Unit 12 Flashcards
Characteristics of Preferred Stock
- Usually does not have the same voting rights or appreciation potential as common stock
- Priority claims over common stock
- Dividends are fixed
- Like a bond, its price is sensitive to interest rate changes
What are the basic features of common stock?
- potential capital appreciation
- income from dividends
- hedge against inflation
What is a 2 for 1 stock split?
2 stocks for every 1 you own (twice as many shares)
What is a property dividend?
shares in a subsidiary company/product
Rights of common stockholders:
- right to vote for the BOD
- common stockholders usually have the preemptive right to maintain their proportionate share of ownership in the corporation
What is the record date?
Before a votre or a payment of a dividend, the company established a record date. This is the date by which an investor must be an owner of record in order to vote or receive the announced dividend.
Risks of owning common stock?
Mark risk, business risk, and low priority at dissolution
Because the primary objective by investing in preferred stock is income, when analyzing a specific preferred stock, the most important determination should be
the ability of the company to meet its dividend payments.
Straight (noncumulative)
no special features beyond the stated dividend payment, missed dividends are not paid to the holder
Callable Preferred
company can buy back at a stated price after a specified date
Convertible Preferred
owner can exchange the shares for a fixed number of shares of common stock of the issuing corporation. Convertible preferred price tends to fluctuate in line with the common.
For investors looking for fixed income through preferred stocks, what would be the LEAST appropriate choice.
adjustable-rate
For exam purposes, all preferred stock:
is nonvoting and it makes no difference if the par value is $10, $25, or $100.
Benefits of owning preferred stock
- Fixed income from dividends
- Prior claim ahead of common stock
- Convertible preferred sacrifices income in exchange for capital appreciation. Preferred stock is a perpetual security.
Risks of owning preferred stock:
- Market risk
- Possible loss of purchasing power
- Interest rate (money rate) risk
- Business difficulties leading to possible reduction of elimination of the dividend and even bankruptcy leading to loss of principal.
Fundamental analysts evaluate:
broad-based economic trends, current business conditions within an industry, and the quality of a particular corporation’s business, finances, and management
What is a dividend model?
some analysts believe that the value of a stock can be determined based upon current or anticipated dividends
Dividend Discount Model
this model states that the current market value of a stock should be equal to the present value of all future dividends.
- Divide annual dividend / required rate of return
Dividend Growth Model
assumes that the amount of the annual dividend will grow at a constant rate
Which model computes a higher current stock price?
The answer is one that factors in growth.
Technical analysts attempt to:
predict the direction of prices on the basis of charts reflecting price and trading volume patterns of a specific securities without regard to the issuer’s profitability
They chart a stock’s price and volume over a period of time.
Support Level
the price where the stock price bottoms
Resistance Level
where the stock’s price reaches a high enough level where there are now more sellers than buyers
Breakout
when the price movement penetrates the support or resistance level
Moving Averages
attempts to modify the fluctuations of stock prices into a smoothed trend
Short Interest Theory
refers to the number of shares that have been sold short, higher short interest is a bullish indicator and low short interest is a bearish indicator
Odd-Lot Theory
the belief that small investors invariably buy and sell at the wrong times
Advance/Decline Theory
the number of issues closing up or down on a specific day reflects market breadth, the number of advances and declines can be significant indications of the market’s relative strength
