Module 3: Equity Investments and Managed Assets Flashcards
Equity Investing Risks
- Market Risk
- Interest Rate Risk
- Financial Risk
- Business Risk
Rights
Sometimes referred to as subscription rights, are given by the corporation who plans to raise more money via stock issues. This gives the owner the right to buy more shares of the company before someone else does, so it doesn’t dilute their equity holdings in the company. Rights are valued separately and actually trade in their own secondary market during the “subscription period”.
Warrents
Long-Term, customized call options that allows the owner to buy shares of the company at a specified price.
Differences Between Warrants and Call Options (4)
- Warrents are not sold in round lots like a call option. aka 1 call option equals x amnt of shares.
- Warrants are created by the corporation, call options created by an individual.
- A warrant is customized to fit the needs of the corporation, whereas the options is required to follow the OCC guidelines.
- A warrant may not expire for years, whereas the Call Option expires within 9 months on average.
Specific Idenitification Method
When the shares werre bought for cost basis, which is different from the FIFO method.
Difference between Dividend and Interest from a bond
Interest from a bond is a guaranteed payment from a corporation, a dividend is declared by the board of directors
Shareholder of Record
The person who receives the dividend because they are the owner who is listed as such on the record date To be listed as the shareholder of record, the investor must purchase stock before the ex-dividend date
Record Date
is the first dividend date after the ex-dividend date.
Ex-Dividend Date
The first dat eon which a security is traded that a buyer is not entitled to receive a previously declared dividend.
Dividend Reinvest Plans (DRIPS)
The opportunity for shareholders to purchase more stock using the dividends they’ve received.
Reinvested Dividends Taxes
They are streated the same for income tax purposes as those that you receive in the form of cash, however, the amount reinvested in dividends dds to the investors tax basis.
Taxation of Cash Dividends
Qualifying Dividends may be trated at favorable long-term cap gains rates (0%, 15%, 20%) if it meets the following criteria:
- The dividend received is from a domestic corporation or a qualified foreign corporation
- The stock must be held for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date
Non-qualified dividends are taxed at ordinary income tax rate.
Which Dividends are Considered Qualifying?
Most dividends declared by the corporate board of directors of a domestic corporation are considered qualifying dividends and are permitted preferential tax treatment.
- qualified foreign companies
- Corporations, who stock of American depository receipts trades readily on an United States securities market
Stock Dividends
Dividends paid to shareholders of record in the form of additional shares of company stock rather than in cash.
Stock dividends taxation
- Unless they have the option to receive a cash dividend (which would create a constructive receipt), the stock dividend is usually not federally taxable, although it does decrease the basis in the overall holding to reflect the received stock.
Forward Pricing
The purchase or redemption of a mutual fund share is determined at the next NAV calculation after an order is entered
NAV Calculation
assets(cash+value of securities) - liabilities
Mutual Fund Operating Expenses
- Management Fee
- 12b-1 Fees
- Other Expenses
Mutual Fund Management Fees
The fee paid by a mutual fund to the investment advisor for its services related to managing the fund
12b-1 Fees
Fees used to compensate investment advisors on an ongoing basis for selling the funds
Mutual Fund other expenses
Administrative or outside services, such as shareholder recordkeeping, auditing, custodial services, legal services, proxy solicitations, annual meeting costs, directors fees, and state and local taxes
Types of Mutual Funds
Bond Funds equity funds hybrid funds precious metal funds commodity funds
Taxable Bonds Funds
- Primary Objective is to provide current income to shareholders.
Bond Funds vs. Individual Bonds
- Interest Income Changes, it’s not fixed
- Maturity is not fixed
- Yield is calculated differently, a bond funds yield is based on current income relative to its NAV
- Monthly interest distributions
GNMA Funds
These funds hold at least 80% of their portfolios in mortgage-backed securities guaranteed by Ginnie Mae.
Multisector Bond Funds
“Strategic Income Bond Funds” - typically purchase 3 types of bonds: US Government Bonds, high-yield corporate bonds, and foreign bonds (up to 25% of the fund’s portfolio).
Foreign World Bond Fund Risks
Investors should be aware of the potential change in the value of the foreign currency relative to the U.S dollar because some funds won’t gedge currency risk.
Municipal Bond Fund Considerations
- Determining if the interest from them is subject to the alternative minimum tax, and if so, to what extent.
Small Market Capitalization
$2b or lower
Mid Market Capitalization
$2b to $10b