Unit 3- Equity Securities

Question 1

“3:1 stock split” means?

Answer 1

You get 3 stocks for each 1 you own. (Aka: “3 for 1”….like a fast food deal :) )

Question 2

Difference between class A and class B stock?

Answer 2

Class B has no voting rights .

Question 3

Formula: theoretical value of a stock right, before the ex date?

Answer 3

(Stock price - Subscription price) / # of rights + 1

*I think the “1” into create a profit for the rights seller?

Question 4

Formula: the theoretical value of a stock right on/after the ex date?

Answer 4

(Stock price - Subscription Price) / # of rights

Question 5

Characteristics of ADRs?

Answer 5

• Foreign stock is deposited in a DOMESTIC bank.
• Trades in the US, denominated in USD.
• Generally do no have voting rights.
• Investor has the option to take ownership of the underlying security.
• Foreign income tax (aka: tax on dividends) usually taken in the foreign country. This can be taken as a tax credit in the United States.
• IS subject to currency risk.
• The custodian bank is the registered owner.
• All exchange listed ADRs are sponsored.

Question 6

Amount of net capital losses that can be used to reduce gross income?

Answer 6

$3,000

Question 7

Penny stock rules? (Aka: “15g rules”)

Answer 7

• Risk disclose document must be sent to customer before initial trade. Must wait 2 days after sending before executing 1st trade. Customer must return a signed acknowledgement that they have received the risk disclose document.
• Current ask/bid must be given before every transaction, either verbally or in writing.
• Compensation to the firm and rep must be disclosed to the customer.
• Account statements must be sent MONTHLY.
• A special suitability statement must be signed by the customer before training can begin.

Question 8

When can the special suitability statement be waived for a penny stock customer?

Answer 8

If they are an “established customer” or executing an unsolicited trade.

Definition:

• made a non-penny stock transaction or deposit of funds/stocks more than 1 yr before the proposed trade.

Or

• Made three unsolicited penny stock trades, on three days, in three different securities.

Question 9

What is the “fair prices” or “5% policy”, and when does it apply?

Answer 9

It is a guideline for fair commissions in equity securities.

Exclusions: Securities offered by prospectus (new issues, mutual funds, variable annuities, DPPs).