Equity Investments & Managed Assets Flashcards
What is common stock?
It represents units of ownership in a publicly traded corporation. Owners are entitled to vote (by proxy) on the selection of the board of directors and other important matters
What is a stocks par value?
The value of the stock written on the stock certificate or corporate charter.
What are blue-chip stocks?
Stocks issued by highly regarded, well-established companies. Usually the top companies in their respective fields.
What are growth stocks?
Stocks issued by companies that usually have sales and earnings growth rates exceeding those of the average company in their industry
These stocks usually don’t pay dividends, but instead reinvest their earnings back into the company
What are income stocks?
Stocks that pay regular, consistent dividends. Usually companies in the maturity phase of their lifecycle
What are value stocks?
Stocks that are undervalued.
What are cylindrical stocks?
Stocks of companies who tend to do well during market expansion and do poorly during market decline. Companies that deal in luxury items are a good example
What are defensive stocks?
Stocks that are relatively unaffected by the market, because their products are necessary for everyday life, like grocery stores.
What are the four risks of equity stocks?
Market risk: the fluctuation of the market changes the price of stocks
Interest rate risk: when interest rates go up, stocks go down.
Business risk: the way a business operates can affect stock
Financial risk: the way a business handles its financials can affect stock
What are the tax implications of stocks?
Short and long term capital gains on the difference between the cost basis and the selling price.
In the case that there was multiple purchases, the shareholder will either need to declare a specific lot (of 100 shares) or use the FIFO rule.
What are stock rights?
These are time limited rights to current stockholders to purchase more stock below market price during a stock split in order to maintain their current percentage of ownership
What is a warrant?
A long-term, customized call option used to purchase stock. Warrants guarantee the opportunity to buy stock at a fixed price during a particular period (for a small premium).
What are the differences between warrants and call options?
Warrant is issued by a corporation - a call is issued by an individual
Warrant is customized to fit the need of a corporation - a call includes standard, required terms
Warrant has a maturity date of several years - a call usually expires in 9 months
Who is a shareholder of record?
Any one listed on the share itself as the owner
What is the record date in relation to the dividend?
It is the first business day after the ex-dividend date, which is when trades are settled and reflected on the books
What is the ex-dividend date?
The date declared by which the stocks must have been purchased before in order to receive a dividend.
For instance, if a dividend is issued on Fri, Oct 2nd, then the ex-dividend date is Thurs Oct 1st and the stock must have been purchased on Wed Sept 30th.
What is dollar cost averaging?
Dollar-cost averaging refers to the practice of systematically investing equal amounts, spaced out over regular intervals, regardless of price.
The goal of dollar-cost averaging is to reduce the overall impact of volatility on the price of the target asset; as the price will likely vary each time one of the periodic investments is made, the investment is not as highly subject to volatility.
Dollar-cost averaging aims to avoid making the mistake of making one lump-sum investment that is poorly timed with regard to asset pricing.
What are Dividend Reinvestment Plans (DRIPs)?
Plans that allow stockholders to reinvest cash dividends in order to purchase more stock with little or no commission and often at a discount.
Tax-wise, DRIPs are treated the same as cash dividends except the amount of reinvested dividends adds to the tax basis
How are qualified and non-qualified cash dividends defined and taxed?
Qualified. Dividend must have been received from domestic corporation or qualified foreign corporation AND must have been held for 60 days prior to the ex-dividend date = long term capital gains
Non-qualified. Doesn’t meet the above or is a non-qualified entity = ordinary income
What is a stock dividend?
A dividend paid to shareholders in additional stocks rather than cash. Proportionally, all share holders stocks will increase the same percentage. The company’s retained earnings will decrease
What is a stock split?
The par value of the stock is reduced and the number of shares is increased proportionally.
What is a reverse stock split?
The number os shares is reduced and the cost per share is increased proportionally
What are mutual funds?
Mutual funds pool capital from many investors and invest in stocks, bonds, money market instruments, and other securities.
Why are mutual funds considered open-ended investments?
Because there is no limit to the number of shares that can be sold to investors.
Mutual funds can only be purchased or exchanged through the mutual fund; they are not traded on exchanges.
What is NAV and how is NAV fund price calculated?
Net Asset Value - this is how mutual funds are priced. They must be priced once per day and its usually done at the end of the day when the NYSE closes.
NAV = assets (cash + current value of securities) - liabilities
How is the NAV per share calculated?
NAV per share = Fund’s NAV / number of shares outstanding
What are front-end load (or class A) shares?
Commission is added onto the front of the shares. These are generally lower overall cost and better for long term horizons
What are back-end load (or B class) shares?
AKA contingent deferred sales charge (CDSC), the back-end load assesses shares if the investor sells them within a certain time of purchase
What are level-load (or C Class) shares?
This sales charge is asset based; it uses the 12b-1 fee as a sales charge
