IP - Chapter 9 - Equity Securities* Flashcards
Represents accounting profit of the company on a per share basis
EPS - Earnings per Share
What is the EPS Formula?
Net Income - Preferred Dividends / Shares Outstanding
Structure that does not include any dilutive securities.
Simple Capital Structure
What is the Payout Ratio?
Dividends per share/ Earnings per share
Formula for the retention ratio?
Net Income - Dividends / Net Income
When must the buyer own the stock to receive the dividend?
1 day before the ex-dividend date
How is dividend yield set?
In dollars (dividend % fluctuates with stock price while dollar amount remains the same)
What is most noteworthy of stock dividends?
Stock Dividends typically dilute share price (result in more shares outstanding)
What is the result of a 2 for 1 stock split?
- Doubles the number of shares
- Reduces par value by 1/2
What is the result of a 3 for 1 split?
- Triples the number of shares outstanding
- Reduces the PAR value in thirds
Often declared when a company perceives that its stock price is too high for the average investor.
Stock Splits
What is a round lot?
100 shares
When do companies utilize a reverse split?
When a company wants to reduce the number of outstanding shares of company stock.
(Increase share price and reduce the number of shares in an attempt to prevent delisting)
Stocks that trade with a share price below _______ are subject to delisting.
$1.00
What is straight or statutory voting?
- 1 vote per share of common stock
- Most common form of voting
What is cumulative voting?
1 vote per share times # of seats on board of directors
Sending written authorization to agent to cast vote for shareholder.
Proxy Voting
Allowing the owner of a stock or share to maintain his/her ownership percentage.
Preemptive Right
What is it called when the courts hold shareholders liable for the actions of a corporation?
Piercing the Corporate Veil
Stocks that are generally unaffected by general fluctuations in the economy and the market.
Defensive Stocks
What is the corporate dissolution payout order?
1) Secured Creditors
2) Unsecured Creditors
3) Preferred Stockholders
4) Common Stockholders
Stocks with high fixed costs that typically have investments in plant and equipment.
Cyclical Stocks (Auto, Cement, Airlines)
Companies with sales and market growth at higher rates than the average company.
Growth Stocks
Companies that typically grow with GDP?
Income Stocks (i.e. Utility Companies)
What are typically companies/stocks that are sensitive to interest rates? (5)
- Insurance Companies
- Banks
- Savings and Loans
- Telephone and Utility Companies
- Home Construction Companies
High quality companies that investors feel are undervalued by the market
Value Stocks
Outstanding shares X Share Price
Market Cap
What is mega-cap?
Excess of $200 Billion
What is large cap?
Market Cap greater than or equal to $10 Billion
What is mid cap range?
Greater than or equal to $2 Billion
Less than $10 Billion
What is the small cap market range?
Less than $2 Billion
What is the micro cap market cap?
Less than $300 MM
What is the Nano Cap market cap?
Less than $50MM
What is another name for ‘Treasury Stock?’
Company Buyback Shares
These shareholders are issued dividends before common stock holders.
Preferred Stock
When a company is required to pay any unpaid preferential dividends from prior years this is called paying _____________________ .
Dividends in Arrears
What type of preferred stock has dividends in arrears?
Cumulative (Non-Cumulative companies have no dividends in arrears)
What is the order of Dividends paid out?
Preferred Stock Dividends in ARREARS Preferred Stock Dividend Common Stock Dividend Preferred Participating Dividends Common Participating Dividends
Buying Stock direct from a company without the aid of a broker.
Dividend Reinvestment Plan
Type of underwriting where the underwriter purchases the entire issue of securities at a specific price and tries to resell it
Firm Commitment
Underwriter purchases remaining securities at predetermined price after the IPO to sell.
Stand By Underwriting
Underwriter sells as much as possible of the issue and the remainder is returned to the company
Best Efforts Underwriting
Many different firms participate in selling part of an offering
Syndicate
Companies may sell only to accredited investors
Rule 504
What is an accredited investor?
- Earned income exceeds $200k ($300k with spouse) in each of the prior 2 years and reasonably expects the same for the current year
- Has Net Worth of over $1MM either alone or with spouse (excluding value of primary residence)
What is rule 506 (b)?
- Unlimited Accredited Investors
- Limited to 35 non-accredited investors (with sufficient business experience)
Plans offered by companies that allow investors directly from company as opposed to going through a broker
DR|PS - Dividend Reinvestment Plans
Certificates held by U.S. banks representing ownership in foreign companies?
ADR’s
3 facts about ADRs?
1) Denominated in US dollars
2) Pay dividends in US dollars
3) No protection from exchange rate risk
These types of funds allow investment managers to invest in much less liquid securities without fear that investors will wish to liquidate - forcing manager to sell securities.
Close End Funds
Example:
Facebook Class ‘A’ Share: 1 vote per share
Facebook Class ‘B’ Share: 10 votes per share
Dual Class Structure
Investors usually chose these types of investments because they are less correlated with the US market although they are typically more volatile?
Foreign/Emerging Markets
These offerings are exempt from SEC registration and faster because of lack of registration requirements.
Private Placement
What is an accredited investor?
- Earned income exceeded $200k (or $300k w/spouse) in each of prior 2 years
- Has Net worth over $1MM either alone or with spouse (excluding primary residence)
For crowd funding rules- If both your annual income and your net worth are equal to or more than this number during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser but not to exceed this number.
$107,000
For investors and crowdfunding, what are the rules?
- If both Annual Net Income and New Worth individually are greater than or equal to $107,000 then: During any 12 months the individual can invest up to 10% of Annual Income or Net Worth (whichever is lesser)
- If both Annual Net Income and Net Worth individually are less than $107,000 then: During any 12 months the individual can invest the greater of $2,200 or 5% of the lesser Annual Income or Net Worth
Emerging growth companies are defined as __________________ .
Issuer with gross revenues under $1B
Companies can not do crowd funding directly, they must use either __________ or ______________ .
A broker dealer or funding portal
What is the job of the secondary market?
To provide liquidity to the primary market
Where investors buy and sell securities previously issued in the primary market?
Secondary Market
Also known as the OTC market and where trading is conducted by large institutional investors like mutual funds and pension funds. (Dealers only market)
Third Market
Trading done without broker dealers where large volumes of securities are traded
Fourth Market
A type of index that takes the price of the stock without consideration to the companies market cap essentially averaging prices of companies.
Price Weighted Index
Example of price weighted index?
How is the value determined?
DOW
It is the average of the share prices of the companies in the index
Index that measures a group of companies by market value (measured by taking total for current market year / market value for base year)
Market Cap Weighted Index
Examples of market Cap Weighted indexes?
- NASDAQ
- S&P 500
- Wilshire 5000 Index
To be included in the S&P 500 a company must have a market cap of what?
At least $8.2 Billion
This index measures all publicly weighted US firms?
Wilshire 5000 Index
Russel 3000
Complete US market
Russel 2000
Small cap market
Russel 1000
Large Cap Market
Barrons 400
400 most fundamentally sound companies for investors
What is the MSCI EAFE?
Index tracking: Europe, Australia, and Far East
What is the ‘new uptick rule?’
If stock has dropped more than 10% in a day, short sale can not occur
Shorting a stock actually owned by the seller to avoid capital gains?
Short against the box
What is the typical maintenance margin requirement?
35%
This type of market order protects from large losses if the security reaches a certain price stop order turns into market order.
Stop Loss Order
Once stop price is reached stop limit order becomes a limit order to buy or sell.
Stop limit order
What is a FOK (Fill or Kill) order?
Filled in entirety immediately or cancelled
What is (AON) all or none order?
Must be executed in entirety, will remain active until filled or cancelled
What is an IOC (Immediate or cancel) order?
Requires full or partial fill immediately or cancelled
A holder of a stock receives a declared dividend if the holder is the owner on _______________ .
The date of record
How is a 25% stock dividend expected to lower the price of a share of stock to 80% of its original value?
Old price / New (increased) number of shares outstanding = % of original value
Stock dividends do what?
Increase the number of shares outstanding
What type of voting protects minority shareholders?
Cumulative Voting
Which market consists of exchanges?
The secondary market
Long position
The purchase of a security
Short Position
Sale of a security
How often do orders expire (unless otherwise specified)?
Each day
Ways that shareholders can hold their ownership in companies?
Physical Certificates, Street Name, or Directly
The percentage of earnings that are not paid out as dividends are referred to as the ___________________ .
Retention Ratio
Share holders are generally protected from personal liability for any ____________________ .
Lawsuits against their corporation
This ratio equals the percentage of earnings that are paid out as dividends to shareholders.
Payout Ratio
Represents the accounting profit of a company on a per share basis.
EPS
Stock that is repurchased from the corporation by the shareholder?
Treasury Stock
What is the definition of ‘shorting’ stock?
Selling borrowed stock and replacing it with a stock purchased in the market at some future date
What are the most common type of trading order?
Market Order
When is the date of record relative to the ex-dividend date?
The day after the ex-date
What is the ‘margin requirement’ as established by the federal reserve?
50%
What type of stock are non-voting shares?
Preferred Stocks
There is a ____ % exclusion from taxation on dividends of preferred stock of one corporation held by another corporation.
If _____ % or more of the company is owned by the company receiving the dividend then up to 100% of the dividend is tax free.
70%
20%
If a stock is purchased on or after the ex-date who keeps the dividend?
Seller
