Series 7: Equity Securities

Equity Securities: Escrow Receipt (3)

(1) A certificate guaranteeing the securities underlying an option contract are on deposit, and (2) will be delivered when the option's exercised. (3) Issued by the bank holding the underlying securities.

DPPs: Partnership Agreement (4)

(1) A document that includes the rights and responsibilities of the general and limited partners, and (2) the general partner's right to: charge a management fee for making decisions for the partnership, (3) enter the partnership into contracts, (4) decide whether limited partners get cash distributions, and (4) accept or decline limited partners.

DPPs: Certificate of Limited Partnership (9)

(1) A legal agreement between the general and limited partners, (2) filed in the home state of the partnership. Includes: (3) name and addresses of partnership and all partners, (4) partnership goals, (5) amounts contributed by partners and expected contributions, (6) profit distribution arrangement, (7) roles of participants, (8) method of dissolution, (9) limited partner rights to sell or reassign their interest.

Preferred Stock Types: Sinking Fund Provisions (2)

(1) A means of repaying fund borrowed through a bond issue. (2) Adds safety to a stock as company has funds to back it up, but used to pay off high-yielding securities.

Preferred Stock: Definition (5)

(1) A representation of company ownership that grants the holders money leftover after bankruptcy, (2) requires consistent cash dividends be paid regardless of company profits, (3) nonvoting stock, and (4) generally has a par value of $100 and tends to trade close to that. (5) Offers limited growth and often has a higher cost per share; misses out on potential gains common stockholder realize.

Common Stock: Rights of Common Stockholders (5)

(1) A share of the company's success through pro rata share of dividends or capital appreciation. (2) A company's assets during liquidation after bondholders, debt holders, and preferred stockholders. (3) Voting Rights regarding company matters like objectives and stock splits. (4) Preemptive Rights (5) Access to Corporate books

Common Stock Types: Growth (3)

(1) A stock that generates a higher rate of return than others in the market; (2) a stock consistently expected to provide returns in excess of the company's cost of capital. (3) Sensitive to increases in interest rates and inflation, because these factors drive up capital, and growth, by definition, must exceed these hurdles.

Preferred Stock Types: Participating (3)

(1) Although rarely issued, allows investors to receive common dividends in addition to usual preferred dividends. (2) Issued usually by early-stage start-ups needing an urgent infusion of money. (3) All the upside potential of common stock with the steadiness of preferred.

ADRs(3)

(1) American Depositary Receipts are certificates representing foreign securities issued by U.S. banks. (2) They're denominated in US dollars giving holders the benefits and privileges of a stockholder. (3) Can be traded on US stock exchanges (and OTC markets) like domestic securities.

Equity Securities: Transfer Agent (2)

(1) An agent, employed by a corporation or mutual fund, to maintain shareholder records, (2) including purchases, sales, and account balances.

DPPs: Subscription Agreement (3)

(1) An application form that potential limited partners must complete. (2) General partners uses to decide suitability of the applicant in become a limited partner. (3) Gen partner must endorse the agreement to officially accept the investor into the DPP.

Equity Securities: Transfer Procedures (2)

(1) Bearer securities are transferred by endorsement or physical delivery of the instrument. (2) Registered securities are transferred when the registrar amends the registry.

Real Estate DPPs: New Construction (3)

(1) Builds on purchased property. (2) After construction, the goal is to sell the property and structure at a profit. (3) Speculative since building costs can be higher than expected, and there's no income until the property's sold, but not as risky as raw land land since the structure can offset potential land depreciation.

Common Stock: Dividends (4)

(1) Cash- a way corporations share profits with shareholders; a taxable event for investors. Not required to pay, but provide incentive for investors to hold a stock with slowed growth. The market price of the stock falls on the ex-dividend date. (2) Stock- like forward splitting stocks in that the investor receives more share of stock and aren't taxable with the overall investment value not changing. (3) Product (4) Board of directors vote on issuing dividends.

Warrants: Definition and Purpose (3)

(1) Certificates, issued and guaranteed by the company, entitling the bondholder to buy other securities, in the future, at a specified price above the current market price. (2) If market price exceeds warrant price, the investor can buy the shares at the discount, and resell immediately for profit. (3) Purpose is to make new offerings more appealing (sweeten).

DPPs: Income and Expenses (2)

(1) Considered passive income to limited partners, and can only be used to write off losses from other passive income. (2) Used to be a tax shelter, prior to 1986, as losses be written off against other income.

Right Offering: Value of Rights (2)

(1) Cum Rights forumla: Value of right= (market price-subscription price)/[(number of rights needed to buy 1 share) +1]; The +1 accounts for the drop in the value of the right on the ex-date (1st day stock trades without rights). (2) Ex-Rights: same as cum rights without the +1 since the market price has already fallen; used to calculate the value of right from the ex-date on.

Common Stock Types: Cyclical/ Counter-Cyclical (2)

(1) Cyclical Stocks: move with the broader market, and often with greater volatility, outpacing the market during expansions but whipsaw back during contractions. For example: automotive stocks. (2) Countercyclical: do better in bear markets, when investors look for safe places unaffected by economic currents. Examples: food, health care, and defensive industries.

Real Estate DPPs: Public Housing (3)

(1) Develops low-income and retirement housing. (2) Purpose being consistent income and tax credits. (3) Risks in that appreciation potential is low and maintenance costs high, but considered low-risk as the US government, through HUD (Housing and urban Development), pays deficient rent payments.

DPPs: Definition (3)

(1) Direct Participation Programs (2) Limited Partnership business venture in which passive investors tie up their investment dollars for a long period of time, (3) taking advantage of tax benefits

Common Stock: Stock Splits (4)

(1) Division of already issued (outstanding) shares of a firm into a larger number of shares, (2) to increase affordability and improve marketability while (3) maintaining the current stockholders' proportional firm ownership. (4) Aggregate share value remains the same, but the price (and dividend) per share declines with the split ratio.

Subscription Agreement: RR Responsibility (3)

(1) Ensure client clearly understands the benefits and risks of DPPs and that these are appropriate for the client's financial goals. (2) Consider: the economic soundness of the DPP and the general partner's expertise, and the enterprise's goals, costs, potential, and certainty of revenue. (3) Investigate subscribers portfolio for capital to invest, and liquidity to provide possible loans to the DPP.

Preferred Stock Types: Cumulative (2)

(1) Ensures steady dividend payments in regular intervals. (2) Dividends not paid accumulate, and must be paid before common shareholders receive payment.

Warrants: Exercise Term (2)

(1) Generally have longer expiration periods than rights do or no expiration. (2) Can be detached and traded separately from the securities with which they were issued.

Preferred Stock Types: Convertible (2)

(1) Gives the holder the option to exchange shares for common stock according to a defined ratio. (2) Gives the stability of preferred stock with the potential growth of common.

Preferred Stock Types: Adjustable-Rate (2)

(1) Holders receive a divided that's reset every six month to math movements in prevailing interest rates. (2) Stable stock price given a more adjustable dividend.

Tax Advantages: IDCs (4)

(1) Intangible drilling costs; (2) Write-offs are drilling expenses that are intangible like employees, fuel, repairs, insurance, etc. (3) Completely deductible in the tax year costs are incurred. (4) IDC deductions only for the drilling and preparing of a well.

Real Estate DPPs: Raw Land (5)

(1) Invest in undeveloped land, (2) looking for long-term capital appreciation. (3) Doesn't build on or rent out the property. (4) Partnership hopes the property will appreciate, then be resold for a profit. (5) The riskiest real estate DPP since there's no cash flow, and value of land can increase or decrease.

DPPs: Offerings (6)

(1) Issued as managed or non-managed offerings. (2) Managed offerings issued through underwriting syndicates. (3) Non-managed issued by sponsors. (4) Sponsor either the general partner or an affiliate of the gen partner. (5) Sponsor uses wholesalers to go through different brokerages, touting the DPP, and advertising to the broker's suitable clients. (6) Wholesalers may be sponsor employees, nonaffiliated sales people, or an independent firm.

Right Offering: Origination (4)

(1) Issued to current shareholders to exercise, (2) sell to other parties or given as gifts. (3) Cannot be sold back to the company for cash, and (4) expire after a certain time if not exercised.

Common Stock Types: Income (2)

(1) Mature company with high dividend yield and few prospects for growth or diversification. (2) Typically utility companies, but may be blue chip.

Rights Offering: Definition and Purpose (3)

(1) New common stock issue offered to existing shareholder in proportion to their current shareholding, (2) for a specified period at a specified (usually discounted) price. (3) Purpose is to afford current shareholders the opportunity to maintain their % of ownership of the firm.

Preferred Stock: Types of Stock (8)

(1) Noncumulative (straight), (2) Cumulative, (3) Participating, (4) Nonparticipating, (5) Convertible, (6) Callable, (7) Preference upon dissolutions (Senior), and (8) Adjustable-rate (floating rate)

Oil and Gas DPPs: Income (3)

(1) Objective being immediate income by purchasing producing well. (2) Advantage being immediate cash flow and no IDCs. (3) Risk being high initial cost, and the risk drying or gas prices lowering.

Oil and Gas DPPs: Developmental (3)

(1) Objective being to drill near producing wells in hope of finding new reserves. (2) Advantages being long-term capital appreciation. (3) Risk being high drilling and property costs, dry holes, but less risky than exploratory; medium level of IDCs.

Oil and Gas DPPs: Exploratory (wildcatting) (3)

(1) Objective being to locate and drill oil in unproven, undiscovered areas. (2) Advantages being long-term capital appreciation potential, and high returns for discovery of new oil and gas reserves. (3) Riskiest O&G DPP because reserves may be found; high IDCs since there's no producing wells.

Oil and Gas DPPs: Combination (3)

(1) Objective to provide income to help pay for the cost of finding new reserves. (2) Advantages being ability to offset costs of drilling new wells with income from existing wells. (3) Risks and rewards of the other programs combined.

Types of DPPs: Oil and Gas (3)

(1) Partnership included programs that produce income, are speculative in nature, or a combination. (2) Types of write-offs: IDCs, TDCs, and depletion. (3) Types of Oil and Gas DPPs: exploratory, developmental, income, and combination.

Warrants: Antidilution Agreement (2)

(1) Provisions in a firm's articles of association (or bylaws) preventing issuance of additional stock without first giving current shareholders option to buy the new shares. (2) The purpose is to give current shareholders the chance to retain their % of firm ownership.

DPPs: Sales (4)

(1) Public offerings registered with SEC. Fair compensation for selling DPPs: (2) Maximum front-end load (commission and sales fees) should not exceed 15% of the offering proceeds, (3) Maximum compensation to underwriters, wholesalers, broker/dealers, and their affiliates not exceed 10% of proceeds, (4) FINRA member firms performing due diligence should not be compensated more than .5% of the proceeds, for expenses.

Types of DPPs: Equipment Leasing (3)

(1) Purchases equipment (trucks, heavy machinery, computers, etc.) and leases it out to other companies. (2) Objective being steady cash flow and depreciation write-offs. (3) Two types: operating and full payout.

Equipment Leasing DPPs: Full Payout lease (3)

(1) Purchases equipment and leases it for a long period of time. (2) DPP receives enough income from 1st lease to cover equipment and financing costs. (3) Initial leases usually lasts for the equipment's useful life.

Equipment Leasing DPPs: Operating Lease (2)

(1) Purchases equipment and leases it out for a short period of time. (2) DPP doesn't receive the equipment's full value during 1st lease, allowing several leases of the machinery during its life.

Real Estate DPPs: Existing Properties (2)

(1) Purchases existing properties to generate a regular stream of rental income. (2) Risk being maintenance and repair expenses eating out profits, or tenants not renewing leases; but generally low risk.

Preferred Stock Types: Preference upon Corporate Dissolution (2)

(1) Receives compensations before common and other holders in the event of corporate bankruptcy. (2) Lower dividend given lower risk.

Preferred Stock Types: Noncumulative (2)

(1) Receives steady dividend payment in regular dividends, but a rare form of preferred stock. (2) If dividends aren't paid, back payments don't accumulate.

DPPs: Recourse and Non-Recourse Debt (2)

(1) Recourse debt finds the borrower personally liable, allowing lender to seek repayment from personal property. (2) Non-recourse debt is secured by collateral such that the borrower isn't personally liable.

Common Stock: Reverse Splits (2)

(1) Reduction in the number of issued (outstanding) shares by combining them, thus, (2) increasing the par value or the earnings per share (eps), because their aggregate market values remain the same.

Common Stock: Definition (2)

(1) Securities representing ownership in a corporation. (2) Used by corporations to raise business capital.

Equity Securities: No Par Value (2)

(1) Stock issued without the specified par value indicated in the company's articles of incorporation or on the stock certificate itself. (2) Most shares are classified as no-par value today as prices are determined by what investors are willing to pay.

Common Stock Types: Blue Chip (2)

(1) Stock of a large, national company with a solid record of stable earning and/or dividend growth and (2) a reputation for high quality management and/or product.

Equity Securities: Treasury Stock (4)

(1) Stock reacquired by a corporation to be retired or resold to the public. (2) Treasury stock is issued but not outstanding, and (3) is not taken into consideration when calculating earnings per share or dividends (4) or for voting purposes.

Voting Power: Nonvoting Stock (2)

(1) Stock which does not provide the owner with the right to vote on corporate matters. (2) Preferred stock is usually nonvoting.

Common Stock Types: Defensive (2)

(1) Stocks (and bonds) that do not lose as much value as other securities when the market is in decline. (2) Usually issued by firms less affected by economic cycles (like healthcare and utilities) (2) Investors tend to switch to defensive securities in times of economic downturns or financial instability for their stable returns.

Preferred Stock Types: Callable (3)

(1) Stocks that can be repurchased, at the price on the certificate, and added to the treasury stock. (2) Receives higher dividends given the risk of buy back. (3) Bought back using a sinking fund that draws from company earnings to periodically redeem shares.

Voting Power: Statutory (2)

(1) System in which shareholders vote for board of director nominees. (2) The number of votes must be split evenly between the candidates with a yes or no decision for each candidate.

DPPs: Depreciation and Depletion Deduction (2)

(1) TDCs deductions can be made in a straight -line fashion (equal amount every year) or (2) accelerated (writing off more in the early years and less in the later)

Tax Advantages: TDCs (3)

(1) Tangible drilling costs; (2) Write-off being items purchased with salvage value (can be resold) like storage tanks, well equipment, etc. (3) Not immediately written off, but depreciated (deducted) over seven years.

Tax Advantages: Depletion (2)

(1) Tax deduction that allows partnerships dealing with natural resources to deduct for the decreasing supply of the resources. (2) Can claim depletion deductions only on the amount sold and not stored.

Equity Securities: Par Value (3)

(1) The dollar amount assigned to a security by the issuer. (2) For equity securities, par value is usually a very small amount that bears no relationship to its market price, (3) except for preferred stock where par value is used to calculate dividend payment.

Equity Securities: Authorized (3)

(1) The maximum number of shares a company can issue. (2) Specified initially in the company charter, but can be changed with shareholder approval. (3) Generally, more shares are authorized than issued for flexibility to issue more later.

Preferred Stock Types: Nonparticipating (2)

(1) The opposite of participating in which preferred stockholder only receives the preferred dividend payment without provisions for common dividend payments that participating holders receive. (2) More common than participating.

Equity Securities: Registrar (2)

(1) The organization, usually a bank or trust company, that maintains a registry of the share owners and number of shares held for a mutual fund, bond, or stock, and (2) ensures that no more shares than authorized are issued.

Common Stockholder Rights: Voting Power (3)

(1) The right of a common shareholder to vote, in person or by proxy, for members of the board of directors and (2) other matters of corporate policy, like issuance of senior securities, stock splits, and substantial changes in operations. (3) Two methods: Statutory and cumulative.

Common Stockholder Rights: Preemptive Right (2)

(1) The right of current stockholders to maintain their fractional ownership of a company by buying proportional number of shares of any future issue of common stock. (2) Typically valid only if made explicit in a corporation's charter.

Equity Securities: Issued (2)

(1) Total number of of a company's shares that have been sold and are held by shareholders. (2) Can be held by both insiders and the general public.

Equity Securities: Limited Liability (2)

(1) Type of investment in which a partner or investor cannot lose more than the amount invested. (2) Thus, the investor bears no personal responsibility for a company's liabilities.

Common Stock Types: Speculative (2)

(1) aka special situation stock given a "sub-investment" rating by bond rating agencies, equating to a rating of "BB"(Standard & Poor's) or "Ba"(as rated by Moody's) or lower. (2) Considered unsuitable for investment by fiduciary organizations.

Common Stock Types: Special Situation (3)

(1) aka speculative stock that, for whatever reason, are undervalued. (2) They could be emerging from bankruptcy or reorganization, or trading below historic trading range. (3) Thus, ripe for sharp upward movement in stock price.

DPPs: Procedures (4)

(1) requires at least one limited partner, and one general partner. (2) Limited partners have voting rights and provides money needed; has the rights to check books, receives their proportion of profits and losses, can invest in competing partnerships, and has limited liability. (3) General partners manage the partnership and the assets, they have unlimited liability, can't compete against the partnership, and receives compensation for their job. (4) Documents required to establish DPP: Partnership agreement, Certificate of limited partnership, and the subscription agreement.

Equity Securities: Stock Certificate

A document reflecting legal ownership of a specific number of share in a corporation.

Equity Securities: Endorsements

A signature used to legally transfer a negotiable instrument, like bearer securities.

Voting Power: Cumulative

A voting system that gives minority shareholders more powers, by allowing them to cast all of their board of director votes for a single candidate.

Common Stockholder Rights: Pro Rata Share of Dividends

Every shareholder gets an equal proportion of dividends for each share owned.

Types of DPPs: Real Estate (4)

Includes programs that invest in (1) raw land, (2) new construction, (3) existing properties, or (4) government-assisted housing.

DPPs: Types (3)

Partnerships can be formed to run any sort of business, but the most common types are: (1) real estate, (2) equipment leasing, and (3) oil and gas.

DPP: Requirements (4)

Required by the IRS to avoid two of the following: (1) Limited Liability(diff avoid): liability limited to the amount invested + any recourse loans taken by the DPP, (2) Infinite life(easy avoid): must set a definite date for dissolution of the partnership, (3) free transferability of partnership interest(easy avoid): must pass scrutiny of registered rep and approval of the general partner to get in and out of by showing available investment capital and asset liquidity in the event a loan is needed, or (4) centralized management(diff avoid): management of the partnership from several locations.

Common Stockholder Rights: Access to Corporate Books

Shareholders owning at least 5% of company stock or stockholder of record for more than 6 months have an absolute right, upon a good faith written request, to obtain the preceding fiscal year's financials, as well as any interim statements distributed to shareholders.

DPPs: Crossover point

The point where investment returns exceed the cost of expenses.

Common Stockholder Rights: Residual Claims on Corporate Assets

The right to a company's assets after debt holders.

Equity Securities: Outstanding

The shares of a corporation's stock that have been issued into the hands of the public.

Voting Power: Proxies

Where shareholders give company management the right to cast their vote at a shareholder's meeting.

Common Stock Types: Emerging Stock

Young firm in new industry with good growth prospects, but also high risk