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Series 7 > Unit 3 > Flashcards

Unit 3 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

common stock

A

equity/ownership position. Portion of company’s profits and dividends.

Able to vote and elect BOD. Not able to vote on dividends.

classified as:
- authorized
- issued
- outstanding
- treasury

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2
Q

authorized but unissued stock

A

doesn’t carry rights and privileges of issued shares and not included in the company’s total capitalization. Can be used for: raising new capital, pay stock dividends, exchanging common stock for outstanding convertible bonds or preferred stock.

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3
Q

authorized stock

A

corporate charter authorizes the # of shares the company can issue.

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4
Q

Issued stock

A

authorized stock that has been sold to investors.

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5
Q

outstanding stock

A

any shares that the company has issued that are in the hands of investors.

Analyst care about # of outstanding shares

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6
Q

treasury stock

A

stock a corporation has issued and subsequently reacquired. Corporation can hold this indefinitely or reissue.

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7
Q

treasury stock

A

stock a corporation has issued and subsequently reacquired.

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8
Q

common stock characteristics

A
  • limited liability: stock holders can not lose more than they invested
  • residual claim to assets: last claim, most junior
  • stock splits - ONLY FOR COMMON STOCK
  • stock dividends: pay dividends with additional shares of stocks
  • transferability: can trade on open market, liquid
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9
Q

forward stock split

A

increases the number of shares. Investor gets more shares but value is reduced

(# of shares owned x first #) / by second #

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10
Q

reverse stock split

A

fewer shares that are worth more.

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11
Q

reverse stock split

A
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12
Q

Rights of common stock ownership

A
  • voting rights
  • preemptive rights
  • inspection rights
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13
Q

common stock voting rights

A

Vote on:
- BOD
- issuance of convertible securities or additional common stock
- sustainable business changes - M&A
- declarations of stock splits

No votes on dividends.

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14
Q

dilution

A

a reduction in earnings per share of common stock. occurs through the issuance of additional shares of common stock and conversion of convertible securities

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15
Q

statutory voting

A

cast 1 vote per share

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16
Q

cumulative voting

A

allows for allocating their total votes in any manner - benefits the minority

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17
Q

proxy

A

absentee ballot

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18
Q

nonvoting common stock

A

Class A = voting
Class B = nonvoting

allows company to raise additional capital while maintaining management control and continuity

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19
Q

preemptive rights

A

give investors the right to maintain a proportion interest in a company’s stock

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20
Q

inspection rights

A

vary from state to state but stock holders are entitled to annual financial statements and lists of stockholders

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21
Q

preferred stock

A

Represents ownership.

always issued with a fixed rate of return - fixed divided that is being paid.

exception, adjustable rate preferred stock has a variable dividend payout.

nonvoting.

No preset date of maturity or redemption.

preferred stock prices tend to move inversely with interest rates.

Inflation risk/sensitive to interest rates

Benefits:
- get dividends before common stockholders
- priority claim over common stockholders.

Good for investors looking for income and safety.

No stock splits or rights

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22
Q

fixed dividend

A

Preferred stock is often identified by its annual dividend payment stated as a % its par value.

assume paid quarterly.

no obligation for them to be paid.

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23
Q

categories of preferred stock

A
  • straight
  • cumulative
  • convertible
  • participating
  • callable
  • adjustable rate
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24
Q

straight preferred stock

A

no special features beyond stated dividend payment.

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25
Q

cumulative preferred stock

A

skipped dividends must be paid before paying a common dividend.

missed dividends are in arrears.

typically has lower stated dividend due to less risk

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26
Q

convertible preferred stock

A

gives owner the right to exchange each preferred share for shares of common stock. conversion rate is fixed at the time of issue.

typically has lower stated dividend due to less risk

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27
Q

participating preferred stock

A

eligible to get a % of the common stock dividend. Max % is stated at issue.

28
Q

callable preferred stock

A

company can buy back the stock from investors at a stated price on the call date or after. Likely to be used when interest rates decline.

typically has higher dividend rate.

29
Q

adjustable rate preferred stock

A

adjustment is made off chosen standard.

doesn’t have interest rate risk.

when interest rates go up, so does the dividend.

30
Q

rights offering

A

allows stockholders to buy common stock below the current market price.

rights are valued separately from the stock.

Trade on secondary market.

rights are not ownership.

short term.

on issuance, exercise price is below market price

31
Q

subscription right

A

certificate representing the privilege to buy additional shares of a corporation.

expire in 30-45 days of issue (rarely longer than 60)

shareholders will always receive one right for each share of common stock they own. No rights for preferred stock.

In an odd play on words, the only similarity here is that neither of them have voting rights. Warrants are long-term while rights are short-term. The exercise price of a right is below the current market while that of a warrant is above. Only rights are distributed to existing shareholders in proportion to the investor’s current stock ownership. Warrants are not sent to shareholders; they are most often part of another issue.

32
Q

terms of the offering

A

described in the subscription rights document are the terms. Include: # of shares a stockholder can buy, the subscription (exercise) price, final date for exercising and date new shares will be issued.

33
Q

value of a right before ex-date

A

(market price - subscription price)/ (# of rights to purchase 1 share +1)

34
Q

value of a right after ex-date

A

(market price - subscription price)/ (# of rights to purchase 1 share)

35
Q

standby underwriter

A

purchase excess shares that remain unsold after a rights offering. Issuer is assured of all share being sold.

36
Q

warrants

A

certificate granting its owner the right to purchase securities from the issue at a specified price.

long-term. generally expire at least 2 yrs after issue, typically 5 yrs.

purchase price is always HIGHER than the current market price on the date of issue of the warrant.

are not ownership.

sweeteners

In an odd play on words, the only similarity here is that neither of them have voting rights. Warrants are long-term while rights are short-term. The exercise price of a right is below the current market while that of a warrant is above. Only rights are distributed to existing shareholders in proportion to the investor’s current stock ownership. Warrants are not sent to shareholders; they are most often part of another issue.

37
Q

American Depository Receipts (ADRs)

A

receipt for shares of foreign stocks deposited with a custodian.

English and trade in USD.

typically have no voting rights.

Can get the foreign shares from the custodian if desired.

foreign income tax.

currency risk

registered on the books of the US banks responsible for them.

all exchange listed ADRs are sponsored - foreign company sponsors the issue to increase ownership base.

unsponsored ADRs are issued by banks without the participation of the issuer.

38
Q

primary market

A

new issues market.

proceeds of sales go to the issuer of the securities sold.

39
Q

secondary market

A

previously issued securities are bought and sold.

40
Q

securities act of 1933

A

regulates activity in the primary market

41
Q

securities act of 1934

A

regulates activity in the secondary market

42
Q

exchange market

A

NYSE and other exchanges on which listed securities are traded.

must register with SEC.

operate as auction markets - floor brokers compete to execute trades at the most favorable prices. the designated market maker (AKA specialist) conducts the auction.

An exchange is not a negotiated market but an auction market in which securities listed on that exchange are traded. No minimum price is set for securities. Rather, the highest bid and the lowest offer prevail.

43
Q

listed securities

A

any security which is bought and sold on an exchange

44
Q

listed securities

A

any security which is bought and sold on an exchange

45
Q

OTC market

A

largest in the US in terms of # of securities traded.

functions as inter dealer market for unlisted trades.

no central marketplace.

Interdealer network.

Negotiated market.

46
Q

unlisted securities

A

not listed on any exchange

47
Q

unlisted securities

A

not listed on any exchange

48
Q

OTC Bulletin Board

A

where stocks that do not qualify for listing on the exchanges are traded.

49
Q

OTC Link/Pink Sheets

A

where thinly traded securities trade

50
Q

electronic communication network (ECN)

A

automatically matches buy and sell orders specified prices.

SEC sanctioned alternative trading system

51
Q

dark pools

A

trading volume isn’t public.

can execute large block orders without affecting price.

17% of US trading volume.

52
Q

portfolio income

A

dividends, interest, net capital gains.

taxed in the year it is earned.

53
Q

cash dividends

A

most are qualified (the tax rates are lower) and max rate is typically 15%, might be 20% for super high income.

if unqualified ordinary income tax rates apply.

preferred stock dividends are always paid in cash.

54
Q

stock dividends

A

pays out shares of common stock rather than cash.

not taxable

common stockholders can get either stock or cash dividends.

55
Q

capital gain

A

sale of security at a price higher than the cost

56
Q

capital loss

A

sold at a lower price than it costs.

57
Q

short term

A

any security sold within 12 months of purchase

58
Q

long term

A

12 months + 1 day and beyond

59
Q

short term gains

A

taxed at ordinary income rates

60
Q

long term gains

A

taxed at 15% (unless in highest tax brackets)

61
Q

net capital losses

A

losses that exceed capital gains are deductible against earned income. Max is 3000 per year. Carried forward indefinitely to offset gains in future years.

62
Q

penny stocks

A

less than $5 a share and is not listed on any major exchange

63
Q

penny stock risks

A
  • lack of transparency: trade on OTC bulletin board and OTC link, analyst coverage is slim.
  • lack of liquidity: trade infrequently. Large spread.
  • no track record: new companies with no history.
  • pump and dump
64
Q

Penny Stock rules

A

15g rules

before initial transaction must be given risk disclosure doc. Need signed and dated acknowledgement from customer. Firm must wait 2 business days after sending the statement before executing the first trade.

Must provide current bid and asked quote orally or in writing before effecting any transactions (disclosure of quotations).

info on compensation to be earned (disclosure of compensation).

Monthly statements are required.

suitability determination and make suitability statement as to why it is appropriate for customer. customer must sign and return for trading in penny stocks.

established customer exception, no suitability statement needed - traded or made deposi for at least a year or made 3 unsolicited purchases of penny stocks on 3 separate days.

65
Q

rule 2121

A

5% policy (not specifically 5%) - applies to secondary market transactions.

adopted to ensure the investing public gets fair treatment and is charged reasonable rates.

guideline not firm rule.

does not apply to prospectus offerings

66
Q

call premium

A

erm used to describe that excess over par that the issuer pays when calling in the preferred stock (or callable bond).

Series 7 (19 decks)

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