Investment Vehicles: Equity Securities

Question 1

Describe Blue Chip Stock

Answer 1

Stock issued by a company that is generally nationally known with a reputation for quality management, products, and services.

Question 2

Describe Growth stock

Answer 2

stock issued by a company that is expected to have above-average increases in revenues and earnings.

These companies:
1. have a high percentage of retained earnings
2. pay little or no dividend resulting in a low dividend yield
3. generally, have a high price/earnings ratio
4. stock price may fluctuate widely and typically have high volatility
5. an emerging growth company is high risk, high return, and high failure rates

Question 3

Describe cyclical stock

Answer 3

stock that is heavily affected by normal business and economic cycles (rise and decline with the economy)

Question 4

Describe countercyclical stock

Answer 4

stocks that move in the opposite direction of the economy

Question 5

Describe Defensive or non-cyclical stock

Answer 5

stocks issued by a company that is resistant to normal business cycles and to general stock market fluctuations (stable and consistent)

Question 6

What is the formula for Current or Dividend Yield

Answer 6

current (dividend) yield % = annual dividend / stock price

Question 7

Give 5 examples of a cyclical stock

Answer 7

Cyclical stock examples:
1. auto manufacturers
2. steel companies
3. appliance manufacturers
4. housing companies
5. paper companies

Question 8

Give 3 examples of a countercyclical stock

Answer 8

Countercyclical stock examples:
1. gold mining companies
2. budget retailers (Wal-Mart)
3. temp agencies

Question 9

Give 4 examples of defensive or non-cyclical stock

Answer 9

Defensive (non-cyclical) stock examples:
1. tobacco companies
2. utilities
3. food companies
4. pharmaceutical companies

Question 10

Give 4 reasons a company would want to buy back their own stock

Answer 10

Treasury stock buyback:
1. Increase earnings per share - treasure shares are not included in the EPS calculation
2. Finance future acquisitions - takeover stock for stock acquisition
3. Provide stock for employee stock options
4. Fight a takeover attempt

Question 11

Define outstanding shares

Answer 11

Outstanding shares:
The shares of a corporation’s stock that are issued and held by stock holders

They are the only shares which vote, receive dividends, and are used to calculate earnings per share

Question 12

What is the formula to determine outstanding shares

Answer 12

Issued stock - treasury stock = outstanding stock shares

Question 13

What are the two major market sectors in the securities industry

Answer 13

Primary market:
1. represents securities being sold for the first time by a corporation such as an initial public offering
2. the funds from the sale of securities go to the issuer f the securities

Secondary market:
1. do not involve issuers
2. take place in different marketplaces such as the floor of a stock exchange (listed transactions) and off the floor (over-the-counter transactions)
3. broker-dealers are compensated with commissions and mark-up/mark-downs charged on trades, and agents share in that compensation

Question 14

Define common stock

Answer 14

1. it is an equity security (ownership)
2. common stockholders generally have the following rights:
   a. inspect certain corporate books
   b. receive dividends when and if declared by the board of directors
   c. the right to receive proxies and vote
   d. sell their shares in the secondary market
   e. to sue the board of directors for negligence

Question 15

What is the order of asset distribution if liquidation occurs?

Answer 15

1.Taxes
2. Secured debt
3. Unsecured debt (debentures, general creditors, accounts payable)
4. Preferred stockholders
5. Common stockholders

Question 16

Define proxy

Answer 16

a proxy is a legal authorization for one part to act on behalf of another

Question 17

What are the two types of voting rights for stockholders

Answer 17

1. Regular or statutory - stockholders receive one vote per share per director. (beneficial to substantial stockholders)
2. Cumulative or block - stockholders receive one vote per share times the number of directors being voted on (beneficial to minority stockholders)

Question 18

Describe stock split

Answer 18

1. Primary purpose of a stock split is to increase the marketability by reducing the market price of the stock
2. The number of shares outstanding increases and the par value decreases proportionately
3. Outstanding common shareholders must vote to approve stock splits
4. Stock splits do not cause dilution (Dilution results when a company has more newly issued shares outstanding which causes a decrease in the earnings per share)

Question 19

Corporations can pay dividends in the form of

Answer 19

1. Cash
2. Their own stock
3. Stock of other corporations
4. Treasury stock
5. Products

Question 20

Dividends are paid on

Answer 20

1. Common stock
2. Preferred stock
3. Mutual fund shares
4. American Depositary Receipts

Question 21

What is an ADR

Answer 21

American Depositary Receipt - Receipts traded in the US for foreign securities which are held in bearer form by an American bank in foreign countries. Dividends are paid in US dollars

Question 22

What are the key dates relating to dividends

Answer 22

D-E-R-P
1. Declaration Date - date on which dividend is declared by Board of Directors
a. Must own stock at least 1 business day prior to ex-date to get dividend
2. Ex-Dividend Date - the date the buy of the stock would not be entitled to the divided if the stock was purchased on or after the ex-date (remember without dividend)
a. Ex-date is 1 business day prior to record date for “regular” transactions. For cash it is the business day after record date.
3. Record Date - date the corporation closes the updating of the stock record book. Those named receive the dividend whether they are entitled to it or not
4. Payable date - date the dividend is actually paid