SIE Unit 2 - Equity Securities

Callable preferred stock

A company can buy back from investors at a stated price after a specified date allows the company to replace a relatively high fixed dividend obligation with a lower one when the cost of money has gone down Similar to refinancing a mortgage They cease on call date Every day after the call date, the issuer is at risk Issuer will only call if to their advantage, when interest rates fall When interest rates fall, look for a call

Spin Off

A corporation forms a subsidiary company out of some of the corporation's assets and operations. It then issues new shares of the newly formed corporation to the shareholders of the original company. Not a taxable event if shares are received

Common stock

A security that represents ownership in a corporation. Exercise controls by electing a board of directors and voting on corporate policy

American Depositary Receipts (ADR)

A type of equity security designed to simplify for foreign investing for US investors created when common shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a US bank and a receipt is created may represent one or more shares of the foreign company's shares held on deposit Provides investors with a convenient way to diversify their holdings beyond domestic companies Foreign shares are purchased by a depository bank and that bank issues receipts against the foreign shares which are traded on domestic markets

Dividend dates for mutual funds

ALL SET BY BOD: Declaration Date Ex-dividend rate (Ex-date) day after record date Record Date Payable Date DERP

Cumulative Preferred Stock

Accrues payments due to its shareholders in the event dividends are reduced or suspended Accumulate on the company's books until BOD decides to pay them When dividends resume, stockholders receive current dividends plus the total accumulated dividends before any dividends go to common

Statutory voting (common stock)

Allows a stockholder to cast one vote per share owned for each item on a ballot, board candidate needs a simple majority to be elected One vote, per share, per position open Benefits larger shareholders

Cumulative voting (common stock)

Allows stockholders to allocate their total votes in any manner they choose Numbers of shares X number of open seats Benefits the smaller investor

Tender Offer

An offer to buy a security directly from the owners of the security (not through secondary markets) Corporations may make a tender offer on their own debt as a way to retire the debt early Companies looking to acquire another company (friends or hostile) may make a tender offer to buy the targets company's shares A company making a big to take over another company might also make a tender offer on the target's convertible securities

Classes of common stock for a corporation

Authorized Issued Outstanding Treasury

Issued Common Stock

Authorized stock that has been sold to investors, investors bought and the company receives the money When a corporation sells fewer shares that total number, it reserved the unissued shares for future needs (raising new capital for expansion, Paying stock dividends, Exchanging common stock for outstanding convertible bonds or preferred stock)

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 time the warrants are issued and some time in the future Usually a long term instrument that gives the investor the option of buying shares at a later date at the specified (exercise) price Offered to the public as sweeteners in connection with other securities, such as debt instruments (bonds) or preferred stock, to make those securities more attractive, often bundled as units You can attach a bond to warrant to offering, might not be exercisable for another 5 years, not sure where the stock will go

Cash Dividend

Check or automatically deposited into brokerage account Typically paid quarterly and are taxed in the year they are distributed May be taxed as either non qualified or qualified

Authorized common stock

Corporations can raise money by issuing securities The corporate charter specifies the number of shares the company is authorized to issue Corporation will issue enough authorized shares to raise sufficient capital for needs

Dividend disbursement dates for common stock

Declaration Date Ex-dividend rate (Ex-date) Record Date Payable Date DERP

Dividends from Common Stock

Declared by the BOD, not stockholders Either paid out with: cash dividend, stock dividend or product dividend

Reverse Stock Split

Decreasing the number of shares and increasing the price without affecting the total market value of shares outstanding Cost basis per share will likewise increase, total value of the position is unchanged by the split

Benefits of owning preferred stock

Dividend preference - When the BOD, declares dividends, owners of preferred shares must be paid before any payment to common shareholders Priority at dissolution over common stock - If a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders on the assets remaining after creditors have been paid Priority schedule

American Depositary Receipts (ADR) risk/advantage

Ease of Use - listed on NYSE, familiar way, trade and settle T + 2 Taxation - dividends paid to US investor may be subject to tax withhold by amount of home country, profits would be taxable in the US Currency and political risk - company pays in home currency and bank converts to USF

Preferred Stock

Equity security that represents nonvoting ownership in a corporation Senior to common and junior debt Annual dividend represents its fixed rate of return - attraction for income oriented investors No voting rights or preemptive rights

Proxy voting

Every publicly traded company must have an annual general shareholder meeting where management presents any decisions that would require shareholder approval Approval (or disapproval) is given by means of voting for each decision Can be in person, online or mail Most shareholders vote by means of a proxy, absentee ballot Proxy - limited power of attorney that a stockholder gives another person, transferring the right to vote on the stockholders behalf Proxy is automatically revoked if stockholder attends shareholder meeting or if the proxy is replaced by another proxy

Ex-dividend date (common stock)

FINRA or exchange declares this One business day before the record date Customer must purchase the stock two business days before the record date to qualify for the dividend To receive the dividend, the stock must be purchased before the ex-dividend date The day before - is the last day to get the dividend If you trade too late then the seller would get the dividend

Financial benefits for common stock

Growth (capital gains) Income (regular quarterly cash dividends) Limited Liability (personal assets are not at risk)

Preemptive rights (common stock)

Have the preemptive right to maintain their proportionate share of ownership in the corporation Preemptive - put oneself in front of another One right per share

Stock Dividend

If a company wishes to reinvest its profits for business purposes rather than pay cash dividends Company issues additional shares of its common stock as a dividend to its current stockholders instead of cash so the shareholder owns more shares Adjusted cost per share will impact the tax consequences when they are sold

Taxes on Offers

If the corporate action results in the existing shareholders receiving shares of stock, there is no tax event at the time of action If the corporate action results in the stockholder receiving cash, it will generally result in a tax event because it is a sale of the security Stock splits and stock dividends are never taxable events because they result in receipt of additional shares Mergers, acquisitions and spin offs are generally not taxable events because shareholders receive stock. However these offers may be a mix of stocks and cash payments. Cash is taxable as a capital gain or loss Buybacks and tender offers are almost always all-cash offers and are treated as a sale of the security resulting in a capital gain or loss

Outstanding common stock

Includes all shares that a company has issued and that are in the hands of investors Sometimes corporations buy back its this stock or it's donated

Notification of corporate actions

Issuers are required by the SEC to give notice of corporate actions to shareholders for such actions as cash dividends, stock dividends, a forward or reverse split or a rights or warrants offering Notice should be given no later than 10 days before the record involved or in case of subscription or another offering if giving 10 days advance notice is not practical on or before the record date and in no event later than the effective date

Types of common stock

Large Cap Mid cap Small cap Penny stock

Large Cap Stock

Largest companies, $10 B + Rapidly growing companies that have a long history of steady dividend payments are often called blue chip stocks

Straight Preferred Stock

No special features beyond the stated dividend payment Missed dividends are not paid to the holder, BOD are forced to pay every year

Buy back

Occurs when a company buys its own outstanding shares in the open market from existing shareholders Companies might buy back shares for numerous reasons. Doing so reduces the number of shares available (supply) and therefore can increase the value of shares still available Cash is received and is treated as a sale of position

Stock Splits

Occurs when a company divides each existing share of its stock into several new shares Total number of shares increases but the total value of all shares taken together remains the same Can be forward or reverse

Participating Preferred Stock

Offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid Percentage to which participating preferred stock participates is noted on the stock certificate Before participating rate can be paid, a common dividend must be declared

Acquisition

One company takes over the operations and assets of another firm Shareholders that were acquired will receive shares of the company that did the acquiring and their old shares are canceled Not taxable if shares are received to replace canceled shares

Risks of owning preferred stock

Purchasing Power - inflation Interest rate sensitive - when interest rises, value of share declines Decreased or no dividend income Priority at dissolution - paid before common but behind all creditors

Small Cap Stocks

Small but still listed on national exchanges, $300m to $2 b Oriented toward growth and produce very little dividends

Product Dividend

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

Mid Cap Stock

Still large but not as large, $2 billions - $10b Small and large cap characteristics

Treasury common stock

Stock a corporation has issued and subsequently reacquired Does not carry the rights of outstanding common shares - voting rights and dividends

Freely transferable shares (common stock)

Stock can be moved to anyone who wants to buy it or receive it as a gift Shareholders have the right to sell or give away their shares without permission of corporation

Record Date (common stock)

Stockholders of record on the record date receive the dividend distribution Must be owner to be entitled to dividend

Types of preferred stock

Straight Cumulative Callable Convertible Adjustable

Payable date (common stock)

The dividend disbursing agent sends dividend checks to all stockholders whose names appear on the books as owners as of the record date Investors are taxed for the tax year the dividend is paid, based on the payable date Dividend paid to those entitled

Restricted stock

Those acquired through some means other than a registered public offering A security purchased in a private place = restricted security and may not be sold until they have been fully paid for six months after holding restricted stock fully paid for six months, an investor may begin selling shares. When issued these shares will have a restricted legend on the certificate (legended or legend certs)

Control Stocks

Those owned by directors, officers or persons who own or control 10% or more of the issuer's voting stock If an unaffiliated individual owns 7% of the voting stock of XYZ, that person is not a control person however is that person's spouse owns 4% of voting stock then they would both be control persons When a control person (affiliate) wants to sell shares - that person must complete a form 144, which is used to determine the number of shares the control person can sell over a 90 day period

Adjustable preferred stock

Tied to rates of other interest benchmarks (something safe) such as treasury bills and money market rates Issuer determined frequency of adjustments Look at the yield each year and add percentage on For investors looking for a fixed income, adjustable-rate preferred would be their least appropriate choice

Forward Stock Split

To make the stock price attractive to a wider base of investors by increasing the number of shares and 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 Total market value of ownership interest is the same before and after the split

Merger

Two or more companies combine operations and assets The shareholders of both companies receive new shares of the combined company and their shares of the company are canceled Not taxable if shares are received to replace canceled shares

Penny Stocks

Unlisted security trading at less than $5 per share Highly speculative Customers are required to be given a copy of a risk disclosure before initial transaction

Risks of owning common stock

Value Risk - chance that a stock will decline in rpice Decreased or no dividend income - not guaranteed Low priority at dissolution - bonds and preferred over common, last position in liquidation

Benefits of owning common stock

Voting Freely Transferable Information Preemptive rights Financial Benefits

Stock Dividends

When a company wishes to reinvest its profits for business purposes rather than pay cash dividends Common with growth companies that invest their cash resources in research/development Company issues additional shares of its common stock as a dividend to its current stockholders instead of cash Net result = shareholder owns more shares after distribution but the price per share is adjusted downward Stock dividend is not taxable but adjusted cost per share (new cost basis) will impact the tax consequences when the shares are sold

Declaration date (common stock)

When a company's BOD approves a dividend payment, it is recognized as the date the dividend was declared BOD would also designate the payment date and the dividend record date

Stock Rights (Preemptive Rights)

When a corporation wants to issue more common shares in order to raise capital (APO), they allow shareholders to purchase enough of the new shares to maintain their ownership Preemptive rights before offering them to the general public Allowed them to purchase common stock below the current market price Rights are valued separately from the stock and trade in secondary market during the subscription period, 30-45 days Existing shareholders receive one right per share owned

Rule 144: Restricted Stock and Control Persons

applies to shares that are sold through nonstandard offering and are subject to resale restrictions and to sales by persons who are classified as control persons How to get rid of stock that is restricted

Convertible preferred stock

if the owner can exchange the shares for a fixed number of shares of the issuing corporation's common stock Generally issued with a lower stated dividend rate than nonconvertible preferred of the same quality because the investor may have the opportunity to convert to common shares and enjoy greater capital gain potential No conversion from common to preferred but there is conversation from preferred to common If common stock position is valued at $120, parity of convertible preferred stock is $120 Always going to par value divided by the conversion price (not current market value) = how many shares

Equity Securities

represent ownership in a company and give an investor the opportunity to grow their wealth along with a company's success stock

Information (common stock)

right to limited access to the books Right to examine meetings of minutes and examine the list of stockholders Right to receive an audited set of financial statements of company's performance report Limited access to books and records

Common stock voting

the right to vote for corporate directors, Crucial corporate decisions, Voting for BOD Shares X vacancies = number of votes