Equity Securities

Question 1

Common stock

Answer 1

Corporations Equities come in stock to raise new capital to finance the operations and ventures of the company when you buy the stock of a corporation you became part owner or a shareholder of the corporation.

Question 2

Reason for investing

Answer 2

Buy the common stock up a corporation is to make a profit on their investment a profit can be realized on dividends while investments on this year and buy realize in a capital gain

Question 3

Risk and reward potential

Answer 3

Unlimited upside potential because there is no limit on how high stock price could go.
Downside Risk is limited, Could decline to zero result in a loss of all of the money invested

Question 4

Shareholder rights

Answer 4

1. Receive a stock certificates
2. Inspect certain but not all corporate books of the corporation.
3. Receive dividends as they are declared by the board of directors.
4. Receive your proportionate share of the companies if said if company is dissolve after more senior claims have been satisfied.
5. Vote
6. Sell their shares

Question 5

Order of distribution up on liquidation

Answer 5

1. Taxes
2. Secured debt (it generally bonds backed by assets)
3. Unsecured debt (debentures, general creditors)
4. Preferred stock orders
5. Common stockholders

Question 6

Vote

Answer 6

A. Regular/statutory voting -
Receive one vote per share per Director who is up for election. Cast one vote first year either for or against each candidate for the board

B. Cumulative/ block voting -
Receive one vote per share times the number of directors being voted on they may cast your votes as a block for one candidate or made by their votes in any manner desired

Question 7

Rights that common shareholders do NOT have

Answer 7

1. Not entitled to receive dividends
2. Do not have the right to demand vote on the dissolution of a company
3. Do not have the right to vote for officers or senior management of the company

Question 8

Status of common stock

Answer 8

1. Authorized stock - The maximum number of shares of stock that is allowed to be sold by a corporation as regulated by its corporate charter that is filled with the secretary of state of the state of incorporation.
2. Issued stock - The amount of stock taken from authorize stock that is sold or issued to the public in a primary distribution. The amount is equal or less than that authorized by the company.
3. Treasury stock (or re-purchased stock) - When a company re-purchase it’s on outstanding common shares in the open market.
4. Outstanding shares - The number of cooperation stock that are issued and held by stockholders outstanding shares are the only share which vote receive dividends are issued to calculate earnings per share

Question 9

Reasons a company would re-purchase its own stock

Answer 9

1. To increase earnings per share
2. To finance future acquisitions
3. To provide stock for employee stock option plans
4. To fight a takeover attempt

Question 10

How to calculate outstanding shares

Answer 10

Issued stock - treasury stock = outstanding stock

Question 11

Common stock positions

Answer 11

When investor buy or sell stock they will either be
1. long position Buys and owns any security this may be bullish
or
2. short position- investor borrows from a broker dealer and then sell the borrowed stock this may be Bearish

Question 12

Regulation T settlement

Answer 12

T +4 - Federal Reserve Board regulation covering the extension of credit customers it requires that payment for purchases of securities must be received by the fourth business day after the trade date

Question 13

Trade date

Answer 13

The date on which a buy or sell order is executed

Question 14

Par value

Answer 14

Stated fixed value printed on the face of the stock certificate it has little or no relevance for investors

Question 15

Regular way settlement date

Answer 15

T +2 - The date on which a trade must be settled meaning the buyer must pay for the security that was purchased and the seller must deliver the security that was sold the second business day after the trade date

Question 16

Categories of common stock

Answer 16

Blue chip stock, growth stock cyclical stock, countercyclical stock, defense, noncyclical stock, utility stock, special situation, American deposit your receipts (ADR)

Question 17

Blue chip stock

Answer 17

Company that is generally nationally known with the reputation as quality management products and services these companies have demonstrated the ability to pay moderate dividend consistently in good times and bad times

Question 18

Growth stock

Answer 18

Company that is expected to have above average increases in revenues and earnings
Pay little or no dividend
Have a high price/earnings ratio
Stock price may fluctuate widely and typically have a high volatility
An emergent growth company is a fast growing company with a total annual gross revenue of less than $1.07 billion
Have a high percentage of retained earnings

Question 19

Cyclical stock

Answer 19

Heavily affected by normal business and economic cycles. cyclical stocks are those that rise and decline along with and fall with the economy

Example auto manufacturers steel company is appliance manufacturers house in companies paper companies tools and die manufacturers

Question 20

Countercyclical stock

Answer 20

Opposite of cyclical stocks referred to stocks that move in the opposite direction of the economy

Example
Gold mining companies budget retailers Walmart Temp Agency

Question 21

Defensive/non-cyclical stock

Answer 21

Company that is resistance to normal business cycle and the general stock market fluctuation an investor would not expect significant increase or growth

Example
Tobacco companies utilities food companies pharmaceutical companies auto repair companies

Defensive stock does not include steel companies such as auto manufacturers tool and die manufacturers

Question 22

Utility stocks

Answer 22

Companies provide electricity, gas, water to their customers
Offer above average dividend yield to investors but less capital appreciation as compared to growth stocks

Usually high leverage debt and can do so safely since they supply a commodity on which customers are dependent

Because of the debt card by utility companies the price of common stocks of utility companies will be more susceptible to fluctuation due to changes in interest rates
A high level of debt means high cost of operation because of interest rates
Increases in interest rate will increase operating cost for a highly leveraged company

Question 23

Special situation stock

Answer 23

Stocks that are undervalued and therefore their price can increase suddenly and dramatically due to a number of reasons

A. New management
B. introduction of a popular new product
C. discovery of natural resource on corporate property

Question 24

American depository receipts ADRs

Answer 24

Receipts traded in the US for foreign stocks that are held in bearer form by American Bank in the foreign country

A. They have no voting privilege
B. dividends are paid in the U.S not in the foreign currency
C. Taxed as security and gains and losses are reported to the IRS form 1099B
D. Not issued as callable

Question 25

Stock split

Answer 25

Increases the number of outstanding shares, But does not change the proportionate equity ownership of shareholders.

Question 26

Reverse split

Answer 26

Opposite of stock split also known as stock consolidation decreases the number of outstanding shares of the stock and increases the market price

Question 27

Purpose of stock split

Answer 27

To increase the marketability of the stock by reducing the market price of the stock

Question 28

Stock splits calculation

Answer 28

Divide the previous stock price by the ratio. Eg. $40 ratio 3:2 $40/(3/2) = 40/1.5 =$26.67 Multiply the shares times the split ratio Eg. 200 shares 2:1 (2/1) x 200 = 400

Question 29

Warrants/subscription warrants

Answer 29

A long-term option to buy stock at a specified price from the issuer in the company 1. Traded separately from the security to which they are attached. 2. At issuance do not have any market premium that initially exercise or price of the warrant is higher than the current market price of the stock 3. Issued with debentures (debenture are unsecured bonds) 4. Voluntary on the part of the issuer 5. Exercise warrant would cause dilution of the earnings per share of outstanding common shares they do not protect investors from dilution (dilution means the total outstanding shares has increased therefore decreasing the EPS) 6. Sometimes given to underwriters as a form of compensation on a new issue 7. Dividends are not paid on warrants 8. Mutual funds are allowed to put warrants into the portfolio that they manage

Question 30

Subscription Rights/preemptive rights/rates are RTS

Answer 30

A short term privilege granted by a corporation to existing common shareholders which give them the opportunity to subscribe to proportion at number of newly issued shares at a price that is lower than the public offering price 1. Preemptive rights clause - Offer existence your order is preemptive right upon the issuance of new share. 2. Rights offering - The distribution of subscription rights to the existing common shareholders in a rights offering existence your holders receive one right for each sheer of common stock that they hold. 3. Rides generally have a maximum maturity of 90 days. 4. Right holders may - use the right to subscribe to purchase additional shares, sell their rights, let their rights expire, gift the rights to another investor. May not redeemed the rights for a cash with the corporation. 5. Existing holders that exercise their rights maintain their proportionate share of ownership in the corporation those who do not exercise their rights would decrease their proportion share of ownership in the corporation

Question 31

How to calculate rights

Answer 31

Outstanding shares \ new shares = # of rights needed to purchase each new share. Eg. 1,000,000 outstanding and new issue of 250,00. 1000000/250000 = 4

Question 32

Preferred stock

Answer 32

1. An equity security 2. Is a fixed income security because the dividend is fixed 3. Pays dividends that is stated as a percentage of par par usually is $100 or any fixed dollar amount for no par shares 4. Usually does not receive preemptive rights or voting privileges 5. Generally less volatile than common stock 6. Generally offer is less potential for appreciation then come in stock

Question 33

Types of preferred stocks

Answer 33

1. Cumulative - All dividends must be current on cumulative preferred stock before dividends are paid to common stock orders. 2. Convertible - May be converted into common stock at the option of the stockholder. Conversion will increase the number of common shares outstanding and dilute the earnings per share. 3. Participating - dividends are fixed as to a minimum but not a maximum amount. Entitled to their minimum dividends but have the rights to participate with common shareholders in additional earnings distributions. 4. Callable - These may be redeemed by the issuer at a certain premium over the par value after a specified date most preferred stock is callable beneficial to the issuer.

Question 34

Dividends

Answer 34

A portion of a companies net profit that is distributed by the company to its stockholders typically paid in cash but can also be paid in stock, (The companies on previously unknown is it stock or the stock of other companies owned by the corporation) Products Dividends are paid on common stock,preferred stock, mutual fund shares American depository receipts ADRs Long stock receive dividends and stock splits short stock owe dividends in stock splits Qualified cash dividends paid to investors are fully taxable at the federal state and local level qualified dividends are generally tax at 15% at the federal level

Question 35

Dates related to dividends

Answer 35

DERP 1. Declaration date - date on which a dividend is declared by a resolution of the board of directors off the corporation 2. Ex dividend date - stock begins to trade without the dividend therefore a buyer of the stock would not be entitled to the dividend if the stock was purchased on or after the Ex-date. Exception: The Ex-date for cash transactions is the business day after the record the date. 3. Record date - date on which the corporation closes the updating of the stock record book persons whose name appear on the book as of this date will be sent dividend. 4. Payable date - The date that the dividend is actually paid to the investor dividend become a taxable liability to the investor in the year the dividends paid this date it also creates the taxable event for the investor investor ** To be entitled to the dividend investors must buy/on the stock at least one business day before the ex-date

Question 36

Dividends calculation

Answer 36

* Par value x % = $ per share * $ per share x amount of shares = annual dividend income Eg: 100 shares of 5% XYZ preferred trading at $50 per share. $100 par value x 0.05 = $5 per share. $5 per share x 100 shares = $500 annual dividend income

Question 37

Current yield on common stock

Answer 37

The current yield is the measurement of the annual percentage rate of return you receive from investing in a stock also referred to as dividend yield

Question 38

Current yield calculation

Answer 38

Annual dividend \ market price = current yield % | 

Question 39

Due bill

Answer 39

Statement of money owed. Use between broker dealers to adjust for incorrect dividend payments

Question 40

Real estate investment trusts REITs

Answer 40

Companies that manage a portfolio of real estate properties to earn profit for their shareholders such as apartment, office buildings, nursing homes and shopping centers which produce revenue from rental income. A. REITS May: 1. Invest in long-term mortgages 2. Own real property 3. Make Short term real estate and construction and development loans 4. Invest in other REITs B. Types of REITs include: 1. Equity REITs - take equity position in real estate shareholder receive income and capital gains when the property is sold at a profit. 2. Mortgage REITS - lend money to build in developers and pass the interest income onto shareholders generally highly leveraged 3. Hybrid REITs - A mix of equity and mortgage REITs

Question 41

Facts and characteristics of REITs

Answer 41

1. IRS rules require to pay out at least 90% off their income to shareholders. Must have at least 75% office asset in real estate related activities. If it satisfies these requirements it avoids double taxation because it does not pay a corporate tax 2. Can provide investors with: income diversification growth professional management 3. No specific tax bracket or net worth is needed to invest. No minimum investment requirements 4. Considered to be an income equity security generally for investors seeking income and capital appreciation 5. Do not provide investors with depreciation right off and losses are not pass-through to investors dividends paid or tax added individuals ordinary income tax rates 6. Earnings come from the difference between rental income and interest paid on borrowed money

Question 42

Advantages of REITs

Answer 42

A. Appreciation in property values B. Dividend income to investors. C. Liquidity an investor could sell their shares D. An increased demand for real estate E. An increase in the occupancy of rental properties. F. Managed by a board of trustees

Question 43

Risk or potential disadvantages of REITS

Answer 43

A. A decrease or a week and an in demand for real estate would negatively impact B. An increase in interest rate thus an increase in mortgage rates would not be adventurous to REITs C. Property developers over building would have a negative effect on REITs

Question 44

REITS (more facts)

Answer 44

* . If the stock market was expected to be volatile an investor wanting a balance portfolio may want to consider increase in investments in REITs * . Some REITs are traded OTC and some are traded on exchanges. If they are publicly sold must be registered with the SEC they are not exempt from registration * not redeemable not investment companies not regulated under the investment company act of 1940 not direct participation programs or limited partnerships.  *  investing in REITs ETF Would increase and investors diversification in the real estate sector because the funds invest in many rather than just one one *  private REITs are not treated on a national exchange or registered with the SEC. as a result private REITs are not subject to the same disclosures as public REITS

Question 45

Direct participation programs DPPs

Answer 45

Real estate partnerships and oil and gas programs are investment which allow the investor certain tax advantages. The limited partnership is the primary vehicle used for DPP.  A limited partnership is composed of general and limited partners

Question 46

Terms used with DPP

Answer 46

1. General partners - Managed entity and have unlimited liability 2. Limited partners - Limit their liability to the amount of their ad to risk investment in the entity 3. Adjusted cost basis - And investors cost or bases in a partnership interest is increase and decrease by certain items and he’s been referred to as the adjusted basis the adjusted basis is increased by: * Additional contribution by the partner * partnership income The adjusted basis is decreased by * Distribution of property to the partner by the partnership * partnership losses *nondeductible partnership expenses * depletion deductions for oil and gas partnerships 4 adjusted basis is important to a limited partner because limited partners can never write off more than the adjusted basis Add risky investment is the investors initial cash investment plus any recourse loans require salons are loans for which the investor is paid personally responsible non-recourse loans do not hold the investor personally responsible

Question 47

Advantages of direct participation programs DPP

Answer 47

A. Income and expenses flow through to the limited partners B. Limited partnership of a single tax status C. Must file a federal tax return but the limited partnership does not pay federal income tax the individual partners must report their share of the net income or net loss of their individual tax return D. No double taxation of profits as with a corporation E. Farm K-1 are issued at a limited partners for tax purposes 2. The capital risk is normally limited to the investors initial cash investment 3.  Capital cost can be depreciated 4. They have flexibility concerning the types of investments available 5. Diversification of financial risk and professional management

Question 48

Disadvantages Of limited partnerships

Answer 48

1. Lack of liquidity limited partners may not sell their interest in the partnership back without restriction 2. Limited partners lack control over management 3. Possible changes in the tax code eliminating the tax advantage of a transaction 4. Last of all or part of the investment 5. Possible assessment of additional funds (oil and gas programs) 6. Additional IRS scrutiny (abusive tax shelters) 7. Potential alternative minimum a tax consequences