Series 7: Part 2 Unit 3
foreign shares they represent
ADR owners have the right to exchange their ADR certificates for the... - they do this by returning the ADRs to the depository banks, which cancel the ADRs and deliver the underlying stock
warrants
- long-term - on issuance, exercise price HIGHER than market price - may trade with or separate from the units - offered as a sweetener for another security
rights
- short term - on issuance, exercise price BELOW market price - may trade with or separate from the common STOCK - offered to existing shareholders with preemptive rights
capital gain
the sale of a security at a price higher than its cost which results in a profit
suitability statement
this statement shows why the proposed penny stock trade is suitable for the customer - once signed and returned, trading in penny stocks may take place
rights common stockholders hold
ADR owners have most of the... - these include the right to receive dividends when declared - dividends are in US dollars
the books of the US bank responsible for them
ADRs are registered on... the individual investors in the ADRs are not considered the stock's registered owners
True
True or False: in most countries, a WITHHOLDING TAX on dividends is taken at the source
True
True or False: institutions choosing to use dark pools are able to execute large block orders without affecting public quotes or prices
True
True or False: preferred stock prices tend to move inversely with interest rates
True
True or False: stockholders have the right to receive annual financial statements and obtain lists of stockholders
True
True or False: what a corporation can do that individuals can't is raise money by issuing securities
True
True or false: by engaging a standby underwriter, an issuer is assured of selling all the shares being offered
false: companies may issue both voting and nonvoting (limited voting) common stock, normally differentiating as Class A and Class B
True or false: companies may issue only voting common stock
True
True or false: cumulative voting benefits the smaller investor, whereas statutory voting benefits larger shareholders
false - charges of more than 5% can be reasonable
True or false: for FINRA Rule 2121, this mandates markups or commissions of 5% or less
False: unlike the NYSE, the OTC market does not have a central marketplace
True or false: like the NYSE, the OTC has a central marketplace for trading
true
True or false: the 5% policy applies to both principal (dealer) and agency (broker) transaction - it applies to markups, markdowns, and commissions, but not to securities sold by prospectus
FINRA Rule 2121: Fair prices and commission
Type of FINRA Rule - also known at 5% policy - was adopted to ensure that the investing public receives fair treatment and is charged reasonable rates for brokerage services - it is considered a guideline - not a firm rule - policy applies to transactions in equity securities and applies to both the OTC and exchange markets
receives the right
a buyer who buys stock cum rights...
warrant
a certificate granting its owner the right to purchase securities from the issuer at a specified price - always a long-term investment (2-5 years expiration after issue) - the purchase price is always higher than the current market price on the date of the issue - do not pay dividends and do not vote - often offered with another security to gain attraction**
subscription right
a certificate representing the privilege to buy additional shares of a corporation
pump and dump
a fraudulent activity where unscrupulous firms or investors spread rumors in an attempt to "pump" up the stock's price - this causes the price to drop and the unknowing investor suffers a big loss
established customer
a member may solicit this type of customer WITHOUT having the prepare a suitability statement. This customer is one that: - effected a nonpenny stock transaction or made a deposit of funds or securities in an account more than one year before the proposed penny stock trade - made three unsolicited purchases of penny stocks, on three separate days, involving three separate issues. once a customer buys three different penny stocks, he is no longer covered by the suitability statement requirement
American Depository Receipt (ADR)
a receipt for shares of a foreign stock deposited with a custodian - shows ownership in the deposited security and represents a specific number of shares in a foreign company held by a custodian - securities that trade on the US securities markets - are English and trade in US dollars
- exercise the rights to buy stock by sending the rights certificates and a check for the required amount to to the rights agent - sell the rights and profit from their market value (rights certificates are negotiable securities) - let rights expire and lose their value
a stockholder who receives rights may...
exchange market
after initial offering, many stocks are bought and solder in a two-way auction process through this market - is composed of the NYSE and other exchanges on which listed securities are traded - ex. NYSE, Nasdaq stock market, CBOE
sponsored
all exchange-listed ADRs are... - that is, the foreign company sponsors the issue to increase its ownership base - sometimes referred to as American depository shares (ADS)
stock rights
also called preemptive rights - these entitle existing stockholders to maintain their proportionate ownership in a company - gives them the right to buy newly issued shares before the company offers them to the public
a foreign security trading in the US - receipts issued by US banks (custodian)
an ADR represents...
does not receive the rights
an investor who buys stock ex-rights...
units
attractiveness that enables the issuer of warrants to reduce the interest cost of debt or the fixed dividend of preferred stock - these offerings are often bundled as...
total capitalization
authorized but unissued stock does not carry the rights and privileges of issued shares and is not considered in determined the company's...
issued stock
authorized stock that has been sold to investors - those investors have bought the stock and the company has received the money
junior security
because common stock is last in line in a corporate liquidated, it is known as the most...
OTC Bulletin Board
best known of the the OTC markets - where stocks that do not qualify for listing on the exchanges are traded
auction markets
historically, stock exchanges operated as... - floor brokers competed to execute trades at the most favorable prices - the designated market maker (DMM) conducts this auction
earned income
capital losses that exceed capital gains are deductible against... - the annual maximum is $3,000 (losses) per year
limited liability
characteristic of common stock - stockholders cannot lost more than they have invested to buy the stock - those who own stock in a corporation cannot be held liable for the company's debts
terms of the offering
described in the subscription right certificate - include the number of new shares a stockholder may buy and the subscription (exercise) price - the final date for exercising the rights is shown and the date the new shares will be issued
cash or as additional shares of stock (stock dividend)
dividends on common stock may be paid in...
cash
dividends on preferred stock are always paid in...
no, they never expire
do perpetual warrants ever expire?
long-term
for any security sold within 12 months and 1 day (or more), what is the holding period? - tax treatments favor this
short-term
for any security sold within 12-month of purchase, what is the holding period?
adjustment to the cost basis of the shareholding
for stock dividend payouts, the IRS does not consider stock dividends taxable when paid. What is required from there?
market price - subscription price / number of rights to purchase 1 share +1
formula for the value of one right?
- cumulative preferred stock - convertible preferred stock - common stock - warrant
from the following securities, rank them from most suitable to least suitable for a client whose primary objective is income with relatives safety: convertible preferred stock warrant common stock cumulative preferred stock
voting rights
generally ADRs do not have...
long-term gains are taxed at 15% (unless in the highest tax brackets)
how are long-term gains taxed?
short-term gains are taxed at ordinary income rates
how are short-term gains taxed?
- multiply the number of shares owned by the first number of the split, and then divide by the second number
how do you determine the number of shares after a split?
residual claim right to claim corporate assets
if a corporation is liquidated, the common shareholder has this... - they come after all debts and other security holders have been satisfied - the common shareholder has the last claim
ordinary income tax rates apply
if the dividend is nonqualified, what type of tax applies?
political risk
in addition to currency risk, because ADRs originate outside the US, they are also subject to...
freely transferrable
in almost all cases, shares of stock are... - means that shareholders do not need the permission of the issuer, or anyone else, to sell their stocks in the open market
sweeteners
inducements of warrants - offered in connection with an offering of other securities such as bonds, or preferred stock
fixed dividend
key attraction of preferred stock for income-oriented investors - stated as a percentage of par value - assume all dividends are paid quarterly - no obligation for them to be paid
blue-chips
many of the stocks listed on the NYSE are considered what? - refers to the common stock of well-known companies with a history of growth and dividend payments
primary market
market in which the proceeds of sales go to the issuer of the securities sold - generally called the new issues market
secondary market
market where previously issued securities are bought and sold
qualified
on the exam, most of the cash dividends will be... - tax rates are LOWER than if nonqualified - the tax rate is generally a maximum of 15% - for exam purposes, assume any dividend from a US corporation, including mutual funds, is this unless the question states otherwise
electronic communications network (ECN)
one area of the OTC market is the electronic system known as... - broker-dealers can send an order through an this instead of going through a market maker - this is an electronic trading system that automatically matches buy and sell orders at specified prices - SEC-sanctioned alternative trading systems (ATS) and open 24 hours a day, no inventory**
OTC market (over-the-counter)
other trades take place in the nationwide network of broker-dealers known as... - in terms of securities traded, this market is the largest in the US - functions as an interdealer market in which unlisted securities trade - computers and telephones connect securities dealers across the country
common stock
ownership of this represents an investor's proportionate interest in a company - can be classified as authorized, issued, outstanding, or treasury
thinly traded securities
penny stocks that usually have a large spread between the buy and sell price
income and safety
preferred stock appeals to investors seeking...
listed securities
refers to any security that is bought and sold on an exchange
the Securities Exchange Act of 1934
regulates the activity in the secondary market - requires registration of an exchange with the SEC - under this act, the SEC has many powers including enforcement of the laws
inspection rights
rights that do not include the right to examine detailed financial records or the minutes of the BOD meetings
15g rules
rules for penny stocked that can be found in the Securities Exchange Act of 1934 - special rules to protect investors
unlisted securities
securities not listed on any exchange
stock splits, board members, and issuance of additional equity-related securities such as common stock, preferred stock, and convertible securities
shareholders do not vote on dividend-related matters, such as when they are declared and how much they will be. They do vote on...
treasury stock
stock a corporation has issued and subsequently reacquired - the corporation can hold this stock indefinitely or can reissue or retire it - does not carry the rights of outstanding common shares, such as voting rights and the right to receive dividends
outstanding stock
stock that includes any shares that a company has issued and are in the hands of investors
proxy
stockholders often find it difficult to attend the annual stockholders' meeting, so most vote on the company matters of a... - form of an absentee ballot
penny stocks
stocks that trade for less than $5 per share and is not listed on a major exchange such as NYSE or the Nasdaq Stock Market - highly speculative securities
arrears
technical term for missed dividends is dividends in...
portfolio income
term that includes dividends, interest, and net capital gains derived from the sale of securities - not matter what the source of the income, it is taxed in the year in which it is earned**
arrive at an agreeable price by bargaining - unlike the exchanges, which are considered auction markets, prices on OTC securities are determined by negotiation (bargaining) between broker-dealers
the OTC market is a negotiated market. this is best described by saying that buyers and sellers...
interdealer network
the OTC market is an... - while the NYSE has the DMM to facilitate trading on the floor, the OTC market has market makers - market makers chooses to deal in selected OTC stocks - the OTC is a negotiated market*****
number of shares the company is authorized to issue
the corporate charters specifies the number of... - decisions made by the founders of the business
spread
the difference between the bid and the ask price
stock split
to make the stock price attractive to a wider base of investors (small vs institutional investor) a company can declare this...
dark pools
trading volume that occurs that is not openly available to the public - sometimes referred to as dark pools of liquidity - bulk of this volume represents large trades engaged in by institutional traders and trading desks away from the exchange markets - generally these occur on ECNs
risk disclosure document
type of 15g Rule that requires customers, before their initial transaction in a penny stock, be given a copy of Risk Disclosure Document - the member firm must receive a signed and dated acknowledgment from the customer that the document has been received - in addition to obtaining the client's signature, the SEC requires the firm to wait at least TWO business days after sending the statement before executing the trade
disclosure of quotation
type of 15g rule that requires members to provide penny stock purchasers with a current bid and asked quote on the stock to prevent the practice of quoting prices that are away from the current market to customers - the quote information must be provided to the customer orally or in writing before effecting any transaction with the customer for the purchase or sale of any penny stock - this information is also sent in writing with the trade confirmation
customer suitability determination
type of Rule 15g that addresses sales practices to curb abusive sales practices - this rule requires members who are soliciting new customers to make a suitability determination - the member must inquire as the the prospective customer's income, net worth, objectives, and risk tolerance - a suitability statement is prepared using this information
disclosure of compensation
type of Rule 15g that requires members to provide penny stock purchasers with information on the compensation to be earned by both the member and the registered representative as the result of the transaction - this is to prevent excessive markups
frequency of customer account statements
type of Rule 15g that requires members to provide penny stock purchasers with monthly statements showing the estimated market value of each penny stock purchases - the normal statement frequency is quarterly
rights offering
type of offering that allows stockholders to purchase common stock below the current market price - rights are valued separately from the stock, and trade in the secondary market during the subscription period - not ownership
callable preferred
type of preferred stock - also called redeemable preferred - means the company can buy back the stock from investors at a stated price on the call dates or any date thereafter - this feature would most likely be used when interest rates decline** - risk is the issuer may decide to redeem it
cumulative preferred
type of preferred stock - any dividends skipped must be paid before paying a common dividend - typically has lower stated dividend than straight preferred (less risk equals less reward)
straight preferred (noncumulative)
type of preferred stock - has no special features beyond the stated dividend payment - does not have to be made up in future years if only a part of none of the dividend can be paid out
convertible preferred
type of preferred stock that gives the owner the right to exchange each preferred share for shares of common stock - conversion rate is fixed at the time of issue - lower dividend rate - this feature causes the stock's price to track that of the common stock - has less interest-rate risk than the otehrs
participating preferred
type of preferred stock that is eligible to receive a percentage of the common dividend - the maximum percentage is stated when the stock is issued - before this dividend can be paid, a common dividend must be declared
adjustable/variable dividend rates
type of preferred stock where an adjustment is made on a chosen standard - the interest rate on the US government Treasury bills is one frequently used - adjustments are generally done quarterly
reverse split
type of stock split that has the opposite effect on the number and price of shares - investors own fewer shares worth more per share
forward stock split
type of stock split that increases the number of shares - reduces the price without affecting the total market value of shares outstanding - an investor will receive more shares but the value of each share is reduced
preferred stock
type of stock that is always issued with a fixed (stated) rate of return - fixed dividend that is being paid - securities that are purchased for income - nonvoting** - does not have the same growth potential as common stock
statutory voting
type of voting that allows a stockholder to case one vote per share owned for each item on a ballot, such as candidates for the BOD - a board candidate needs a simply majority to be elected
cumulative voting
type of voting that allows stockholders to allocate their total number of votes in any manner they choose
adjustable-rate preferred stock
variable dividend payout for preferred stock
OTC Bulletin Board and the OTC Link
what are penny stocks traded on? - the requirements for trading these are less stringent than the major exchanges - coverage by analysis is spotty, so getting information is more difficult than with listed stock
limited liability residual claims to assets stock splits stock dividends transferability
what are some characteristics of common stock?
lack of transparency lack of liquidity no track record pump and dump
what are some of the risks with penny stocks?
stocks corporate bonds all municipal and US government securities
what are some securities traded on the OTC market
straight (noncumulative) cumulative preferred convertible preferred callable preferred adjustable-rate preferred
what are the five types of preferred stock?
- when BOD declared dividends, owners of preferred stock must receive their stated dividend in full before common stockholders may receive a dividend - if a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders on the assets remaining after creditors have been paid
what are the two advantages for preferred stock over common stock?
common and preferred stock
what are the two primary types of equity securities? considered ownership positions in a corporation
primary market secondary market
what are the two terms used to describe the marketplace for securities?
statutory voting cumulative voting
what are the two voting methods companies have depending on the company's bylaws and applicable state laws - one vote for each share of stock owned
to prospectus offerings - if a member must give a customer a prospectus is any transaction, that transaction is outside the scope of 5% (ex. new issues, mutual funds, variable annuities, DPPs)
what doesn't FINRA Rule 2121, 5% policy rule, apply to?
the excess over $3,000 may be carried forward indefinitely as a deduction to offset capital gains in the future years - if losses carried forward are short-term, they keep that status
what happens if the capital losses are greater than $3,000?
is does not have the interest-rate risk of other fixed income securities
what is the advantage to an adjustable-rate preferred stock?
issued stock - treasury stock = outstanding stock
what is the basic formula for outstanding stock?
Nasdaq Stock Market
what is the best example of an electronic stock exchange?
market price - subscription price / number of rights to purchase 1 share
what is the ex-rights formula?
nonvoting stock
what kind of stock (either voting or nonvoting) common stock allows a company to raise additional capital while maintaining management control and continuity without diluting voting power
foreign income tax
what kind of tax is associated with investors holding ADRs - may be taken as credit against any US income taxes owned by the investor
17%
what percentage do dark pools account for of the trading volume in the US stock market?
short-term or long-term
what two categories do either capital gains (profit) or capital losses (loss) fall into? - known as holding periods
inverse relationship: as interest rates climb, the prices of preferred stocks decline
what type of relationship does the stated rate of dividend payments for preferred stock have with interest rates?
currency risk
what type of risk are ADR investors subject to? - the foreign company is paying dividends in its local currency - if that currency drops in valued compared to the US dollar, the investor receives less money - same is true with market value of a stock
inflation risk
what type of risk is preferred stock subject to?
stock dividends
when a corporation pays out shares of common stock rather than cash - there is no monetary change to the investor's account - there are more shares, but each share has a lower price -- this results in the total value remaining the same
preemptive right
when a corporation raises capital through the sales of additional common stock, it may be required by law or its corporate charter to offer the securities to its common stockholders before the general public - known as anti-dilution provision - this then gives stockholders what type of right to purchase enough newly issued shares to maintain their proportionate ownership in the corporation?
stand by underwriter
when it comes to a rights offering, there is a special role that is played by the broker-dealer serving as the underwriter of the offering - when a company's current stockholders do not exercise their preemptive rights in an additional offering, a corporation has an underwriting standing by to purchase whatever shares remain unsold as a result of rights offering
parity price
when the underlying common stock has the same value as the convertible preferred stock, it is said to be at its...
within 30-45 days of issue
when will rights expire?
the Securities Act of 1933
which act regulated activity in the primary market
convertible preferred stock
which type of preferred stock would be a suitable recommendation for an investor who likes a fixed dividend but also would like to take advantage of capital appreciation if the company's common stock rises?
the custodian holding the actual shares
who receives dividends in the foreign currency for ADRs? - it then converts them into US dollars
SEC
who, under the powers granted in the Securities Exchange Act of 1934, aims to protect investors by regulated the exchanges, the over-the-counter market, the extension of credit by the Federal Reserve Board, broker-dealers and their registered representative, insider transactions, trading activities, client accounts, and financial requirements?
