Equity Securities

Question 1

Security

Answer 1

• An investment that represents either an ownership stake or a debt stake

Question 2

Equity Security (Position)

Answer 2

• Investor becomes part owner in a corporation by buying shares of the company’s stock

Question 3

Origins of Common Stock

Answer 3

• Two primary types: common and preferred stocks
• Considered ownership positions in a corporation
• All corporations issue common stock
• Each share of common stock entitles its owner to a portion of the company’s profits an dividends and an equal vote on directors & other important matters

Question 4

Authorized Stock

Answer 4

• Corporate charter specifies the # of shares the company is authorized to issue
• Decision made by the founders of the biz
• Most cases, biz does not issue all of the authorized shares
• If biz want to issue more shares than authorized, the charter must be amended through a stockholder vote

Question 5

Issued Stock

Answer 5

• Is authorized stock that has been sold to investors
• Investors have bought the stock & the biz has received the money
• Authorized BUT unissued stock does not carry the rights & privileges of issued shares & are not determined in a biz’s total capitalization (like blank checks in a checkbook)

Question 6

When a corporation issues or sells fewer shares than the total # authorized, it normally reserves the unissued shares for …

Answer 6

• Raising new capital or expansion
• Paying stock dividends
• Exchanging common stock for outstanding convertible bonds or preferred stock

Question 7

Outstanding Stock

Answer 7

• Includes any shares that a company has issued & are in the hands of the investors

Question 8

Isn’t all issued stock outstanding stock?

Answer 8

• Sometimes it is but other times it is not
• However the company gets the stock back (buy or donated to), that stock is no longer outstanding

Question 9

Treasury Stock

Answer 9

• Is stock a corporation has issued & subsequently reacquired
• Corp can hold this stock indefinitely, can reissue or retire it
• Does not carry the rights of outstanding common shares

Question 10

Common Stock Characteristics

Answer 10

• Limited Liability
• Residual Claims to Assets
• Stock Splits
• Stock Dividends
• Transferability

Question 11

Right of Common Stock Ownership

Answer 11

• Certain rights that protect their ownership interests
• Voting Rights
• Preemptive Rights
• Inspection of Corporate Books

Question 12

Common Stock Limited Liability

Answer 12

• Stockholders cannot lose more than the amount they have invested to buy the stock
• Those who own a stock in a corp cannot be held liable for the biz’s debts

Question 13

Residual Claims to Assets

Answer 13

• Claims to assets come after all debts & other security holders have been satisfied
• Common stockholder has the last claim (if there is anything left)

Question 14

Stock Splits

Answer 14

• An increase in the # of a corp’s outstanding shares which increases or decreases its stock’s par value
• The market value of the total # of shares remains the same
• Two types of splits: forward stock split & reverse split

Question 15

Forward Stock Split

Answer 15

• Increases the # of shares & decreases the stock price
• Reduces the price without affecting the total market value of shares outstanding (is the same before and after the split)

Question 16

Reverse Split

Answer 16

• Opposite effect than forward
• Investors own fewer shares worth more per share
• Total market value does not change

Question 17

Stock Dividends

Answer 17

• One option a corp can pay common stockholders is additional shares of stock (stock splits and dividends are very different things)
• This saves the cash for other purposes
• Price per shares changes but the overall value does not

Question 18

Transferability

Answer 18

• In almost all cases, shareholders do not need the permission of the issuer - or anyone else - to sell their stock in the open market
• This means stock has good liquidity (ability to get your money quickly at a fair price)
• One exception is restricted stock

Question 19

Voting Rights

Answer 19

• Common stockholders have the right to vote
• Voting generally take place at the annual meeting & could include such topics as: issuance of convertible securities or additional stock, declaration of stock splits, mergers, acquisitions, BOD election
• Depending on the biz’s bylaws & applicable state laws, a stockholder may have either a statutory or cumulative vote

Question 20

Statutory Voting

Answer 20

• Allows a stockholder to cast one vote per share owned for each item on the ballot
• This voting style benefits the larger shareholders
• For example: Mr. X owns 100 shares and is voting on 3 BOD seats; he may use a maximum of 100 votes for any one seat (BOD1 = 100, BOD2 = 100, BOD3 = 100)

Question 21

Cumulative Voting

Answer 21

• Allows a stockholder to allocate their total votes in any manner they choose
• This voting style benefits the smaller investor
• For example: Mr. X owns 100 shares and is voting on 3 BOD seats; he may allocate all 300 votes to one seat, giving him a greater impact (BOD1 = 200, BOD2 = 75, BOD3 = 25)

Question 22

Proxies

Answer 22

• Stockholders often find it difficult to attend the annual stockholders’ meetings so most vote on biz matter by means of proxy - a form of absentee ballot
• Proxy can be automatically canceled if the stockholder attends the meeting, authorizes a subsequent proxy or dies

Question 23

When a company sends proxies to shareholders, it is know as a …

Answer 23

• Proxy solicitation
• A stockholder my revoke a proxy at any time before the biz tabulates the final vote at its annual meeting

Question 24

Nonvoting Common Stock

Answer 24

• Companies may issue both voting & nonvoting (or limited voting common stock (Class A & Class B)
• Allows a company to raise additional capital while maintaining management control & continuity w/o diluting voting power

Question 25

Preemptive Rights

Answer 25

• A right to purchase enough newly issued shares to maintain their proportionate ownership in the corporation
• When a corporation raises capital through the sale of additional common stock, it may be required by law or its corporate charter to offer the securities to its common stockholders before the general public
• An anti-dilution provision
  EX: Pete owns 10% of the 1M shares of XYZ Inc; the corp issues 500K new shares so Pete has a right to purchase 50K shares to keep his 10% ownership

Question 26

Inspection of Corporate Books

Answer 26

• Stockholders have the right to receive annual financial statements and obtain lists of stockholders
• Vary from state to state