SIE Ch. 2 Flashcards
What are two common benefits to owning equities?
Capital gain and dividends
How is a companies net worth calculated?
Business assets - liabilities
what is ownership percentage in relation to a single stock?
Each stock is equal to the next
Benefits to owning common stock? 4
- Capital gains
- Dividends
- Limited liability (only loose what you invest)
- Protection from inflation (if the money were to remain in cash)
Define limited liability?
Clients only can loose the amount invested. Essentially can own a company without putting personal assets on the line.
Forms of dividends?
- Cash
- Stock
- Property
- Sample products
When are dividends generally paid?
Quarterly
Rights of common stock holders?
- Vote for board of directors
- Freely transferable
- Access to books
- Access to financial statements
- Preemptive rights to any additionally issued shares
What are the risks of common stock?
- Market fluctuation
- Loss of dividend
- Loss of complete principle (bankruptcy)
Who decides what dividends are and when to receive them?
Board of directors
In the event of bankruptcy, what is a common stock holders right to assets?
The lowest of all stock holders
What are the two main types of bankruptcy?
Reorganization and liquidation
Differences between those two?
Reorganization means the company will keep its property and keep doing business; liquidation means cease in business activities and sell of all assets and property
General formula for repayment after bankruptcy?
- Taxes and wages
- Debt holders
- equity holders
In what ways is preferred stock like a debt security?
It has a fixed rate of return, unlike common stock.
How is the dividend stated? How often are they?
Annually, and they are stated as a percentage of par value.
What is typically par value?
$100 unless otherwise stated
How would you identify a preferred stock with a $100 par value that pays $6 annual dividends?
6% preferred
How would you identify a preferred stock with NO par and a $6 annual dividend?
$6 no-par preferred
Which has higher growth potential, common or preferred?
Common
Two main advantages of preferred?
- Dividends are paid first over common
2. Priority over common in bankruptcy
Four risks associated with preferred?
- Purchasing Power (inflation may make the dividend less appealing over time)
- Interest rate sensitivity (rates go up the value of PS goes down)
- Possible loss of dividend
- Still not paid ahead of debtors in bankruptcy
What is straight preferred stock?
NON cumulative; in the event of missed dividends nothing is paid back.
What is cumulative preferred stock?
Dividends have to be paid back, anything that’s missed will be paid when the next dividends are paid (missed + new).
What are callable preferred stock?
Issuer can call or buy back the stock at a specified price after a specific date. The company does this to replace a high rate security with a lower one (refinance). These are bought back at a a premium (more than they are worth).
What is convertible preferred?
Can be converted to common stock by the owner when it is profitable to do so. This one has a lower dividend rate than other preferred stock.
What is adjustable rate preferred?
The rate of the dividend can be adjusted by the issuer whenever (sometimes quarterly).
What is participating preferred?
Gives the owner a chance to participate in profit sharing. The dividend would state something like 6% with participating to 9% (3 percent profit sharing).
Which of these are the WORST option for a client looking for income from owner preferred stock?
Adjustable rate because the dividend may go down.
What are control securities?
Those owned by a director, officer, or persons owning more than 10% issuer.
What are restricted securities?
Those acquired through means other than a registered public offering.
What is the holding period for a restricted stock?
6 months
When are there volume limits for selling restricted/controlled?
When owned by an affiliate insider
What are penny stocks?
Those trading at less than $5 per share
What is involved in buying a penny stock?
The buyer most sign a disclosure agreement
What must be done when cold calling on penny stocks?
Suitability must be established and commission must be disclosed.
What makes a client an established customer?
Held an account for at least a year and purchased at least three penny stocks from different issuers.
What is the bond maturity date?
The date the investor receives the principle back.
What is a term maturity date?
Principle is paid all at once
What is a serial maturity date?
Portions of principle are paid back over time.
What is balloon maturity date?
Some principle paid during life of bond, most is paid at once.
What is the coupon of a bond?
The interest rate
What is a bonds par value?
$1,000
Two other common phrases for coupon rate?
Nominal or yield rate
How much does a 5% coupon pay?
$50 per year (5% x $1,000)
What two market forces affect bonds?
Supply/demand and interest rates
What happens to the coupon rate as the price of a bond fluctuates?
It always stays the same
What is nominal yield
Stays the same, coupon yield
What is current yield?
Measure of bonds annual coupon payment. Annual coupon payment / market price = current yield
Yield to maturity?
Reflects annual return to maturity
Yield to call?
Annual return until call date
