Unit 1: Types and Characteristics of Equity Securities

Question 1

Preferred Stock

Answer 1

-senior to common stock,
-perpetual security,
-no preemptive or voting rights
-can be cumulative, callable, convertible, or adjustable

Question 2

Nonqualified Stock Options

Answer 2

-when exercised, taxed as ordinary income with payroll
-no tax consequences at time of receipt

Question 3

Incentive Stock Options

Answer 3

-can be taxed LTCG if held 2 yrs after grant, and 1 yr after exercise
-will contribute to AMT
-no tax consequences at time of receipt

Question 4

Control Stock

Answer 4

-Must file 144 and follow selling volume limits (if owned by control person)
-Applies to unregistered securities regardless of owner.

Question 5

ADR’s

Answer 5

-foreign stock held in vehicle that can trade in US market
-uses “participation rate/ratio” to normalize price for US market

Question 6

ADR features

Answer 6

-can have voting rights, but not preemptive rights
-currency risk, market risk, but not liquidity risk