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Series 7 > Equity Securities > Flashcards

Equity Securities Flashcards

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Series 7 Top-off Exam flashcards
0
Q

Debt security

A

Acquired by buying a company’s bonds

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1
Q

Define security

A

Investment that represents either an ownership stake or a debt stake in a company.

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2
Q

Debt investment

A

A loan to a company in exchange for interest income and the promise to repay the loan at a future maturity date. (Does not confer ownership)

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3
Q

Stock exchange

A

Auction market where buyers and sellers are matched by a specialist (Designated Market Maker) who maintains a fair and orderly market for a particular set of stocks.

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4
Q

FINRA

A

Financial Industry Regulatory Authority

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5
Q

OTC market

A

Interdealer market linked by computer terminals to FINRA members across the country (no physical location, no face-to-face interaction like stock exchanges)

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6
Q

Stock vs. bond

A

Stock - Ownership/Equity in a company

Bond - Loan to a company (a debt)

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7
Q

Balance Sheet

A

Company’s disclosure of total capitalization, or equity and debt:

  • Assets: what the co. owns
  • Liabilities: what the co. owes
  • Equity: excess of value of assets over value of liabilities
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8
Q

Net Worth equation

A

Assets - Liabilities = Net Worth

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9
Q

Board of Directors (BOD)

A

Oversees company’s business, elected by stockholders, has some day in co. management, but is not involved in day-to-day details of its operations.

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10
Q

Common Stock vs. Preferred Stock

A

Both equity ownership, Pref. does not have same voting rights or appreciation potential. Pref. normally pays fixed dividends an has priority claims over common (paid first if co. goes bankrupt)

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11
Q

Classifications of common stock

A
  • Authorized - # of shares a co. has authorization to issue, or sell; laid out in co. original charter
  • Issued - # of shares a co. has sold to investors
  • Outstanding - # of shares issued by a co. but not repurchased (stock that is investor owned)
  • Treasury - # of shares that was issued, but was since repurchased (can hold indefinitely, or can reissue or retire it)
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12
Q

Usage for unissued stock

A
  • Raising new capital for expansion
  • Paying stock dividends
  • Providing stick purchase plans for employees
  • Providing SOs for officers
  • Exchanging common stock for convertible bonds or preferred stock
  • Satisfying the exercise of outstanding stock purchase warrants
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13
Q

Usage for Treasury Stock

A
  • Increase earnings per share
  • Have an inventory of stock available (for SOs, funding pension plans, etc.)
  • Use for future acquisitions
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14
Q

Common stock: Par Value

A

Arbitrary value given to stock, determined in co’s articles of incorporation, has no effect on stock’s market price (money exceeding par value on stock sale is marked on corporation’s balance sheet as “capital in excess of par”)

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15
Q

Common Stock: Book Value

A

Measure of how much a stockholder could expect to receive for each share if corporation were liquidated

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16
Q

Common Stock: Book Value Formula

A

(Value of tangible assets - Value of liabilities) / (# of outstanding shares)

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17
Q

Common Stock: Market Value

A

Price investors must pay to buy stock, influenced by supply and demand

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18
Q

Rights of Common Stock Ownership

A
  • Voting Rights
  • Proxies
  • Preemptive Rights
  • Limited Liability
  • Inspection of Corporate Books
  • Residual Claims to Assets
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19
Q

Usage of common stock voting rights

A

Vote on:
- Issuance of convertible securities (dilutive to current stockholders) or additional common stock
- Substantial changes in corporation’s business (mergers/acquisitions)
- Declarations of stock splits (forward/reverse)
DO NOT VOTE ON:
- Dividend-related matters (i.e. when they are declared, or how much they will be)

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20
Q

Statutory vs. Cumulative Voting

A
  • Statutory: allows one vote per share owned for each item on the ballot (simple majority to be elected); benefits large shareholders
  • Cumulative: allows allocation of total votes in any manner they choose; benefits smaller investor
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21
Q

Define proxy/proxy solicitation

A
  • Absentee ballot for topics to be voted on at annual stockholders’ meeting
  • When a company sends proxies to shareholders for a specific meeting (info must be submitted to SEC for review)
22
Q

Nonvoting Common Stock

A

Class A (voting) vs. Class B (nonvoting); allows a company to raise additional capital while maintaining management control and continuity without diluting voting power

23
Q

Preemptive Right: Antidilution provision

A

When a corporation raises capital by issuing additional common stock, common stockholders have the right to purchase enough newly issued shares to maintain their proportionate ownership in the corporation

24
Q

Common Stock: Limited Liability

A

Stockholders cannot lose more than they have pod for corporation’s stock; Lim. Liabil. protects stockholders from having to pay a corporation’s debts in bankruptcy

25
Q

Common Stock: Inspection of Corporate Books

A

Right to receive annual financial statements and obtain lists of stockholders (not the right to examine financial records or minutes of BOD meetings)

26
Q

Common Stock: Residual Claim to Assets

A

If corporation is liquidated, common stockholder has right to claim assets after all debts and other security holders have been satisfied (common stock is at the bottom of the liquidation priority list, aka “the most junior security”)

27
Q

Common Stock: Forward Split

A

Increases # of shares and reduces price without affecting total market value of shares outstanding (ea. investor now has more shares, but value of each share is reduced); total market value is the same before/after split

28
Q

Common Stock: Forward Split Calculation

A

Assume a 5:4 split.
- Multiply original shares by 5, then Divide by 4 for # of new shares.
- Divide original value by new shares # for new per share value
NOTE:
Percentage decrease in price is always less than percentage increase in shares

29
Q

Common Stock: Reverse Split

A

Decreases number of shares and increases price per share without affecting total market value of shares outstanding (investors then own fewer shares worth more each)

30
Q

Common Stock: Reverse Split Calculation

A

(Same as Forward Split)
Assume a 2:3 split.
- Multiply original shares by 2, then Divide by 3 for # of new shares.
- Divide original value by new shares # for new per share value

31
Q

Common stock: “Long the stock”

A

An investor who buys shares with the intent of selling at a higher price.

32
Q

Common Stock: “Short the stock”

A

An investor who borrows stock to sell at a higher price, with the intention of buying shares at a lower price and returning them to the lender

33
Q

Common Stock: Capital Appreciation

A

Increase in the market price of shares

34
Q

Common stock: Expectations of owning stock

A

Owners expect to receive growth (capital appreciation), income (dividends), or both from owning stock

35
Q

Common Stock: Income - Dividends

A
  • Cash dividends
  • Stock dividends - additional shares in the issuing company
  • Property dividends - shares in a subsidiary company or sample products
36
Q

Common Stock: Tax Effects

A
  • Capital gains
  • Realized gain
  • Unrealized gain
37
Q

Common Stock: Capital gains

A

Taxes for selling stock at a higher price than purchased:

  • Realized gain: when an investor sells stock at a higher price, responsible for taxes on growth
  • Unrealized gain: when an investor does not sell the stock, not taxed
38
Q

Common Stock: Taxes on Dividends

A
  • Individuals must pay taxes on the dividends the come from their stock
  • Corporations receive a 70% exclusion on div income received from investments in other companies
39
Q

Common Stock: Risks of Owning Stock

A
  • Market Risk: stock could decline at time when investor(s) need money
  • Decreased/No Income: possibility of div income decreasing or ceasing if company loses money
  • Low Priority at Dissolution: bonds/pref stock have higher priority if company declares bankruptcy
40
Q

Preferred Stock

A

Has features of both equity and debt securities:

  • fixed-income security
  • price tends to fluctuate with interest rates
  • mostly nonvoting
41
Q

Preferred Stock: Advantages Over Common Stock

A
  • When BOD declares dividends, pref stockholders receive divs before common stockholders
  • If company goes bankrupt, pref stockholders have priority claim over comm stockholders on assets after creditors have been paid
42
Q

Preferred Stock: Fixed Dividend

A
  • Key attraction for income-oriented investors

- pref stock identified by its annual div payment stated as a percent of its par value (normally $100)

43
Q

Preferred Stock: Adjustable/Variable Dividends

A
  • Dividends usually tied to rates of other interest rate benchmarks, such as Treasury bill or MM rates
  • Can be adjusted as often as semiannually
  • Date of div adjustment is “reset date”
44
Q

Preferred Stock: Limited Ownership Priviledges

A

Pref stock does not have biting or preemptive rights (unless for rate exceptions)

45
Q

Preferred Stock: No Maturity Date

A

Pref stock has no preset date at which it matures and no schedule redemption date

46
Q

Preferred Stock: Fluctuations in Price

A

Even though pref stock is an equity instrument, it fluctuates in price more like a debt instrument. The fixed rate of div payment causes pref stock to trade like bonds.

47
Q

Preferred Stock: Categories

A
  • Straight pref
  • Cumulative pref
  • Convertible pref
  • Participating pref
  • Callable/Redeemable pref
48
Q

Preferred Stock: Straight Preferred (noncumulative)

A

No special features beyond the stated div payment. Any missed div payments at not paid to the holder

49
Q

Preferred Stock: Cumulative Preferred

A

If a company has to suspend div payments, cum pref stockholders accumulate divs on the company’s books until the company can pay them. When they can pay, holders receive current divs plus accumulated divs before any divs may be distrib to common shareholders
- Safer than straight pref stock

50
Q

Preferred Stock: Convertible Preferred

A

Pref stock is convertible if the owner can exchange it for shares of common stock. Often issues at a lower div rate, due to option of converting to common stock and enjoying capital gains

51
Q

Preferred Stock: Participating Preferred

A

Fixed divs, offers owners a share of corporate profits remaining after divs and interest due other securities are paid. Percentage for participating is noted on stock certificate.

52
Q

Preferred Stock: Callable Preferred

A

Preferred stock that a company can call back, or redeem, after a specific date, allowing companies to replace a high fixed div for a lower.

  • div payments and conversion rights cease
  • Company pays a premium exceeding stock par value (such as $103 for a $100 par value stock)

Series 7 (1 decks)

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