Equity Securities

risks of owning common stock (x3)

1) value risk - the chance a stock will decline in price 2) decreased or no dividend income - possibility of dividend income decreasing or ceasing entirely if co. loses money. No guarantee of payment. Common stockholders have *last claim on earnings 3) low priority at dissolution - bond- and preferred stock-holders have priority over common stockholders; "senior securities". Common sh-holders (*most junior class of investors) have residual rights to corp. assets upon dissolution; any residual funds are paid out following payment to senior security holders.

benefit of owning common stock (x5)

1) voting - right to vote for corp. directors through absentee ballot (proxy)., along with highly important issues (new shares, name change). vote is either statutory or cumulative. 2) freely transferable shares - right to sell or give away shares without permission from corporation. 3) information - a) right to limited access to corp's books, b) may examine BOD meeting minutes, and c) right to examine list of stockholders for credible reason. also, right to receive Form 10-K. 4) preemptive rights - right to maintain proportionate shares of ownership in a corporation. 5) financial benefit - growth (capital gains), income, and limited liability. In sum, a) capital appreciation, b) income from dividends, and c) hedge against inflation.

capital appreciation

A rise in the market price of an asset.

preemptive right

A stockholder's legal right to maintain proportionate ownership by purchasing newly issued shares before the new stock is offered to the public. 'preempt' -- to put oneself in front of another.tyg

statutory voting

A voting method that permits stockholders to cast one vote per share owned for each position. This method of voting benefits majority stockholders.

cumulative voting

A voting procedure that permits stockholders either to cast all of their votes for any one candidate, or to cast their total number of votes in any proportion they choose. R esults in greater representation for minority stockholders.

benefits of owning preferred stock (x2)

A. Dividend preference -- must be paid before common shareholders. B. Priority at dissolution over common stock -- at bankruptcy, priority claim over common on assets remaining.

advantages and risks of ADRs

A. Ease of use -- listed on NYSE, Nasdaq, or OTC, allowing investor to execute in familiar, well-regulated setting and purchase in USD. Settle (T+2) like common stock. Periodic reports filed with SEC to provide comfort. B. Taxation -- dividends subject to withholding tax by home country. Applied as credit against investor's US tax liability. Trading profits (capital gains) only taxable in US. C. * Currency and political risk -- dividends paid in USD, thus eliminating complication of currency conversion. Still subject to currency risk as issuing bank conducts conversion. Exchange rate changes affect dividends. Value of ADR rises and falls in conjunction. Political risk if unstable country.

*financial benefits offered by ownership of common stock

A. Growth (capital gains) -- results from an increase in the market price of secs. historically provides returns in excess of inflation rate, thus a hedge against inflation for investors with a long-term investment horizon. B. Income -- quarterly cash dividends. may increase over time as profitability increases. May also take form of stock or product. C. Limited liability - a shareholder's personal assets are not at risk in event of corporate bankruptcy. Why would you include common stock in a client's portfolio. -- potential capital appreciation -- income from dividends -- hedge against inflation

risks of owning preferred stock (x3)

A. Purchasing power risk -- the potential that because of inflation, the fixed income will not be worth as much. B. Decreased or no dividend income -- income may decrease or cease entirely if co. loses money. Not guaranteed. C. Priority at dissolution -- paid behind all creditors at bankruptcy. In sum, client incurs the following risks: -- possible loss of purchasing power -- interest rate (money rate) risk -- business difficulties (leading to possible reduction or elimination of dividend) and even bankruptcy (leading to loss of principal).

six types of preferred stock (x6)

A. Straight (noncumulative) -- no special features B. Cumulative -- accrued payments in event dividends are reduced or suspended. Paid along with current dividends upon resumed payment, known as "dividends in arrears". C. Callable preferred -- corp. may buy back shares (call privilege) at a premium above par value; similar to refinancing a mortgage. D. Convertible preferred -- owner may exchange for common to enjoy greater capital gain potential; lower dividend rate E. * Adjustable-rate (variable) -- tied to other benchmarks (T bills, money market), thus stock price remains relatively stable. F. Participating preferred -- owners receive both fixed divs. and a share (%) of profits that remain after other pmts made. % is noted on stock certificate.

cumulative preferred stock

An equity security that offers the holder any unpaid "dividends in arrears". In event dividends are reduced or suspended, payments accrue, and must be paid (with current dividend, before common sh-holders) when BOD decides to resume.

penny stock

An unlisted OTC equity security trading at less than $5 per share. Highly speculative. SEC rules require customers receive a risk disclosure doc before the initial transaction, and deliver a signed & dated acknowledgement of receipt. BDs must provide a monthly account stmt which indicates market value, no. of shares, and issuer name.

restricted security (legend certs)

An unregistered, non-exempt security required either directly or indirectly from the issuer, or an affiliate, and a transaction that does not involve a public offering. (ex. private placement) Under Rule 144, may not be sold until held fully paid for 6 mos. Shares will have a restrictive legend upon issue located on the certificate, which warns about the holding period restriction. Issuer must release (remove) restriction before sale, allowing free trade. "The sale effectively registers the stock".

issued stock

Equity securities authorized by the issuer's registration statement and distributed to the public. May reserve shares following a partial issue for future needs, incl: a) raising new capital for expansion, b) stock dividends, or c) exch. common stock for outstanding convertible ponds or preferred stock.

outstanding stock

Equity securities issued by a corporation and in the hands of the public. Issued stock that the issuer has not reacquired.

treasury stock

Equity securities that the issuing corporation has issued and re-purchased from the public at the current market price. Does not carry the rights of outstanding (voting rights, right to receive dividends).

forward split

Increases the number of shares and reduces the price, without affecting total market value of shares outstanding. Enacted in order to counter high market price, an inhibitor to trading, and raise the attraction of the stock to a wider base. *remember: total market value always remains the same before/after the split

SEC notification requirements of corporate actions

Issuers req. by SEC to give notice (no later than 10 days before) of corp. actions to shareholders for actions such as cash divs, stock divs, forward/reverse split, or a rights or warrants offering. * No later than 10 days before. Following should be included: -- title of the security -- date of declaration -- date or record for those entitled to distr. or the split -- date of payment or distribution -- for cash div - amount to paid -- for stock div - rate of dividend (e.g. 10%) -- for a split (fwd/reverse) - rate of distribution (e.g. 2:1)

spin-off

a type of divestiture where a parent co. forms a subsidiary out of current assets and operations, then issues shares of the newly formed company to existing shareholders of the original company. *Non-taxable, unless cash involved (capital gain/loss)

warrant

a certificate granting its owner the right to purchase secs from the issuer at a specified (exercise) price, usually higher than current market price, at a future date. Investor hopes exercise price will be below CMV when shares exercised. *long term, bundled (as sweetener for bonds or preferred stock), above current market value (CMV)

dividend

a distribution of the earnings of a corp. May be in the form of cash, stock, or property. All dividends must be declared by the BOD.

tender offer

a limited-period SEC-registered offer to acquire a substantial portion of a co's secs (equity or debt) directly, not through secondary market. A filing is req. to disclose terms of the offering and info about bidders (Offer to Purchase), along w/ SEC Form TO. *Taxable; almost always all-cash offers, so treated as a sale of the security, (thus capital gain/loss)

small-cap stock

a market cap range from $300m - $2B. Still large enough to be listed on national exchanges. Tend to be growth-oriented and produce very little dividends.

common stock

a security that represents ownership in a corporation. Holders exercise control by electing a BOD and voting on corporate policy. Classified as: a) authorized, b) issued, c) outstanding, or treasury.

acquisition

a transaction wherein one company purchases most or all of another company's shares to gain control of that company's operations assets *Non-taxable, unless cash involved (capital gain/loss)

rights offering

allows stockholders to purchase common stock below current market price. The rights are valued separately from the stock, and trade in the secondary market during a 'subscription period', which typically lasts 30-45 days. One right per share owned.

convertible preferred stock

an equity security that may be exchanged for a fixed # of common stock shares at specified prices or rates. Dividends may be cumulative or noncumulative. Generally issued with lower stated dividend rate than nonconvertible preferred because of investor's opportunity for greater capital gain potential.

preferred stock

an equity that represents non-voting ownership in a corp. Senior to common and junior to debt. Characteristics (*some shared with debt): -- *fixed rate of return (annual dividend), stated as % of par value. Default preferred par value is $100. -- no preemptive rights (along with zero voting rights) -- no right to keep proportionate owernship

stock rights (preemptive rights)

an existing stockholder's granted legal right to maintain proportionate ownership by purchasing newly issued shares in an APO before the stock is offered to the public. Rights permit: -- exercising the right to buy by sending the rights certificate, and a check for the req. amount to the rights agent. -- sell the rights and profit from market value -- let rights expire and lose value (unlikely) *short-term, existing shareholder, below CMV

control stock

any security owned by a director, officer, or person who owns or controls 10% or more of the issuer's voting stock. Family members may aggregate their percentages for each to qualify. A 'control person' (affiliate) must complete Form 144 before sale to determine # of shares that may be sold over a 90-day period. Volume limitations are the greater of: -- 1% of outstanding shares -- the average weekly trading volume over most recent four weeks.

ex-dividend date (ex-date) (2)

the first date on which a security is traded without entitling the buyer to rec. distributions previously declared. One business day before the record date. Set by a regulator (exchange or FINRA). *DERP

stock dividend

declared by a corporation's BOD when profit reinvestment desired, a distribution of add'l shares of the corp's own stock to stockholders without the receipt of any payment in return. Common for many growth cos. with cash resources invested in R&D. Net result is an increase in shareholder share quantity, though cost per share is adjusted downward. Non-taxable, however new cost basis impacts tax consequences upon sale.

reverse split

decreases the number of shares owned and increases the price per share, without affecting total market value of shares outstanding. Enacted to combat low stock price and prevent risk of delisting due to failure to meet listing criteria of an exchange. Opposite effect of forward split. *remember: total market value always remains the same before/after the split

market capitalization (market cap)

determined by multiplying the number of outstanding shares by current market value (CMV) of a share; market cap = (outstanding shares x CMV).

American Depository Receipts (ADRs)

facilitates trading in foreign secs in the US domestic market. Also shown as 'ADS', and similar to GDS (global). a type of equity designed to simplify foreign investing for US investors. created when common shares are purch'd in foreign co. home market. Receipt made when shares deposit in foreign branch of US bank. Provides US investors convenience in diversifying beyond domestic.

callable preferred stock

holds the right of a corp. ('call privilege') to call (buy back) from investors at a stated price and specified date. Allows company to replace a high fixed-dividend obligation with a lower one, when cost of money decreases. Similar to refinancing a mortgage. Upon call, dividend pmts cease on 'call date'. Corp. may pay a premium in return exceeding par value.

cash dividend

money paid to a corp's stockholders out of the corp's current earnings or accumulated profits. normally distr. by check, or auto-deposited into a brokerage account if shares held in street name. Typically paid quarterly and taxed in year of distribution as either: - non qualified (ordinary income tax or rate), or - qualified (depends on current IRS tax code and income tax bracket; positive correlation w/ bracket, moves up to specified max -- historically lower than ordinary rate).

buyback

occurs when a co. buys its own outstanding shares in the open market from existing shareholders. Reduces the number of shares avail. (supply) and therefore increase the value (demand) of shares still available. Becoming more popular. *Taxable; almost always all-cash offers, so treated as a sale of the security, (thus capital gain/loss)

stock split

occurs when a corp. divides each existing share into several new shares. The market value of the total # of shares remains the same. No tax implications at time of split (non-taxable) a) forward: increases # of shares, decreases price b) reverse: decreases # of shares, increases price -- even split = given certain no. for each share owned (2 for 1) -- uneven split = split can be designated in any ratio (3 for 2)

participating preferred stock

preferred stock offering the owner a share of corp. earnings remaining after all senior secs are paid. Payment is made in addition to a fixed dividend stated on the stock certificate, and may be cumulative or noncumulative.

product dividend

rare dividend; company sends a sample of company product to shareholders.

large-cap stock

stocks with a market cap > $10B. A long history of steady dividend payments called 'blue-chip stocks'.

mid-cap stock

stocks with a market cap of $2 - 10B. Reflect characteristics of both small and large caps.

value risk

the chance a stock will decline in price. Stock price fluctuates daily as perceptions of business prospects change and influence actions of buyers/sellers. No assurance to recoup investment. Price may be higher or lower than at initial purchase.

merger

the combination of two or more cos. (operations and assets) by offering stockholders of one co. cash and/or secs in another co. in exchange for surrender of old stock. *Non-taxable, unless cash involved (capital gain/loss)

record date (3)

the date a corp's BOD establishes that determines which stockholders are entitled to receive dividends or rights distributions.

payable date (4)

the dividend disbursing agent sends dividend checks to all stockholders whose names appear on the books as owners, as of the record date. Investors re taxed for the tax year of the dividend payment (based on payable date).

declaration date (1)

the first date associated with the dividend disbursement process. the date the dividend is declared by the BOD, upon which payment date and record date are designated. *DERP

authorized stock

the number of shares of stock that a corp. may legally issue. The number is stipulated in the corp's state-approved charter and may be changed by vote of stockholders.

cold-calling rules for penny stock

upon solicitation to buy by a BD, rep must first determine suitability based on buyer financial situation and objectives. Customer must sign suitability stmt prior to trade. BD must also disclose: - name of penny stock - no. of shares to be purchased - current quotation - amount of commission the firm and rep receive *established customers are exempt from suitability (but not disclosure) - account held for at least one year (deposit made), or - at least 3 penny stock purchases made from diff. issuers on diff. days