Unit 2 Equity Securities Flashcards
_______ represent ownership in a company and give an investor the opportunity to grow their wealth along with a company’s success.
Equity securities
Common stocks are called ____ because they represent ownership in the company.
equities
Investors who buy common stock are called ____
shareholders
The 4 classes of common stock are:
authorized, issued, outstanding, or treasury.
The ____specifies the number of shares the company is authorized to issue.
corporate charter
Common Stock Characteristics:
ownership in a company
purchase for growth (capital appreciation)
purchase income (dividend)
_____ refers to the maximum number of shares a publicly-traded company can issue, as specified in its articles of incorporation or charter
Authorized stock
______is authorized stock that has been sold to investors.
Issued stock
_____ includes all shares that a company has issued and that are in the hands of investors.
Outstanding stock
____is stock a corporation has issued and subsequently reacquired.
Treasury stock
Market cap is determined by
multiplying the number of outstanding shares by the current market value (CMV) of a share (outstanding shares ×CMV).
Common stocks are often classified by the of the corporation.
size (market cap)
Types of Common Stock:
Large-Cap
Mid-Cap
Small-Cap
_____ stocks are the largest companies. These can be rapidly growing technology companies or big, long-established firms
Large-cap
Large-cap companies that have a long history of steady dividend payments are often called ____
blue-chip stocks
____stocks are still large by most standards, just not as huge as the large-cap stocks.
Mid-cap
____ are still large enough to be listed on national exchanges but still the smallest size. They tend to be oriented toward growth and produce very little dividends.
small caps
A _____ is an unlisted (not listed on a U.S. stock exchange) security trading at less than $5 per share.
penny stock
equity securities defined as penny stocks are considered ____
highly speculative. come with rules
penny stock rules of suitability and disclosure apply only to ____
solicited transactions
are distributions of a company’s profits to its shareholders.
Dividends
Dividends may be paid in any of three ways:
Cash dividends
Stock dividends
Product dividends
There are four dates to remember that are associated with the dividend disbursing process:
Declaration date.
Ex-dividend date (ex-date).
Record date
Payable date.
On the ____ , the dividend disbursing agent sends dividend checks to all stockholders whose names appear on the books as owners as of the record date.
payable date
The stockholders of record (those who own the stock) on the ____ receive the dividend distribution.
record date
To receive the dividend, the stock must be purchased before the ____
ex-dividend date
If the stock is purchased on or after the _____, the new owner has purchased the stock without the dividend, and is therefore not entitled to receive it.
ex-date
When a company’s BOD approves a dividend payment, it is recognized as the date the dividend as the ____.
Declaration date
The declaration date, record date, and payable date are established by the company’s ____.
Board of Directors
Test Alert DERP
The order of dates is declaration, ex-dividend, record, and payable.
Benefits of Owning Common Stock:
voting rights, freely transferable shared, the opportunity for capital appreciation, and current income, as well as limited liability
A stockholder can cast ____ vote for each share of stock owned.
one
____ allows a stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the BOD. Aboard candidate needs a simple majority to be elected.
Statutory voting
____ allows stockholders to allocate their total votes in any manner they choose.
Cumulative voting
___ voting benefits the smaller investor, whereas ____ voting benefits larger shareholders.
Cumulative, statutory
Freely transferable means:
Common Stock Shareholders have the right tos ell or give away their shares without permission of the corporation.
Shareholders have preemptive rights which means:
If a corporation wants to issue additional shares, existing shareholders have the right to purchase those shares in an amount that would keep their proportionate ownership in the corporation unchanged.
Risks of owning Common Stock:
Value Risk
Decreased or no dividend income
Low priority at dissolution (bonds and preferred stock are considered senior securities if there is a bankruptcy
Another term for stocks and bonds is
equity and debt
A ____ is a class of stock that is granted certain rights that differ from common stock. Namely, preferred stock often possesses higher dividend payments, has a fixed rate of return and a higher claim to assets in the event of liquidation
preferred stock
preferred shareholders generally do not have ____ or _____
voting rights or preemptive rights.
Benefits of Owning Preferred Stock
Dividend preference.
Priority at dissolution over common stock.
Risks of Owning Preferred Stock
Purchasing power risk
Interest rate sensitivity
Decreased or no dividend income
Types of Preferred Stock
Straight (noncumulative)
Cumulative
Callable preferred
Convertible preferred
Adjustable-ratepreferred.
Participating preferred.
_______ preferred stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.
Straight
_____ preferred stock accrues payments due to its shareholders in the event dividends are reduced or suspended.
Cumulative
Corporations often issue _____ preferred stock, which a company can buy back from investors at a stated price after a specified date in which the corporation may pay a premium on the stock
Callable
A preferred stock is ____ if the owner can exchange the shares for a fixed number of shares of the issuing corporation’s common stock.
convertible
Some preferred stocks are issued with _____ dividend rates. Such dividends are usually tied to the rates of other interest rate benchmarks, such asTreasury bills, and money market rates.
adjustable (or variable)
_____ preferred stock offers its owners a share of corporate profits that remain after dividends and interest
due other securities are paid.
participating
_____ are a type of equity security designed to simplify foreign investing for U.S. investors. An _____ is created when common shares are purchased in the foreign company’s home market. These shares are then deposited in a foreign branch of a U.S. bank, and a receipt is created.
American Depositary Receipts (ADRs)
ADRs offer the following advantages and risks:
Ease of use.
ADR taxation
Currency and political risk
Not the same voting rights
______ (part of the Securities Act of 1933) applies to shares that are sold through a
nonstandard offering and are subject to resale restrictions and to sales by persons who are classified as control persons (insiders) of the issuer.
Rule 144
The volume limitations under Rule 144 are the greater of:
- 1% of the outstanding shares of the company or
- the average weekly trading volume over the most recent four weeks.
Issued Stock- Treasury Stock=
Oustanding Stock
ADR dividends are generated in foreign currency but are )))) by the depsitory bank
converted into US dollars
The Rule 144 form is used to determine the number of shares the ____ person may sell over a 90-day period.
control (affiliate)
_____ entitle existing common stockholders to maintain their proportionate ownership share in a company by buying newly issued shares before the company offers them to the general public.
Stock rights or preemptive rights
A stockholder who receives preemptive rights may:
- exercise the rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent;
- sell the rights and profit from their market value (rights certificates are negotiable securities); or
- let the rights expire and lose their value (not a likely scenario
_____ are usually offered to the public as sweeteners in connection with other securities,
such as debt instruments (bonds) or preferred stock, to make those securities more attractive.
Warrants
Characteristics of preemptive rights are:
-A rights offering allows stockholders to purchase common stock below the current market price.
-The rights are valued separately from the stock and trade in the secondary market during the subscription period, which is typically 30-45 days.
-Existing shareholders receive one right per share owned.
-The number of rights required to purchase one share of the new issue depends on the number of outstanding shares and the number of new shares offered.
_____ are an instrument that gives the investor the option of buying shares at a later date at the specified (exercise) price.
Warrants
Note that while the exercise price is higher than the current market value when the warrants are issued, the investor hopes that the exercise price will be below current market value when the warrants are eventually exercised.
If a company wishes to reinvest its profits for business purposes rather than pay cash
dividends, its board may declare a ______.
stock dividend
A ____ occurs when a company divides each existing share of its stock into several new shares. The total number of shares increases but the total value of all shares taken together remains the same.
stock split
Aggregate value _____ for a stock dividend or a stock split
stays the same
What is the result of a stock dividend?
The net result is that the shareholder now owns more shares after the distribution, but the price per share is adiusted downward.
Two types of Stock Splits:
Forward and backward
In a _____, the number of shares will increase and the price per share wli decrease. Note that the cost basis per share will decrease as well.
forward split
In a ______, the number of shares decreases while the price per share increases. The cost basis per share will likewise increase. The total value of the position is unchanged by the split.
reverse split
there are no _____ at the time of a stock dividend or split.
tax implications
In a ____ , two (or more) companies combine operations and assets. The shareholders of both companies receive new shares of the combined company and their shares of the old company are canceled.
merger
In an ______ one company takes over the operations and assets of another firm The shareholders of the company that was acquired will receive shares of the company that did the acquiring, and their old shares are canceled.
acquisition
In a _____, a corporation forms a subsidiary company out of some of the corporation’s assets and operations. It then issues shares of the newly formed corporation to the shareholders of the original company.
spin-off
A ____ occurs when an issuer buys its own outstanding shares in the open market from existing shareholders in order to reduce the number of shares available (supply) and therefore can increase the value ofshares still available.
buyback
Types of Nonstandard Corporation Action
merger
acquisition
spin-off
buyback
Tender offer
An offer to buy a security directly from the owners of the security (and not through secondary markets) is called a ____
tender offer
TAKE NOTE
Buybacks and tender offers are normally _____.
cash offers
If the corporate action results in cash offers/payments the action is ___
taxable
issuers are required by the SEC to _____ of corporate actions to shareholders for such actions as cash dividends, stock dividends, a forward or reverse split, or a rights or warrants offering.
give notice
A ____ is a limited power of attorney that a stockholder gives to another person, transferring the right to vote on the stockholder’s behalf.
proxy
If a customer does not return the proxy by the 10th day before the annual shareholder
meeting, the member may …..
vote the shares as it sees fit as long as the matters to be voted on are of minor importance.
If the matters to be voted on are of major importance (e.g., merger or issuance of additional securities), the member may never vote the shares as it sees fit. In this case, if the proxy is not returned…
the shares are not voted
Rights and Warrants are ____
opposites
Which tpe of type preferred stock is noted as being even more stable in price than the others
adjustable
There are no ____ for a stock dividend.
tax implications
A rights offering allows:
stockholders to purchase common stock below the current market price.
The rights are valued separately from the stock and trade in the secondary market during the subscription period, which is typically 30 to 45 days.
Existing shareholders receive one right per share owned.
The number of rights required to purchase one share of the new issue depends on the number of outstanding shares and the number of new shares offered.
An ____ stock split involves a ratio that does not end in 1. For example: 3:2 stock split. 5:4 stock split.
uneven
If the stock split ratio ends in 1, then it’s an ____ stock split. For example: 2:1 stock split.
even
Which of the following features of preferred stock allows the holder to reduce the risk of inflation?
covertible
common stock generally bears little risk due to fluctuations in ____
interest rates
Signing and returning proxy statements to a broker-dealer for stock held in street name is enough to get the shares voted as recommended by the issuer’s management, as long as the broker-dealer receives the statements by the ___ day before a shareholders’ meeting
tenth
With callable preferred stock, to compensate for the possibility that the shares may be called, the issuer pays a ____
higher dividend
All else being equal, which of the following preferred would pay the highest dividend?
callable
If there is a _____ or more interest held by immediate family members, then all those family members owning voting stock are considered to be control persons.
10%
The primary purpose of American depositary receipts (ADRs) is to facilitate the trading of….
foreign stocks in U.S. markets.
The Securities and Exchange Commission (SEC) requires that notice of corporate actions be given for :
the issuance of warrants to be attached to a bond offering.
dividend payments on the issuer’s common stock.
a reverse split on the issuer’s common stock.
how many times a year do Common shareholders have the right to receive an audited set of financial statements of the company’s performance?
once annually
The formula to calculate a gain or loss for tax purposes is :
the proceeds - the cost basis
The special penny stock rules only apply to ____ transactions.
solicited
An American depositary receipt is a…
domestic security representing a foreign security in U.S. markets.
_____ is the original value of an asset for tax purposes, usually, the purchase price, adjusted for stock splits, dividends, and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset’s cost basis and the current market value.
Cost basis
Cost basis calcualtion
the cost of all the shares you have purchased and divide it by the (new) number of shares
corporate and Treasury bonds pay ____ semiannually.
interest
