Unit 3 - Equity Securities

Question 1

• this type of stock is authorized stock that has been sold to investors.

Answer 1

Issued Stock

Question 2

• this type of stock includes any shares that a company has issued and are in the hands of investors.

Answer 2

Outstanding Stock

Question 3

• this type of stock is stock a corporation has issued and subsequently reacquired.
• the corporation can hold this stock indefinitely or can reissue or retire it.
• this type of stock does not carry the rights of outstanding common shares, such as voting rights and the right to receive dividends.

Answer 3

Treasury Stock

Question 4

The following characteristics describe this type of stock:
- limited liability
- residual claim to assets
- stock splits & dividends
- transferability

Answer 4

Common Stock (characteristics)

Question 5

The following are rights for this type of stock:
- voting rights
-preemptive rights
- inspection rights

Answer 5

Common Stock (rights)

Question 6

• this type of shareholder voting allows a stockholder to cast one vote per share owned for each item on a ballot.

Answer 6

Statutory Voting

Question 7

• this type of shareholder voting allows stockholders to allocate their total votes in any manner they choose.

Answer 7

Cumulative Voting

Question 8

• this is a right for common shareholders that arises when a corporation raises capital through the sale of additional common stock.
• this gives shareholders the right to purchase enough newly issued shares to maintain their proportionate ownership in the company.

Answer 8

Preemptive Rights

Question 9

• this type of stock is always issued with a fixed rate of return, which is a fixed dividend that is being paid.
• this type of stock is subject to inflation risk but has priority over common stock when dividends are paid out as well as being paid out assets in the event of the company declaring bankruptcy.

Answer 9

Preferred Stock

Question 10

• classification of preferred stock that has no special features beyond the stated dividend payment. The year’s stated dividend must be paid to this type of preferred stock if any dividend is to be paid to common shareholders.

Answer 10

Straight Preferred

Question 11

• classification of preferred stock that requires any dividends that have been skipped to be paid before paying a common dividend. The technical term for missed dividends is arrears.

Answer 11

Cumulative Preferred

Question 12

• this type of preferred stock gives the owner the right to exchange each preferred share for shares of common stock.
• the conversion rate is fixed at the time of issue.
• this type of share has a lower dividend rate because the ability to convert into common stock offers growth potential not otherwise available to a preferred stockholder.

Answer 12

Convertible Preferred

Question 13

• this type of preferred stock is eligible to receive a percentage of the common dividend. The maximum percentage is stated when the stock is issued.

Answer 13

Participating Preferred

Question 14

• this type of preferred stock allows the company to buy back the stock from investors at a stated price on the call date or any date thereafter
• this feature would most likely be used when the interest rates decline - the company could issue a new preferred stock with a lower dividend and use that money to redeem the old stock.

Answer 14

Callable Preferred

Question 15

• this type of preferred stock is issued with an adjustable interest rate that is changed based on a chosen standard (US gov’t T-Bills are frequently used).

Answer 15

Adjustable Rate Preferred

Question 16

• this is a certificate representing the privilege to buy additional shares of a corporation. The corporation sends this certificate to each common stockholder. The certificate grants one right for each share of common stock they own. These rights have a short lifespan, expiring generally within 30-45 days of issue, rarely more than 60.

Answer 16

Subscription Right

Question 17

(Market Price - Subscription Price)
/
(Number of Rights to purchase 1 share + 1) = This Term

Answer 17

Cum Rights

Question 18

(Market Price - Subscription Price)
/
(Number of rights to purchase 1 share)
= This Term

Answer 18

Ex-Rights

Question 19

• this term is a certificate granting its owner the right to purchase securities from the issuer at a specified price.
• this is always a long-term instrument that generally has an expiration date at least two years after issue.
• the purchase price is always higher than the current market price on the issue date
• often offered to the public as “sweeteners” in connection with an offering of other securities, such as bonds or preferred stocks
• bundled as units, they are detachable and may trade separately from the bond or preferred stock

Answer 19

Warrants

Question 20

• short-term offering
• on issuance exercise price is below the market price
• may trade with or separate from the common stock
• offered to existing shareholders with preemptive rights

Answer 20

Rights

Question 21

• this term is simply a receipt for shares of a foreign stock deposited with a custodian.
• represents a specific number of shares in a foreign company held by a custodian.
• traded on the US securities market and are in English and trade in USD.
• owners of this term have most of the rights that common shareholders normally hold. However, they generally do not have voting rights.
• owners of this term have the right to exchange certificates for the foreign shares they represent - this is rarely done.
• this term is registered on the books of the US banks responsible for them.

Answer 21

American Depository Receipts (ADR)

Question 22

• this is a type of ADR in which the issuer provides holders with financial statements in English.
• often referred to as American Depositary Shares (ADS)

Answer 22

Sponsored ADR

Question 23

• this type of ADR is issued by banks without the assistance and participation of the issuer

Answer 23

Non-sponsored ADR

Question 24

• this is the market in which the proceeds of sales go to the issuer of the securities sold
• generally called the “new issues market”
• regulated by the Securities Act of 1933

Answer 24

Primary Market

Question 25

• this is the market where previously issued securities are bought and sold
• Regulated by the Securities Exchange Act of 1934.

Answer 25

Secondary Market

Question 26

• this market is composed of the NYSE and other exchanges on which listed securities are traded
• each exchange requires corporations to meet certain standards before it will allow their stock to be listed for trading on the exchange
• this market operates as an “auction” market

Answer 26

Exchange Market

Question 27

• this market is the largest in the US and functions as an interdealer market in which unlisted securities trade. This market is also known as a “negotiated” market
• computers and telephones connect securities dealers across the country. Thousands of securities are traded on this market, including stocks, corporate bonds, and all municipal and U.S. government securities
• this market has no central marketplace

Answer 27

OTC Market

Question 28

• this electronic system enables broker dealers to send orders through it instead of going through a market maker
• this is an electronic trading system that automatically matches buy and sell orders at specified prices
• it is an SEC-sanctioned alternative trading systems (ATS). They are open 24 hours a day. There is no inventory; this term matches buy and sell orders as agents, not as principals.

Answer 28

Electronic Communications Network (ECN)

Question 29

• this term is the trading volume that occurs that is not openly available to the public.
• The bulk of this volume represents large trades engaged in by institutional traders and trading desks away from the exchange markets.
• Generally, these large volume transactions occur on ECNs. The orders are matched electronically for execution without routing the order to marketplace where last sale price and volume information is displayed.
• institutions use this to execute large block orders without affecting public quotes or prices. Institutions do not reveal their investment strategies by using this term.
• this term accounts for 17% of the trading volume int he US stock market.

Answer 29

Dark Pools of Liquidity

Question 30

• this term is classified as a stock that trades for less than $5 per share and is not listed on a major exchange
• this term trades on the OTC Bulletin Board and the OTC Link
• this term is infrequently trades, which means that it may be difficult to sell shares once you own them

Answer 30

Penny Stock

Question 31

• known as the 15g rules, they are found in Section 15(g) of the Securities Exchange Act

Answer 31

Penny Stock Rules

Question 32

• this rule requires that customers be given a copy of the Risk Disclosure Document before their initial transaction in a penny stock.

Answer 32

Rule 15g-2

Question 33

• this rule requires members to provide penny stock purchasers with a current bid and asked quote on the stock to prevent the practice of quoting prices that are away from the current market to customers.

Answer 33

Rule 15g-3

Question 34

• these rules require members to provide penny stock purchasers with information on the compensation to be earned by both the member and the registered representative as the result of the transaction. This is to prevent excessive markups.

Answer 34

Rules 15g-4 & 15g-5

Question 35

• this rule requires members to provide penny stock purchasers with monthly statements showing the estimated market value of each penny stock purchased.

Answer 35

Rule 15g-6

Question 36

• this rule addresses sales practices to curb abusive sales practices. This rule requires members who are soliciting new customers to make a suitability determination.
• member must inquire as to the prospective customer’s income, net worth, objectives, and risk tolerance. A suitability statement is prepared using this information. This suitability statement shows why the proposed penny stock trade is suitable for the customer

Answer 36

Rule 15g-9

Question 37

• this rule is also known as the 5% policy
• it was adopted to ensure that the investing public receives fair treatment and is charged reasonable rates for brokerage services
• this rule is considered a guideline, not a firm rule. It applies to both principal (dealer) and agency (broker) transactions.

Answer 37

Rule 2121