Unit 1: Individual Securities - Equities

Under the rules, a penny stock is defined as an unlisted, security trading at less than

$5 per share Securities and Exchange Commission (SEC) rules define penny stocks as those that are unlisted on an exchange or Nasdaq trading at less than $5 per share.

Common shareholders wanting to vote on issues at a shareholder meeting can do so in all of the ways EXCEPT: A) by telephone or text message B) by proxy delivered online C) by proxy delivered in mail D) in person

A) by telephone or text message Common shareholders wanting to vote at a shareholder meeting can do so in person or in absentia, using a proxy delivered by mail or online. Voting by text or telephone would not be permitted.

Callable preferred stock is advantageous to the issuing company because it allows the company to: A) replace a higher, fixed-rate issue with a lower issue after the call date B) issue fixed-rate securities at a yield lower than usual C) take advantage of higher interest rates D) call in the stock at less than par value and capture the difference as income

A) replace a higher, fixed-rate issue with a lower issue after the call date By issuing a callable preferred stock, a corporation can call in a high dividend payment issue and replace it with a lower one when interest rates have fallen. This feature allows the company to take advantage of reduced interest rates by calling in high-rate preferred issues and replacing them with lower ones.

Restricted securities may not be sold until they have been held fully paid for A) six months B) one month C) two years D) one year

A) six months Restricted securities may not be sold until they have been held fully paid for a period of six months. This applies to both affiliates and non affiliates, but affiliates would be subject to volume restrictions.

What is an American depository receipt (ADR)?

ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR trades in the U.S. and is denominated in U.S. currency making the process of buying foreign stock much easier for an American Investor. ADRs are subject to U.S. Securities regulations.

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend? A) convertible B) participating C) adjustable rate D) callable

Adjustable rate Adjustable rate preferred dividends are tied to benchmark interest rates such as treasury securities. As these rates fluctuate up and down, so do the dividends on the adjustable shares.

By purchasing shares of stock in a company, investors can benefit from which of the following? 1. An increase in the price of shares 2. An increase in the price of the company's debt securities 3. An increase in the yield of the company's outstanding debt securities 4. The receipt of profits to be distributed A) 2 & 4 B) 1 & 4 C) 2 & 3 D) 1 & 3

B) 1 & 4 Stockholders as owners can benefit from an increase in the price of the shares (capital appreciation) and by sharing in earnings through the receipt of dividends (distributed profits). Both are potential benefits, but neither are guaranteed.

If a preferred shareholder received a $3.50 annual dividend each year, it could be assumed that A) the common shareholders received the same $3.50 annual dividend. B) this is a 3.5% preferred class. C) the shares had increased by 3.5% each year. D) these shares are trading at $35.00

B) this is a 3.5% preferred class An annual dividend of $3.50 simply tells you that this is a 3.5% preferred class of stock (3.5% X par ($100) = $3.50). The current market value is not used to calculate the fixed dividend, nor does this dividend amount tell us what common shareholders received.

Which of the following best describes the trade execution of American Depository Receipts (ADRs)? A) trades are executed overseas in U.S. dollars B) trades are executed domestically in U.S. dollars C) trades are executed domestically in foreign currency D) trades are executed overseas in a foreign currency.

B) trades are executed domestically in U.S. dollars. ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and trade throughout the day. Trades in these securities are dollar denominated. ADRs trade and settle in the same fashion as a traditional U.S.- Based common stock.

Rule 144 imposes volume limitations on the number of shares that can be sold by: 1. Control persons selling registered stock held for one year 2. Control persons selling restricted stock held for two years 3. Non affiliates selling registered stock held for one month 4. Non affiliates selling restricted stock held for more than six months A) 2 & 3 B) 1 & 4 C) 1 & 2 D) 3 & 4

C) 1 & 2 Control persons are always subject to volume limitations. Non-affiliates have no volume ( or any other restrictions) when selling registered stock. If, however, the shares are restricted, volume limits for non affiliates are imposed for six months.

Past-due dividends on cumulative preferred shares A) must be reallocated to common shareholders B) are written off as non-payable C) accumulate on the company's books until paid D) can never be paid until common shareholders receive a dividend

C) accumulate on the company's books until paid Past-due dividends on cumulative preferred stock accumulate on the company's books until the corporations board of directors decides to pay them. When the company resumes dividend payments, cumulative preferred stockholders receive current dividends plus the total accumulated dividends in arrears (those that were missed) before any dividends may be distributed to common stockholders. Common shareholders have no claim on preferred dividends.

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) non-cumulative B) cumulative C) convertible D) callable

C) convertible Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less overtime in terms of purchasing power. The ability to covert to common stock, which tends to keep pace with inflation, offsets this risk.

Which statement describes rights and warrants? A) rights are long term; warrants are short term B) both rights and warrants are long term C) Rights are short term; warrants are long term D) both rights and warrants are short term

C) rights are short term; warrants are long term Stock rights, also known as preemptive rights or subscription rights, are issued to current stockholders in the event more stock is to be sold. This allows them to purchase the new stock at below the current market price for a period of 4 to 6 weeks before the stock is offered to the public. Hence, they are short term. Warrants may be issued at any time and allow the holder to purchase the stock at a price above the current market price, for a period of typically two years or more. Hence, they are long term. The hope with warrants, of course, is that the market price will rise above the exercise price before the warrant expires.

Rule 144 stipulates that after holding restricted stock fully paid for 6 months, an affiliate may begin selling shares A) at the discretion of the issuers board of directors B) subject to the volume restrictions on any single day C) subject to volume restrictions within any 90-day period D) completely unrestricted

C) subject to volume restrictions within any 90-day period Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares but is subject to volume restrictions within any 90-day period.

A preemptive right for existing shareholders is best described as: A) the right that allows new investors to purchase shares before existing shareholders when a company issues additional shares B) the right for the BOD to preempt existing shareholders and only allow them to purchase the newly issued additional shares after the board has purchased the shares they want. C) the right to purchase shares in an amount that would keep a shareholders proportionate ownership in the corporation unchanged when a company issues additional shares. D) the right for the board of directors to preempt existing shareholders from purchasing additional shares so that they may be used for paying stock dividends by the corporation.

C) the right to purchase shares in an amount that would keep a shareholders proportionate ownership in the corporation unchanged when a company issues additional shares Existing shareholders have what is know as a "preemptive right", which is the right to maintain their proportionate share of ownership in the corporation if the company wants to issue additional shares.

A customer has held an account with a broker-dealer for over one year. A registered representative associated with the firm recommends the purchase of an unlisted security trading at $3.50. What documentation, if any, is required prior to the trade? A) no documentation is required B) a suitability statement is needed, but not a disclosure statement. C) both suitability and disclosure statements must be obtained. D) a disclosure statement is required, but not a suitability statement.

D) a disclosure statement is required, but not a suitability statement. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements when penny stocks are being solicited. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made at least three penny stock purchases of different issuers on different days.

For preferred shares, the annual dividend payment is A) subject to variation and stated as a percentage of its current market value (CMV). B) fixed and stated as a percentage of its current market (CMV). C) subject to variation and stated as a percentage of its par value. D) fixed and stated as a percentage of its par value

D) fixed and stated as a percentage of its par value A preferred stocks annual dividend payment is it's fixed rate of return, unlike that of common shares where the dividend is subject to variation.

An investor has just received stock rights in the mail allowing the purchase of 250 shares of stock offering at a discount. With these rights, the investor may take any of the following actions EXCEPT: A) sell some of the rights and let the rest expire unexercised B) exercise some rights and sell the rest C) sell the rights portion of their value D) purchase 125 shares at double the discount

D) purchase 125 shares at double the discount. Once an investor has received stock rights, the rights may be exercised in whole or in part, sold on the open market in whole or in part, allowed to expire in whole or in part, or some combination of these. The discount, however, stands as offered and may not be manipulated.

What is the tax status of a dividend paid to a U.S. based American Depository Receipts (ADR) investor? A) these dividends are tax deferred B) these dividends are only taxable to foreign buyers C) these dividends are tax free D) these dividends may be taxed by both the foreign country and the United States

D) these dividends may be taxed by both the foreign country and the United States. Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investors U.S. tax liability. Note: any trading profits (capital gains) from the ADR would only be taxable here in the United States.