Unit 1 - Types and Characteristics of Equity Securities Flashcards
The investment world is divided between _____ and ____ .
owners, lenders
Being an “owner” in the investment world means that you have bought _____.
stock, or equity securities
Being a “Lender” in the investment world means that you have bought _____.
bonds, or debt securities
A stock owner can receive a share of the company’s profits in the form of _____
dividends
A _____ is an investment that represents either an ownership stake or a debt stake.
security
A debt security is usually acquired by buying an issuer’s (a corporation or a government) _____.
bonds
A ___ ______ is a loan to the issuer in exchange for interest income and the promise to repay the loan at a future maturity date.
Debt investment
____ ____ is equity (ownership) in a corporation.
Common stock
Most corporations are organized so that common stockholders regularly elect a few individuals to a _____.
board of directors
Corporations may issue two types of stock: ______ and ______.
common, preferred
_____ _____ represents equity in a corporation but usually does not have the same voting rights or appreciation potential as common stock.
Preferred stock
Preferred stock normally pays a ____ dividend.
fixed
How often does a preferred stock usually pay out a fixed dividend?
Quarterly
Preferred stock has ____ ____ over common stock.
priority claims
“Priority claims” mean that common stock holders cannot receive a _____ until preferred shareholders have been paid theirs.
dividend
In the event the company goes bankrupt, ____ ____ have a prior claim on any remaining assets.
preferred stockholders
Just as with debt securities, the rate of return on a preferred stock is ____.
fixed
Preferred stock price tends to fluctuate with changes in _____ ____, rather than with the issuing company’s business prospects.
interest rates
Preferred stock does NOT have ____ rights.
voting
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 ____.
bond
When it comes to bonds, regardless of the nature of the owner, it is always a debt security, and that makes the owners _____.
creditors
The ___ ____ of an enterprise is whatever a business owns (its assets) less its creditors’ claims (its liabilities).
net worth
The net worth of an enterprise belongs to its ______.
stockholders
An increase in the market price of securities is _____ ______.
capital appreciation
Historically, owning common stock has provided investors with returns in excess of the _____ rate.
inflation
Most investors with a long-term investment horizon have included common stock in their portfolios as a hedge against ______.
inflation
Because stock is an equity security, unlike interest payments on debt, dividends are NOT ______.
obligatory
Dividends are declared at the discretion of the company’s ____ __ _____.
board of directors
Dividends paid in the form of additional shares of common stock in the issuing company are called ___ ____.
stock dividends
Dividends paid in the form of shares in a subsidiary company, or in company products, are called ____ _____.
property dividends
An increase in the price of stock before it is sold is called ____ ___.
unrealized gain
When a stock is sold, increases in the stock price become ____ ___.
realized gain
When a stock dividend is paid out, the price of the stock will ___ so that the overall value remains the ___.
drop, same
A ___ ___ is an accounting process whereby the corporation exchanges new shares for old ones while changing the number of shares outstanding in the marketplace.
stock split
Stock split: In a 2-for-1 stock split, the investor now owns ____ as many shares worth ____ as much each.
twice, half
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.
freely transferable
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.
transfer agents
The audited set of financial statements of the company’s performance each year that shareholders have the right to receive:
annual reports
Common, but not preferred, stockholders have the ____ ____ to maintain their proportionate share of ownership in the corporation.
preemptive right
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.
record date
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.
limited liability
____ ____ means that the investor is personally at risk only for the amount that was invested.
Limited liability
Stock is always freely transferrable except when it is ____ ____, where sales are contingent upon meeting the requirements of SEC Rule 144.
restricted stock
For what three primary reasons would you include common stock in a client’s portfolio?
1) potential capital appreciation
2) income from dividends
3) hedge against inflation
What are the three primary risks incurred by including common stock in a portfolio?
1) market risk
2) business risk
3) low priority at dissolution
The chance that a stock will decline in price is known as ____ ___.
market risk
The possibility of a decline in the company’s earnings leading to a reduction or the elimination of the dividend is known as ____ ___.
business risk
All types of preferred stock maintain preference over ____ ___.
common stock
The five general types of preferred stock are:
1) straight (noncumulative)
2) cumulative
3) callable (or redeemable)
4) convertable
5) adjustable-rate
This preferred stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the stockholder.
Straight (noncumulative) preferred stock
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.
Cumulative preferred stock
Accumulated past dividends are called:
Dividends in arrears
Which preferred stock would be most suitable for an investor seeking steady income?
Cumulative preferred stock
This type of preferred stock can be bought back by the company from the investor at a stated price after a specified date.
Callable preferred
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.
call
When a corporation calls a preferred stock, dividend payments cease on the ___ ___.
call date
What type of risk for callable preferred stocks would have the investor reinvest the proceeds at a lower rate than the stocks preciously held?
Reinvestment risk
What two ways can an investor compensate for the risk and inconvenience of a callable preferred stock?
1) call price is at a premium over par
2) higher dividend rate than other preferred stock
This preferred stock allows the owner to exchange the shares for a fixed number of shares of common stock of the issuing corporation.
Convertible preferred stock
A convertible preferred stock price tends to fluctuate in line with that of the _____ stock.
common
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.
lower
Convertible preferred stocks’ feature can have the effect of reducing what type of risk?
Interest rate risk
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.
Adjustable-rate preferred stocks
For investors looking for fixed income through preferred stocks, adjustable rate would be their _____ appropriate choice because the dividend will likely fluctuate.
least
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 ____ ____ ____.
straight preferred stock
What is the primary objective that is met by investing in preferred stock?
Income
When analyzing a specific preferred stock, the most important determination should be the ability of the company to meet its ____ ____.
dividend payments
What are the three primary benefits of owning preferred stock?
1) fixed income from dividends
2) prior claim ahead of common stock
3) convertible preferred sacrifices income in exchange for potential appreciation
What are the four primary risks of owning preferred stock?
1) market risk
2) possible loss of purchasing power
3) interest rate (money rate) risk
4) business risk
_____ ____ ____ 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.
Employee stock options
Unlike qualified retirement plans, there are no ________ requirements for employee stock options.
nondiscrimination
The _____ price is usually the market price of the stock at the time the employee stock option is granted.
strike, grant, exercise
The minimum time an employee must remain with the company in order to be able to use the employee stock option is called:
vesting period
What are the two principle kinds of employee stock option programs?
1) nonqualified stock options (NSOs or NQSOs)
2) incentive stock options (ISOs)
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 _____ _____.
bargain element
Because the spread between the market price and the strike price is considered salary, it is subject to ____ ___ as well as ____ ___.
payroll taxes, income tax
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 ___-___ ____ ___.
long-term capital gains
Which employee stock option has no income recognized when option is granted and no tax due when stock is sold?
Incentive stock options (ISOs)
What sort of tax does an incentive stock option incur?
Alternative Minimum Tax (AMT)
Which two types of stock are NOT freely transferable?
1) restricted stock
2) stock owned by control persons
____ ___ 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.
Restricted stock
A ____ ____ is a corporate director, an officer, a large stockholder, or the immediate family of any of the preceding residing in the same home.
control person
____ ____ is any stock held by a control person.
Control stock
Purchases and sales of control stock must be reported to the ___.
SEC
Ownership consisting of 10% or more of the voting stock is considered ____.
control
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.
SEC Rule 144
In almost all cases, those who wish to sell control stock or restricted stock must do so by filing a ____ ___.
Form 144
These facilitate trading of foreign stocks in U.S. markets because everything is done in English and in U.S. dollars.
American Depositary Receipts (ADRs) a.k.a. American Depositary Shares (ADSs)
ADRs are bought and sold (traded) in __ ___ and dividends are paid out in __ ___.
U.S. dollars
An ___ is a negotiable security that represents a receipt for shares of stock in a non-U.S. corporation.
ADR
The use of a ____, or ____ ___, allows ADRs to be priced at an amount more typical of U.S. market share prices.
ratio, participation rate
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 ____ ____.
preemptive rights
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 _____ ___.
currency risk
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.
foreign tax payments
ADRs are issued by _____ ____ of U.S. banks and even though they are traded in U.S. dollars, they still bear currency risk.
domestic branches
The two broad market classifications of foreign markets are:
emerging and developed
_____ 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.
Emerging
The most extreme and undeveloped foreign market is called a ____ market.
frontier
_____ 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.
Developed
What three reasons might you add foreign securities to a client’s portfolio?
1) greater diversification
2) foreign securities sometimes outperform domestic ones
3) foreign securities usually are not highly correlated with domestic ones
What are the four primary risks involved with investing in foreign securities?
1) country risk
2) exchange controls
3) currency risk
4) withholding taxes and fees
The composite risks of investing in a particular country, including political, structural, economic, and inflation risks.
Country risk
Foreign restrictions on currency conversion or movement are called _____ ____.
exchange controls
