Unit 1 - Types and Characteristics of Equity Securities

Question 1

The investment world is divided between _____ and ____ .

Answer 1

owners, lenders

Question 2

Being an “owner” in the investment world means that you have bought _____.

Answer 2

stock, or equity securities

Question 3

Being a “Lender” in the investment world means that you have bought _____.

Answer 3

bonds, or debt securities

Question 4

A stock owner can receive a share of the company’s profits in the form of _____

Answer 4

dividends

Question 5

A _____ is an investment that represents either an ownership stake or a debt stake.

Answer 5

security

Question 6

A debt security is usually acquired by buying an issuer’s (a corporation or a government) _____.

Answer 6

bonds

Question 7

A ___ ______ is a loan to the issuer in exchange for interest income and the promise to repay the loan at a future maturity date.

Answer 7

Debt investment

Question 8

____ ____ is equity (ownership) in a corporation.

Answer 8

Common stock

Question 9

Most corporations are organized so that common stockholders regularly elect a few individuals to a _____.

Answer 9

board of directors

Question 10

Corporations may issue two types of stock: ______ and ______.

Answer 10

common, preferred

Question 11

_____ _____ represents equity in a corporation but usually does not have the same voting rights or appreciation potential as common stock.

Answer 11

Preferred stock

Question 12

Preferred stock normally pays a ____ dividend.

Answer 12

fixed

Question 13

How often does a preferred stock usually pay out a fixed dividend?

Answer 13

Quarterly

Question 14

Preferred stock has ____ ____ over common stock.

Answer 14

priority claims

Question 15

“Priority claims” mean that common stock holders cannot receive a _____ until preferred shareholders have been paid theirs.

Answer 15

dividend

Question 16

In the event the company goes bankrupt, ____ ____ have a prior claim on any remaining assets.

Answer 16

preferred stockholders

Question 17

Just as with debt securities, the rate of return on a preferred stock is ____.

Answer 17

fixed

Question 18

Preferred stock price tends to fluctuate with changes in _____ ____, rather than with the issuing company’s business prospects.

Answer 18

interest rates

Question 19

Preferred stock does NOT have ____ rights.

Answer 19

voting

Question 20

A preferred stock has a fixed dividend payment, and is therefore price sensitive to interest rate changes. As a result, it’s price reacts to the market more like a ____.

Answer 20

bond

Question 21

When it comes to bonds, regardless of the nature of the owner, it is always a debt security, and that makes the owners _____.

Answer 21

creditors

Question 22

The ___ ____ of an enterprise is whatever a business owns (its assets) less its creditors’ claims (its liabilities).

Answer 22

net worth

Question 23

The net worth of an enterprise belongs to its ______.

Answer 23

stockholders

Question 24

An increase in the market price of securities is _____ ______.

Answer 24

capital appreciation

Question 25

Historically, owning common stock has provided investors with returns in excess of the _____ rate.

Answer 25

inflation

Question 26

Most investors with a long-term investment horizon have included common stock in their portfolios as a hedge against ______.

Answer 26

inflation

Question 27

Because stock is an equity security, unlike interest payments on debt, dividends are NOT ______.

Answer 27

obligatory

Question 28

Dividends are declared at the discretion of the company’s ____ __ _____.

Answer 28

board of directors

Question 29

Dividends paid in the form of additional shares of common stock in the issuing company are called ___ ____.

Answer 29

stock dividends

Question 30

Dividends paid in the form of shares in a subsidiary company, or in company products, are called ____ _____.

Answer 30

property dividends

Question 31

An increase in the price of stock before it is sold is called ____ ___.

Answer 31

unrealized gain

Question 32

When a stock is sold, increases in the stock price become ____ ___.

Answer 32

realized gain

Question 33

When a stock dividend is paid out, the price of the stock will ___ so that the overall value remains the ___.

Answer 33

drop, same

Question 34

A ___ ___ is an accounting process whereby the corporation exchanges new shares for old ones while changing the number of shares outstanding in the marketplace.

Answer 34

stock split

Question 35

Stock split: In a 2-for-1 stock split, the investor now owns ____ as many shares worth ____ as much each.

Answer 35

twice, half

Question 36

Stock, whether common or preferred, is ____ ______ (permission of the company is not required) to anyone who wants to buy it or receive it as a gift.

Answer 36

freely transferable

Question 37

Because of the opportunities for fraud, ____ _____ (usually large commercial banks) must be registered as such with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934.

Answer 37

transfer agents

Question 38

The audited set of financial statements of the company’s performance each year that shareholders have the right to receive:

Answer 38

annual reports

Question 39

Common, but not preferred, stockholders have the ____ ____ to maintain their proportionate share of ownership in the corporation.

Answer 39

preemptive right

Question 40

Prior to a vote or a payment of dividend, the company establishes a ____ ____. This is the date by which an investor must be an owner of record (shown as an owner on the company records) in order to vote or receive the announced dividend.

Answer 40

record date

Question 41

One of the most important features of equity ownership is ____ ____. ____ ____ means that if the corporation goes bankrupt, when the corporate assets are not adequate to meet corporate obligations, the stockholder’s personal assets are not at risk.

Answer 41

limited liability

Question 42

____ ____ means that the investor is personally at risk only for the amount that was invested.

Answer 42

Limited liability

Question 43

Stock is always freely transferrable except when it is ____ ____, where sales are contingent upon meeting the requirements of SEC Rule 144.

Answer 43

restricted stock

Question 44

For what three primary reasons would you include common stock in a client’s portfolio?

Answer 44

1) potential capital appreciation
2) income from dividends
3) hedge against inflation

Question 45

What are the three primary risks incurred by including common stock in a portfolio?

Answer 45

1) market risk
2) business risk
3) low priority at dissolution

Question 46

The chance that a stock will decline in price is known as ____ ___.

Answer 46

market risk

Question 47

The possibility of a decline in the company’s earnings leading to a reduction or the elimination of the dividend is known as ____ ___.

Answer 47

business risk

Question 48

All types of preferred stock maintain preference over ____ ___.

Answer 48

common stock

Question 49

The five general types of preferred stock are:

Answer 49

1) straight (noncumulative)
2) cumulative
3) callable (or redeemable)
4) convertable
5) adjustable-rate

Question 50

This preferred stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the stockholder.

Answer 50

Straight (noncumulative) preferred stock

Question 51

This preferred stock accrues payments due its shareholders in the event dividends are reduced or suspended. When the company resumes dividend payments, these stockholders receive current dividends plus the total accumulated dividends before any dividends may be distributed to common stockholders.

Answer 51

Cumulative preferred stock

Question 52

Accumulated past dividends are called:

Answer 52

Dividends in arrears

Question 53

Which preferred stock would be most suitable for an investor seeking steady income?

Answer 53

Cumulative preferred stock

Question 54

This type of preferred stock can be bought back by the company from the investor at a stated price after a specified date.

Answer 54

Callable preferred

Question 55

The right to ____ the stock allows the company to replace a relatively high fixed dividend obligation with a lower one when the cost of money has gone down.

Answer 55

call

Question 56

When a corporation calls a preferred stock, dividend payments cease on the ___ ___.

Answer 56

call date

Question 57

What type of risk for callable preferred stocks would have the investor reinvest the proceeds at a lower rate than the stocks preciously held?

Answer 57

Reinvestment risk

Question 58

What two ways can an investor compensate for the risk and inconvenience of a callable preferred stock?

Answer 58

1) call price is at a premium over par
2) higher dividend rate than other preferred stock

Question 59

This preferred stock allows the owner to exchange the shares for a fixed number of shares of common stock of the issuing corporation.

Answer 59

Convertible preferred stock

Question 60

A convertible preferred stock price tends to fluctuate in line with that of the _____ stock.

Answer 60

common

Question 61

A convertible preferred stock is generally issued with a ____ stated dividend rate than nonconvertible preferred of the same quality because the investor may have the opportunity to convert to common shares and enjoy greater capital gain potential.

Answer 61

lower

Question 62

Convertible preferred stocks’ feature can have the effect of reducing what type of risk?

Answer 62

Interest rate risk

Question 63

This type of preferred stock is issued with adjustable (or variable) dividend rates. Such dividends are usually tied to the rates of other interest rate benchmarks, such as Treasury bills and money market rates, and can be adjusted as often as monthly.

Answer 63

Adjustable-rate preferred stocks

Question 64

For investors looking for fixed income through preferred stocks, adjustable rate would be their _____ appropriate choice because the dividend will likely fluctuate.

Answer 64

least

Question 65

A preferred stock could be cumulative and callable, callable and convertible, or any combination of these adjectives. If none are listed, it is just a ____ ____ ____.

Answer 65

straight preferred stock

Question 66

What is the primary objective that is met by investing in preferred stock?

Answer 66

Income

Question 67

When analyzing a specific preferred stock, the most important determination should be the ability of the company to meet its ____ ____.

Answer 67

dividend payments

Question 68

What are the three primary benefits of owning preferred stock?

Answer 68

1) fixed income from dividends
2) prior claim ahead of common stock
3) convertible preferred sacrifices income in exchange for potential appreciation

Question 69

What are the four primary risks of owning preferred stock?

Answer 69

1) market risk
2) possible loss of purchasing power
3) interest rate (money rate) risk
4) business risk

Question 70

_____ ____ ____ offer employees the right to purchase a specified number of shares of common stock of their employer at a stated price over a stated time period.

Answer 70

Employee stock options

Question 71

Unlike qualified retirement plans, there are no ________ requirements for employee stock options.

Answer 71

nondiscrimination

Question 72

The _____ price is usually the market price of the stock at the time the employee stock option is granted.

Answer 72

strike, grant, exercise

Question 73

The minimum time an employee must remain with the company in order to be able to use the employee stock option is called:

Answer 73

vesting period

Question 74

What are the two principle kinds of employee stock option programs?

Answer 74

1) nonqualified stock options (NSOs or NQSOs)
2) incentive stock options (ISOs)

Question 75

When NSOs are exercised, the difference between the current market price at the time of the exercise and the strike price is referred to as the _____ _____.

Answer 75

bargain element

Question 76

Because the spread between the market price and the strike price is considered salary, it is subject to ____ ___ as well as ____ ___.

Answer 76

payroll taxes, income tax

Question 77

As long as stock purchased through exercise of an ISO is held at least two years after the date of grant and one year after the date of exercise, any profits are reported as ___-___ ____ ___.

Answer 77

long-term capital gains

Question 78

Which employee stock option has no income recognized when option is granted and no tax due when stock is sold?

Answer 78

Incentive stock options (ISOs)

Question 79

What sort of tax does an incentive stock option incur?

Answer 79

Alternative Minimum Tax (AMT)

Question 80

Which two types of stock are NOT freely transferable?

Answer 80

1) restricted stock
2) stock owned by control persons

Question 81

____ ___ has a time limit for all investors (usually 6 months) and may also have a volume limit for affiliates on the amount that may be resold.

Answer 81

Restricted stock

Question 82

A ____ ____ is a corporate director, an officer, a large stockholder, or the immediate family of any of the preceding residing in the same home.

Answer 82

control person

Question 83

____ ____ is any stock held by a control person.

Answer 83

Control stock

Question 84

Purchases and sales of control stock must be reported to the ___.

Answer 84

SEC

Question 85

Ownership consisting of 10% or more of the voting stock is considered ____.

Answer 85

control

Question 86

The mechanism for reporting the sale of control stock as well as the sale of restricted stock is found in ___ ___ ___ of the Securities Act of 1933.

Answer 86

SEC Rule 144

Question 87

In almost all cases, those who wish to sell control stock or restricted stock must do so by filing a ____ ___.

Answer 87

Form 144

Question 88

These facilitate trading of foreign stocks in U.S. markets because everything is done in English and in U.S. dollars.

Answer 88

American Depositary Receipts (ADRs) a.k.a. American Depositary Shares (ADSs)

Question 89

ADRs are bought and sold (traded) in __ ___ and dividends are paid out in __ ___.

Answer 89

U.S. dollars

Question 90

An ___ is a negotiable security that represents a receipt for shares of stock in a non-U.S. corporation.

Answer 90

ADR

Question 91

The use of a ____, or ____ ___, allows ADRs to be priced at an amount more typical of U.S. market share prices.

Answer 91

ratio, participation rate

Question 92

Most of the rights that common stockholders normally hold, such as the right to receive dividends, also apply to ADR owners. They may even have voting rights. But, ADRs never have ____ ____.

Answer 92

preemptive rights

Question 93

The possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with the U.S. dollar is called _____ ___.

Answer 93

currency risk

Question 94

The banks collect ADR dividend payments, convert them into U.S. funds for U.S. owners, and withhold any required ____ ___ ______, for which owners can claim a U.S. tax credit.

Answer 94

foreign tax payments

Question 95

ADRs are issued by _____ ____ of U.S. banks and even though they are traded in U.S. dollars, they still bear currency risk.

Answer 95

domestic branches

Question 96

The two broad market classifications of foreign markets are:

Answer 96

emerging and developed

Question 97

_____ markets are markets in less developed vountries, and feature: low levels of income (GDP), low levels of equity capitalization, questionable market liquidity, potential restrictions on currency conversion, high volatility, prospects for economic growth and development, stabilizing institutions, high taxes and commission costs for foreign investors, restrictions on foreign ownership, and lower regulatory standards.

Answer 97

Emerging

Question 98

The most extreme and undeveloped foreign market is called a ____ market.

Answer 98

frontier

Question 99

_____ markets are those associated with countries that have highly developed economies with stable political and social institutions. They are characterized by large levels of equity capitalization, low commission rates, few/no currency conversion restrictions, highly liquid markets, many large capitalization securities, and well-defined regulatory schemes.

Answer 99

Developed

Question 100

What three reasons might you add foreign securities to a client’s portfolio?

Answer 100

1) greater diversification
2) foreign securities sometimes outperform domestic ones
3) foreign securities usually are not highly correlated with domestic ones

Question 101

What are the four primary risks involved with investing in foreign securities?

Answer 101

1) country risk
2) exchange controls
3) currency risk
4) withholding taxes and fees

Question 102

The composite risks of investing in a particular country, including political, structural, economic, and inflation risks.

Answer 102

Country risk

Question 103

Foreign restrictions on currency conversion or movement are called _____ ____.

Answer 103

exchange controls