Equity Securities Flashcards
This deck focuses on terms and concepts relating to equity securities, including common stock, preferred stock, rights, warrants, and dividend procedures.
Regular way settlement for equities
T + 1
The first day that a buyer buys stock without a dividend
Ex-dividend date
The date on which a corporation pays a dividend to shareholders of record
Payable date
The last day a buyer can buy stock and receive the dividend
Business day before the ex-date
When issuers must notify the exchange prior to the stock’s record date
10 business days prior (the declaration date)
When the ex-dividend date happens relative to the record date for regular way trades
Same day as the record date for regular way trades.
Security with the most junior claim in a corporate liquidation
Common stock
Fixed rate equity security that responds to market conditions like a bond
Preferred stock
Share value of a penny stock
Less than $5 per share
adjustable-rate preferred stock
A type of preferred stock where the stated dividend rate will fluctuate based on an underlying benchmark, such as the rate on T-bills. Because the dividend will adjust based on current interest rates, the share price tends to remain extremely stable.
American depositary receipts (ADRs)
Negotiable certificates that represent ownership in the shares of foreign companies and help facilitate their trading in the US.
American depositary shares (ADS)
The individual shares of foreign corporations represented by ADRs.
authorized stock
The total number of shares of common stock that a corporation is allowed to issue according to its corporate charter.
beneficial owner
The actual owner, who retains all rights of ownership, even if the account has another legal owner in name. When securities are held in street name, the broker-dealer acts as the nominal owner, with the investor still being the beneficial owner.
beta
A measure of the volatility of a stock or portfolio compared to the overall market. A security that has a beta of 1.0 will track the market, a beta of more than 1.0 indicates the price will be more volatile than the market, and a beta of between 0 and 1.0 indicates that the security will be less volatile than the market.
blue chip stock
Shares of large, stable companies that have a long history of steady earnings and dividends. Because of their size, they offer modest growth potential, but generally pay a consistent dividend. Examples include Coca-Cola, General Electric, and IBM.
business risk
The risk that one specific company’s value will lower, be it due to poor management decisions or product recalls. An investor can protect against this risk by owning a diversified portfolio.
callable preferred stock
A type of preferred stock that can be repurchased by the company at its discretion. The company is most likely to exercise this call feature when interest rates are falling in order to issue new stock with a lower dividend. Because of the call risk faced by the investor, callable preferred generally pays a higher dividend than non-callable preferred stock from the same issuer.
capital appreciation
The increase in the value of a securities position, such as one involving a stock or bond.
cash dividend
The most common type of dividend payment. Cash profits are distributed to shareholders if declared by the company’s board of directors. Cash dividends are taxable at receipt by the investor.
cash settlement
A settlement cycle where both payment and legal ownership change hands on the same day the trade is executed. Cash settlement contrasts with regular way settlement, in which there’s a delay between the trade date and settlement date.
common stock
The most widely held equity security, representing ownership stake in a company. Rights of common stockholders include the ability to vote on corporate matters, to receive dividends if declared by the company’s board, and limited liability. Investors typically purchase common stock for capital appreciation and dividends.
convertible preferred stock
A type of preferred stock where holders have the option to exchange their preferred shares for shares of the issuer’s common stock. Because of this benefit for the investor, convertible preferred pays a lower dividend than nonconvertible preferred from the same issuer.
cumulative preferred stock
A type of preferred stock that requires the company to pay any previously skipped dividend payments to these investors before any dividends can be paid to a common stockholder.
cumulative voting
A voting structure in which each shareholder can pool all of his votes together and allocate them as he chooses.
declaration date
The date on which a company’s board of directors declares 1) that a dividend will be paid, 2) when it will be paid (the payable date), and 3) the date an investor must be on the company’s books by to receive the dividend (record date). This announcement must be made at least 10 business days before the record date.
dilution
The reduction in ownership interest of a corporation due to the issuance of additional shares. Pre-emptive rights give investors the opportunity to avoid dilution and maintain their proportionate ownership if the company issues additional shares.
dividend
A distribution of a company’s profits that is paid to shareholders if declared by the board of directors. Dividends can be paid in cash, company stock, stock of a subsidiary, and company product.
dividends in arrears
Missed dividend payments.
equity security
A type of security that represents ownership. The most common examples include common stock and preferred stock.
ex-dividend date
The first day that an investor buys the stock, but will not receive the dividend because the transaction will not settle in time. Because the buyer will not be on the books and records of the company in time to receive the dividend, the seller receives it instead. For regular way transactions, the ex-date is the business day before the record date and for cash-settled transactions, the ex-date is the business day after the record date. On the morning of the ex-date, the price of the security will fall by the amount of the dividend to reflect the fact that the buyer will not receive the dividend.
ex-rights
Shares issued in a rights offering that are trading in the marketplace separate from the rights are said to be trading ex-rights.
forward stock split
A type of stock split in which investors receive additional shares with each share worth a proportionately lower price. The total value of the company remains unchanged. A company may engage in this action if it believes its share price is too high to interest potential investors.
Form 10-K
An audited financial report that must be filed with the SEC and provided to investors on an annual basis.
growth stock
Shares of companies that reinvest most of their earnings back into the business. They have a great potential for increased value, but with considerably more risk. Growth stocks typically trade at a high price-to-earnings ratio with investors seeking capital appreciation.
income stock
Shares of a company that pay steady dividends to investors. These are generally companies that operate in mature industries and have low investments in research and development. Examples include utility stocks.
issued stock
The total number of shares that have been sold to the public by the company.
long-term capital gains
The profits from the sale of securities that have been held by the investor for more than one year. These gains are taxed at a preferential rate.
market risk
The risk that the performance of an individual security will be impacted by the performance of the overall market. Market risk cannot be avoided through diversification, though it can be hedged or protected with investments in options and other derivatives.
nominal owner
The registered or legal owner of the security in name only, as another entity is the beneficial owner, retaining all rights of ownership. A broker-dealer acts as a nominal owner when securities are held in street name.
