Unit 2 - Session 4 - Types & Characteristics of Equity Securities

Question 1

Common Stock

Answer 1

Equity ownership in a corporation

Question 2

Preferred Stock

Answer 2

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

Question 3

Property Dividends

Answer 3

Shares in a subsidiary company or in product of a corporation

Question 4

What are the benefits of owning common stock?

Answer 4

1. ) potential capital appreciation
2. ) income from dividends
3. ) hedge against inflation

Question 5

Residual Claim

Answer 5

Claim common stock holders have on assets as the corporation’s dissolution

Question 6

What are the advantages of Preferred Stock over Common stock?

Answer 6

1. ) Dividends paid before common
2. ) Fixed Dividend payments
3. ) Priority claim over common in liquidation of corporation
4. ) usually no maturity or scheduled redemption date like debt (perpetual security)

Question 7

Straight Preferred Stock

Answer 7

No special features beyond the stated dividend payment. Missed dividends are not paid to the holder

Question 8

Cumulative Preferred

Answer 8

accrues payments due to its shareholders in the event dividends are reduced or suspended

Question 9

Callable Preferred

Answer 9

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)

Question 10

Convertible Preferred

Answer 10

Where the owner can exchange their preferred share for a fixed number of common stock of the issuing corporation

Question 11

Adjusted-Rate Preferred

Answer 11

stocks issued with adjusted (variable) dividend rates, usually tied to some type of benchmark

Question 12

What are the benefits of owner preferred stock?

Answer 12

1. ) Fixed income from dividends
2. ) prior claim ahead of common stock
3. ) convertible preferred sacrifices income in exchange for potential appreciation

Question 13

What are the risks of holding preferred stock?

Answer 13

1. ) market risk
2. ) possible loss of purchasing power
3. ) interest rate risk
4. ) business difficulties leading possible reduction r elimination of the dividend and even bankruptcy leading to loss of principal

Question 14

American Depository Receipts

Answer 14

Facilitate the trading of foreign stocks in US markets b/c transactions are done in English and USD. Dividends are paid out in USD

Question 15

Currency Risk

Answer 15

The possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with USD

Question 16

Who are the registered owners of ADRs?

Answer 16

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

Question 17

Who issues ADRs?

Answer 17

US Domestic banks

Question 18

What are characteristics of Emerging Markets?

Answer 18

low levels of income, measured by the countries GDP

2. ) low levels of equity capitalization
3. ) questionable market liquidity
4. ) potential restrictions on currency conversion
5. ) high volatility
6. ) prospects for economic growth and development
7. ) stabilizing political and social institutions
8. ) restrictions on foreign ownership and on foreign currency conversions
9. ) lower regulatory standards

Question 19

What are characteristics of Developed Markets?

Answer 19

1. ) large levels of equity capitalization
2. ) low commission rates
3. ) few, if any, currency conversion restrictions
4. ) highly liquid markets with many brokerage institutions and market makers
5. ) many large capitalization securities
6. ) well-defined regulatory schemes leading to transparency similar to that enjoyed by those investing in US Securities

Question 20

What additional risks do investors have in foreign markets that they don’t have in domestic markets?

Answer 20

1. ) country risk
2. ) exchange controls
3. ) currency risk
4. ) withholding taxes and fees

Question 21

Country Risk

Answer 21

all risks of investing in a particular country: political military coups, revolutions, structural, confiscatory, economic, inflation, interest rates

Question 22

Preemptive Rights

Answer 22

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

Question 23

Rights Offering

Answer 23

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

Question 24

Warrants

Answer 24

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

Question 25

Nonqualified Stock Options

Answer 25

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.

Question 26

Incentive Stock Options

Answer 26

1. ) No income recognized when option is granted
2. ) No tax due when option is exercised
3. ) 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
4. ) Difference between option price and the FMV on date of exercise is an add back for AMT purposes

Question 27

Fundamental analysts

Answer 27

Evaluate the broad-based economic trends, current business conditions within an industry, and the quality of a particular corporation’s business, finances and management

Question 28

Technical analysts

Answer 28

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

Question 29

Fundamental Analysis

Answer 29

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

Question 30

Dividend Discount Model

Answer 30

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.

Question 31

Dividend Growth Mdoel

Answer 31

assumes the amount of the annual dividend will grow at a constant rate

Question 32

Technical Anaysis

Answer 32

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

Question 33

Support level price

Answer 33

the price where the stock bottoms. Technicians at the support level as it moves to resistance.

Question 34

resistance level price

Answer 34

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.

Question 35

breakout

Answer 35

when the price movement penetrates the support or the resistance level. a benchmark of a breakout is roughly 3% either way.

Question 36

Moving Averages

Answer 36

attempts to modify the fluctuations of stock prices into a smoothed trend; distortions are reduced to a minimum

Question 37

Short Interest Theory

Answer 37

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

Question 38

Odd-Lot Theory

Answer 38

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

Question 39

Advance/Decline Theory

Answer 39

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