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Series 65 > Unit 1 > Flashcards

Unit 1 Flashcards

1
Q

What is an equity security?

A

An investment that represents an ownership stake in a corporation

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2
Q

What is a debt security?

A

An investment usually acquired by buying an issuer’s bonds in exchange for interest income and the promise to repay the loan at a future maturity date.

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3
Q

What benefits do investors receive from owning stock in a corporation?

A

Sharing in earnings through dividends and potential increase in share price

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4
Q

Fill in the blank: An investor can participate in a company’s prosperity by receiving _______.

A

[dividends]

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5
Q

Common stock is?

A

Equity in a corporation

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6
Q

Why does a company issue stock?

A

To raise capital

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7
Q

What rights does a share in common stock entitle its owner?

A
  1. Dividends
  2. Voting Rights
  3. Preemptive Right to maintain their proportionate share of ownership
  4. Limited Liability
  5. Liquidity
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8
Q

What are the two types of stock that corporations may issue?

A

Common stock and preferred stock

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9
Q

What does preferred stock usually not have compared to common stock?

A

Voting rights or appreciation potential

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10
Q

How often does preferred stock typically pay dividends?

A

Quarterly

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11
Q

In the event of bankruptcy, who has priority claims over remaining assets?

A

Preferred stockholders

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12
Q

What is the risk associated with preferred stock’s?

A

Interest rate change or money rate risk

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13
Q

True or False: Most preferred stock has voting rights.

A

False

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14
Q

What do common stock and preferred stock have in common?

A

Both represent ownership in a company

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15
Q

Who are considered creditors?

A

Owners of debt securities, such as bonds

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16
Q

What is the order in which dividends are paid out between common and preferred stockholders?

A

Common cannot receive dividends until preferred shareholders are paid

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17
Q

What is the main reason preferred stock prices fluctuate?

A

Changes in interest rates

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18
Q

What is capital appreciation??

A

An increase in the market price of securities

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19
Q

What are dividends in the context of common stock?

A

Regular payments made by corporations to stockholders, which may increase over time as profitability increases.

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20
Q

What are stock dividends?

A

Dividends paid in additional shares of common stock.

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21
Q

What are property dividends?

A

Dividends paid in shares of a subsidiary company or in company products.

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22
Q

What is a realized gain?

A

A price increase that becomes taxable once the stock is sold.

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23
Q

What is the maximum tax rate on most dividends and long-term capital gains under current tax law?

A

15%.

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24
Q

What happens to the stock price when a company issues a stock dividend?

A

The stock price drops to maintain the overall value.

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25
Q

Are stock dividends taxed when received?

A

No, they are not taxed until sold.

26
Q

In a 2-for-1 stock split, how many shares does an investor own after the split?

A

Twice as many shares, each worth half as much.

27
Q

True or False: A stock split increases the amount of money an investor has.

A

False.

28
Q

What person facilitations the transfer of ownership of equity securities?

A

Transfer Agent

29
Q

Who is often registered as a transfer agents under the Securities Exchange Act of 1934?

A

Large commercial banks

Transfer agents handle the issuance of stock certificates to new owners.

30
Q

What right do common stockholders have regarding their share of ownership?

A

Preemptive rights

This allows them to maintain their proportionate share of ownership in the corporation.

31
Q

Which type of stockholders generally do not receive preemptive rights?

A

Preferred stockholders

Preferred stockholders have preference in dividend payments and liquidation but not in ownership percentage when new shares are issued.

32
Q

What is the record date in relation to dividends?

A

The date by which an investor must be an owner of record to vote or receive dividends

It is established by the company prior to a vote or dividend payment.

33
Q

What is a key feature of equity ownership that protects stockholders in case of bankruptcy?

A

Limited liability

Stockholders’ personal assets are not at risk in the event of corporate bankruptcy.

34
Q

What happens to an investor’s personal assets if a corporation they invested in goes bankrupt?

A

They are not at risk

Investors can only lose the amount they invested, unlike in sole proprietorships or partnerships.

35
Q

What does it mean for shares of stock to be freely transferable?

A

Shareholders can sell their stock without needing permission

This is particularly true for shares traded on major stock exchanges.

36
Q

What is one exception to the rule of freely transferable stock?

A

Restricted stock

Sales of restricted stock are contingent upon meeting the requirements of SEC Rule 144.

37
Q

True or False: Common stockholders generally receive preemptive rights.

A

True

Common stockholders typically have the right to maintain their ownership percentage.

38
Q

Fill in the blank: The _______ is the date by which an investor must be an owner of record to vote or receive dividends.

A

record date

39
Q

What does the Securities Exchange Act of 1934 grant investors?

A

The right to receive an audited set of financial statements of the company’s performance each year (annual reports)

40
Q

Why was the Securities Exchange Act of 1934 created and what rules did it set in place?

A

Opportunities for fraud. Transfer agents must be registered as such with the SEC.

41
Q

Limited liability

A

Stockholders personal assets are not at risk when a company cannot meet debt obligations.

42
Q

What is market risk?

A

The chance that a stock will decline in price

43
Q

What are the potential benefits of including common stock in a portfolio?

A
  • Potential capital appreciation
  • Income from dividends
  • Hedge against inflation
44
Q

What is market risk in relation to common stock?

A

The chance that a stock will decline in price

45
Q

What influences the daily fluctuations in a stock’s price?

A

Perceptions of the company’s business prospects

46
Q

What is business risk for common stockholders?

A

Possibility of a decline in the company’s earnings

47
Q

What happens to dividends if a company’s earnings decline?

A

Reduction or elimination of the dividend

48
Q

What is the priority of common stockholders if a company enters bankruptcy?

A

Low priority at dissolution

49
Q

Who has priority over common stockholders in the event of a company’s bankruptcy?

A

Holders of bonds and preferred stock

50
Q

What are common stockholders entitled to upon dissolution of a company?

A

Residual rights to corporate assets

51
Q

True or False: Limited liability means investors might lose more than the amount of their investment.

A

False

52
Q

What does limited liability protect investors from in a U.S. corporation?

A

Liability to the full extent of their personal property

53
Q

Fill in the blank: An advantage of owning stock is that an investor’s liability is limited to the _______.

A

amount of money invested

54
Q

What is a key benefit of owning common stock? (Three points)

A

Potential capital appreciation
Income from dividends
Hedge against inflation

55
Q

What does limited liability mean for common stockholders?

A

Liability is limited to the amount invested

Investors are not personally liable for the corporation’s debts beyond their investment.

56
Q

What is market risk in the context of common stock ownership?

A

The chance that a stock will decline in price

Market risk is influenced by changes in investors’ perceptions of a company’s business prospects.

57
Q

What is business risk associated with owning common stock?

A

Possibility of a decline in the company’s earnings

A decline in earnings can lead to reduced or eliminated dividends.

58
Q

True or False: Common stockholders have priority over bondholders and preferred stockholders during bankruptcy.

A

False

In bankruptcy, bondholders and preferred stockholders have priority over common stockholders.

59
Q

In the event of a company’s dissolution, what rights do common stockholders have?

A

Residual rights to corporate assets

Common stockholders are last in line to claim any remaining assets after all debts and senior securities are settled.

60
Q

Fill in the blank: Investors have no assurance that they will be able to _______ the investment in a stock at any time.

A

recoup

This highlights the inherent risk involved in stock investments.

61
Q

What are the risks associated with owning common stock?

A
  • Market Risk
  • Business Risk
  • Low Priority at Dissolution

Each of these risks can negatively impact the investor’s returns.

62
Q

Why the SEC Rule 144 of the Securities Act of 1933 created?

A

So that certain resales of already existing securities could be made without have to file a complete registration statement with the SEC.

Series 65 (1 decks)

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