Unit 2 Flashcards
What are preemptive rights?
Existing stockholders are entitled to maintain their proportionate ownership in a company
Rights Offering
Allows stockholders to purchase common stock below the current market price
Subscription Right
A certificate representing the privilege to buy additional shares of a corporation
Ex-Date
The first day it is too late for investors to buy the stock and get their names on the company’s records
Compute the value of a right
market price - subscription price / number of rights to purchase one share + 1
When would you use MP-SP/N?
When the exam asks for the value of a right after the ex-date
When would you use MP-SP/N+1?
When the exam asks for the value of a right before the ex-date (cum/with rights)
What happens when a standby underwriter is engaged?
An issue is assured of selling all the shares being offered
What is a warrant?
A certificate grant its owner the right to purchase securities from the issuer at a SPECIFIED PRICE
Rank securities in order for income with relative safety:
Warrant
Convertible preferred
Cumulative preferred
Common stock
Cumulative
Convertible
Common
Warrant
American Depositary Receipt
A receipt for shares of a foreign stock deposited with a custodian
Which risk affects ADRs?
Currency Risk
Foreign dividends paid in local currency will be affected by the exchange rate
How does the custodian for ADRs receive dividends?
in the foreign currency
An ADR represents
a foreign security trading in the US
What is a 6% dividend on $100 par?
$6 per year
What does the Securities Act of 1933 regulate?
activity in the primary market
What does the Securities Exchange Act of 1934 regulate?
Activity in the secondary market
Exchange Market
composed of NYSE and other exchanges on which listed securities are traded
Listed Security
A security that is bought and sold on an exchange
Auction Market
Floor brokers compete to execute trades at favorable prices
OTC Market
Interdealer network on which unlisted securities trade — not eligible for margin, thinly traded, no central marketplace
Dark Pool
Private stock exchange; about 30% of trading volume in US stock market
ECN
Electronic Communications Network
Electronic trading platform that automatically buys and sells orders at specified prices or better. Open 24 hours, 365 days to accommodate after hours limit order trading
What happens to the tax rate of qualified dividends?
It is lower than that of nonqualifed dividends
What rule regulates penny stocks?
Section 15(g)
Risk Disclosure Document
Required before initial transaction in a penny stock; Rule 15g-2
Disclosure of Quotations
Required to be provided to penny stock purchasers with current bid and ask to prevent quoting prices that are away from the current market; 15g-3
Disclosure of Compensation
Rules 15g-4 and 15g-5; require members to provide penny stock purchasers with information on the compensation to be earned by member and RR; to avoid excessive markups
Rule 15g-6
Requires monthly vs. quarterly statements for penny stock purchasers
Rule 15g-9
Customer Suitability Determination; to curb abusive sales practices
FINRA Rule 2121
Fair prices and commissions; 5% policy
NOT actually 5% just name of policy
Commissions should be fair
The 5% policy applies to…
both principal (dealer) and agency (broker) transactions
applies to markups, markdowns, and commissions but not securities sold by prospectus
What document is used to disclose pertinent information for a new issue?
Prospectus
Dollar definition of penny stock
market price of less than $5
5% policy applies to…
agency and principal nonexempt securities and transactions, both exchange and OTC
it does not apply to prospectus offerings (mutual funds and new issues)
Which security carries the highest dividend rate?
Callable preferred
Callable allows the issue to call the securities away from the investor. From an investor‘s point of view, this is not an incentive. Therefore, callable preferred tends to pay higher rates.
Holders of common shares may generally vote on…
… whether the company should issue additional preferred stock
On a no-par preferred stock…
The dividend rate is stated in dollars
As interest rates fall, prices of straight preferred stock will…
rise
NYSE listed stocks would never trade on which exchange?
CBOE (Chicago board options exchange)
Options exchanges are strictly for trading options, not stock
What is not a right conferred upon ownership of common stock?
Limited liability. Ownership of common stock means the holders maximum loss is limited to the original investment, the doctrine of limited liability is a legal construct, and shields stockholders from being responsible for the debt of the company.
An investor in the 28% tax bracket has a $5000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year?
The maximum deduction of net capital losses against other income in one year is $3000; any remaining loss can be carried forward into the next year
How are dividends received for ADRs?
Dividends are received in US dollars
Which of the following describes a securities exchange?
The highest bid and the lowest offer prevail. Only listed securities can be traded.
A company declares a 5 for 1 stock split on its outstanding shares of $20 power value common stock. This split will cause…
… par value of the shares to change to four dollars per share
Whenever there is a stock split, what happens to the power value?
The power value is adjusted for the split. With a $20 par and a 5 for 1 split, the par value now becomes four dollars per share. A way to think about this is changing a five dollar bill for one dollar bills. The overall value hasn’t changed, but the face or power value of each bill is now 1/5 of what it was originally
