Unit 2 Equity Securities

callable preferred stock

issuing corporation can "call" or buy back issued shares at stated price after a specified date. allows it to replace a high fixed divided with a lower when the cost of money has gone down.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.

straight preferred stock

noncumulative - no special features. missed dividends are not paid to the holder

new cost basis

not taxable - the adjusted cost per share will impact the tax consequences when the shares are sold.

acquisition

one company takes over the operations and assets of another. Shareholders of the company that was acquired will receive shares of the company that did the acquiring, old shares cancelled.

stockholders/shareholders

people who own a share or shares of stock in a corporation

adjustable-rate preferred stock

preferred stock whose dividend is tied to another rate, often the rate paid on Treasury bills and money market rate. issuer determines the frequency of adjustments. relatively stable. least preferred choice for investors

income

quarterly cash dividends to stockholders

Rule 144

shares that are sold in a nonstandard offering and subject to resale restrictions, sales by person who are classified as control persons (insiders) of the issuer. CONTROL PERSON (insider) volume limitations.1 year/2 year NOT nonaffiliate. Rule 144 covers all of the following transactions - Trades by an affiliate on an exchange, trades on an affiliate in the OTC market, trades of a newly issued nonregistered security..

foward uneven split

split can be designated at any ratio (3:2, 5:4)

large-cap stock

stock from a corporation that has issued a large number of shares of stock and has a large amount of capitalization/dividened shares aka blue-chip stocks

preferred stock

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends. key for income oriented investors.

convertible preferred stock

stock that permits the preferred stockholders to convert their shares into common stock

What happens if a company wants to issue more shares?

the charter must by amended through a stockholder vote

Declaration date

the day on which the board of directors declares the date of the dividend, the payment date and record date.

Dividends

the share of the profits (company earnings) paid to shareholders (distribution of profits) as a return for investing in the company,

penny stocks

unlisted on the US stock exchange - less than $5/share. exempt from statement requirement and not exempt from disclosure rules. monthly account stmt, copy of risk disclosure, est. customer need not sign a suitability stmt.

Risks for owning common stock

value risk (decline in price), decreased or no dividend income if the company loses money, low priority - preferred stock have priority over common stock.

4 classes of common stock

(AIOT) Authorized, Issued, Outstanding Treasury

Record date

A specific date on which the company will determine the registered owners of stock and, therefore, who will receive the dividend on the record date.

Rights Offering

Existing shareholders are given the right to buy new shares at a discount to the current market price; 1 right per share owned. Dilutes ownership unless option is exercised; Sometimes the option can be sold

freely transferable shares

Shares that may be sold to anyone without any restrictions (gift or sell)

Unissued stock

does not carry the right and privileges of issued shares and is not considered in determining a company's total capitalization. Similar to blank checks - ready to use but no value yet.

Another term for stocks and bonds

equity and debt

Two characteristics of Preferred stock vs common stock?

generally no voting rights nor preemptive rights

Rule 144 - Restricted Stock

security purchased in a private security, may not be sold until fully paid for 6 months. sell shares after 6 months with a legend certificate "sale effectively registers the stock". buyers not subject to the restrictions.

limited liability

sharesholders are personally at risk for what they invested

Product dividends

some companies will pay a dividend by sending a sample of the company's product to shareholders

Jim Davis bought 100 shares of QRS at $60 per share and then the company declared a 3:2 split. What is Davis' new cost basis and how many shares does he have now? Cost basis is $40 per share Cost basis is $90 per share He now has 150 shares He now has 67 shares

3:2 ratio 1. multiply the shares by the first number, than divide that number by the second number. exp. 100*3 =$300 / 2 = 150 shares. Cost Basis - 100 shares * $60 = $6,000/150 shares = 40cost basis per share.

What are 4 risks of Preferred stock?

* purchasing power risk -fixed income will not purchase as much in the future. * Interest rate sensitivity - if interest rates rise, value of shares declines. *decreased or no dividend income - BOD decides the dividend percentage for preferred stock is fixed but not guaranteed to be pd. *priority at dissolution - preferred share are paid behind all creditors if a company bankruptcy liquidation.

2 Benefits of owning preferred stock?

*Dividened preference - preferred is pd before commonn *Priority at dissolution over common stock - preferred have priority before common on assets remaining

What are the advantages and risks of ADR?

*Ease of use - listed on the NYSE, T+2, file reports with SEC, *ADR taxation - US investor may be sunject to a witholding tax by the country of the stock issuer. Trading profits would only be taxble in the US. reduces liquidity risks. * Currency & Political Risks - ADR can rise and fall, unstable country is political risk.

Dividends can be paid in three way

*cash dividends *stock dividends *Product dividends

Why include preferred stock in a client's portfolio?

*fixed income from dividends *prior claim ahead of common stock

3 types of financial benefits owning stock

*growth (capital gains) *income *limited liability

4 types of common stock

*large cap stocks *Mid-caps stocks *small-cap stocks *Penny stocks

What are risks with preferred stock?

*possible loss of purchasing power * interest rate risk (money rate) *business difficulties and bankruptcy

Issuers are required by SEC to give notice by the following

*title of security *DERP *cash dividend - amount paid *stock dividend - rate of the dividend (%) *split (forward or reverse) - rate of distribution no later than 10 days before the record involved, rights subscription 10 days advance notice is not practical, on or before the record date and in no event later than the effective date. NOT Required - Interest on issuers bonds

merger

Combination of two or more companies into a single firm, companies receive new shares and the old shares are cancelled.

cumulative voting

a system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates

cumulative preferred stock

accumulates on the books until BOD pays them. The preferred stock owners receive all dividends in arrears plus the current year dividend before the corporation pays dividends to the common stockholders

Statutory voting

allows a stockholder to cast one vote per share owned for each item on a ballot

Tender offer

an offer to buy a security directly from the owners of the security (and not through secondary markets). Companies looking to acquire another company may make a tender offer to but another company shares. these are cash offers **Tax ConsequencesShareholders who tender their shares effectively sell the shares at the tender price ($30) and realize a gain or a loss depending on what their cost was for the shares tendered.A capital loss occurs if their cost basis is greater than the tender price.

How is preferred stock paid?

annual dividend payment stated as percentage of it's par value which is $100

Issued Stock

authorized stock that has been sold to investors. investors bought the stock and the company received the money.

Common Stock

called equities are the most basic form of ownership, including voting rights on major issues, in a company. provide the greatest potential for capital appreciation. A risk in investing in common stocks is volatility in share prices. Benefits include: participate in company profits, cap appreciation, hedge against inflation.

Outstanding stock

capital stock that has been issued and is being held by stockholders

warrant

certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the times they are issued, and in the future. Long term instrument which gives the investor the option of buying shares at a later date.

Capital Appreciation

companies benefit by selling the selling shares that increase in price of a share of stock,

Buyback

company buys its own outstanding shares in the open market from shareholders. this reduces that number of share on the market and increases price. cash offer

Stock splits

divide each existing share into multiple shares, thus creating more shares. No change in wealth+ The most common corporate actions—dividend declarations (both cash and stock), stock splits (both forward and reverse), and the issuance of rights and warrants—are standardized regarding any adjustments to cost basis for outstanding shares.

Stockholders rights who receive may

exercise rights to buy *sell the right and profit *let the rights expire and lost value (not likely) *subscription short term 30-45 days NOT indefintely

ADR - American Depositary Receipts

foreign investing for US investors - common shares are purchased in the foreign company's home market, deposited in a foreign branch of a US bank and a receipt is created (ADR) - A domestic security representing a foreign security in US Markets. ADR's trade in US market. ADR's eliminate Liquidity risk.

Growth (capital gain)

increase in the market price of securities - long term investors have included in common stock as hedge against inflations

Forward Stock Split

increases the number of shares and decreases the price without affecting the total market value of shares outstanding, investors will receive more share but value is decreased. ownership hasn't changed. Cost basis decrease

Forward even split

investor always given a certain number of share for each share owned i.e 2 for 1, (mulitply, divide)

Reverse split

investors own fewer shares worth more per share, also can be even and uneven. Decrease of number of shares, increase of price per share. Cost basis - Increase. No tax consequences for a split, reverse or otherwise.As with all adjustments, the net position value remains unchanged before and after the adjustment.

What is a nonqualified cash dividend?

Nonqualified is taxed at the investors ordinary income tax rate.

Authorized Stock

Total amount of stock that a corporation's charter authorizes it to issue.

Particpating preferred stock

The % is noted on the stock certificate.In addition to the fixed stated dividend, participating preferred stock offers its owners the possibility of receiving a share of corporate profits that remain after all dividends and interest due other securities are paid.

what is taxble on the stock dividend?

The adjusted cost per share (new cost basis) will be taxed when the shares are sold.

Payable Date

The dispursing agent sends dividend checks to all stockholders whose names are on the books as owners as of the record date. (taxed based on the tax year on the payable date)

cash dividend

a check or direct deposit (brokerage held in street name) distribution of earnings by a corporation to its shareholders.

Spin-off

a corporation forms a subsidiary company. out of some of the corp. assets and operation. Issues new shares of the subsidiary to the shareholders of the original company. there is no taxable consequences for spinoffs.

Corporate Charter

a legal document that the state issues to a company based on information the company provides in the articles of incorporation. The corporate charter specifies the number of share the company is to authorize

What are the 4 Dividend Dispursement dates?

(DERP) Declaration date, ex-dividend date (ex-date), Record date, and Payable date

Sierra Verde Coffee Company has 122 million shares of common stock outstanding. The last four weeks of trading volume are as follows: 120,000 shares; 100,000 shares; 110,000 shares; and 90,000 shares. What is the volume limitation for an affiliate selling shares of the company over the next 90 days?

1.22 million The volume limitations under Rule 144 are the greater of 1% of the outstanding shares of the company or the average weekly trading volume over the most recent four weeks. In this example 1% of 122 million is 1.22 million. That is higher than any of the trade volumes of the last four weeks, much less the average of 1.05 million.

Midcap Stock

A company whose stock market value is between $2 billion and $10 billion. not large and not small

Treasury Stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

What must take place to see Rule 144 Control Stock?

Affiliates can sell the greater of: *1% of the outstanding shares *The average reported weekly trading volume during the preceding four weeks

Penny stock from a established customer

BrokerDealer has *held an account for at least 1 year (has made deposit of fund or securities). *has minimum 3 penny stock purchases of different issuers on different days.

Cold calling penny stocks rules

BrokerDealer must disclose *name of penny stock *number of share to be purchased *current quotation *amount of commission that the firm and the rep. received. Penny stocks rules are solicitated the rules apply.

Rule 144 Control Stock

Control stock is any security owned by an insider, director, officers who own or control 10% or more of that company. The sale of control stock is subject to volume limitations. 10% - can be2 or more family members i.e. 7% +4%

stock dividend

Corporation's distribution of its own stock to its stockholders. The company reinvests the profits for business instead of paying cash dividends. The difference between cost and the sales price will be the investors gain or loss per share.

What is a qualified cash dividend?

Max tax rate on qualified dividens is specificed by IRS tax code and depend on the investors income tax bracket. higher bracket += higher tax up to specified max.

What happens when a corporation issues/sells/unissued fewer share than authorized?

It reserves the unissued shares for future needs such as *raising new capital for expansion *paying stock dividends *exchanging common stock for outstanding convertible bonds or preferred stock

What information can stockholders obtain?

Limited access to the corporations books. Receive audited set of financial records

When are dividends paid?

Paid quarterly and taxed in the year they are distrubted

Why would you include common stock in a client's portfolio?

Potential capital appreciation, income from dividends, hedge against inflation

Difference between rights and warrants

Rights - short term, existing stockholders, purchase shares below market value Warrants - long term, bundle deal with securities, purchase shares at a price current market at the time the warrants are issued and specified later date.

Preemptive rights

Rights that entitle shareholders to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to outside buyers.

Equity Securities

Securities issued by corporations as a form of ownership in the business. AKA Stock, Participating, Cumulative, convertible

taxes - yes or no

Shareholders receiving share of stock - no tax stockholders receiving cash - tax because of sale of security stock splits/stock dividends - no tax M&A, spinoffs - no taxable events, unless cash is involved buyback/tenderoffers - are typically cash so tax.

Angela Quinn owns 100 shares of LMN with a cost basis of $60. LMN has a 2:1 split and she sells 100 shares the next year for $40 per share. Quinn has which of the following tax consequences?

She has a $10 gain per share on the 100 shares sold. *For forward stock splits the cost basis goes down and the number of shares goes up. Her new cost basis will be $30 but she will now own 200 shares. If she sells the 100 shares at $40, that is $10 above her cost basis and a taxable gain at the time of the sale. There are no tax consequence until the time of the sale. LO 2.h

2 types of voting methods for stock

Statutory and Cumulative Voting

Stock Dividends and Stock Splits

Stock dividends and stock splits received are not "taxable events." When a stock dividend or stock split is "paid"; the issuer sends extra shares to the stockholder, with each share having a reduced real value. For tax purposes, the cost basis of the stock is adjusted for the stock split or stock dividend; no tax is due until the security is sold (if it is sold at a gain). Example: When a company declares a stock dividend, the cost basis per share is always reduced. The computation is the original total cost ($4,000 = 100share*$40) divided by the new number of shares. 100 × .25 = 25 additional shares for a total of 125. $4000 / 125 shares equals a new cost basis per share of $32. When any of the shares are sold, including those received in the stock dividend, the holding period for capital gain or loss, is always the original purchase date. In this case, that was more than 12 months ago so any gains are long term. Under IRS rules, stock dividends are not taxable at the time of receipt. The stock dividend results in the cost basis per share being reduced, with the number of shares held increased proportionately. In aggregate, the customer's cost basis remains the same.

small-cap stock

Stocks of largely unknown companies with smaller market capitalization, or dollar value of total stock ownership. tend to be oriented toward growth and produce very little dividends.

2 types of preferred stock

Straight and Cumulative

What happens to unissued authorized shares?

The company may sell the remaining share in the future or use them for other purposes.

ex-date (ex-dividend date)

The first day when purchasers of a security will no longer be entitled to receive a previously declared dividend. Is one business day prior to the RECORD date. ex-date is set by where the trade will take place (NYSE)

An investor owns 500 shares of stock whose current market value is $20 per share. The stock undergoes a split, after which the investor owns 400 shares. What is the new price of the investor's stock?

The rule for stock splits is that the total value of the stock position must be the same before and after the split. In the case of this reverse, uneven split, the total value of the stock before the adjustment was $10,000. For the 400 shares after the split to be worth $10,000, the price would have to be adjusted to $25 per share ($10,000 ÷ 400 shares = $25).

An investor owning 500 shares of stock worth $40 per share receives notice that the stock will undergo a split. When the split is completed, the investor owns 400 shares of stock worth $50 per share. The split must have been a forward split. a reverse split. an uneven split. an even split.

This split reduced the number of shares, which makes it a reverse split. This investor now owns 400 shares when previously they had 500 shares, which would be expressed as a 4:5 split. Because neither number in the ratio is 1, it is an uneven split.