One Flashcards
What are retained earnings?
Profits retained by a company are often used to expand. and reinforce business operations.
Earnings not paid to investors by dividends
Three things that impact the market price of common stock
- Demand for stock in the market
- Future expectations of the company
- Future dividend payments
Three ways profits are utilized?
- Retain profit
- Pay profit to shareholders
- Both
Four actions BODs can take to guide the company?
- Hiring and/or firing senior-level employees
- Managing senior level employee compensation
- Creating and implementing general company policies
- Approving dividend payouts to investors
What positions do common stockholders have the right to vote for?
Only BOD
What are two ongoing reports. companies must file?
- 10 - K annual audited financial report
- 10-Q unaudited financial report
What are 5 types of securities?
- stocks
- bonds
- mutual funds
- options
- ETFs
What is a preemptive right?
The ability to buy newly-issued shares before they’re publicly offered
What do rights allow investors to do?
Purchase new shares at a lower price than its market value
What are the three paths an investor can take with rights?
- Exercise
- Sell
- Expire
What is a benefit to a company of offering rights?
They don’t need to hire an underwriter
Three paths investor can take with warrants?
- Exercise
- Trade
- Expire
Four characteristics of Rights
- Right to purchase new shares at fixed price
- Intrinsic value at issuance
- Little time value
- Short term
Four characteristics of warrants?
- Right to purchase new shares at fixed price
- No intrinsic value at issuance
- Long term
- Time value exists
What is a bond?
A. bond is a debt security that allows investors to loan funds to organizations in return for interest
What must companies do before performing dilutive actions?
Get majority of shareholder approval
Why is issuing convertible securities a dilutive action?
Because you are giving new common shares to only some stockholders
What are three types of dilutive actions?
- Private placements
- Issuing Convertible stock
- Options to employees
What type of investor are pre-emptive rights issued to?
Common stockholders
When would a company do a forward stock split?
When they feel their stock price is too expensive for the average investor
What is a legal method for issuers to manipulate stock prices?
Stock splits
What requires approval from the BOD but not shareholders?
Dividends of any form
Who must approve stock splits?
Sharehoolders by majority
What is a liquidation of assets?
The sale of all company assets
What is the order of payout during liquidation?
- Unpaid wages
- Unpaid taxes
3.. Secured creditors - Unsecured creditors
- Junior unsecured creditors
- Preferred stockholders
- Common stockholders
When do secured creditors have first rights vs. Unpaid wages and taxes?
Secured creditors have first right to the collateral backing the loan while unpaid wages and taxes are first if the collateral backing the loan is liquidated and does not cover the loan balance
When will the liquidation go to the secured creditor first instead of the unpaid wages and taxes?
If the collateral backing the loan is liquidated and does not cover the loan balance
What is a lien for secured creditors?
The right to a property if a loan cannot be repaid
What is senior debt?
Debt that maintains priority over general and junior debt in the event of liquidation
What are 5 things a transfer agent is responsible for?
- Transfer ownership of sellers to buyers
- Maintain book of stockholders
- Make dividend payments to stockholders
- Distribute proxies to stockholders
- Keep an accurate count of shares outstanding
What are the three specific steps for transfer agents?
- Redeem the seller’s shares
- Adds the buyer to the list of stockholders
- Electronically issue shares to the buyer
What registration format are securities registered?
Book entry format
When a stock split occurs, who is responsible for accurate track of outstanding shares and ownership?
Transfer agent
Difference between negotiable and redeemable securities?
Negotiable trade between investors, redeemable bought and sold with the issuer
Two prominent redeemable securities
- Mutual funds
- Unit investment trusts
At what price does investor purchase redeemable securities from issuer?
at the NAV
What is the public offering price for redeemable securities?
Public offering price + sales charge
Equation for net asset values?
(Assets - liabilities)/Outstanding shares
What is a redemption request?
Investor cashing out mutual funds from issuer at NAV price
What two examples of secondary distributions?
- When an employee sells a large part of the shares they’ve acquired
- Investors liquidate their private placements
What secondary market do listed stocks trade in?
Third market
What happens in the fourth market?
Large institutions trade without brokers
Where does the fourth market operate?
ECN
How do ECN agencies make money?
Commissions
What are 5 roles in the completement of financial transaction?
- Broker dealers
- Introducing broker dealers
- Clearing brokers
- Clearinghouses
- Transfer agents
What are two differences between introducing brokers and clearing brokers?
- Introducing brokers don’t maintain custody of ustomer assets, clearing brokers do.
- Introducing brokers do not process trades, they outsource to CB
What four things do clearing brokers do?
- Maintain custody
- Process orders
- Clearing services between investors and clearinghouse
- Facilitating trades
What does “Best execution mean”?
Obtaining the best possible price
What is the confirmation flow for a trade?
Clearing broker sends a trade confirmation to the introducing broker who then informs customer
What do transfer agents do?
They work on behalf of issuers to keep track of investors that own securities
What is the cutoff time for cash settlement trades?
2:30pm ET
Three roles of clearing house
- Organization responsible for clearing trades
- Ensures buyers deliver cash
- Ensures seller delivers securities
What are settlement rules for common stock regular way and cash settlement?
- Regular way - T+2
- Cash settlement - same day if by 2:30pm
When is the ex-date for a stock split?
The day after the payable date
Who determines the ex-dividend rate for NYSE?
The NYSE
Who determines the ex-date for OTC trades?
FINRA
When is the cash settlement ex-date?
The day after the record date
What kind of account must you open before selling short?
Open a margin account
What is leverage?
investing with borrowed funds
What are the consequences of investing borrowed funds?
Amplification of gain and losses
what must you do to be eligible to lend securities?
Sign the loan consent form
Why is investor responsibility in paying a loaned dividend payment usually a wash?
Because the stock usually drops in price transiently when the dividend is paid, so they recoup the dividend value.
Who has to pay dividends on shares held short?
The short seller (investor) to the lender
Who creates the ADR?
Domestic financial firms with foreign branches
Four steps of companies creating ADFs?
- JP Morgan purchases large amounts of foreign stock with high US demand
- Stocks are placed into a trust account
- Account is sliced into receipts
- Receipts are registered with the SEC and sold to American investors
3 Disadvantages of ADR
- No voting rights
- No preemptive rights
- foreign currency exchange risk
What happens if the foreign government witholds part of the dividend for tax purposes?
IRS provides a tax credit to investors
What are the two currency exchange risks in ADR?
- If currency being exchanged out of weekends
- Currency being exchanged into strengthtnes
What is an ADR?
Us- registered receipt for foreign investments
What happens when foreign issuers issue rights?
The rights will be sold with proceeds distributed to ADR holders
What are tender offers?
Direct proposals to purchase stock from current investors at premium prices
Why would investors try a tender offer rather than buy shares from the market?
Because buying shares would market would flood it with demand and drive up the stock price
What are the two time regulations for tender offers?
- Investors must. be provided 20+ business days to make decision
- If tender offer changes, extended by 10 days
Why would a company do a stock buybsck?
With fewer outstanding shares, the issuer will report higher EPS even if the revenue stays flat
Three steps to hostile takeover
- Purchasing significant stock positions
- Instilling hand picked BOD
- New BOD bending at will of outsider
What is the result of a stock buyback?
Issuer repurchases shares and EPS increases with fewer outstanding shares
5 Requirements for tender offer
- Proposal to purchase security from current investors
- Offered at premium to market price
- participants must be long the security
- Must be available for at least 20 business days
- Additional 10 if change
Two types of systematic risk?
- Market Risk
- Inflation risk
What is a stock index?
Basket of stocks whose performance is averaged to determine performane of market
What two types of risk does diversification not help reduce?
- Market Risk
- Inflation risk
Why are high inflation levels a short term problem for common stock?
Because market values will fall
What type of risk does diversification protect against?
Non-systematic risk
6 types of non-systematic risk?
- Financial risk
- BUsiness risk
- Regulatory risk
- Legislative risk
- Political risk
- Liquidity risk
What condition make stocks subject to financial risk?
Companies have borrowed too much money and owes too much interest
When does business risk occur?
Products in low demand due to competition or mismanagement
When does a company face regulatory risk?
Potential or current governmental regulation negatively affects an investment
Legislative risk?
When a law or regulation negatively affects an investment
What. is the difference between legislative and regulatory risk?
Regulatory risk when government agency regulates a company, legislative risk when a new law signed by the president impacts an investment
When does political risk occur?
When there is political instabilities like military coups or threats of war
What type of security does political risk most likely affect?
Foreign securities from countries with unstable governments
When does an investor face liquidity risk?
When they have trouble turning their stock into cash
When would there be liquidity risk?
For stocks that are not listed on exchanges have less trading volume and participants
What is the result of liquidity risk?
Investor may have to substantially drop their asking price due to no demand
What size stocks are less risky?
Larger cap stocks
Three characteristics of unrealized capital gain?
- Current gain on investment
- Hasn’t been sold
- Gainst at risk if market declines
Three characteristics of realized capital gain?
- Locked in gain on investment
- Investment sold
- No risk on gain
What is inflation risk also known as?
Purchasing power risk
What. isthe best type of security. tohedge against inflation?
common stock
Three things diversification can result in
- Portfolio with a low correlation
- Reduction of non-systematic risks
- Reduction in portfolio volatility
What does the term “current” translate to in assets and liabilities?
Short term
What counts as current assets?
Any cash and any item expected to be turned into cash easily within one year
5 examples of current assets
- Cash
- Cash equivalents
- Accounts receivable
- Inventory
- Prepaid expenses
What are accounts receivable?
Money owed to the company by third parties within one year
5 examples of current liabilities?
- Accounts payable
- Wages payable
- Taxes payable
- Interest payable
- Principal payable (within one year)
What does accounts payable mean?
General term for money owed by the company to third parties within one year
When are bonds considered a liability?
Only if their principal payoff date is within. 1year
What are physical assets?
Long term physical assets expected. to be utilized for at least one year
Intangible assets?
Various forms of intellectual property to be utilized for one year
What are long term liabilities?
Bills, loans, or payments due to third parties in more than one year
Four examples of long term liabilities?
- Bonds and notes > 1 year
- Mortgages
- Pensions
- Long term outstanding loans
Three examples of stockholder’s equity?
- Par value of outstanding stock
- Capital in excess of par
- Retained earnings
What are retained earnings?
Earnings business profits that are not distributed to stockholders
What are Price to Earnings ratio used for?
To determine if a company is overvalued or undervalued
What is the PE ratio formula?
Market price/earnings. pershare
When is a company overvalued?
When the PE ratio. ishigh
What type of companies maintain higher PE ratios
Growth companies
What are companies with lower PE ratios called?
Value companies
Why are value companies PE ratios low?
Significant future growth isn’t worth betting on so investors aren’t willing to overpay
What two things does a company balance sheet indicate?
- Compares assets vs. liabilities
- Company’s net worth
Two High PE ratio characterizations
- May indicate overpriced investment
- Typical for growth companies
Two Low PE ratio characterizations?
- Underpriced investment
- Typical of value companies
When. isa form 13D filled out?
WHen an investor obtains 5% or more of ownership
When is form 8K filled out?
To report significant corporate events
What statement DOES NOT report cash flow?
Balance sheet
What does the balance sheet report?
Assets. andliabilities
