Unit 1 Flashcards
Equity Security
Represents ownership in a company.
Debt Security
Represents a loan to the company or government.
Security
INVESTMENT THAT REPRESENTS EITHER AN OWERSHIP STAKE OR DEBT STAKE
Common Stock (ownership, voting rights, dividends, growth potential
CAPITAL APPRECIATION, INCOME (DIVIDENDS), VOTING RIGHTS, LIMITED LIABILITY, LIQUIDITY, HEDGE AGAINST INFLATION
Preferred Stock (ownership, voting rights, dividends, growth potential)
Own part of company with NO voting rights, pays a fixed dividend, priority over common stock in dividends and during liquidation, GREATER APPRECIATION
WHAT INFLUENCES THE PRICE OF COMMON AND PREFERRED STOCK
COMMON - HEALTH OF COMPANY, PREFERRED - INTEREST RATES
CAPITAL APPRECIATION
AKA CAPITAL GAINS, INCREASE IN THE MARKET PRICE OF SECURITIES
STOCK DIVIDEND (HOW TAXED)
DIVIDEND PAID IN ADDITIONAL SHARES OF COMMON STOCK, NOT TAXED TO SHAREHOLDER
PROPERTY DIVIDEND
PAY IN SHARES IN SUBSIDIARY COMPANY OR IN COMPANY PRODUCTS
WHAT HAPPENS TO PRICE IF COMPANY PAYS IN STOCK DIVIDENDS
THE PRICE OF THE STOCK WILL DROP SO THAT OVERALL VALUE STAYS THE SAME
STOCK SPLIT
ACCOUNTING PROCESS WHERE CORPORATION EXCHANGES NEW SHARES FOR OLD ONES, CHANGING THE NUMBER OF SHARES IN THE MARKETPLACE (CHANGING LARGE BILLS FOR SMALL ONES)
IS STOCK FREELY TRANSFERABLE?
YES, PREMISSION IS NOT REQUIRED OF THE COMPANY, THEY ARE LIQUID
RECORD DATE
DATE BY WHICH AN INVESTOR MUST BE OWNER OF STOCK IN ORDER TO VOTE OR RECEIVED DIVIDENDS
LIMITED LIABILITY
STOCKHOLDERS PERSONAL ASSETS ARE NOT AT RISK (COMMON OR PREFERRED), LIABILITY IS LIMITED TO INVESTEMENT AMOUNT
COMMON STOCK RISKS
MARKET RISK, BUSINESS RISK, LOW PRIORITY AT DISSOLUTION
MARKET RISK
CHANGE THAT A STOCK WILL DECLINE IN PRICE
BUSINESS RISK
DECLINE IN THE COMPANY’S EARNINGS
SENIOR SECURITIES VS RISIDUAL RIGHTS
COMPANYS DEBT AND PREFERRED SHARES, COMMON SHARES
TYPES OF PREFERRED STOCK
STRAIGHT, CUMULATIVE PREFERRED, CALLABLE PREFERRED, CONVERTIBLE PREFERRED, ADJUSTABLE RATE PREFERRED
STRAIGHT (NONCUMULATIVE) PREFERRED STOCK
PLAIN VANILLA, NO SPECIAL FEATURES
CUMULATIVE PREFERRED
ACCRUES PAYMENTS DUE ITS SHAREHOLDERS IN THE EVENT DIVIDENDS ARE REDUCED OR SUSPENDED. IF BOARD SUSPENDS PAYMENTS AND STARTS AGAIN, PAYMENTS ARE PAID IN ARREARS
CALLABLE PREFERRED
COMPANY CAN BUY BACK FROM INVESTORS AT A STATED PRICE AFTER A SPECIFIED DATE. USED TO REPLACE HIGH FIXED DIVIDEND WITH A LOWER ONE. SIMILAR TO REFINANCING A MORTGAGE, DIVIDENDS CEASE ON CALL DATE. SOLD AT PREMIUM OVER PAR
CONVERTIBLE PREFERRED
OWNER CAN EXCHANGE SHARES FOR A FIXED NUMBER OF COMMON STOCK, PRICE FLUCTUATES WITH COMMON STOCK PRICE, GIVE CAPITAL GAIN POTENTIAL AND LOWERS INTEREST RATE RISK.
ADJUSTABLE (FLOATING) RATE PREFERRED
DIVIDEND RATE IS TIED TO RATES OF OTHER INTEREST RATE BENCHMARKS, SUCK AT TBILLS, AND CAN BE ADJUST OFTEN, KEEPING STOCK PRICE STABLE, REDUCING INTEREST RATE RISK
THE MOST IMPORTANT DETERMINATION WHEN INVESTING IN PREFERRED STOCK FOR INCOME?
ABILITY OF COMPANY TO MEET ITS DIVIDEND PAYMENTS
PREFERRED STOCK RISKS
MARKET RISK (PRICE DROPS), LOSS OF PURCHASING POWER, INTEREST RATE(MONEY RISK), REDUCTION OR ELIMINATION OR DIVIDENDS
PERPETUAL SECURITY
STOCK HAS NO PRESET DATE WHEN IT MATURES OR REDEMPTION DATE
EMPLOYEE STOCK OPTIONS
ISSUED IN COMMON STOCK, STRIKE PRICE IS MARKET PRICE AT TIME OPTION IS GRANTED, REQUIRES A VESTING PERIOD
TYPES OF STOCK OPTIONS
NONQUALIFIED STOCK OPTION (NSO/NQSO) INCENTIVE STOCK OPTION (ISO)
NONQUALIFIED STOCK OPTION (NSO)
MOST COMMON TREATED AS A FORM OF COMPENSATION, TAXED AS INCOME
BARGAIN ELEMENT
DIFFERENCE BETWEEN THE CURRENT MARKET PRICE AT TIME OF EXERCISE AND STRICK PRICE
INCENTIVE STOCK OPTION (ISO)
STOCK PURCHASED THROUGH EXERCISE MUST BE HELD FOR 2 YEARS AFTER DATE OF GRANT AND 1 YEAR AFTER DATE OF EXERCISE. 10 YR LIMIT TO EXERCISE. PROFIT REPORTED AT LT CAPITAL GAINS. TAXED AS ALTERNATIVE MINIMUM TAX
RESTRICTED STOCK
SECURITIES THAT CANNOT BE TRADED THAT ARE SOLD AS PART OF A PRIVATE PLACEMENT THAT MUST BE HELD FOR A CERTAIN PERIOD OF TIME (6 MO) AND VOLUME
CONTROL STOCK
CONTROL PERSON THAT OWNS 10% OR MORE OF VOTING STOCK, MUST REPORT TO SEC (DIRECTOR, OFFICER, MAJOR SHAREHOLDER)
SEC RULE 144 OF SECURITIES ACT 1933
MECHANISM FOR REPORTING SALE OF CONTROL AND RESTRICTED STOCK, FILE FORM 144
AMERICAN DEPOSITARY RECEIPTS (ADR)
TRADING OF FOREIGN STOCKS IN US MARKETS
CURRENCY RISK
POSSIBILITY OF AN INVESTMENTS IN ONE CURRENCY DECLINES IN EXCHANGE RATE WITH US DOLLAR
EMERGING MARKETS
MARKETS IN LESS DEVELOPED COUNTIRES, POTENTIAL FOR HIGH GROWTH RATE BUT HIGH RISK
FRONTIER MARKETS
LESS THAN EMERGING MARKETS
DEVELOPED MARKETS
HIGHLY DEVELOPED ECONOMIES WITH STABLE POLITICAL AND SOCIAL INSTITUTIONS, LOWER RISK
WHY INCLUDE FOREIGN SECURITIES?
GREATER DIVERSIFICATION, FOREIGN CAN OUTPERFORM DOMESTIC, FOREIGN NOT HIGHLY CORRELATED WITH DOMESTIC REDUCING RISK
RISKS OF INVESTING IN FOREIGN MARKETS
COUNTRY RISK, CURRENCY RISK, REGULATORY DIFFERENCES (RULES, FEES, TAXES)
COUNTRY RISK
COMPOSIT OF ALL RISKS OF INVESTING IN FOREIGN MARKETS
CURRENCY RISK
FLUCTUATIONS IN EXCHANGE RATE
