacks of limited liability corporations
- Often require more paperwork
- Organizational structure is not as familiar to the public
- Some states require dissolution date; death/dissolution of a member can cause total dissolution
What is the main purpose of structuring an enterprise as an LLC?
To tax revenue at individual investor level and not at corporate level.
How are corporate earnings double taxed?
Once when it is realized as income, and again when it is passed to shareholders as dividends.
Over the Count (OTC) Definition
Stocks and bonds purchased and sold virtually.
Designated Market Maker
Specialist maintaining orderly market for a particular set of stocks.
Class B Stock
Non-voting common stock
Class A Stock
Voting common stock
Statutory voting
One vote per share for each ballot item. (This benefits large shareholders.)
Cumulative voting
Allocate total votes in any manner. (This benefits small shareholders.)
Proxy
Form of absentee ballot.
Proxy Solicitation
When the company sends proxies to shareholders for a specific meeting.
Proxy Contest
Vote to change control of the company.
Requirement to offer the sale of additional common stock to current stockholders prior to the public.
Anti-dilution Provision
Current stockholder has the right to purchase newly issues shares to maintain proportionate ownership.
Pre-emptive Rights
Stockholder cannot lose more than the amount paid for a stock to cover corporation debt in bankruptcy.
Limited Liability.
Stockholder can receive annual financial statement and list of stockholders.
Inspection Rights.
Common stockholder has this claim after debts and other securities.
Residual Claim to Assets.
Long Position
Investor intends to buy stock low and sell high.
Risk of Long Position
Limited to Investment.
Short Sale
Investor sells shares high and buys low later.
Risk of Short Sale Position
Unlimited if the price continues to rise.
Capital Gain
Investor buys low and sells high.
Combination of dividend income and price appreciation or decline over a given period.
Return on Investment.
Reset Date
Date of dividend adjustment for Adjustable Rate Preferred.
Current Yield or Dividend Yield
Annual dividend/Current Market Value
Round lot
Share amounts divisible by 100.
Odd lot
Transactions of shares fewer than 100.
Point
Whole dollar portion of stock’s market price quote.
Issuer offers unsold rights to investment banker for resale to general public.
Standby Underwriting
Short term (30-45 days) privilege to buy additional shares of corporation.
Subscription Right
Terms of Rights Include
3 things
- Shares eligible to buy
- Date of new issue
- Final date to exercise rights
When a company sells stock, this is the money received exceeding par value.
Capital In Excess of Par
Current liquidation value.
Book Value
Book Value Calculation
Tangible Assets-Liabilities/Shares Outstanding
Under which two exceptions will preferred shareholders be given the right to vote?
- If a corporation defaults on its dividends so many times
2. If the corporation wants to issue a new class of preferred stock equal to or senior to the existing preferred stock.
