Unit 1 Flashcards
What is an equity security?
An investment that represents an ownership stake in a corporation
What is a debt security?
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.
What benefits do investors receive from owning stock in a corporation?
Sharing in earnings through dividends and potential increase in share price
Fill in the blank: An investor can participate in a company’s prosperity by receiving _______.
[dividends]
Common stock is?
Equity in a corporation
Why does a company issue stock?
To raise capital
What rights does a share in common stock entitle its owner?
- Dividends
- Voting Rights
- Preemptive Right to maintain their proportionate share of ownership
- Limited Liability
- Liquidity
What are the two types of stock that corporations may issue?
Common stock and preferred stock
What does preferred stock usually not have compared to common stock?
Voting rights or appreciation potential
How often does preferred stock typically pay dividends?
Quarterly
In the event of bankruptcy, who has priority claims over remaining assets?
Preferred stockholders
What is the risk associated with preferred stock’s?
Interest rate change or money rate risk
True or False: Most preferred stock has voting rights.
False
What do common stock and preferred stock have in common?
Both represent ownership in a company
Who are considered creditors?
Owners of debt securities, such as bonds
What is the order in which dividends are paid out between common and preferred stockholders?
Common cannot receive dividends until preferred shareholders are paid
What is the main reason preferred stock prices fluctuate?
Changes in interest rates
What is capital appreciation??
An increase in the market price of securities
What are dividends in the context of common stock?
Regular payments made by corporations to stockholders, which may increase over time as profitability increases.
What are stock dividends?
Dividends paid in additional shares of common stock.
What are property dividends?
Dividends paid in shares of a subsidiary company or in company products.
What is a realized gain?
A price increase that becomes taxable once the stock is sold.
What is the maximum tax rate on most dividends and long-term capital gains under current tax law?
15%.
What happens to the stock price when a company issues a stock dividend?
The stock price drops to maintain the overall value.
Are stock dividends taxed when received?
No, they are not taxed until sold.
In a 2-for-1 stock split, how many shares does an investor own after the split?
Twice as many shares, each worth half as much.
True or False: A stock split increases the amount of money an investor has.
False.
What person facilitations the transfer of ownership of equity securities?
Transfer Agent
Who is often registered as a transfer agents under the Securities Exchange Act of 1934?
Large commercial banks
Transfer agents handle the issuance of stock certificates to new owners.
What right do common stockholders have regarding their share of ownership?
Preemptive rights
This allows them to maintain their proportionate share of ownership in the corporation.
Which type of stockholders generally do not receive preemptive rights?
Preferred stockholders
Preferred stockholders have preference in dividend payments and liquidation but not in ownership percentage when new shares are issued.
What is the record date in relation to dividends?
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.
What is a key feature of equity ownership that protects stockholders in case of bankruptcy?
Limited liability
Stockholders’ personal assets are not at risk in the event of corporate bankruptcy.
What happens to an investor’s personal assets if a corporation they invested in goes bankrupt?
They are not at risk
Investors can only lose the amount they invested, unlike in sole proprietorships or partnerships.
What does it mean for shares of stock to be freely transferable?
Shareholders can sell their stock without needing permission
This is particularly true for shares traded on major stock exchanges.
What is one exception to the rule of freely transferable stock?
Restricted stock
Sales of restricted stock are contingent upon meeting the requirements of SEC Rule 144.
True or False: Common stockholders generally receive preemptive rights.
True
Common stockholders typically have the right to maintain their ownership percentage.
Fill in the blank: The _______ is the date by which an investor must be an owner of record to vote or receive dividends.
record date
What does the Securities Exchange Act of 1934 grant investors?
The right to receive an audited set of financial statements of the company’s performance each year (annual reports)
Why was the Securities Exchange Act of 1934 created and what rules did it set in place?
Opportunities for fraud. Transfer agents must be registered as such with the SEC.
Limited liability
Stockholders personal assets are not at risk when a company cannot meet debt obligations.
What is market risk?
The chance that a stock will decline in price
What are the potential benefits of including common stock in a portfolio?
- Potential capital appreciation
- Income from dividends
- Hedge against inflation
What is market risk in relation to common stock?
The chance that a stock will decline in price
What influences the daily fluctuations in a stock’s price?
Perceptions of the company’s business prospects
What is business risk for common stockholders?
Possibility of a decline in the company’s earnings
What happens to dividends if a company’s earnings decline?
Reduction or elimination of the dividend
What is the priority of common stockholders if a company enters bankruptcy?
Low priority at dissolution
Who has priority over common stockholders in the event of a company’s bankruptcy?
Holders of bonds and preferred stock
What are common stockholders entitled to upon dissolution of a company?
Residual rights to corporate assets
True or False: Limited liability means investors might lose more than the amount of their investment.
False
What does limited liability protect investors from in a U.S. corporation?
Liability to the full extent of their personal property
Fill in the blank: An advantage of owning stock is that an investor’s liability is limited to the _______.
amount of money invested
What is a key benefit of owning common stock? (Three points)
Potential capital appreciation
Income from dividends
Hedge against inflation
What does limited liability mean for common stockholders?
Liability is limited to the amount invested
Investors are not personally liable for the corporation’s debts beyond their investment.
What is market risk in the context of common stock ownership?
The chance that a stock will decline in price
Market risk is influenced by changes in investors’ perceptions of a company’s business prospects.
What is business risk associated with owning common stock?
Possibility of a decline in the company’s earnings
A decline in earnings can lead to reduced or eliminated dividends.
True or False: Common stockholders have priority over bondholders and preferred stockholders during bankruptcy.
False
In bankruptcy, bondholders and preferred stockholders have priority over common stockholders.
In the event of a company’s dissolution, what rights do common stockholders have?
Residual rights to corporate assets
Common stockholders are last in line to claim any remaining assets after all debts and senior securities are settled.
Fill in the blank: Investors have no assurance that they will be able to _______ the investment in a stock at any time.
recoup
This highlights the inherent risk involved in stock investments.
What are the risks associated with owning common stock?
- Market Risk
- Business Risk
- Low Priority at Dissolution
Each of these risks can negatively impact the investor’s returns.
Why the SEC Rule 144 of the Securities Act of 1933 created?
So that certain resales of already existing securities could be made without have to file a complete registration statement with the SEC.
