fundamentals of investments Flashcards
what are the two forms of underwriting?
best efforts and firm committment
what is best efforts underwriting?
the underwriter agrees to sell as much of the offering as possible
the risk of the issue not selling resides with the firm bc any shares not sold to the public are returned to the company
what is firm commitment underwriting?
underwriter agrees to buy the entire issuance of stock from the company
(can create a spread if they want to)
but the risk that the issuance may not sell resides with the underwriter
what does as prospectus include?
outlines the risks, management team, business operations, fees and expenses
must be issued by an investment company prior to selling shares to an investor
what is a red herring?
this is the preliminary prospectus issued before the SEC approval
is used to determine investors’ interest in the security
what is a 10K?
an annual report of financial statements filed with the SEC
this is AUDITED
what is a 10Q?
a quarterly report that is filed with the SEC
this is NOT AUDITED
What is an annual report?
contains a message from the Chair of the Board on the progress in the last year and outlook for the coming year
is sent directly to shareholders
what are the different types of orders?
Market Order
Limit Order
Stop Order
Stop Limit or Stop Loss Limit Order
What is a market order?
timing and speed of execution are more important than price
most appropriate for stocks that are not thinly traded
What is a limit order?
the price at which the trade is executed is more important than the timing
most appropriate for stocks that are extremely volatile and are not frequently traded
What is a stop order?
the price hits a certain level and turns to a market order
stop order to sell = once the stop order price is reached, the stock is sold at that price or possibly less bc it becomes a market order
primary risk is that the investor may receive significantly less than anticipated if the market is moving too quickly
What is a stop limit or a stop loss limit order?
investor sets two prices:
- first price is the stop loss price aka once the price is reached, the order turns into a limit order
- second price is the limit price aka investor will not sell below the second price
risk is that the market moves too quickly and the order does not fill - leaving the investor with the stock at a significantly lower price
appropriate for those with a significant gain built in and don’t wait to sell it during a period of significant volatility
What is the initial margin requirement set by Regulation T by the Federal Reserve?
50%
what is the margin call formula?
Margin Call = LOAN / 1- Maintenance Margin
what does the value line research report on? and what is their scale?
ranks stocks on a sale for 1-5 for timeliness and safety
1 = highest rating aka signal to buy
5 = lowest ranking aka signal to sell
what does the morningstar research report on?
rates mutual funds, stocks and bonds using 1 to 5 stars
1 star = lowest ranking
5 stars = highest ranking
what is the ex dividend date?
the date the stock trades without the dividend
if you sell ON the exdividend date then you get the dividend
if you buy the stock on or after the ex dividend date then you WILL NOT get the dividend
ex dividend date is ONE BUSINESS DAY before the date of record
what is the date of record?
the date on which you must be a registered shareholder in order to receive the dividend
date of record is one business day after the exdividend date
an investor must purchase the stock two business days prior to the date of record in order to receive the dividend
what are cash dividends and how are they taxed?
qualified dividends receive capital gains tax treatment
is taxed upon receipt
what are stock dividends and how are they taxed?
not taxable to the shareholder until the stock is sold
what is a stock split?
increases shares outstanding and reduces stock price
a 2 for 1 stock split where an investor has 100 shares at $50/share MEANS….
it is now 200 shares worth $25/share
what is the Securities Act of 1933?
regulates the issuance of new securities (primary market)
requires new issues are accompanies with a prospectus before being purchased
what is the Securities Act of 1940?
regulates the secondary market and trading of securities
created the SEC to enforce compliance with security regulations and laws
