CH 2: Equity Securities

DATES: Order of Occurrence: Record Date Payable Date Ex-Dividend Date Declaration Date

1) Declaration 2) Ex-Dividend 3) Record 4) Payable

Electing the Board

2 Methods: (1) Statutory Voting and (2) Cumulative Voting

Place the stock dividend dates in order of occurrence 1 - Payable Date 2 - Ex-Dividend Date 3 - Record Date 4 - Declaration Date

4, 2, 3, 1. [Declaration > Ex-Dividen > Record > Payable] Stock dividend dates are always based on regular way settlement (T+2), therefore...

Dividends

A distribution of a portion of a company's earnings. Shareholders are entitled to their share of the profits in this form. Some corporations do not pay dividends but choose, instead, to reinvest earnings back into the company to fund future growth.

A common stock is trading at $100 and recently paid a $1 quarterly dividend. What is the current dividend yield? A. 8% B. 4% C. 2% D. 1%

B. 4% $1 x 4 = $4: $4/$100 = 4%. Current dividend yield is the annual cash flow divided by the current market price.

Payable Date

The date on which the company pays the dividend to the shareholders of record. This date is set by the board of directors and usually is a week or more after the record date, so the company has sufficient time to ensure all shareholders entitled to receive the payment are accurately paid.

Book Value [Common Stock Values]

Theoretical liquidation value of the business. This is what the stock would be worth if the assets are sold, the liabilities are paid, and any other obligations of the corporation are settled.

Par Value and Fixed Income [Characteristics of Preferred Stock]

Typically, preferred stock is issued with a fixed dividend based on a percentage of the par value of the stock. (I.E. 3%, 5%, 6.5%) While common stock may pay dividends that fluctuate based on the market (as determined by the board), preferred stock dividends are fixed based on a stated rate as specified.

Market Value [Common Stock Values]

the most meaningful measurement of value for the average investor. The price investors will pay for the stock in the secondary market. Determined by supply and demand through the trading of the shares.

Which of the following voting methods gives smaller shareholders a better chance of gaining representation on the board of directors? A - Cumulative B - Discretionary C - Statutory D - Proxy

A - Cumulative

Which stock valuation method is determined by supply and demand? A - Market value B - Book value C - Agreed value D - Par value

A - Market Value Most direct measurement of a stocks worth.

f an investor owns 100 shares of XYZ stock and XYZ pays a 10% stock dividend, the investor will: A - Now own 110 shares B - Be able to request a cash dividend instead C - Automatically receive a check in the mail D - Have an increased price per share

A - Now own 110 shares

Why Treasury Shares?

A company may buy its own stock if they feel it is undervalued or to boost the price of the common stock in the market. If the company earns the same amount of profits, but there are fewer shares outstanding, the reported earnings per share will increase.

An investor that wants to protect against rising prices, would: A. Buy a futures contract B. Sell an options contract C. Sell a futures contract D. Buy and sell option contracts

A. Buy a futures contract Purchasing a futures contract allows the investor to buy the physical commodity at a future date and price that is set today. This will protect against rising prices.

What would happen to the market value of a preferred share of stock issued with a $100 par value and a fixed dividend rate of 5%, when interest rates are at 7%? A. It would go down B. It would go up C. It would remain the same D. The par value and stated dividend would have to change accordingly

A. It would go down Preferred stock is interest rate sensitive. There is an inverse relationship between its value and interest rates. If interest rates are higher than the stated dividend, then the value would fal

Which of the following option contracts would a bearish investor seek? A. Long put B. Short put C. Long call D. Bearish investors would avoid options

A. Long put Bearish investors anticipate that stock prices will fall. Put buyers (long put) are bearish since their options become more valuable as the stock goes down.

What is a major advantage of preferred stock over common stock? A. Preferred stock dividends have priority over common stock dividends B. Preferred stock may have a call provision C. Preferred stock has voting rights D. Preferred stocks have limited capital appreciation

A. Preferred stock dividends have priority over common stock dividends

Forwarding Proxies and others...

Broker-dealer is obligated to promptly forward all proxies and other materials received from the issuers of securities to the customers who own the securities. The customer cannot be charged for this service. The broker-dealer may ask the issuer to reimburse them for these costs.

Pat owns 400 shares of common stock in the Cryptolane Corporation. Three new members are to be elected to the board of directors. Based on statutory voting, how many votes may Pat cast? A -3 B - 400 C - 1,200 D - Zero

C - 1,200 The stockholder may cast one vote per share owned for each director position under the statutory method. 400 shares X 3 new directors = 1200 votes.

What is a major advantage of preferred stock over common stock? A - Preferred stock has voting rights B - Preferred stocks have limited capital appreciation C - Preferred stock dividends have priority over common stock dividends D - Preferred stock may have a call provision

C - Preferred stock dividends have priority over common stock dividends It is more predictable

What is the maximum loss for a corporation's stockholder? A - A stockholder's liability is unlimited since they are considered an owner B - The original amount invested plus the judgements from lawsuits filed against the company C - The value of the investment in the company D - Any equity in their home in addition to the original amount paid for the stock

C - The value of the investment in the company

If the Quasi Corporation declares a dividend on August 8 to stockholders of record on Wednesday, August 23, on what date will the stock trade ex-dividend? A - Monday, August 28 B - Sunday, August 20 C - Tuesday, August 22 D - Thursday, August 24

C - Tuesday, August 22 The ex-dividend date for a stock is 1 business day before the record date. If the investor purchases the stock on or after the ex-dividend date, the investor is NOT entitled to receive the dividend.

Which of the following types of preferred stock pays dividends in arrears? A. Participating B. Adjustable C. Cumulative D. Straight

C. Cumulative

An investor would sell an options contract to: A. Protect a stock position B. Make a profit from a declining market C. Generate income from the sale of the contract D. Avoid losing money in a volatile market

C. Generate income from the sale of the contract

If the Quasi Corporation declares a dividend on August 8 to stockholders of record on Wednesday, August 23, on what date will the stock trade ex-dividend? A. Sunday, August 20 B. Monday, August 28 C. Tuesday, August 22 D. Thursday, August 24

C. Tuesday, August 22

Margaret, an employee of Maximus Corporation, is granted 1,000 stock options that can only be exercised on 100 shares each year for 10 years. This schedule is referred to as: A. Layering B. Structuring C. Vesting D. Diluting

C. Vesting Vesting schedules may apply to employee stock option plans, where the employee is only allowed to exercise a certain number of the stock options per year.

Type of Dividends

Can be paid in form of... (1) Cash (2) Stock (3) Property

Preferred Stock

Can only be issued by a corporation after common stock has been distributed. Receives preferential treatment over common stock regarding dividend payments and bankruptcy proceedings.

Important Dividend Dates (DERP)

Common stock dividends are only paid if declared by the board of directors. They specify exactly who is entitled to the dividend and to prevent last minute sales of stocks to investors solely to obtain dividends. TYPES: Declaration Date, Ex-Dividend Date, Record Date, and Payable Date.

Authorized Shares

Corporate Charter will specify the maximum number of shares that the issuer is permitted to sell. Usually very high and far more than what needs to be issued to raise capital during the initial public offering. This will allow the corporation to save time and money later by not amending the charter to issue more stock. ***The unissued shares will be reserved for future use, if the corporation needs to raise additional capital by selling stock through a primary distribution.

Right of Free Transfer [Transfer of Ownership]

Corporate stock is considered a negotiable security that shareholders are generally free to give, transfer, assign, or sell without restrictions.

Share Vote

Corporate voting is based on the number of shares owned. Each investor receives one vote per share.

Which type of security must all corporations issue? A - Debentures B - Cumulative preferred stock C - Preferred stock D - Common stock

D - Common stock

All the following are true regarding treasury stock, except it: A - Does not receive dividends B - Is authorized, but not outstanding C - Has been issued and repurchased by the company D - Has voting rights

D - Has voting rights TREASURY STOCK DOES NOT HAVE THIS

What would happen to the market value of a preferred share of stock issued with a $100 par value and a fixed dividend rate of 5%, when interest rates are at 7%? A - It would go up B - It would remain the same C - The par value and stated dividend would have to change accordingly D - It would go down

D - It would go down *** Preferred stock is interest rate sensitive. There is an inverse relationship between its value and interest rates. If interest rates are higher than the stated dividend, then the value would fall.

If an investor is unable to attend a shareholder meeting and vote in person, what other option does the investor have to cast a vote? A - Sell the shares to another investor who can attend the meeting in person B - Petition the Board to hold the shareholder meeting at a more convenient date, time, and location C - Sell the shares back to the company D - Submit a vote via proxy in a complete and timely manner

D - Submit a vote via proxy in a complete and timely manner FOR SHAREHOLDERS

Investors do NOT vote on which of the following? A - Changes in policies or objectives B - Election of the directors C - Written contracts with investment advisers and principal underwriter D -Amounts of dividend payments

D -Amounts of dividend payments THEY NEVER VOTE ON DIVIDENDS

Pat owns 400 shares of common stock in the Cryptolane Corporation. Three new members are to be elected to the board of directors. Based on statutory voting, how many votes may Pat cast? A. 400 B. 3 C. Zero D. 1,200

D. 1,200 The stockholder may cast one vote per share owned for each director position under the statutory method. 400 shares X 3 new directors = 1200 votes.

All of the following are true statements regarding ADRs except: A. ADR holders receive dividends B. ADR holders do not receive preemptive rights C. ADRs are used to facilitate foreign trading D. ADRs holders have voting rights

D. ADRs holders have voting rights

Which stock valuation method is determined by supply and demand? A. Agreed value B. Book value C. Par value D. Market value

D. Market value most direct measurement of a stock's worth, since it represents the current liquidation or purchase price of the stock and is determined by supply and demand.

If an investor owns 100 shares of XYZ stock and XYZ pays a 10% stock dividend, the investor will: A. Be able to request a cash dividend instead B. Have an increased price per share C. Automatically receive a check in the mail D. Now own 110 shares

D. Now own 110 shares

If an investor is unable to attend a shareholder meeting and vote in person, what other option does the investor have to cast a vote? A. Sell the shares back to the company B. Sell the shares to another investor who can attend the meeting in person C. Petition the Board to hold the shareholder meeting at a more convenient date, time, and location D. Submit a vote via proxy in a complete and timely manner

D. Submit a vote via proxy in a complete and timely manner

Split Stock

DOES require shareholder approval. Will make the stock more "marketable in the market," or make the price more attractive for investors trading the stock in the secondary market.. If the stock price in the secondary market is relatively high, indicating that investors in the secondary market may not actively trade the security. Similarly, a company will declare a reverse stock split, making fewer shares available and raising its market price. In either case, no taxable event occurs (until sale)

DATES: Declaration vs Payable

Declaration Date - Which the board of directors announces company will pay a dividend to shareholders Payable Date - which company actually pays dividend to shareholders of record

Par Value [Common Stock Values]

Each share of stock is assigned a nominal or par value for accounting purposes.May be an arbitrary number such as $0.01 a share or $0.10 a share. Because common stock represents ownership, it must have an intrinsic value, but it is virtually meaningless for the typical common shareholder. The par value is unrelated to the selling price

Common Stock

First type of stock issued by corporations and is referred to as the most "junior" security. It carries the greatest risk of loss compared to any other securities issued by the corporation, but it also provides investors with the highest possible capital appreciation.

Interest-Rate Sensitive

For this reason, preferred stock prices are interest-rate sensitive as there is an inverse relationship between interest rates and the price. > When current interest rates rise, preferred stock prices decrease > When current interest rates fall, preferred stock prices increase Shareholders selling stock will win selling their stock at a higher price, when rates are low.

Cost Basis

Important when considering the impact of dividends and stock splits. It's the original purchase price of a security plus any costs associated with that purchase. Used for calculating taxable gains or losses associated with the sale of a security or liquidations. Both dividends and stock splits can alter a customer's original cost basis per share, but their original total cost basis will remain the same.

Outstanding Shares

Issued Shares - Treasury Shares = Outstanding Shares Shares of stock that are in possession of investors are referred to as outstanding shares.

Issues Shares

It's once authorized shares have been sold to investors. The money raised from this original issuance is often used to pay the costs associated with starting the business. The company can sell the authorized and previously unissued shares in the future to raise additional funds.

Equity Securities (Advantage)

LIMITED LIANILITY One of the major advantages of incorporating the business is the legal protection afforded to its shareholders. While a corporation has an unlimited liability and can be sued, the shareholders have a limited liability and can only lose their original investment in the company.

Stock Dividend

May be declared and issue additional shares of its common stock to investors. Does not require shareholder approval AND is not considered a taxable event. Instead, it becomes taxable as a capital event (gain or loss) upon sale, based on the adjusted cost basis.

Classify Characteristics

OPTION CONTRACT BUYER: Long, Holder, pays premiums, has right to buy/sell OPTION CONTRACT SELLER: Short, Writer, Receives premium payment, has obligation to buy or sell

Ex-Dividend Date

On this day, the security begins to trade without the value of the dividend in the stock price. The ex-dividend date is 1 business day before the record date (R-1). This date is set by FINRA.

Statutory Voting

One vote per share owned for each directorship position under the statutory method. Voted for each available seat on the board. If there are 5 candidates running for 3 available seats on the board of directors, an investor who owns 1,000 shares will have 1,000 votes per seat (total 3,000 votes), while a smaller investor owning 100 shares will only have 100 votes per seat (total 300 votes).

Types of Shares

Outstanding Shares - Shares of stock that are in possession of investors Authorized Shares - Max # of shares a corporatists charge states that the issuer is permitted to sell Treasury Shares - Shares that have been previously issued and repurchased by company Issued Shares - Shares that have been sold to investors

Cash Dividends

Payable in terms of a dollar amount for each share owned. Typically are declared and paid quarterly but are stated as an annual rate. Are taxable at preferential rates in the year received. Customers have the option of reinvesting their dividends. In either case, a cash dividend is taxed in the year received. Reinvested dividends are added to the customer's cost basis for tax purposes.

Record Date

The date on which an investor must own the stock to receive the dividend. This date is set by the board of directors. Only "shareholders of record" will receive a dividend.

Declaration Date

The date on which the board of directors announces the company will pay a dividend to shareholders.

Cumulative Voting

Under this, small (minority) shareholders have a better chance of gaining representation on the board. The maximum number of votes based on the number of shares multiplied by the open seats and vote in any fashion they choose. The votes may be divided evenly among desired candidates or weighted in favor of one candidate.

Proxies

Voting is often done by mail utilizing a form called a ____, which provides written instructions on how the individual can vote through an appointed agent. Filled out and returned in a timely manner. Absent shareholders do not lose their chance to vote on the important corporate issues addressed at the meeting.

What would happen to the market value of a preferred share of stock issued with a $100 par value and a fixed dividend rate of 5%, when interest rates are at 7%? A It would go up B It would remain the same C The par value and stated dividend would have to change accordingly D It would go down

A.It would go down.Preferred stock is interest rate sensitive. There is an inverse relationship between its value and interest rates. If interest rates are higher than the stated dividend, then the value would fall.

Investors do NOT vote on which of the following? A. Election of the directors B. Amounts of dividend payments C. Changes in policies or objectives D. Written contracts with investment advisers and principal underwriter

B. Amounts of dividend payments Investors NEVER vote on dividends; they are payable at the discretion of the board of directors.

Which type of preferred stock allows the investor the opportunity to increase the overall value in their holdings as the company grows? A. Cumulative B. Convertible C. Adjustable D. Callable

B. Convertible

Which of the following voting methods gives smaller shareholders a better chance of gaining representation on the board of directors? A. Proxy B. Cumulative C. Discretionary D. Statutory

B. Cumulative Under cumulative voting, small (minority) shareholders have a better chance of gaining representation on the board because the maximum number of votes based on the number of shares multiplied by the open seats and allows shareholders to earmark their votes in any fashion they choose.

DATES: Record vs. Ex-Dividend

Record Date - which an investor must own the stock to receive the dividend Ex-Dividend Date- The security begins to trade w/o the value of dividend in the stock price. 1 Business day before the record R-1

Inspection of Books & Records

Shareholders have the right to inspect the corporation's books and records. This is usually not necessary since corporations are required by the SEC to send audited financial reports annually to their shareholders. Additionally, there are shareholder lists, which include the names and addresses of all shareholders. These must also be made available to shareholders upon request.

Why Preferred Stock

Shareholders own "non-voting" stock and have no control over electing board members. These investors are more interested in the income stream shares are expected to provide through quarterly dividends. Preferred stock usually offers investors a higher dividend rate than is paid on the common stock.

Corporate Governance

Shareholders vote on a Board of Directors to looks out for best interest. Shareholders CAN vote on mergers and acquisitions, a change in the authorized number of shares, and Stock split. BUT Stockholders DO NOT VOTE FOR DIVIDENDS.

Treasury Shares

Shares that have been previously issued and repurchased by the company - Has no voting rights - Does not receive dividends - Is purchased by the issuer to increase earnings per share

Property Dividend

Sometimes given, paid in the form of the company's products. For example, Starbucks might give each of their shareholders coupons for free coffee. Shareholders must report the value of that property as ordinary income in the year they receive it.

Stock Certificate

Stockholders may choose to receive this as evidence of ownership. FACE SHOWS: name of the shareholder AND the number of shares owned -> typically based on a round lot, which is 100 shares. Shares sold in odd lots (fewer than 100 shares) would be issued with individual stock certificates.