Unit 1: Individual Securities: Equities Flashcards
Common Stock
1) What are the 4 different classes of common stock?
2) What are 4 types of common stock? (classified by size of issuing company) What are the differences between them?
3) What are penny stock cold calling rules?
1) Authorized, Issued, Outstanding, treasury
2) Large cap, mid cap, small cap, penny stocks
3) When a BD cold calls investors to purchase penny stocks, they have to tell them:
- the name of the penny stock, the number of shares to be purchased, current quotation, commission the BD/firm receives
Dividends
1) What are 3 forms of dividend payments to common stockholders?
2) What are the 4 key dividend disbursement dates?
1) 3 forms of dividend payments to common stockholders:
- Cash dividends : when the company pays out cash earning as a dollar amount per share owned. Taxed as dividend income.
- Stock dividends : when a company issues stock as a form of dividends. This is done by growth companies who are reinvesting.
- Product dividends : when a company sends it’s products to investors (very rare)
2) The dividend disbursement dates:
a) Declaration date : BOD announces dividends
b) ex-Dividend date : Is one business day before the record date. Since most trades settle two days after the transaction, trades have to take place 2 days before the record date to qualify for the dividend. In other words, trades have to take place at least one day before the ex-dividend date.
c) Record date : registered owners of the share on this date will receive the dividend.
d) Payment date : Payment is made
Stockholder Voting
1) What is Statutory Voting vs Cumulative voting in regards to voting in stockholder meetings?
2) What are 3 benefits of owning the common stock of a company?
3) What are 3 risks of owning the common stock of a company?
1) Statutory voting allows shareholders to vote the number of votes they have (one vote per share owned) for each item on the ballot. Whereas in cumulative voting your number of votes, multiplied by number of items on the ballot is how many total votes a shareholder has. And they can vote as freely as they like. No specific numbers have to be followed.
a) Larger shareholders benefit from statutory, smaller investors benefit from cumulative.
2) Stock value appreciation, no liability, dividend income
3) Has the lowest priority at dissolution/bankruptcy, dividend income isn’t guaranteed, loss on investment through stock value depreciation
Rights and Warrants
1) What are preemptive stock rights?
2) What are warrants?
1) Preemptive stock rights are rights to purchase new shares of a company (before they trade on a public exchange) that are offered to existing shareholders of that company. Companies offer preemptive rights to allow investors to keep their percentage of ownership. Preemptive stock rights are issued for a discount than current market price and then trade on the secondary market during the subscription period for 30-45 days.
2) Warrants, stock warrants are contracts that allow an investor to purchase shares of a company at a future date at a specified price. usually the price is higher than the current share price, and ideally investors will enact the warrant once the share price passes the specified price. Warrants are mostly paired with other debt securities to make them more appealing.
Restricted Stock and Control Persons
1) What is restricted stock?
2) What is control stock?
3) What are the volume limitations under Rule 144?
1) Restricted stock refers to any kind of securities that are issued in a private placement and not through a registered public offering. According to Rule 144, Restricted stock has to be held fully paid for at least 6 months before the owner can sell them.
2) Control stock refers to any stock in which the owner owns at least 10% or more of a company’s total voting stock. If close family members own stock for equal to or more than 10% combined, then they are both considered affiliates. Control stock has limitations on how many shares the owners can sell.
3) Rule 144 states that over the course of 90 days, controlling members (affiliates) can sell a number of shares that is the greater of:
- 1% of total outstanding shares
- Average weekly trading volume of the past 4 weeks
ADRs and Preferred Stock
1) What are ADRs? What are some benefits and risks of ADRs?
2) What is preferred stock? How is it different from common stock?
3) Benefits and risks of owning preferred stock?
4) What are the 6 different types of preferred stock?
1) ADRs allow investors to invest in foreign companies easily. An investor will purchase foreign securities in the foreign market, and those shares are deposited into a foreign branch of a U.S bank, and an ADR will be created. ADRs can be listed on U.S stock exchanges but also trade OTC. Any capital gains on the foreign shares are only taxed in the U.S. Any dividend payments will be charged a withholding fee by the foreign government, but this fee can be applied as a credit to any dividend income tax in the U.S.
- Some benefits of owning ADRs is diversification past the U.S market.
- Some risks include currency risk. The currency of the foreign market relative to the dollar could fall or rise.
2) Preferred stock is an equity security that has characteristics of equity and debt securities. Preferred stock has a fixed annual rate of return which is stated as a percentage of its par value in the form of a dividend. preferred stock has no voting rights and don’t receive preemptive rights like common shareholders.
3) Some benefits of owning preferred stock is that there is guaranteed income, preferred shares have a higher priority at dissolution/bankruptcy, as well as when the BOD announce dividend payments. -Some risks with preferred shares is the risk of default of the company, as well as loss of purchasing power risk, as well as interest rate sensitivity. Although preferred stock have priority over common shareholders, they are paid after all other creditors.
4) The 6 different types of preferred stock are:
a) Straight preferred stock : is regular preferred stock. Any missed dividend payments are not paid later.
b) Cumulative preferred stock : is preferred stock that accumulates any missed dividend payments. Missed PMTs have to be paid out later when the business makes money again.
c) Callable preferred : is stock that is issued with the company’s option to call the stock back and prepay the principal amount at a specified price after a specified date. Callable preferred stock has a higher interest rate since the investor faces the risk of loss of interest payments if the stock is called.
d) Convertible preferred : is preferred stock that is issued with the option to convert them to the company’s common stock once the common stock price reaches a specific price. Once it passes this price, the preferred shares will start reflecting the common share price assuming the investor will convert. Convertible preferred stock is usually issued at lower interest rates.
e) adjustable rate preferred : is preferred stock who’s interest rate is tied to that of another benchmark interest rate like that of T-Bills. Since the interest rate will be relative to current interest rates, the price of the preferred stock remains stable.
f) Participating preferred : Is preferred stock in which investors get more payments paid out with any profits left after taking care of other dividend and interest due securities. Participating percentage is stated on the certificate.
