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
The date of a dividend adjustment is sometimes referred to as the ...
reset date
