Equity Securities

Question 1

What are equity securities and what do they represent❓

Answer 1

✅ Represent ownership interest in the issuing corporation. Examples include preferred stock and common stock.

Question 2

What is Common Stock and what does it represent❓

Answer 2

✅Type of equity security most commonly issued by corporations to raise capital (money)
✅Each share represents part ownership, example if company issues 1Mil shares, each individual share represents one-millionth ownership.

Question 3

List Stockholder rights and the functions of each -

Answer 3

✅ Right of Inspection - Right to inspect books and financial records of issuer usually through annual report.
✅ Limited Liability - liability limited to the amount invested. You can’t go negative or owe money.
✅ Residual rights - If a company files for bankruptcy, common stockholders will be paid last. (If any money is left)
✅ Voting rights - Right to vote on important company topics like electing board of directors, stock splits, tenders, etc
✅ Right of perpetual ownership - Shareholders own their shares forever (in perpetuity) unless they choose to sell them.
✅ Preemptive right - “rights offering” notice gives existing shareholders the opportunity to buy new shares of a company before they are offered to the public, so they can maintain their current ownership percentage.

Question 4

What is the order of liquidation❓

Answer 4

This refers to the order at which a company will distribute assets in the case of if they file for bankruptcy.

1. Unpaid workers
2. IRS
3. Secured creditors
4. General creditors
5. Subordinated debentures
6. Preferred stockholder (if any money is left over)
7. Common stockholder (if any money is left over)

Question 5

Define Statutory voting rights - ❓

Answer 5

✅ - Statutory - Shareholders can cast one vote per share for each director position up for election. Votes must be distributed evenly among all candidates; you cannot allocate more votes to a specific candidate.
○ Ex- Shares owned 100
○ Director positions 3
○ Total votes 100 x 3 = 300 votes
○ You can cast 100 votes total per candidate per position totaling 300 votes

Question 6

Define Cumulative voting rights ❓

Answer 6

✅ - Definition: Cumulative voting allows shareholders to allocate their total votes flexibly among one or more candidates. This system enhances the ability of minority shareholders to influence board elections by concentrating their votes on fewer candidates.
○ Ex- Shares owned 100
○ Director positions 3
○ Total votes 100 x 3 = 300 votes
○ You can allocate your 300 votes in any way as long as the total adds up to 300.

Question 7

❓What are the similarities and key differences between statutory and cumulative voting rights?

Answer 7

✅Similarities
- Total votes
○ In both, each share represents one vote
○ You multiply your total shares by the number of open seats to get your total votes.
§ Ex - you own 200 shares of XYZ company, if there are 5 open board seats, you have a total of 1000 votes

✅ Differences
- Vote Allocation:
○ Statutory: Equal votes per candidate (one vote per share per candidate).​
○ Cumulative: Flexible allocation; all votes can be given to one candidate or split among multiple.​
- Minority Shareholder Influence:
○ Statutory: Less influence for minority shareholders.​
○ Cumulative: Greater potential influence by concentrating votes.

Question 8

❓What is proxy voting?

Answer 8

✅ Form of absentee voting, example voting by mail.

Question 9

❓Define Authorized Shares, Issued Shares, and Outstanding shares

Answer 9

✅ - Authorized - total amount of shares that are authorized per the corporate charter (bylaws)
✅ - Issued - number of shares that have been placed with shareholders (ALL bought shares)
✅ - Outstanding - Issued (owned by shareholders) minus Treasury = outstanding

Question 10

❓What are treasury shares and why would an entity partake?

Answer 10

✅ These are shares bought back by the issuer to protect against a hostile takeover (majority shareholder) or to increase the price of the outstanding shares. Also known as retired shares.

Question 11

❓What is ‘Par Value’?

Answer 11

✅ - A value assigned to each share for bookkeeping purposes.
✅ - Not important for common stockholders.
✅ - Very important to bond and preferred stockholders.
✅ - Also known as nominal or originating value.

Question 12

❓Define ‘Corporate actions’

Answer 12

✅ These are actions taken by corporations that affect the price of the security.
- Shareholders MUST be notified (and sometimes must vote)
○ IF trading on NYSE- the exchange is responsible
○ IF trading on OTC - FINRA is responsible

Question 13

❓Corporate actions - Define Buyback

Answer 13

✅ When a company buys back shares from the open market to turn into treasury shares to increase share price or stop a corporate takeover (majority shares)

Question 14

❓Corporate actions - Define Tender Offer

Answer 14

✅ When a company offers to buy back shares from shareholders at a premium, the offer is only good for a certain number of days and minimum number of holders.
○ Ex- XYZ company puts tender offer out, 50% of outstanding shareholders must agree or the deal is canceled.

Question 15

❓Corporate actions - Define Exchange offer

Answer 15

✅ When a company offers to exchange equity shares to either reduce debt or buy more time to payback debt
○ Ex - ABC company offers bond holders the offer to exchange for common stock thus lowering their corporate debt
○ Ex- XYZ company exchanges 4% bonds that mature in two years for 5% bonds that mature in 10 years thus buying more time to pay back their debt.

Question 16

❓Corporate actions - Define Mergers

Answer 16

✅ When two companies agree to merge usually gaining market share, this is a good thing

Question 17

❓Corporate actions - Define Acquisitions

Answer 17

✅ When a bigger company takes control of a smaller company, bigger corp must own majority shares of target smol corp.

Question 18

❓Corporate actions - Define Forward stock split

Answer 18

✅ Company splits the stock to increase shares and lower price to make their stock more attractive (and affordable!)
○ e.g., 2-for-1, 3-for-1, 4-for-2, etc)
X for 1 formula; Multiply held shares by first number to get new total shares, Divide original price by first number to get new price.

Ex- Bob has 200 shares of ABC stock at $40 per share and the company decides to split 3 for 1. After the split Bob will own 600 shares at $13.33 a share. His equity remains at $8000.

5/4/3 for 2/3/4/etc; Divide first number by second number to get multiplier; multiply held shares by that number to get new total shares, divide original price by that number to get new price.

Ex: Bob owns 100 shares of XYZ at $20 per share and the company decides to split at 3-2. After the split Bob will own 150 shares at $13.33, His equity remains the same at $2000

At the end the total shareholder equity DOES NOT CHANGE!

Question 19

❓Corporate actions - Define Reverse stock-split

Answer 19

✅ Company combines stocks to inflate the price and reduce the amount of shares in the market. Usually not a good thing!
○ e.g., 1-for-2 or 1 for 3 or 1 for4, etc
1 for X formula: Divide the held shares by the second number (x) to get new share amount. Then multiply the original price by the second number (x) for new price per share.

Ex- Bob owns 250 shares of ABC company at $5 per share. The company decides to do a reverse split of 1 for 5. After the reverse split bob will own 50 shares at $25 per share. His equity remains at $1250

At the end the total shareholder equity DOES NOT CHANGE!

Question 20

❓What does the term ‘pro rata’ mean in terms of dividends issuance?

Answer 20

✅ if a dividend is issued, each shareholder is entitled to an equal proportion for every share they own.

Question 21

❓Define cash dividend and ex Dividend date

Answer 21

✅ A dividend is a share of the profits the company made in CASH form this is a taxable event. The ex dividend date refers to the day AFTER a dividend is paid out, the market price goes down by the payment amount.

Ex- Bob owns 10 shares of ABC company at $100 a share, if the dividend is 8%, the owner recieves $ 80 (8 dollars per share) and the share price goes down to $92 (8% less of $100).

Question 22

❓What is Ex-Dividend date and how is it calculated?

Answer 22

✅ The price a security trades at AFTER a dividend is paid out, always less. Formula is (Price minus dividend paid equals new price on ex-dividend date.)

Ex- Bob was paid a dividend of $1.50 per share of XYZ company, the market price was $12. On ex-dividend date the new price will be $10.50.

Question 23

❓ Define stock dividends-

Answer 23

✅ - Nontaxable event in which the company pays out more stock (like a forward stock split) instead of cash. This makes the stock more attractive and they get to keep the profits (cash).
- These are handed out in percentages, ex 3%, 5%, or 10%.

○ Formula - To find the new share amount and stock value, find the stock dividend percentage and add that number to his current shares for the new amount of shares, then find the SAME percentage of the share price and subtract form the price to get the new price.

○ Ex. Bob has 220 shares of ABX corp at $40 per share. The company pays him a stock dividend of 5%, after the dividend is paid his new share amount is 231 (5% of 220 is 11) and the new share cost is $38 per (5% of 40 is 2). Bob STILL has $8800 in equity.

At the end, shares go up and price goes down, but EQUITY REMAINS THE SAME.

Question 24

❓Define Preferred stock

Answer 24

✅ Equity security that represents ownership in a company.
✅ Usually does not have voting rights
✅ More commonly receives cash dividend payment. (taxable event)
✅ There are several different types of preferred stock, and they can be MULTIPLE types at once.
✅ PAR value is usually 100 (could be 25 or 50) and tends to trade closer to PAR value

Question 25

❓ What are some drawbacks of preferred stock?

Answer 25

✅ Higher cost per share, lack of voting rights, and lack of growth.

Question 26

❓How do you calculate the cash dividend for a preferred stock?

Answer 26

✅ Multiply the percentage of the cash dividend by the PAR value. Ex: If a dividend is 6% and PAR value is 100, the dividend is $6 per share owned. Extra note - To calculate total dividend paid, multiply the dividend by shares held for total dividend for the total dividend.

Question 27

❓ Preferred Stock - Define Noncumulative (straight)

Answer 27

✅ If a dividend payment is missed (not issued) this type of preferred stock will NOT be paid in rears.

Question 28

❓Preferred Stock - Define Cumulative

Answer 28

✅ If a dividend payment is missed (not issued) this type of preferred stock WILL be paid in rears. Cumulative preferred stock owners will always be brought current before a common stock owner is paid. Ex- ABC company promised Bob a 5% dividend out of $100 dollars, that's $5, if Bob doesn't receive all of the dividend year one, Bob will be entitled to the new dividend plus what he's owed during year 2.

Question 29

❓Preferred Stock - Define Convertible

Answer 29

✅ Preferred stock that can be exchanged for common stock. Conversion price is set when first issued. The conversion ration tells you how many shares of common a preferred will trade for.

Question 30

❓Preferred Stock - Define Callable

Answer 30

✅ Preferred stock the issuer (company) can buy back at any time at a set price.

Question 31

❓Preferred Stock - Define Participating

Answer 31

✅ Rarely issued that allows stockholders to receive common dividends and preferred stock dividends up to a certain amount. Most preferred stock is NON participating.

Question 32

❓Preferred Stock - Define Prior (senior)

Answer 32

✅Senior preferred stockholder that gets paid even before regular preferred stockholders.

Question 33

❓Preferred Stock - Define Adjustable (variable or floating rate)

Answer 33

✅ Holders of adjustable receive a dividends that's adjusted every three months to match movements in prevailing interest rates. Stock price remains more stable due to being tied to interest rates (like T-Bill)

Question 34

❓What is a round lot?

Answer 34

✅ This is considered 100 shares of given stock.

Question 35

❓What is an ADR?

Answer 35

✅ Stands for American Depository Recipe. These are foreign stocks that have been converted to Americanized versions so they can be traded in the states. Benefits include the currency is converted for you, all materials come in English, can be bought and sold like US securities. Negatives include the potential for currency risk- the value of the issuing country's money going down. yikes!

Question 36

❓What are Rights?

Answer 36

✅ The right to buy shares at a discount so shareholders can keep proportionate ownership.

Question 37

❓What are Warrants?

Answer 37

✅ Sweeteners, like an offer to buy shares at a certain price (usually higher than what it is currently trading at) with the intention of honoring them at a later date when the price is better. Ex- ABC offers to sell shares at $50 with a warrant that says, you can buy another 100 shares at $80. It doesnt make sense to redeem the warrants now because the market price is better, BUT if in the future shares rise to say $100 a pop, the warrant serves as a discount.