Unit 1

Question 1

Security

Answer 1

Intangible financial asset that can be bought, sold or gifted.
According to SEC vs Howey (Howey Test) it is an investment of money made to a common enterprise with the expectation of profit through the efforts of a third party.
NOT securities (Cash, fixed annuities, life insurance, personal residence, commodities)

Question 2

Authorized Stock

Answer 2

The number of shares the company is authorized by the corporate charter to issue

Question 3

Issued Stock

Answer 3

Authorized stock that has been sold to investors

Question 4

Outstanding Stock

Answer 4

Shares that have been issued by the company that are in the hands of investors.

Question 5

Treasury Stock

Answer 5

Stock a corporation has issued and subsequently reacquired.

Question 6

Market Cap (Equation)

Answer 6

Multiply the number of outstanding shares by the current market value of a share.

Question 7

Large-Cap Stocks

Answer 7

Also called blue-chip stocks, these are the stocks of the largest companies with a long history of steady dividend payments.

Question 8

Mid-Cap Stocks

Answer 8

Still larger companies but smaller than large-cap stocks. Reflect characteristics of both large and small caps.

Question 9

Small-Cap Stocks

Answer 9

Smallest stocks that are large enough to be listed on the national exchanges. Growth oriented and produce little dividends.

Question 10

Penny Stocks

Answer 10

Not listed on the US stock exchange, these trade at less than $5 a share, highly speculative, and require customers to receive a copy of a risk disclosure document before purchase.

Question 11

Penny Stock Cold-Calling Rules

Answer 11

SEC requires BDs to give the name of the penny stock, number of shares to be purchased, current quotation, and the amount of commission that the firm/representative receive when a rep is making a solicitation to buy to a potential customer.
Established customers (held an account with BD for at least 1 year, has made at least 3 penny stock purchases of different issuers on different days) are exempt.
Unsolicited transactions are also exempt.

Question 12

Cash Dividends

Answer 12

Declared by BOD and distributed to all investors holding stock. When declared, they are typically paid quarterly and taxed in that year they are distributed.

Question 13

Stock Dividends

Answer 13

Declared by BOD, issue additional shares of common stock to current stockholders instead of cash. The cost per share is adjusted downward. Dividend is not taxable, but has tax implications when shares are sold.
Typical of growth companies that invest money into R&D.

Question 14

Product Dividends

Answer 14

Some companies issue dividends of whatever they produce to shareholders (i.e. a loaf of bread).

Question 15

Declaration Date

Answer 15

Date a company’s BOD approves a dividend payment

Question 16

Ex-dividend Date (Ex-date)

Answer 16

One business day before the record date. To receive a dividend, the stock must be purchased before the ex-dividend date.

Question 17

Record Date

Answer 17

All stockholders of record (owning the stock) on the record date receive the dividend distribution.

Question 18

Payable Date

Answer 18

The dividend disbursing agent sends the dividend checks to all stockholders on the books as owners as of the record date on this day.

Question 19

Benefits of owning common stock

Answer 19

Voting rights, stocks are freely transferrable, capital appreciation, current income from dividends, limited liability, hedge against inflation

Question 20

Risks of owning common stock

Answer 20

• Market risk: Investors could lose investment
• Decreased or no dividend: common stockholder have the last claim on earnings
• Low priority at dissolution: Bonds and preferred stockholders have priority over common stockholders

Question 21

Stock Rights (Preemptive rights, or just Rights)

Answer 21

Entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before they are offered to the public. Offers stock below current market price, with one right per share owned given to the holder (# oustanding/ # being authorized for trade = rights required per share). Typically given 30-45 days to purchase (short term). Can exercise rights, sell rights, or let them expire.

Question 22

Warrants

Answer 22

Certificate granting its owner the right to purchase securities from the issuer at a specified price at some date in the future (long term). Usually bundled with other securities as a “sweetener” to bonds or preferred stock more appealing.

Question 23

Restricted Stock

Answer 23

Under rule 144, securities purchased in a private placement. May not be sold until they have been held fully paid for six months. Are not subject to any restrictions after being sold (the sale effectively registers the stock).

Question 24

Control Stock

Answer 24

Stock owned by directors, officers, or persons who own or control 10% or more of the issuer’s voting stock (Families must combine their ownership). To sell stock, the person must fill out form 144 (volume limitations are the greater of 1% of the outstanding shares of the company, or the average weekly trading volume over the most recent four weeks) and can sell over a 90 day period.

Question 25

Affiliate

Answer 25

A control person (Officers, directors, person or family who owns 10% or more of an issuer’s voting stock).

Question 26

American Depositary Receipts (ADR)

Answer 26

Common shares are purchased in a foreign company’s home market and then deposited in a foreign branch of a US bank. The receipts (ADR) are sold to US investors and purchased with US dollars. Owners of ADRs have no voting rights to the foreign company. May be subject to withholding tax of foreign country, which will be a credit applied against investors US Tax liability. ADRs are also subject to exchange rate risks.

Question 27

Preferred Stock

Answer 27

Receives annual dividend (fixed rate of return similar to debt securities), attractive to income-oriented investors. Assume par value is $100, preferred stock is identified by its annual dividend stated as a percentage of its par value. Owners have no voting or preemptive rights.

Question 28

Statutory and Cumulative Voting

Answer 28

Statutory voting gives stakeholder the amount of shares they own in votes for each open seat but they cannot combine their votes across seats. Cumulative voting allows the owner to use the total number of votes (shares x number of seats open) in any combination they would like

Question 29

Benefits of owning preferred stock

Answer 29

Dividend preference (above common shareholders), priority over common shareholders at dissolution.

Question 30

Risks of owning preferred stocks

Answer 30

• Inflation could reduce the purchasing power of the fixed income produced.
• When interest rates rise, the value of preferred shares declines.
• Decreased or loss of dividend if the company struggles
• Preferred shares are paid behind all creditors at dissolution.

Question 31

Straight (noncumulative) preferred stock

Answer 31

No special features. Missed dividends are not paid to the holder

Question 32

Cumulative Preferred Stock

Answer 32

Accrues payments if dividends are reduced or suspended. Accumulated missed dividends are repaid to these shareholders before any dividends are given to common stockholders.

Question 33

Callable Preferred Stock

Answer 33

Issuing company can buy back the stock from investors at a stated price after a specified date. Allows the company to replace a high fixed-dividend obligation with a lower one. Corporation may pay a premium exceeding the stocks par value.

Question 34

Convertible Preferred Stock

Answer 34

The stock owner may exchange the shares for a fixed number of common stock shares from the issuing company. Typically has lower stated dividend rate.

Question 35

Adjustable-rate Preferred Stock

Answer 35

Dividend rate is variable. Generally rates are tied to rates of other interest rate benchmarks (T-bills and money market rates). Can be adjusted quarterly. This allows the price of the stock to remain relatively stable. These are the least appropriate choice for investors looking for income through preferred stocks.

Question 36

Participating Preferred Stock

Answer 36

Offers owners a share (specified percentage) of corporate profits that remain after all dividends and interest are paid in addition to the dividend already given.