Unit 2 - Session 4 - Types & Characteristics of Equity Securities Flashcards
Common Stock
Equity ownership in a corporation
Preferred Stock
Represents equity ownership in a corporation but usually does not have the same voting rights or appreciation potential as common stock. Usually pays fixed quarterly dividend and has priority claim over common stock (acts more like debt). Usually nonvoting
Property Dividends
Shares in a subsidiary company or in product of a corporation
What are the benefits of owning common stock?
- ) potential capital appreciation
- ) income from dividends
- ) hedge against inflation
Residual Claim
Claim common stock holders have on assets as the corporation’s dissolution
What are the advantages of Preferred Stock over Common stock?
- ) Dividends paid before common
- ) Fixed Dividend payments
- ) Priority claim over common in liquidation of corporation
- ) usually no maturity or scheduled redemption date like debt (perpetual security)
Straight Preferred Stock
No special features beyond the stated dividend payment. Missed dividends are not paid to the holder
Cumulative Preferred
accrues payments due to its shareholders in the event dividends are reduced or suspended
Callable Preferred
A company can buy back from investors at at state price after a specified date. This right gives the company to replace relatively high fixed dividend obligation with lower ones when the cost of money has gone down (refinancing)
Convertible Preferred
Where the owner can exchange their preferred share for a fixed number of common stock of the issuing corporation
Adjusted-Rate Preferred
stocks issued with adjusted (variable) dividend rates, usually tied to some type of benchmark
What are the benefits of owner preferred stock?
- ) Fixed income from dividends
- ) prior claim ahead of common stock
- ) convertible preferred sacrifices income in exchange for potential appreciation
What are the risks of holding preferred stock?
- ) market risk
- ) possible loss of purchasing power
- ) interest rate risk
- ) business difficulties leading possible reduction r elimination of the dividend and even bankruptcy leading to loss of principal
American Depository Receipts
Facilitate the trading of foreign stocks in US markets b/c transactions are done in English and USD. Dividends are paid out in USD
Currency Risk
The possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with USD
Who are the registered owners of ADRs?
They appear on the books of US banks and dividends are sent to the US banks. The bank collects, converts to USD, and fund to owners
Who issues ADRs?
US Domestic banks
What are characteristics of Emerging Markets?
low levels of income, measured by the countries GDP
- ) low levels of equity capitalization
- ) questionable market liquidity
- ) potential restrictions on currency conversion
- ) high volatility
- ) prospects for economic growth and development
- ) stabilizing political and social institutions
- ) restrictions on foreign ownership and on foreign currency conversions
- ) lower regulatory standards
What are characteristics of Developed Markets?
- ) large levels of equity capitalization
- ) low commission rates
- ) few, if any, currency conversion restrictions
- ) highly liquid markets with many brokerage institutions and market makers
- ) many large capitalization securities
- ) well-defined regulatory schemes leading to transparency similar to that enjoyed by those investing in US Securities
What additional risks do investors have in foreign markets that they don’t have in domestic markets?
- ) country risk
- ) exchange controls
- ) currency risk
- ) withholding taxes and fees
Country Risk
all risks of investing in a particular country: political military coups, revolutions, structural, confiscatory, economic, inflation, interest rates
Preemptive Rights
entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public
Rights Offering
allows these stockholders to purchase common stock below the current market price. the rights are valued separately from the stock and trade in the secondary market
Warrants
certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than then current market price
Note: b/c the value of rights and warrants is dependent upon the value of the underlying stock, these are considered derivatives
Nonqualified Stock Options
Type of employee stock option. When exercised, the difference between the current market price at the time of exercise and the strike price is reported as wages. The tax treatment is ordinary income instead of capital gains. This is also subject to payroll and income tax.
Incentive Stock Options
- ) No income recognized when option is granted
- ) No tax due when option is exercised
- ) Tax is due when stock is sold
a. ) Gain is capital if held at least one yr and sold at least two yrs after grant
b. ) otherwise - ordinary income - ) Difference between option price and the FMV on date of exercise is an add back for AMT purposes
Fundamental analysts
Evaluate the broad-based economic trends, current business conditions within an industry, and the quality of a particular corporation’s business, finances and management
Technical analysts
Attempts to predict the direction of prices on the basis of charts reflecting price and trading volume patterns of specific securities without regard to the issuer’s profitability
Fundamental Analysis
the study of the business prospects of an individual company within the context of its industry and the overall economy. They do this by examining the company in detail, including the financial statements and company management
Dividend Discount Model
states the value of a stock should be equal to the present value of all future dividends. Take the investors expected future returns (dividends) and then discount that amount to compute the present value.
Dividend Growth Mdoel
assumes the amount of the annual dividend will grow at a constant rate
Technical Anaysis
looks at the market. looks to measure market risk assumed when investing in a particular security. this method of attempting to predict stock price trends over the near term, generally four to six weeks. the prediction is based on current stock price trends and the relationship of the present trend to prior trends
Support level price
the price where the stock bottoms. Technicians at the support level as it moves to resistance.
resistance level price
the price where the stock reaches a high enough level where there are more sellers than buyers. Technicians sells at the resistance level as it moves to support.
breakout
when the price movement penetrates the support or the resistance level. a benchmark of a breakout is roughly 3% either way.
Moving Averages
attempts to modify the fluctuations of stock prices into a smoothed trend; distortions are reduced to a minimum
Short Interest Theory
refers the number of shares that have been sold short. b/c short positions must be repurchased eventually, some analysts believe that short interest reflects mandatory demand that creates a support level or stock prices. high short interest is a bullish indicator, and low short interest is a bearish indicator
Odd-Lot Theory
transactions of fewer than 100 shares. These theorist believe small investors buy and sell at the wrong times. When these traders buy they are bearish and when they sell they are bullish
Advance/Decline Theory
Advances and declines are indicators the market’s relative strength. When declines outnumber advances by a large amount, the market is bearish even if it closed higher. In bull markets, advances substantially outnumber declines. Technical analysts plot daily advances and decline to show indication marks
