Section 103 Unit 3

Question 1

Types of Stocks

Answer 1

Common

Perferred

Question 2

Shareholder of Record

Answer 2

A shareholder of record is any owner who is listed as such on the record date.

Question 3

Record Date

Answer 3

The record date for the corporation is the second business day after the ex-dividend date. On the record date, trades are settled and reflected on the corporation’s books.

Question 4

Ex-Dividend Date

Answer 4

The ex-dividend date is the first date on which a security is traded that a buyer is not entitled to receive a previously declared dividend.

Question 5

Common Stock Ownership

Answer 5

An investor is issued a certificate (certificate form) of ownership by the corporation indicating the number of shares owned.
Investors may use a brokerage firm to hold stock in a brokerage account on their behalf (street name).

Question 6

Blue-Chip Stocks

Answer 6

Blue-chip stocks are stocks issued by highly regarded, usually well-capitalized companies that have historically paid dividends regardless of the condition of the broader economy.

Question 7

Growth Stocks

Answer 7

Growth stocks are stocks issued by companies that usually have sales and earnings growth rates exceeding those of the average company in their industry. Growth stocks typically do not pay dividends; instead, they invest their earnings back into the company.

Question 8

Income Stocks

Answer 8

Income stocks are stocks issued by companies that pay regular, consistent dividends and provide current income for investors.

Question 9

Value Stocks

Answer 9

Value stocks are stocks currently trading at prices that are low, given the issuing company’s historical earnings and asset values.

Question 10

Cyclical Stocks

Answer 10

Cyclical stocks are stocks issued by companies that tend to prosper in a growing economy and tend to do poorly during declining economic conditions.

Question 11

Defensive Stocks

Answer 11

Defensive stocks are stocks issued by companies that are relatively unaffected by the business cycle.

Question 12

Preferred Stock

Answer 12

Receive dividends each year equal to a stated percentage of the par value of the stock. Not guaranteed the payment of the dividend.

Question 13

Cumulative Preferred Stock

Answer 13

The corporation is required to first pay any unpaid preferred dividends from prior years to the preferred shareholder before paying any current dividend.

Question 14

Purchasers of Preferred Stock

Answer 14

Investors looking for a potential yield (in the form of dividend income) higher than that available from the company’s common stock;
Investors wanting a fixed, relatively steady cash flow; and
Corporations attempting to take advantage of the 70% or more dividends received exclusion from taxation. Note that large corporations are the most prominent purchasers of preferred stock because of favorable tax treatment and not necessarily the investment potential of the stock issue.

Question 15

Stock Dividends

Answer 15

A stock dividend is a dividend paid to shareholders of record in the form of additional shares of company stock, rather than in cash.

Question 16

Taxation of Stock Dividends

Answer 16

Unless the stockholder has the right to receive the dividend in cash rather than stock (which would trigger the constructive receipt doctrine of income taxation), receipt of the stock dividend is generally not taxable for federal income tax purposes

Question 17

Stock Splits

Answer 17

In a stock split, the par value of each share of stock is reduced, and the number of shares is increased proportionately.

Question 18

Taxation of Stock Splits

Answer 18

Stock splits are never income taxable to the shareholders.

Question 19

Reverse Stock Split

Answer 19

The company reduces the total number of shares outstanding.

Question 20

Subscription Rights

Answer 20

When a corporation plans to raise funds by issuing new stock to the public each current shareholder is given one right for each share of stock. The right allows them to purchase the company’s stock below the current market price. It prevents dilution of ownership share of the corporation.

Question 21

Stock Appreciation Right

Answer 21

An employee benefit, usually granted only to executives of a corporation, and is a form of equity-based compensation.

Question 22

Warrant

Answer 22

Like call options, warrants give the owner the right to purchase a specified number of common stock shares for a specified period of time at a specified price, normally higher than the current market price, as of the date of the issue of the warrant. Issued by corporations. Typically matures no less than five years. Corporations use them to lower the cost of capital necessary to float the issue.

Question 23

American Depositary Receipts (ADRs)

Answer 23

Are trust receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank. Pay dividends in U.S. dollars but are declared in local currency. Traded on exchanges so they are liquid and marketable investments. The foreign company may withhold foreign taxes due, which can be deducted.

Question 24

Open-End Investment Company Characteristics

Answer 24

It is referred to as open end because it can create an unlimited number of shares. Shares for the fund are always priced at net asset value at the end of the trading day.

Question 25

Net Asset Value

Answer 25

The fair market value of the securities within the portfolio, less any outstanding liabilities, divided by the number of shares outstanding.

Question 26

Index Funds

Answer 26

Securities designed to mirror a selected market index, such as the Standard & Poor’s 500 Index.

Question 27

Sector Funds

Answer 27

Restricts its investments to a particular sector of the market, such as energy or health care.

Question 28

Asset Allocation Funds

Answer 28

These funds focus on providing a diversified portfolio by investing across various asset classes, including equities, bonds, and money markets

Question 29

Balanced Funds

Answer 29

These funds invest in fixed percentages of equity, bond, and money market securities.

Question 30

Investors Interested in:
Growth
Income
Safety of Principal
Immediate Liquidity
Tax Relief
Maximizing Current Income

Answer 30

Should invest in:
Growth - Stock Funds
Income - Bond Funds
Safety of Principal - Government Bond Funds
Immediate Liquidity - Money Market Funds
Tax Relief - Municpal Bond Funds
Maximizing Current Income - Corporate Bond Funds

Question 31

Mutual Fund Taxation

Answer 31

Shareholders are taxed annually on the distributions, but are permitted to increase their adjusted basis in the shares. This is not the result if the distributions from the fund are paid directly to the shareholders in cash. In this event, the shareholders are taxed annually on the distributions, but are not permitted to subsequently adjust their basis in the shares.

Question 32

Closed-End Investment Company Characteristics

Answer 32

Their shares trade in the same manner as publicly traded stocks in the secondary market. Because shares are subject to supply and demand, they will generally sell at a discount or premium relative to NAV.

Question 33

Characteristics of Unit Investment Trusts (UIT)

Answer 33

Investment company whose units are sold in the secondary market, but not on the major exchanges. As income is earned and securities mature, investors receive both income and principal from the trust. Generally unmanaged or passively managed funds. No board of directors, corporate officers, or investment adviser.

Question 34

Characteristics of Exchange-Traded Funds (ETFs)

Answer 34

An Index fund that can be bought and sold throughout the trading day. Lower expenses than Mutual Funds due to less management. Investor may redeem some of the shares for a distribution of some of the fund’s underlying the stock.

Question 35

Advantages of Exchange-Traded Funds

Answer 35

An investment in ETFs may be advantageous for investors who:

seek to invest in an industry sector or index but who do not want to have to consider a multitude of actively managed securities;
are interested in a low-cost, tax-efficient portfolio; and
are interested in a security that may be bought on margin and can be sold short.

Question 36

Hedge Fund Concept

Answer 36

Generally is an unregistered, privately offered, managed pool of capital for wealthy, financially sophisticated investors. Typically implements a wide array of investment strategies, including heavy borrowing and short selling, in an attempt to achieve a superior return.

Question 37

Features of Separately Managed Accounts

Answer 37

The professional manager of the account purchases the securities in the portfolio on behalf of the investor, not on behalf of the fund.

Question 38

Venture Capital

Answer 38

Financing for a privately held company. Typically in the form of convertible preferred stock and is characterized by high risk with the potential for high return.

Question 39

Characteristics of Private Placements

Answer 39

Rather than the time and expense of an IPO the business will sell their securities privately. Avoid SEC registration. Limited to 35 unaccredited investors, but is available to an unlimited number of accredited investors. Accredited investors are individuals with more than $200,000 of annual income.

Question 40

Advantages of Limited Parternerships

Answer 40

Business venture participation with limited liability;
Start-up financing shared with other partners, whereby, one individual is not responsible for all the start-up costs; and
Receipt of periodic income payments.

Question 41

Disadvantages of Limited Parternerships

Answer 41

They are generally riskier investments than bonds or exchange-traded equities;
They are generally illiquid;
Limited partners cannot participate in the management of the partnership; and
The sale of partnership interest may be restricted.