Chapter 3

non-cumulative preferred stock

-Investor is only entitled to the current dividend; the investor is NOT entitled to unpaid dividends (dividends in arrears) -If preferred stock is non-cumulative, any missed dividend payments don't accumulate. Instead, only the current year's dividend must be paid before common stock dividends are paid. -If the same company as before rebounds in year 4, it is only required to pay its shareholders the stated $5 for that year (year 4). Remember, non-cumulative preferred stock is not entitled to any missing or unpaid dividends.

participating preferred stock

-Investors MAY receive additional dividends based on the company's profits -Most preferred stock is *NOT* participating -an investor who purchases participating preferred stock may receive a greater dividend if the company is doing well and its common dividends exceed a specified amount. For example, an investor owns a 5% preferred stock, with a potential 3% additional payout. This investor is entitled to the 5% dividend, but could receive up to 8% if the common stock dividends reach a specified level. -Allows stockholders to share in dividends paid to common stockholders: participating preferred stock

two main categories of equity securities

-common stock (junior security) -preferred stock (senior security)

you don't have to file a 144 form with the SEC if...

Filing form 144 is NOT required if selling NO MORE than 5,000 shares or $50,000 worth of securities (over 90 days) because otherwise it's not important enough to the SEC to file a form over it

Control Stock (affiliated stock)

Registered stock that is part of an issuer's public float and purchased in the open market by officers, directors, or greater than 10% shareholders of the issuer (they're considered insiders) -these have no minimum holding period -restricted shares have a 6 month holding period, control shares have no holding period

classifications of common stock

Specific stocks are often categorized based on the size (e.g., large-, mid-, or small-cap) or type of issuing company, assumed risk, expected return, or correlation to the business cycle. The following section lists some of the more common classifications including: *blue chip stocks, growth stock, defensive stock, income stock, cyclical stock, and American depository reciepts (ADRs)*

The security with the longest expiration date would normally be a: Put Call Warrant Right

Warrant

the following are test Qs

next

preferred dividends must be satisfied before common dividends

periodt

comparisons between rights and warrants

*rights* -issued to existing common stockholders -maturity is short-term (30-45 days) -subscription price is below the current market value (immediate discount) *warrants* -attached to a new issue of a stock or bond -long-term and even perpetual -subscription price is above the current market value (initial premium)

statutory and cumulative voting methods

-*statutory voting* ---With statutory voting, a shareholder is given one vote, per share owned, per voting issue. Therefore, the more shares a person owns, the greater her voting power. ---For that reason, statutory voting is considered to be beneficial for the larger, more substantial (majority) shareholders. -*cumulative voting* ---With cumulative voting, shareholders are able to multiply the number of shares that they own by the number of voting issues. The result of that calculation is the total number of votes that shareholders may cast in any manner that they choose. ---Cumulative voting tends to favor the smaller, less substantial (minority) shareholders. -example on page 6 of notes if get confused

rights of common stockholders (common stock ownership rights)

-Right of inspection (of the books) -Right to vote -Right to receive dividends -Right to evidence of ownership -Right of transfer (of ownership)

notice of sale (under rule 144)

-Under Rule 144, a person that intends to sell either restricted or control securities must notify the SEC by filing Form 144 at the time the sell order is placed with the broker-dealer. -Once notification is made, the SEC provides a *90-day period during which the securities may be sold.* If the securities are not sold during this period, an amended notice must be filed. -An exemption from the notice of sale requirement is available if the amount of the sale doesn't exceed 5,000 shares or securities with a value that doesn't exceed $50,000. -In other words, if a person is not selling an excessive number of shares or the aggregate dollar value of the sale is insignificant, no filing with the SEC is required

benefits of equity investment in a company

-bond holders don't have voting rights -if a company does well, the shareholders may receive capital appreciation, whereas bondholders just gain interest on they initial investment -stockholders have more to lose and gain, and they have part ownership of the company in the form of their shares they own -if the company fails they are more likely to lose heir investments, though, because bondholders have higher claim to the company's assets and will be repaid first

FINRA Rule 2262: Disclosure of Control Relationship with Issuer

A brokerage firm that has a control relationship with the issuer of any security is required to disclose this fact to its customers. The disclosure must be provided either before or at the time of executing a transaction in the security. -Two situations in which a control relationship exists are if the member firm is a publicly traded company or if it's a subsidiary of a publicly traded company. -For example, a customer has an account at LRR Investments and is purchasing 1,000 shares of LRR Incorporated, which is listed on the NYSE. In this case, LRR Investments is required to disclose the existing control relationship between the two firms. -Say you work for Merrill Lynch, and ML is owned by Bank of America- if your client is buying shares of BOA then you need to disclose that you're connected to that stock and you have a conflict of interest. They just need to know.

XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of XYZ common stock is: A. $4,500,000 B. $5,000,000 C. $90,000,000 D. $100,000,000

A company's market capitalization is found by multiplying the market value by the outstanding shares. $20 market value x 4,500,000 shares outstanding = *$90,000,000.* 500,000 shares bought back are no longer outstanding. Outstanding shares= Issued shares - treasury shares

file articles of incorporation

A corporation has what is called "file articles of incorporation" which is the legal documents or corporate charter that establishes all the information or legal details about the corporation

growth stocks

A growth stock is an issue of a company whose sales, earnings, and share of the market are expanding faster than the general economy and the industry average. Typically, this type of company is aggressive, research minded, and retains most of its earnings to finance expansion and, therefore, pays little or no cash dividends -Stock of companies with sales and earnings that are expanding faster than the economy; pay little (if any) dividends is *growth* (apple, microsoft was a growth company but is now a blue chip company, twitter is in this stage now but will probably become a blue chip company)

right to receive dividends

Although not guaranteed, companies will often pay out a portion of its profits to shareholders. The portion of a company's profit that's paid to common and preferred shareholders is referred to as a dividend. Dividend payouts and stock splits will be covered in detail in Chapter 13.

limited liability

As a legal entity, a corporation may engage in many of the activities that a natural person is able to do. For example, it may buy property, obtain loans, sue, and be sued. Although a corporation is owned by its shareholders, the business is considered a separate person under the law and, therefore, an individual shareholder generally is not held personally responsible for the corporation's debts. If a business fails, the most a shareholder can lose is her original investment. In other words, shareholders have *limited liability.*

authorized shares

At the time of incorporation, a company is authorized to issue a certain number of shares. Once the original number of shares is set, it can be changed only by a majority vote of the stockholders and by revising the corporate charter (the documents that establishes the corporation). Most corporations issue fewer shares than what's authorized in order to keep a certain amount of stock available for future use.

blue chip stock

Blue-chip stocks are high-grade issues of major companies that have long and unbroken records of earnings and dividend payments. The term is used to describe the common stock of large, well-established, stable, and mature companies that have great financial strength. -Stock of strong, well-established, dividend paying companies Blue Chip (because blue chip is highest value in poker)

common stock

Common stock is (1) the basic unit of corporate ownership, (2) the most widely issued type of stock, and (3) the first type of stock that a corporation issues. For bookkeeping purposes, common stock is usually issued with a par (face) value that's an arbitrary amount and is used for the company's financial statement. There's no relationship between the par value of an equity security and its market value. -common stockholders get paid last if a company declares bankruptcy, after bondholders and then preferred stock holders

Board of Directors (BOD)

Corporations have a "board of directors" (BOD) that may include people that work at the company as well as outside directors-- independent level of management -the responsibility of these directors is to oversee the management team, corporate governance, and *declare dividends* -shareholders don't declare dividends, the board does -The shareholders of the company elect a board of directors (BOD) and this board is responsible for overseeing the company and appointing its senior managers. -Proxy means allowing someone to attend a meeting and vote on your behalf but you tell them exactly how you want to vote, that's just if you can't make the meeting

derivative securities issued by a corporation

Derivative securities are special types of investments that track the value of common stock or another underlying asset. *rights and warrants*

SEC Rule 10b-18: Purchases of Certain Equity Securities by the Issuer

For a variety of reasons, an issuer of securities may be tempted to purchase its stock in an effort to increase the price. To minimize the possibility of manipulation, the SEC has created Rule 10b-18 which controls how an issuer or any affiliates may purchase its own stock in the secondary market. -Some of the legitimate reasons for issuers to purchase their own stock in the open market include for stock buyback plans or for funding employee stock purchase plans. -there are *safe harbors under 10b-18* that allow you to buyback stock fairly

treasury stock

For various reasons, a corporation may ultimately repurchase some of its issued shares. When stock is issued and subsequently repurchased by the company, it's referred to as treasury stock. As long as the stock remains in the treasury, it has no voting rights and does not receive dividends. Treasury stock appears as an informational item on the corporation's balance sheet. -There are certain rules *(10b18 about share buyback)* that have to do with this -Treasury shares *do not receive any dividends nor voting rights*. Their share to the company has been repurchased in the marketplace -by purchasing back some of their own shares, a company can effectively raise the price per share and therefore their eventual *earnings per share* so there are SEC rules (10b-18) to make sure that companies don't control their market price in an unfair way

FINRA 2261: Disclosure of a financial condition

If requested, a member firm is required to make available for inspection by a regular customer the information related to the firm's financial condition as disclosed in its most recent balance sheet. The balance sheet may be delivered to a customer in either physical or electronic form.

preferred stock (senior security)

In the capital structure, preferred stock is considered a senior security above the common stockholders, but it still ranks below the bondholders. -The name preferred is derived from the fact that these owners have preference over common stockholders regarding payment of dividends. This preference also extends to a bankruptcy proceeding conducted under Chapter 7 or Chapter 11 of U.S. law. -In both Chapter 7 and Chapter 11 bankruptcy proceedings, the corporation's secured creditors have the highest claim. Administrative claim holders are paid next, followed by unsecured creditors, then are preferred stockholders, and the last to receive payments are common stockholders.

issued shares

Issued shares represent the number of shares that *have* been sold by the corporation. Any shares that haven't been sold or distributed are referred to as unissued shares. -(I think they're referring to unissued shares here) Can be given to employees as part of their compensation or sold to investors

SEC Rule 144

Rule 144 regulates the sale of *restricted* securities and *control (affiliated)* securities. (it is an exemption) -How could someone sell these without registration with the SEC? With the rule 144 exemption -both restricted and control securities must be sold according to the provisions of rule 144 -here, you're not asking the SEC you're telling them -form 144 is filed at the time the order is placed -securities must be sold over a 90 day period through unsolicited broker's trades or to a dealer that is acting as a principal -If any shares from this filing remain unsold and the investor wants to sell them, an updated Form 144 must be filed

Safe harbors under 10b-18

The SEC will not assume that an issuer is attempting to manipulate its stock price if the issuer adheres to the following conditions: ---Only one broker dealer used. *Only one broker-dealer/brokerage firm is used to place bids and make purchases during any trading session.* ---Purchases made late in the day are prohibited. *Purchases are not made during certain times of the day*. Issuers are prohibited from making a purchase that's the first reported transaction for that day and from making a purchase during the *last 30 minutes* of the normal trading day. If the issuer's stock is actively traded, the purchase prohibition changes to within the *last 10 minutes* of the trading day. (that because early in the morning or late in the day influences the market more) ---Purchase price is restricted. *The bid or purchase price of securities is limited to certain prices*. The price may not be higher than the highest independent bid or the last independent transaction price, whichever is higher. For example, if the last independent transaction was $23.53 and the current bid/ask spread is $23.50 - $23.60, the highest price at which the issuer may buy its stock is $23.53. ---Single-day purchase amount is limited. *The amount of stock purchased on any single day is limited.* The total volume on any single day *may not exceed 25%* of the average daily trading volume (ADTV) for that security.

cumulative preferred stock

What happens if a corporation fails to pay the full dividend on its preferred stock? If the preferred stock is cumulative, then all of the preferred dividends that are in arrears (owed) must be paid before the common stockholders receive dividends. -*Most preferred stock is cumulative.* -Investor is entitled to unpaid dividends (those "in arrears") before common stock dividends may be paid -Say they owe a stated 5% preferred cumulative stock ($5 a year), but only were able to pay $2 a year the last 3 years. Then they finally start having success, so they pay the preferred stock owners before anyone else $14 ($3+3+3+the full stated $5 for the fourth year)

what happens if a company goes bankrupt, who gets paid first?

if a company goes bankrupt, bondholders would be paid first, then preferred (senior) shareholders, then if there are any funds left, common (junior) shareholders would be paid

If a corporation believes that its stock is undervalued, which of the following actions will cause the share price to rise? A. Issuing additional shares B. Issuing preemptive rights C. Issuing bonds with a warrant attached D. Buying back some of the shares

*D. Buying back some of the shares* One reason that a company will buy back its own shares is that it believes that the stock is undervalued. Once the buy-back is done, there are fewer shares (i.e. lower supply) and the price of the shares will typically rise. Issuing new shares will increase the number of shares outstanding, which could decrease the price of the shares. Creating new rights and warrants could also increase the shares outstanding, which is likely to cause the stock's price to decrease.

During a period of stable interest rates, which type of preferred stock tends to be the most volatile? A. Non-cumulative B. Cumulative C. Participating D. Convertible

*D. convertible* Convertible preferred stock may be converted into a fixed number of common shares of the same issuer. For that reason, if the common stock into which the preferred stock may be converted has appreciated above the parity price, the value of the convertible preferred will also rise. During a period of stable interest rates, the other types of preferred stock tend to remain stable.

right to vote

*The ability to vote is typically associated with common stockholders* -They may attend annual shareholder meetings and vote on important issues, including the *election of members to the board of directors, whether the stock may be split, and whether the company is able to merge with or acquire another company.* -It's important to remember that shareholders *DO vote on whether the corporation may execute a stock split, but NOT on whether the corporation should pay cash and/or stock dividends.* (the board of directors does that) -the number of votes that are available to each shareholder is determined by the number of shares the person owns. For instance, if a person owns 100 shares, she's provided with 100 votes. -there are two different voting methods: *statutory* and *cumulative*

What is the correct ranking of securities from longest to shortest life? The securities are options, rights and warrants

*Warrants, then options, then rights* Rights usually last less than 60 days. Options usually last for nine months or less, although some can exist for three years. Warrants usually have a life span of several years and they can even be perpetual.

sponsored vs unsponsored ADRs

*sponsored* -For a sponsored ADR, the company whose stock underlies the ADR pays a depositary bank to issue ADR shares in the U.S. This sponsorship permits the company to raise capital in the U.S. and list the ADR on either the NYSE or Nasdaq. Many of the largest ADRs are sponsored. Basically means that the conversion from foreign shares to US shares is sponsored by the actual company -issued in cooperation with the foreign company -may trade on US exchanges (NASDAQ or NYSE) *unsponsored* -For an unsponsored ADR, the company *doesn't* pay for the cost associated with trading in the U.S.; instead, a depositary bank issues the ADR. Unsponsored ADRs trade in the OTC market and are usually quoted on the OTC Link—an electronic exchange that executes trades in securities that are not eligible for NYSE or Nasdaq listing. -Issued without involvement of the foreign company -Generally trade in the OTC market (OTCBB or OTC Pink Markets) -This means the company doesn't care to sell shares to the US but brokerage firms are still interested in buying those shares -ex. Nintendo is based in Japan, they don't want to sell to the US, but a brokerage firm wants to pay for the ADR program because they know they can make commission by selling those shares. That is an unsponsored share and there are quotes on the OTC programs, and there are hundreds of thousands of foreign companies that trade in the US that the companies aren't involved and they are called unsponsored ADRs, and in some cases they can be a risky investment

preemptive rights

-An exclusive privilege for *common* stockholders is that they may be entitled to *preemptive rights.* it is a shareholder's right to maintain a percentage of ownership without dilution -If a corporation is seeking to raise more capital and intends to issue additional shares of stock, a *rights offering* may be conducted to provide current shareholders with the opportunity to buy the shares before they're offered to the public. (one right for each share owned--1,000 shares=1,000 rights. It takes a certain amount of rights to buy one new share, plus a certain amount of dollars. Those dollars are called the *subscription price*) -By participating in the offering, the current shareholders are able to maintain their percentage of ownership in the company. If shareholders choose not to subscribe to the offering, their percentage of ownership and ability to control the company's future will be diluted by the new stock offering.

cyclical stocks

-Cyclical stocks are associated with companies whose earnings fluctuate with the business cycle. When business conditions improve, the company's profitability is restored and the price of its common stock rises. -However, when conditions deteriorate, business for the company falls off sharply and its profits are diminished. This ultimately causes the stock's price to decline. -Examples of companies whose stock is considered cyclical include household appliance, steel, construction, and automobile companies. you don't buy a new car or new dryer when you're in a recession, those are for luxury rather than necessity, -Stock companies whose values fluctuates with the business cycle (e.g household appliances, automobile) is *cyclical stock*

defensive stocks

-Defensive stocks are associated with companies that are resistant to a recession, including sectors of necessary services (utilities), production of consumer staples (tobacco, pharmaceuticals, soft drinks, and candy), and essentials (food). -Essentially, defensive stocks are related to companies that perform well regardless of the current economic environment. -It's important to distinguish between a *defensive stock* and a *defense stock.* A defense stock is issued by a company that's involved in the manufacture of materials that are used by the armed services to defend the country. -Stock of companies that are resistant to recession (e.g. utilities, tobacco, cosmetic companies) *is defensive stock* (think of these as things that you need no matter what)

preferred stock

-Does *Not* have voting rights- only common stock has voting rights -Preferred stock is often issued by established companies that already have common stock outstanding. -These shares are suitable for investors who are more interested in income than capital appreciation (i.e., the same type of investors who might otherwise purchase bonds). it'e the closest an equity security can get to a bond-like security -Preferred stock is normally issued with a par (face) value of $100, which corresponds to its initial market price, and carries a specified dividend (that is niot guaranteed). For example, a 5% preferred stock is expected to pay an annual dividend of $5 (5% of the par value of $100). However, the dividend rate for preferred stock may also be stated as a dollar amount (e.g., $3 preferred stock is expected to pay a 3% annual dividend). A preferred stock's dividend rate generally represents the maximum amount that the preferred stockholders may receive. If a company is not doing well, its board of directors may choose to pay less than the full amount or may choose to pay nothing at all. ($3 over four quarters so $0.75 every quarter). -Dividends are paid to preferred stockholders before common shareholders -Corporations attempt to make their preferred stock marketable to specific investors by adding features to their shares, so there are multiple types of preferred stock which include: *cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, callable preferred stock, and convertible preferred stock* -Pays a stated dividend (dividend could change all the time with a common stock, but in preferred stock, if company is able to pay, it will pay the same amount whenever it can)

American Depository Receipts (ADRs)

-Facilitates the trading of foreign stock in the US markets -ADRs facilitate the trading of foreign stocks in the United States. An ADR represents a claim to foreign securities while the actual underlying shares are held by U.S. banks located overseas. ADRs trade in U.S. markets, either on an exchange or over-the-counter, and are priced and pay dividends in U.S. dollars, rather than in a foreign currency. *ADR shareholders have dividend rights, but don't directly receive preemptive rights* (to be covered shortly). -ADRs represent shares of foreign companies (stock, not bonds) that are sold in the US, and because there are different regulatory requirements as well as different currencies, people in the US don't want to buy shares in foreign currency; they would rather buy shares in US dollars and be paid dividends in US dollars -ADRs are characterized by: ---*Price in US dollars ---pay dividends in US dollars* -sponsored or unsponsored -So any question on the exam that asks an individual is buying shares of stock in a foreign company from the US what are they purchasing? The answer is ADRs. what will they pay? A price in US dollars. Remember there will be currency fluctuations which is why US citizens are reluctant to buy these forms of securities. The dividends will be paid in US dollars which makes US investors more comfortable -an ADR may be *sponsored* or *unsponsored*

convertible preferred stock

-For investors who want *greater potential for capital appreciation* than preferred stocks typically provide, convertible preferred stock may be a suitable choice. -The trade-off is a *lower dividend rate* than what's offered by other types of preferred stock. -Investors who purchase convertible preferred stock are able to, at their discretion, *convert the par value of the preferred stock into a predetermined number of common shares at a specified price—which is the stated conversion price.* -To determine the conversion ratio (i.e., the number of shares to which an investor is entitled), the par value of the preferred stock ($100) is divided by its conversion price. For example, if the conversion price is $25, then the conversion ratio is 4-for-1 ($100 par value ÷ $25). In this case, the preferred stockholder will receive four shares of common stock for every one share of preferred stock. -A *feature that an issuer may add to convertible preferred stock is to make the stock callable*. The choice of whether to convert the stock or allow it to be called will generally depend on the relative value of the common stock received through conversion as compared to the call price. The preferred stock will typically trade at a value which reflects the best choice for the customer. -They sometimes refer to this as a *hybrid security* -For example, a notice is published stating that RMO 5% convertible preferred stock will be called at $102 per share. The preferred is convertible into 2 shares of common stock and RMO's common stock is selling in the market at $55 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at a price near $110. ---Why is this the case? Since the convertible preferred stock has a conversion value of $110 ($55 per common share x 2 share conversion ratio), the market price of the preferred stock will reflect the increased value of the common stock. The call price of $102 doesn't reflect the common stock's increased value.

holding period

-For the *restricted securities* of a reporting company (one that's subject the reporting requirements of the Securities Exchange Act of 1934), the purchaser must generally hold the securities for *six months* before he can dispose of them. (important for exam) -The six-month holding period starts from the time the securities were fully paid for (no margin) by the original purchaser. -However, there is no holding period requirement that applies to *control securities*. -In other words, securities that are acquired in the public market are not restricted and there's no mandatory holding period for an affiliate that purchases the securities. -Despite the lack of a required holding period, the resale of an affiliate's control securities is subject to other conditions of the rule.

rights offering and subscription price

-In a rights offering, all existing common stockholders automatically receive one right for every one share they own. 1,000 shares=1,000 rights. It takes a certain amount of rights to buy one new share, plus a certain amount of dollars. Those dollars are called the *subscription price*) -However, the number of rights required to buy one new share of stock, the price at which the shares may be acquired, and the available period for exercising the rights will vary. Typically, the offer is good for only a limited number of days and the preset purchase price is below the current market value of the stock (discounted). This preset exercise price is referred to as the *subscription price.* -If the company wants to raise more capital, instead of doing a follow up offering to a new group of public investors, they may give the first opportunity to the existing shareholders. You can buy more of our shares at a discount! So the common stock price is $20, and you allow the existing shareholders to buy it at $18, then that $2 discount is the *immediate intrinsic value*. -These rights are *short term* and *tradeable*. Rights only allow you to buy those shares for a limited period of time and they are tradeable; if you own shares of common stock and you receive rights in a rights offering, they trade for about 4-6 weeks based on their intrinsic value and the time left before they expire (like a coupon with an expiration date). Generally, the rights will trade on the same exchange as the underlying stock. -When you receive rights you can subscribe to the offering and buy the new shares, or not subscribe to the rights offering and sell your rights for a dollar amount. Interesting fact: if you owe shares of common stock, and there is a rights offering, and you subscribe and pay the money, your ownership percentage will not change (i.,e no dilution). If you decide NOT to buy those shares, there will be more shares outstanding and you will still own the same amount, so your ownership percentage of the company will be diluted/reduced. -*Rights are a type of derivative because their price/value comes from the value of the common stock*. If the right is priced at $18 and the common stock is $20, then there is $2 of value. If stock rises to $22, then there is $4 of value, so the value of the right is derived from the value of the common stock (as compared to subscription price)

income stocks

-Income stocks are issued by companies that pay higher-than-average dividends in relation to their market price. -This type of stock is generally attractive to investors, particularly the elderly and retired, who are interested in current income as opposed to capital appreciation. -Utility stocks are often placed in the income stock category -Stock of companies that pay higher than average dividends in relation to market price is *income stock*

warrants

-Rights are given to you if you already own shares of stock whereas warrants are generally provided to you when you buy the original shares or bonds. A warrant is another type of derivative on an equity security that may be issued by corporations. Like rights, warrants give the holders the ability to buy the issuer's common stock at a specified price (the subscription price) in the future. -unlike stock rights that have a relatively short life, warrants have a maturity that's often set years in the future. In fact, some warrants have a perpetual (endless) life. -Warrants allow you to buy a specific amount of the company's common shares at a price above the current market value (premium), and they are *generally long-term*, or even perpetual (may be exercised 5 years or 10 years after the original issuance) -Another way that warrants differ from stock rights is that a *warrant's subscription price is usually set at a price that's higher than the current market price of the stock*. Therefore, if a stock later increases in value (above the subscription price), the holder of the warrant will be in a position to realize a profit. Companies typically issue warrants in connection with an offering of stock or bonds. By including the warrants, investors are given an added incentive (i.e., as a sweetener) to purchase these issues. -Warrants are usually able to be *detached* from the securities with which they were originally issued and may be sold separately. -They are detachable, meaning that when you buy the security itself (unit--one share of common/preferred stock/bond and one warrant) and the warrant trades separately from the underlying security. Rights also trade separately but warrants are attached to a securities offering Then trades separately, whereas rights are given to you when you already own the shares

right to evidence of ownership

-Shareholders have the right to receive one or more stock certificates as proof of ownership. The certificate states the name of the corporation, the name of the owner, and the number of shares that are owned by the stockholder. The certificate must also show the names of both the transfer agent and registrar and include the signature of an authorized corporate officer. As with a check, a stock certificate must be endorsed by the owner when it's sold to be considered in good deliverable form. -You might receive a certificate with your name on it but that is rare, but if you hold it at the brokerage firm it is called street name

right to transfer

-Stockholders have the right to freely transfer their shares by selling them, giving them away, or bequeathing them to heirs. There are some cases in which shares are not freely transferable, such as when a person buys shares before the company's initial public offering (IPO) or acquires shares as part of their work compensation. -These restricted shares often include a *legend (warning)* to indicate that the shares are ineligible for transfer.

right of inspection of the books

-Stockholders have the right to inspect certain books and records of the company, including the stockholders' list and the minutes of stockholders' meetings. This right is usually exercised through the receipt of an audited annual report. -Reports referred to as a 10k (annual) or 10q (quarterly)

restricted securities/stock: lockup agreements and legends

-When securities are purchased through a private placement, they are referred to as *restricted securities* -Stop-transfer instructions are issued and a legend on the certificates indicates that the securities are unregistered -For certain investors who own restricted securities, a lock-up agreement dictates the amount of time that pre-IPO investors (e.g., private placement buyers, management, venture capitalists, and other early investors) must wait before selling their shares after the company has gone public. -Purchasers basically must sign the letter to acknowledge that the shares cannot be resold within a defined period -Although these lock-up agreements will generally expire six months following the closing of the company's IPO, there's no statutory time limit. The lock-up is designed to prohibit management and venture capitalists that initially funded the company from immediately liquidating their shares for a profit once the issue goes public. -The lock-up period also restricts or limits the supply of shares being sold in the market. Shares that are subject to a lock-up agreement will have the restrictive legend printed across the face of the certificate to indicate that the securities haven't been registered with the SEC and are not eligible for resale unless the legend is removed. In many cases, the removal of the legend is accomplished under *SEC Rule 144.* -The reason this is a thing is because if they could just sell any amount of shares anytime they want that would drive the price of the shares down and that affects the company/issuer

intrinsic value

If the stock's market price rises above the warrant's subscription price, then the warrant has intrinsic value. For example, if the warrant's subscription price is $30 and the stock's market price is $33, then the warrant has intrinsic value of $3 (i.e., the investor could acquire the stock for $30 and sell the shares at $33, for a 3-point gain). However, to reflect the possibility that the stock's price may increase further before the warrant expires, the actual value of the warrant may be even higher than the intrinsic value.

chapter 11 and chapter 7 bankruptcy

In a bankruptcy proceeding, secured creditors are given the highest claim priority. For companies is the U.S., there are two types of bankruptcy proceedings -- Chapter 7 and Chapter 11. Chapter 7 is when the company is going out of business and all of the assets owned by the company are sold. This type of bankruptcy is also referred to as liquidation. Chapter 11 is also referred to as reorganization because the company is not going out of business; instead, it's taking steps to come out of the proceedings in a healthier financial position.

callable preferred stock

Issuer has the ability to repurchase the stock -Typically repurchased at a premium over par value -A company that issues callable preferred stock has the right to repurchase the stock (i.e., to call it back) at a specified price at some time in the future. -In order to induce investors to buy the stock, the call price (price/premium at which the issuer repurchases) is typically higher than the stock's par value.(I think at this point it would be treasury stock? maybe?) -Keep in mind: most companies that have common stock dont also have preferred stock- only select companies have both and they tend to be more established companies like blue chip companies

conversion value/stock price (convertible preferred stock)

The conversion ratio is par value divided by conversion price. So if i buy 4%, $100 par convertible preferred stock at $110, and the stock is convertible at $10 and the common stock's price has risen to $12, then the conversion ratio is $100/10= 10 shares of common stock for 1 share of preferred stock. Based on the increased price of the common stock, at what price should the preferred stock be trading? Market value of the common stock times the conversion ratio = price of the preferred stockl. ($12 x 10 shares= $120 per share). Since the price of the common stock has risen to $12, the convertible preferred stock should be trading at $120 per share.

outstanding stock/shares

The term outstanding stock refers to the *number of shares that have been issued to the public (issued stock), minus any stock that has been repurchased by the company (treasury stock)*. -*Issued Stock - Treasury Stock = Outstanding Stock* -Outstanding stock receives dividends and has voting rights. -Many market professionals refer to a company's *market capitalization, or market cap* to indicate its size, which is found by multiplying the current market price of the stock by the number of outstanding shares. -market cap formula: the *number of outstanding shares times the market value per share* (which changes on a day-to-day basis -So if there are 8 million outstanding shares and the price per share is $1 per share, the market cap would only be 8 million. If it was 10 dollars, the market cap would be 80 million That number changes every day as the market price per share changes every day

volume limitation (144)

Under Rule 144, the maximum amount of securities that a control person of an exchange-listed company may sell over any 90-day period is the *greater of 1% of the total shares outstanding or the average weekly trading volume during the four weeks preceding the filing.* -For example, an issuer has 7,000,000 shares outstanding and the average weekly trading volume for the past four weeks was 60,000 shares. Since 1% of the total shares outstanding is 70,000 shares and the four-week average is 60,000 shares, the holder can sell the greater of these two amounts, which is 70,000 shares. (26 mins in the lecture)

process of issuing stock

When a company goes public through an IPO, a corporate charter determines how many *authorized* shares there CAN be offered/sold -of those, shares that have been sold are *issued* shares -after that, a corporation may repurchase some of its issued stock, making it *treasury stock* -what is still out there in the hands of investors is *outstanding stock*