Investments - Stock

Question 1

Common Stock

Answer 1

• unit of ownership of a corporation
• default risk - is a company fails, claims are paid first to secured and unsecured creditors, bonds, and preferred stock first.

Question 2

Preferred Stock

Answer 2

• hybrid security that resembles an equity and a bond
• pays a fixed dividend rate
• maturity is infinite (longer duration)
• greater interest rate risk than bond
• Generally a corporate treasure buys preferred stock with excess funds on hand because 50% of the dividends received are excluded from taxation.

Question 3

American Depositary Receipts (ADR)

Answer 3

Receipt for shares of a foreign based corporation held in a vault at a U.S. bank. Therefore U.S. investors do not have purchase markets overseas. This reduce the risk of fraud and provides convenience.

• Shareholders are entitled to all dividends and capital gains.
• Prices are quoted in the dollar, dividends are paid in the dollar, but dividends are declared in the foreign currency.
• Investors get a foreign tax credit.

Question 4

Exchange Traded Funds (ETFs)

Answer 4

• A security that represent a basket of stock and bonds comprised of whatever index it is mean to replicate.
• Generally Open end index fund, but can be closed end
• have lower expense ratio than investing directly in an index mutual fund.
• The initial minimum investment is lower than an index mutual fund.
• The investor can trade ETFs at market price on the stock exchange anytime the stock market is opened.