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Series 7 Flashcards > Module 1 - Equities > Flashcards

Module 1 - Equities Flashcards

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Series 7 Top-off Exam flashcards
0
Q

Outstanding Stock

A

Shares of the company that are owned by the investors

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1
Q

Issued Stock

A

Authorized stock that has been issued to shareholders in either private placements or public Offerings

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3
Q

Treasury Stock

A

Shares of stock that the company issues and later repurchases

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4
Q

Corporate Charter

A

Provides a description of the company’s purpose, the articles of incorporation, by-laws and other material information at the time of incorporation

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5
Q

Board of Directors

A

Are elected by the stockholders/owners of the company. The board of directors is responsible for advising the company and appointing officers to carry out corporate policies

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6
Q

CAPITALIZATION indicates the company’s sources of funds for long-term use. The company receives EQUITY CAPITAL through the sale of stocks, DEBT CAPITAL through the sale of bonds, and EARNED SURPLUS through retained profits

A

Remember for Test

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7
Q

Equity

A

Means ownership; a corporation’s equity is composed of shares of preferred stock and shares of common stock that are issued by the company

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8
Q

Shareholders

A

Are the owners of the company, and the number of shares owned by an investor constitutes the amount of ownership the investor has in the company

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9
Q

Every corporation must issue COMMON STOCK. Corporations issue common stock to establish ownership and to raise money to do business

A

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10
Q

Investors buy common stock in one of two ways:

A
  • When it is issued by the corporation (the company receives the money from the sale).
  • Through the securities market (the seller, usually another investor or a broker/dealer, receives the money from the sale).
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11
Q

People buy common stock because they want to:

A
  • Be owners of the company.
  • Earn income through dividends, if they are paid (yield).
  • Profit from any potential appreciation in the value of the stock (capital gains).
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12
Q

A corporation is not obligated to issue PREFERRED STOCK

A

Remember for Test

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13
Q

Authorized Stock

A

Is the maximum number of shares of stock that has been authorized for issuance by the corporate charter

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14
Q

UNISSUED STOCK

A

Which is an additional number of shares that can be issued with the approval of the common stockholders

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15
Q

ISSUED STOCK

A

Is authorized stock that has been issued to shareholders in either private placements or public offerings

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16
Q

OUTSTANDING STOCK

A

Shares of the company that are owned by investors

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17
Q

TREASURY STOCK

A

Shares of stock that have been issued by the corporation but repurchased by the company

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18
Q

A company may buy back stock for any of the following reasons:

A
  • To distribute for stock option plans
  • For use in acquisitions or takeovers
  • To increase the earnings per share, which should increase the market value of the outstanding stock
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19
Q

PAR VALUE

A
  • A bookkeeping term used to show the dollar value assigned to the issued and outstanding common and preferred stock on the balance sheet
  • Preferred stock is ordinarily issued with a par value of $100
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20
Q

Common stockholders have the following rights:

A
  • The right to receive dividends, if dividends are declared by the board of directors and paid by the corporation (dividends are not guaranteed to any shareholder)
  • The right to elect the board of directors and to vote on major management decisions, such as a change in the nature of the business
  • The right to maintain their proportionate ownership in the corporation, known as the preemptive right
  • The right to transfer ownership in their stock (sell or give their stock to someone else)
  • The right to receive copies of the corporation’s annual report
  • The right to inspect the financial records of the corporation
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21
Q

PRIVATELY HELD COMPANY

A

A company is considered private when its founders (or those who purchase private placements) own all the stock

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22
Q

CLOSELY HELD

A

When only a few people hold a majority of the stock

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23
Q

THINLY TRADED STOCK

A

Stock that allows few public shareholders

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24
Q

Preferred stock differs from common stock in four major ways:

A
  • In the case of liquidation, preferred stockholders are always paid off before common stockholders.
  • Preferred stockholders are paid dividends before common stockholders.
  • Different types of preferred stock may provide additional rights to the preferred stockholders.
  • Preferred stockholders have limited voting rights
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25
Q

The best way to remember the preferred dividend amount is: The amount you see, whether percent or dollar, is the amount paid

A

• 5% = $5 and 6% = $6

26
Q

CUMULATIVE PREFERRED STOCK

A
  • A preferred stock that will pay dividends every year, when declared by the board of directors. In the event that a dividend payment is either missed or partially paid, the unpaid portion of the dividend will accrue until fully paid. No dividends can ever be paid to common stockholders until cumulative preferred stock is completely paid up on all past and current dividends.
  • Cumulative preferred stock is the only preferred stock that will receive past dividends that have been missed. The word “cumulative” means that missed dividends “accumulate” until paid in full.
27
Q

CONVERTIBLE PREFERRED STOCK

A

Can be converted (exchanged) into shares of common stock if requested by the holder of the preferred stock

28
Q

PARITY PRICE

A
  • Is the price at which the common and preferred stocks are equal
  • Divide the preferred stock’s market price by the conversion ratio.
29
Q

CONVERSION RATIO

A
  • Used to determine the number of common shares a holder of preferred stock can get for a convertible preferred stock.
  • This ratio is calculated as follows: Divide the par value of the preferred stock by the conversion price
30
Q

CALLABLE PREFERRED STOCK

A

Preferred stock that gives the company the option (provision) to call the stock back at any time

31
Q

PARTICIPATING PREFERRED STOCK

A
  • Type of stock that is rarely issued.
  • It guarantees that a fixed amount will be paid if any dividend is declared and also participates in a percentage of the dividends paid to common stock
32
Q

DIVIDENDS

A

Distribution of current year or prior year earnings (profits). Payments are made to stockholders in the form of cash or more shares of stock of the issuing company

33
Q

A dividend may be paid to the stockholders only if the board of directors votes and declares the dividend. The board of directors picks a date (called the RECORD DATE) on which all of the owners will be entitled to the dividend. Then the board will determine the date the checks will be sent,called the PAYMENT DATE. To receive the dividend the person must own the stock on the RECORD date (they are the “holder of record”)

A

Remember for Test

34
Q

CASH DIVIDEND

A
  • A money distribution that is usually a portion of the EARNINGS. Earnings are the profits of a corporation after taxes are paid
  • Cash dividends, if paid, are usually paid quarterly
35
Q

STOCK DIVIDEND

A

A stock dividend is the distribution of more shares of stock to current shareholders

36
Q

When cash or stock dividends, are distributed to shareholders, the price of the shares is reduced in the open market

A

Remember for Test

37
Q

MARKET CAPITALIZATION

A

The number of shares outstanding multiplied by the price per share

38
Q

STOCK SPLITS

A

Like stock dividends, increase the number of shares outstanding without affecting earnings, but the price of the underlying stock in the market is still reduced

39
Q

Calculating Stock Splits

A

100% stock dividend = 2-for-1 stock split

If an investor had 300 shares of stock and a 100% stock dividend is declared, the investor would own 600 shares, but the price per share would be cut in half. The total value of the investor’s holdings would remain the same.

25% stock dividend = 5-for-4 stock split

To calculate this, start by using 100 shares: 25% of 100 shares is 25 more shares. Add those 25 to the original 100 owned and the investor now has 125 shares versus 100 previously owned shares.

Another way of looking at this increase is to divide the new number of shares by the old number of shares, or 125/100. This fraction reduces to the ratio of 5/4.

If an investor owned 400 shares and the board granted a 25% stock dividend (or 5-for-4 stock split), the investor would now own 500 shares:

400 × 5 ÷ 4 = 2,000 ÷ 4 = 500`

40
Q

CURRENT YIELD

A

The percentage of return an investor receives based upon the dividends received divided by the current market price

41
Q

STATUTORY VOTING

A

Allows a stockholder to cast one vote per share for each director to be elected

42
Q

CUMULATIVE VOTING

A
  • Allows stockholders to combine all of their votes and vote in any manner they choose
  • This allows the MINORITY SHAREHOLDERS to get better representation on the board of directors because they can band together and cast all their votes for one director.
43
Q

PROXY SOLICITATION

A

A process that allows all absentee voting owners of a corporation (the stockholders) to vote for the board of directors

44
Q

PREEMPTIVE RIGHT

A

This allowed stockholders to maintain their proportion of ownership in the event that the company issued new shares of common stock

45
Q

NUMBER OF RIGHTS A STOCKHOLDER OWNS

A
  • A stockholder is issued one right for every share of stock that is owned
  • 1 share of stock = 1 right in a rights offering.
  • The rights offering allows the investor to maintain proportionate interest in the company.
46
Q

WARRANTS

A
  • The privilege of buying common stock at a preset price for a period of years or an indefinite period of time
  • The warrants make the bonds they are attached to more marketable because they may be used to purchase stock at a discount in the future
  • They have no right to dividends, nor do they have voting rights or preemptive rights.
47
Q

PRICE/EARNINGS RATIO

A

PRICE/EARNINGS RATIO = MARKET VALUE PER SHARE/EARNINGS PER SHARE

48
Q

LIQUIDATING VALUE

A

The theoretical value of a company’s assets if it were to go out of business

49
Q

ORDER OF LIQUIDATION

A

When a company goes bankrupt, it is important to remember that the creditors come before stockholders in the distribution of whatever value is remaining. The order of liquidation is as follows:
1. Taxes — all taxes must be paid first.
2. Secured bondholders — those who have their bonds backed by an
asset, such as land.
3. Secured creditors — those who have sold the company goods, and
thus the goods are the collateral for the creditor.
4. Debenture bondholders — those bondholders who have no
security for the bond. The bond is only backed by the good name of the company. A debenture bond is only backed by whatever assets are left to pay the bondholders with. These will be discussed in the Corporate Bond Module.
5. Unsecured creditors — those who have provided services to the corporation with no collateral: utility and phone companies, etc.
6. Subordinated debenture holders — similar to the debenture bondholders above, except they are subordinated to all other creditors, which means they come after all other creditors and bondholders.
7. Preferred stockholders
8. Common stockholders

50
Q

A small company can break-off from a large corporation in two ways:

A
  • The large company spins-off the smaller company.
  • The small company buys itself out from the large corporation, through issuing shares of the new company and issuing bonds with the company’s assets as collateral in a leveraged buy-out
51
Q

AMERICAN DEPOSITARY RECEIPTS (ADRs)

A
  • Used to “facilitate the trade of foreign securities in American markets.”
  • The holders of the ADRs have all the rights of a regular stockholder, except for preemptive rights and voting rights.
  • ADRs can have a specific ratio of shares of underlying stock per ADR, and this ratio is determined by the issuing bank at the time of issue.
  • If a foreign company declares a dividend, it will be declared in the foreign currency of that country; however, the holding bank will convert the dividend into U.S. dollars, and the holder of the ADR will be paid in U.S. dollars.
52
Q
  • Blue chip stocks
  • Growth stocks
  • Cyclical stocks
  • Defensive stocks
  • V alue stocks
  • Small cap stocks
  • Large cap stocks
A

Remember for Test

53
Q

BLUE CHIP STOCK

A

Stock of well-established companies with large market capitalization (a high number of shares and a high dollar value per share)

54
Q

GROWTH STOCK

A

Refers to a stock that is issued by a fast-growing company
• Emerging growth companies - have just gone public
• Aggressive growth companies - have been in business for a long- enough period of time to be stable, but their earnings are growing faster than other businesses in general
• Growth companies - have been in business more than two years, are more likely to do well, and are growing faster than other companies in their industry

55
Q

CYCLICAL STOCKS

A

Stocks whose prices fluctuate in response to business cycles

56
Q

DEFENSIVE STOCKS

A

Stocks whose prices decline less in recessionary periods. Shares of utilities, food, and tobacco are common examples.

57
Q

DEFENSE STOCKS

A

Stocks of a corporation that manufactures or works on equipment for the defense and aerospace industries.

58
Q

CONSERVATIVE COMPANY

A

Refrains from borrowing too much money because the company’s management does not want to burden the company with too much debt.

59
Q

LEVERAGED COMPANY

A

Uses borrowed funds (usually through bonds) to attempt to make more money than what it costs in interest charges for the borrowed money.

60
Q

With the exception of the utility companies, a highly leveraged company is considered to be a speculative investment, because the company is gambling that increased borrowing will generate enough profits to cover the interest and other charges on the borrowed funds.

A

Remember for Test

Series 7 Flashcards (10 decks)

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