Chapter 1: Equity Securities

What should you always assume to be the par value of a PREFERRED stock?

$100

Common stock can be authorized as four things ...

- Authorized - Issued - Outstanding - Treasury

What is a transfer agent responsible for?

- Ensuring that its securities are issued in the correct owners name - canceling old and issuing new certificates - maintaining records or ownership - handling problems relating to lost, stolen, or destroyed certificates

3 types of common stock values

- Par Value - Book Value - Market Value

3 different types of income

1. Cash dividends 2. Stock dividends 3. Property dividends

Two benefits of owning stock

1. Growth 2. Income

Three risks of owning stock *hint* think MDL

1. Market risk 2. Decreased or No Income 3. Low priority at Dissolution

What are the different categories of preferred stock?

1. Straight preferred 2. Cumulative preferred 3. Convertible preferred 4. Participating preferred 5. Callable preferred

Two advantages of preferred stock over common stock

1. When BOD declares dividends, owners of preferred stock receive their dividends before common stockholders 2. If a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders on the assets remaining after creditors have been paid

Proxy

A form of absentee ballet

Forward "splits"

A forward split stock increases the number of shares and reduces the price without affecting the total market value of shares outstanding basically an investor will receive more shares, but the value of each share will be reduced

Bonds represent ...?

A loan (debt) to a company

Debt Investment is

A loan to a company in exchange for interest income and the promise to repay the loan at a future maturity date and it does NOT confer ownership

Describe "long stock"

A long (or long position) is the buying of a security such as a stock, commodity or currency with the expectation the asset will rise in value. In the context of options, it is the buying of an options contract. A long position is the opposite of a short (or short position).

Preemptive Rights

A preemptive right is a privilege that grants stockholders the right to purchase additional shares in the company prior to shares being made available for purchase by the general public

Convertible Preferred

A preferred stock is a CONVERTIBLE if the owner can exchange each preferred share for shares of common stock

Reverse "splits"

A reverse split has the opposite effect on the number and price of shares After a reverse split, investors own fewer shares that are then worth more per share

Book Value (common stock)

A stock's book value per share is a measure of how much a common stockholder could expect to receive for each share if the company is liquidated and is most commonly used by analysts The Book Value per share is the difference between the value of a corporations tangible assets and its liabilities divided by the number of shares outstanding

Stock dividend

Additional shares in the issuing company

Statutory Voting

Allows a stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the BOD

Cumulative Voting

Allows stockholders to allocate their total votes in any manner they choose

What is on a stock certificate?

Among other things: - Company name - # of shares - Investors name - Security's CUSIP number

What is a SECURITY?

An investment that represents either an ownership stake or a debt stake in a company

Decreased or No Income

Another risk of stock ownership is possibility of dividend income decreasing or ceasing entirely if the company loses money

What is anti-dilution provision?

Anti-dilution provisions allow for early stage investors to retain their percentage ownership in a company in the event that future financings would dilute them. Shares, options and convertible securities are adjusted so that the holder of these securities receives additional securities

Par Value (common stock)

Arbitrary value the company gives the stock in the company's articles of incorporation and has no effect on the stock's market price

Net Worth

Assets = liabilities + net worth Assets - liabilities = net worth

How does an investor become part owner in a company?

By buying shares of the company's stock

How does a company disclose the composition of its total capitalization (equity and debt)?

By publishing a balance sheet

What is a CUSIP number?

CUSIP (A Committee on Uniform Securities Identification Procedures) number is a universal security identification number Each issue of common stock, preferred stock, corporate bond, and municipal bond has its own CUSIP number

Growth is also known as ...

Capital appreciation

What are the two types of stock a corporation may issue?

Common and preferred

Callable preferred

Corporations often issue callable or REDEEMABLE preferred stocks which a company can buy back from an investor at a state price after a specified date

Describe "short stock"

Customer, in this case, is selling stock he does not own and he does this by borrowing stock from a stock lender and selling the borrowed shares

Dividends (preferred)

Distributions of a company profits to its stockholders

Stocks represent ...?

Equity or ownership of a company

True/False ... Preferred stock has the same voting rights and appreciation potential as common stock

False

True/False ... Preferred stockholders use their voting rights to exercise control of a corporation by electing a board of directors and by voting on important corporate policy matters at annual meetings

False ... COMMON stockholders are the ones who use their voting rights, not preferred stockholders

Stock dividends (preferred)

If a company uses its cash for business purposes rather than to pay cash dividends, its BOD may declare a stock dividend This is typical in many GROWTH companies

Proxy Contest

If a proxy vote could change control of a company, all persons involved must register with the SEC as participants or face criminal charges

Participating preferred

In addition to fixed dividends, participating preferred stock offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid

Cumulative preferred

In this case, all dividends due cumulative preferred stock accumulate on the company's books until the corporation can pay them THEN when the company can resume full payment of dividends, cumulative preferred stock holders will receive their current dividends plus the total accumulated dividends before any dividends are distributed to common stockholders

Outstanding Stock

Includes any shares that a company has issued but has not repurchased (that is - stock that is investor owned)

Securities and Exchange Commission (SEC)

Is a U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception. The SEC consists of five commissioners who serve staggered five-year terms.

(Growth) Capital Appreciation

Is known as an increase in the market price of shares

Treasury Stock

Is stock a corporation has issued and subsequently repurchased from the public - the corporation can hold this stock indefinitely or can reissue or retire it

Issued Stock

Is stock that has been authorized and distributed to investors

What is the advantage of issuing nonvoting common stock

Issuing nonvoting common stock allows a company to raise additional capital while maintaining management control and continuity without diluting voting power

Cash dividend

Many corporations pay out regular quarterly cash dividends and this is one of the main reasons people invest in stocks

Market Value (common stock)

Market price is the price investors must pay to buy the stock and is the most familiar measure of a stocks value

Are stock dividends (preferred) taxable?

No

Can stockholders lose more than the amount they have paid for a corporations stock?

No

Do preferred stocks have a preset date at which it matures? As well as no scheduled redemption date?

No

Do stockholders have the right to examine detailed financial records or the minute's of a BOD meeting?

No

Are preferred stocks only offered with a fixed rate of return?

No!

Cash dividends (preferred)

Normally distributed by check if an investor holds the stock certificate or are automatically deposited to a brokerage account Cash dividends are TAXED in the YEAR they are received

Low priority at Dissolution

Of a company declares bankruptcy, the holders of its bonds and preferred stock have priority over common stockholders - making a company's debt and preferred shares considered to be SENIOR securities *keep in mind* common stock is also referred to as junior securities due to being last on the list of liquidity in terms of bankruptcy

Where are stocks and bonds normally purchased and sold?

On a stock exchange

What is recorded when a corporation sells stock and the money received exceeds par value on the balance sheet ... ?

On the balance sheet it will be recorded as CAPITAL IN EXCESS OF PAR which is also known as PAID-IN SURPLUS, CAPITAL SURPLUS, or PAID-IN CAPITAL

Limited Liability

Protects stockholders from having to pay a corporation's debts in bankruptcy

Authorized Stock

Refers to a specific number of shares the company has authorization to issue or sell

Preferred Stock

Represents equity ownership in a corporation, but it usually does not have the same voting rights or appreciation potential as common stock

Market risk

Risk is the chance that a stock will decline in price at a time the investor needs his money *Keep in mind* that investors have no assurances that they will be able to recoup their investment in a stock at any time

Property dividends

Shares in a subsidiary company or a product sample

Adjustable-Rate Preferred

Some preferred stocks are issued with adjustable, or variable, dividend rates which are usually tied to other benchmarks (such as a US Treasury Bill)

What is a stock power?

Something a registered owner of a stock must sign to transfer ownership of said stock

Board of Directors (BOD)

Stockholders regularly vote for and elect candidates to the BOD and thus have some say in the company's management without being involved with the day-to-day details of its operations

What does the balance sheet do?

Summarizes the company's: assets, liabilities, and equity

Give an example of a stock exchange

The NYSE (New York Stock Exchange)

What is the NYSE? Give a brief definition

The NYSE is an auction market where buyers and sellers are matched by a specialist (a designated market maker) who maintains fair and orderly market for a particular set of stocks

Equity

The excess value of assets over the value of liabilities (the net worth of the company)

What is the Registrar?

The registrar is a state entity and must be independent of the issuing corporation

Straight preferred (non-cumulative)

This has no special features beyond the stated dividend payments and missed dividends are not paid to the holder

Describe "long sell"

To close the position the customer would sell the stock

Why would a company "split" its stock?

To make the stock price attractive to a wider base of investors

True/False ... A preferred stock's price tends to fluctuate with changes in interest rates rather than with the issuing company's business prospects

True

True/False ... An individual's stock ownership represents his proportionate interest in a company

True

True/False ... Preferred stock normally pays a fixed, semiannual dividend and has priority claims over common stock; that is the preferred is paid first if a company declares bankruptcy

True

True/False ... The transfer and registration of stock certificates are two distinct functions that, by law, cannot be performed by a single person or department operating within the same institution

True

True/False ... a company that solicits proxies must supply detailed and accurate information to the shareholders about the proposals to be voted on as well as submit the information to the SEC for review

True

True/False ... a preferred stock's fixed dividend is a key attraction for income-oriented investors

True

True/False ... convertible preferred is often issued with a lower stated dividend rate than nonconvertible preferred because the investor may have the opportunity to convert to common shares and enjoy capital gains

True

True/False ... like a bond, preferred stock is usually issued as a fixed-income security with a fixed dividend

True

True/False ... market value is influenced by a company's business prospects and the consequent effect on supply (which is the number of shares available to investors) and demand (the number of shares investors want to buy)

True

True/False ... the book value per share can - and usually does - differ substantially from a stock's market value

True

True/False ... Common stock is the most junior security. Explain why or why not.

True ... Because in the event of bankruptcy common stock is last in line in terms of corporate liquidation

Debt Securities are

Usually acquired by buying a company's bonds

Liabilities

What the company OWES: accounts payable (current bills it must pay), short and long term debt, other obligations, etc.

Assets

What the company OWNS: cash in the bank, accounts receivable (money its owed), investments, property, inventory, etc.

Proxy Solicitation

When a company sends proxies to shareholders, usually for a specific meeting

Do stockholders have the right to receive annual financial statements and obtain lists of stockholders?

Yes

Does the price of a convertible preferred stock fluctuate in line with the common stock? Why?

Yes, as long as the common stock's value is high enough to make conversion attractive

Is a preferred stock's par value meaningful?

Yes, as opposed to common stock par value which means basically nothing

Are shares of stock negotiable? Why?

Yes, because a stockholder can give, transfer, assign, or sell shares he owns with little to no restrictions

Describe "short sell"

aka "shorting the stock" this is when short selling makes it possible to sell what one does not own. The short seller achieves this by borrowing the stock from a broker, and immediately selling the stock at its current market price, with the sale proceeds credited to the short seller's margin account. At a future point in time, the short seller will cover the short position by buying it in the market and repaying the loaned stock to the broker.

Current Yield (dividend yield)

annual dividend (which is normally four times the quarterly dividend) divided by the current market value of the stock **** will probably be asked to calculate dividend yield on exam

Stock certificate

indicates the shares of a corporation a person owns

What does OTC stand for? What is it?

over-the-counter (market) The OTC Market is an inter-dealer market linked by computer terminals to FINRA (Financial Industry Regulatory Authority) member firms across the country Basically, the OTC has no physical location

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