equity securities Flashcards
4 phases of common stock and definitions
authorized- approved by finra
issued- stock bought by investors
treasury stock- stock bought back by issuer
outstanding- issued shares-treasury shares
voting methods of common stockholders and description of each
statutory- votes split evenly
cumulative- anyway you want (benefits small investor)
dividends are payable as:
cash, stock, or property
describe a cash dividend
-price adjusts down by the amount of the dividend on the ex-dividend date
describe a stock dividend
- price of stock adjusts down for dividend
- investor receives additional shares of stock
- proportionate value remains same
when are cash dividends taxable?
taxable when received
when are stock dividends taxable?
taxable when shares are sold
short term gains (length)
less than 1 year
long term gains (length)
more than 1 year
settlement dates for cash and regular way settlements
cash- same day
regular way- trade + 3 business days
calculate cost basis for even stock splits:
shareholder long 100 shares @ $40
stock splits 2:1
100 shares X $40 = $4,000
$4,000 / 200 shares = $20
after split: 200 shares @ $20
calculate cost basis for odd stock splits:
shareholder long 100 shares @ $40
stock splits 3:2
100 shares X $40 = $4,000
$4,000 / 150 shares = $26.67
after split: 150 shares @ $26.67
formula for dividend (current) yield
annual dividend / current market value
calculate dividend yield:
XYZ stock trading @ $42 pays a $2 annual dividend
$2 / $42 = 4.76% dividend yield
describe preemptive rights/stock rights
- right to maintain percentage ownership
- one right per share of stock owned
- short term (1 month)
exercise price of rights is:
below market price of the stock
owner of rights may:
- exercise (if you have money available)
- sell (if no money available)
- allow to expire (not smart. owner would sell or exercise before letting them expire)
describe warrants
- long term (5 years)
- exercise price above market price
- sweeteners
warrants are usually attached to what and for what purpose are they attached?
attached to bond
- marketability
- lower interest rate on bonds
what are the two equity positions?
common and preferred stock
describe a reverse stock split adjustment
- price of stock adjusts up for reverse split
- investor will have fewer shares
- proportionate value of ownership remains the same
describe preferred shares
- fixed par value ($100)
- dividends are fixed stated rate (% of par)
describe straight (noncumulative) preferred shares
missed dividends are not payable
describe cumulative preferred shares
dividends in arrears and current preferred dividends must be paid before common
describe callable preferred shares
issuer may buy back shares after a specified date at a specified price
describe participating preferred shares
issuer may pay more than the stated dividend to investor
describe adjustable rate preferred shares
dividend tied to another rate (ex. T-bill rate)
right and warrants: which is marginable?
rights-non marginable
warrants-marginable
what type of investment would be suitable for investors seeking income?
preferred stock because dividend yield of preferred is generally higher than common shares)
calculate conversion ratio on a convertible preferred stock:
par=$100 Conversion price= $25
$100 (par value) / $25 (conversion price) = 4
4:1 conversion ratio
what types of preferred stock can be used as a possible hedge against inflation?
- participating preferred stock
- adjustable rate preferred stock
an ADR represents:
a foreign security in a domestic market
ADR shares are held by?
bank and the bank issues reciept
ADRs are quoted in:
US dollars
how are ADR dividends declared?
declared in foreign currency but paid in US dollars (ADR holder has currency risk)
describe bullish and bearish stock positiions
bullish- want price to go up
bearish- want price to go down
what is the market value of stock affected by?
earnings and dividends
what is the market value of stock determined by?
supply and demand
where are REITs traded?
- exchanges
- OTC
What do REITs provide?
liquidity for real estate investors
describe REIT 75%
-75% of assets must be invested in operating income producing real estate or mortgages
describe REIT 90%
-90% of net operating income must be distributed for REIT to avoid taxation as a trust
when disseminating information about transactions of OTC securities, 1 share equals 1 round lot for stocks trading at or above:
$175 per share
a company with 20 million shares paid $36 million in dividends. if the CMV of the company’s shares is $36, the current yield is:
$36 million (dividends paid) / 20 millions shares = $1.80 per share
$1.80/$36 = 5% current yield
how are REITs taxed?
taxed at the investor’s ordinary income tax rate
XYZ conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of XYZ is $70, what is the value of one right before the stock trades ex-rights?
formula:
(CMV-subscription price)/number of rights to purchase 1 share + 1
($70 - $50)/2 = $10
