Series 7

Your client owns a $10,000 5% Treasury bond. He is in the 33% Federal tax bracket and a 3.5% state tax bracket. How much tax does he pay per year on the interest from this bond?

$165.00 U.S. Treasury bonds are taxable at the Federal level only. The bond generates $500 per year in interest, taxable to your client at the 33% rate. Therefore, he pays $165 in taxes on the interest.

A bond is trading at $1,200 and is convertible at 20:1. What is the stock's parity price?

$60 If the bond is trading at a $200 premium, the total price of the bond would be $1,000 (par) + $200 for a total of $1,200. To find the stocks parity price, divide the price by the multiple; in this case $1,200/20 = $60.

ABC Company stock is currently trading at $38.00 when the company performs a 4-for-1 stock split on Thursday, May 5th. What price would each share of stock be valued at after the stock split?

$9.50 A 4-for-1 stock split means that once the split is complete each shareholder will own 4 shares of stock for every 1 share he or she owned prior to the split. This kind of stock split results in a decreased stock price. The price of a stock after a stock split is calculated by multiplying the company's current stock price by the number of shares a shareholder has before the split, then dividing by the number of shares the shareholder will have following the split. In this case, the customer will have 4 shares for every 1 share, each worth $9.50.

Donny is known as the 'Dividend Poacher' at his office, however, he has not seen much of a profit as most of the stocks in his portfolio were trading without a dividend when he purchased them. He has since learned that stocks trade "Ex-dividend" at what point:

2 business days before the record date Assuming regular way settlement of 3 business days, stocks begin to sell at a reduced price without a dividend 2 business days before the record date. Ownership is only transferred upon settlement, therefore if a stock is purchased two business days prior to the record date, the previous shareholder would still receive the dividend.

XYZ stock is selling for $60 per share with a quarterly dividend of $0.40. The current yield for XYZ is

2.67% A quarterly dividend of $0.40 equals an annual dividend of $1.60. $1.60 divided by $60 per share produces a current dividend yield of 2.67%

Everything is peaches and roses with ABC corp. The stock price has increased from $60 to $75 and they have increased their quarterly dividend to $0.75 per share. What is the dividend yield?

4% The dividend yield is calculated by dividing the annual dividend by the current market value of the stock. Quarterly dividends are multiplied by four. (4 X $0.75) divided by $75 = 0.04 or 4%

Your client owns 1000 shares of LMN Corporation stock trading at $8 per share. LMN declares a 2:5 reverse stock split. On the day of the split, your client would own

400 shares worth $20 per share. In a reverse stock split, shareholders end up owning fewer shares at a proportionally higher share price. In this case, the client would own 40% of the original number of shares, with each share worth 2.5 times as much as they were the day before the split. The value of his position would remain unchanged.

American Pride Energy has authorized 2 million shares of common stock. It issued 1 million of them and then bought back 125,000 shares. How many shares does it have outstanding?

875,000 Outstanding stock is stock that is currently in the hands of shareholders and is not being held by the corporation.

When compared to a direct investment in real estate, the advantages of investing in a real estate investment trust (REIT) include all of the following EXCEPT: A. A REIT is managed by an experienced investment team B. A REIT investment is typically more liquid than a direct investment in real estate C. A REIT investment generally provides greater diversification than a direct investment in real estate D. A REIT investment allows the investor more control over the underlying real estate

A REIT investment allows the investor more control over the underlying real estate A REIT (real estate investment trust) is a group of real estate assets that are pooled and offered as an investment. As a pooled investment, the REIT is managed by third-party managers, and investors do not have control over any particular real estate holding in the pool.

Anaconda Investments is offering 10-year bonds at 9.25%. They also offer a related bond with a lower yield. What kind of bond might the lower yield bond be?

A bond with a put option A put option allows an investor the opportunity to turn a bond back early at the investor's discretion. This type of option is relatively rare and it is offered with a lower yield than other comparable bonds. Callable bonds typically have higher yields because the company may call them back early. Bonds with longer maturities tend to have higher yields because the investor's money is tied up longer. Lower grade bonds have higher yields than higher-grade bonds because they are riskier.

Foreign company stocks trading on U.S. markets are considered:

ADRs ADRs is an acronym for American Depository Receipts. These receipts represent shares in foreign companies, and these shares trade in the US markets. The investor owns the rights to the actual shares of the foreign company their ADR represents.

Common stock shareholders of a company are entitled to vote on all of the following EXCEPT

Chief Financial Officer General state corporate law provisions will govern what matters shareholders are entitled to vote on. Common stock shareholders can vote on auditors, board of directors, and changes to the company's articles of incorporation. Common stock shareholders do not vote on the Chief Financial Officer.

Which of the following decrease a company's assets?

Cash dividends Stock splits and stock dividends do not decrease assets, only the par value per share and the number of shares outstanding change. Cash dividends, however, are paid using current assets.

What is considered statutory voting?

Common stock shareholders can only vote up to the amount of shares they own for each board of directors seat Common stockholders have voting rights on important matters such as electing the board of directors. Depending on the corporation, investors will use either statutory or cumulative voting. The total number of votes that an investor gets is the number of shares owned times the number of open seats on the board. Under cumulative voting, shareholders can allocate their total number of votes unevenly among the number of open seats. For example, if ABC company has four seats open on the board of directors, and an investor owns 100 shares of ABC company, this investor will get a total of 400 votes. The investor could allocate the 400 votes unevenly among the four seats, even choosing to use all 400 votes for a single candidate. Under statutory voting, an investor can only vote up to the number of shares owned for each open seat. So, in our example, the investor would only get 100 votes for each of the four seats.

What is the advantage of owning common stock shares of a corporation rather than the corporation's preferred stock?

Common stock shareholders have greater earnings potential. Preferred shareholders have priority over common shareholders with regard to dividend payments and claims to assets. In addition, preferred shareholders have more stability in earnings; preferred shareholders give up the potential for high earning for the safety of consistent dividends. On the other hand, common shareholders have the potential for higher dividends and growth potential.

To qualify as a long-term capital gain or loss, stock must be held for more than a year. When selling, the holding period ends:

The trade date According to the IRS, the holding period begins the day after the shares were purchased and ends (and includes) the date that the shares were sold.

Joe is a savvy investor who has been watching the market for years. His eye has especially been on the recent rise of XYZ Corp. Other investors are sure that XYZ Corp. is going to continue to rise in value but Joe is convinced that it will actually start to decline in value soon. Which of the following should Joe buy?

Put option Put options are the only kind of investment from the above list that actually go up in value when the price of the underlying stock goes down. Since Joe believes the stock value is likely to go down soon, he should invest in put options.

Of the four dates relevant to receipt of dividends--Declaration, Ex-Date, Record and Payable--which is set by FINRA?

Ex-Date The board of directors sets the declaration, record and payable dates. The ex-date is set by FINRA.

Which of the following are true about bearer bonds? I. The bondholder is presumed to be the owner. II. Bearer bonds are still issued by some small companies and municipalities. III. Interest coupons are attached to the bonds. IV. Although the owner's name does not appear on the certificate, it does appear on the interest coupons.

I and III There are no names printed on either the certificates or the interest coupons attached to them. Their issuance was discontinued in the early 1980's.

Which of the following gives the shareholder voting rights? I. Common stock II. Unsponsored ADRs III. Warrants IV. Bonds

I only Common stockholders have voting rights in the company whose stock they own. Unsponsored ADRs, warrants and bonds do not give the shareholder any voting rights. Unsponsored ADRs are often issued by more than one depository bank with each depository bank responsible for only the shares that it issues. The depository bank has no formal agreement with the foreign company that has issued the underlying foreign stock. Unsponsored shares trade on the OTC market. In contrast, sponsored ADRs are issued by one depository bank. Most sponsored ADRs give voting rights.

Regular way settlement for corporate securities is: I. 3 business days after the trade date II. 5 business days after the trade date III. the same day as the trade date

I only Regular way trades for corporate securities settle 3 business days after the trade date. However, there is such a thing as cash settlement, which occurs on the same business day.

Which of the following are benefits of owning ADRs versus owning foreign shares of stock directly? I. ADRs trade in the U.S. market II. ADRs trade in U.S. dollars III. ADR dividends are converted into U.S. dollars IV. ADRs are not subject to exchange rate risk

I, II and III ADR is an acronym for American Depository Receipt. ADRs represent ownership in shares of foreign stock that trade in U.S. markets. ADRs allow investors to purchase foreign investments without having to transact business in another country. Investors benefit from the simplicity of purchasing ADRs because ADRs trade in the U.S. market in U.S. dollars, with all dividends being converted to U.S. dollars. ADRs are subject to currency risk because dividends are converted to US dollars.

To be eligible to collect a dividend, an investor must own the stock by the:

Record date To receive the declared dividend, an investor must actually have completed their transaction by the record date. This means shares need to be purchased in enough time to allow for settlement.

Which of the following are characteristics of preferred stock? I. Preferred stock has preference over common stock if a company is liquidated II. Preferred stockholders receive dividends before common stockholders III. Preferred stock can have a convertible feature IV. Preferred stock has preference over bonds if a company is liquidated

I, II and III Preferred stock offers investors a combination of modest equity price appreciation as well as specified fixed dividends. Preferred stockholders receive their dividends before common stockholders and, in case of the company's liquidation, preferred stockholders are paid out before common stockholders. In addition, some preferred stocks offer a convertible feature allowing investors to convert shares of preferred stock into the company's common stock.

The following are possible classes of common stock: I. authorized stock II. treasury stock III. reissued stock IV. outstanding stock

I, II and IV I, II, and IV are classes of common stock except for reissued. The "re" needs to be removed in order for reissued stock to be correct.

Warrants differ from rights in the following respects: I. Warrants are long-term, rights are short-term II. Warrants are usually issued at a strike price above the market price, while rights have a subscription price below the market price III. Warrants may trade with the stock, rights always stand alone IV. Warrants are typically offered as "sweeteners" for other securities, while rights are only offered to existing shareholders

I, II and IV Only choice III is incorrect. Both rights and warrants can trade either with or separately from the underlying common stock. All other choices are correct.

A stockholder who receives rights may: I. Exercise the rights to buy stock, usually for less than the market price II. Sell the rights for their own market value III. Let them expire IV. Trade them for shares of stock

I, II, III Rights holders may do any of the first three choices listed. They may not trade them for shares of stock.

The major categories of preferred stock are: I. straight II. cumulative III. participating IV. convertible

I, II, III and IV All four categories are types of preferred stock. Callable is another category as well.

Which of the following investment instruments might pay a dividend? I. common stock II. preferred stock III. corporate bond IV. mutual fund

I, II, and IV Common and preferred stocks may pay dividends. Mutual funds may pay dividends as well as making capital gains distributions. Bonds may pay interest.

Which of the following parties has a right to transfer the thing described? I. A tenant renting an apartment II. A corporation that owns its headquarters building III. An individual who owns common stock shares IV. A person who regularly drives a company car

II and III Common stock shares and real estate ownership both establish a right to transfer. Stock shares are generally much easier to transfer than real estate, and thus stock shares are typically described as more liquid than real estate. A tenant renting an apartment is unable to transfer rights to the apartment - the landlord, or owner of the apartment, is the only person who may transfer the rights to the apartment. The same type of logic applies to the company car - the person driving it may access it but only the company who owns it has the right to transfer the car to anyone else.

Common stockholders I. receive dividends on an annual basis II. have the right to vote for the company's board of directors III. have preference if the company goes into bankruptcy IV. have the right to vote on amendments to the company's by-laws

II and IV General state corporate law provisions will govern the matters shareholders are entitled to vote on. Of the potential response items, only board of directors and amendments to by-laws would typically be matters that shareholders uniformly are entitled to vote for.

Real estate investment trusts I. Pass losses through to their investors II. Do not pass losses through to their investors III. Pay qualified dividends to investors IV. Pay dividends that are taxed as ordinary income

II and IV Real estate partnerships pass through losses to investors; REITs do not. Their dividends, however, are not qualified, and are taxed at ordinary income rates.

Which of the following characteristics apply to preferred stock? I. It has a maturity date printed on the face of the certificate. II. It is always issued with a par value of $100. III. In bankruptcy, its standing is inferior to common stock. IV. The annual dividend is printed on the face of the certificate.

II and IV. Preferred stock generally does not have a maturity date, and preferred stockholders stand in front of common stockholders in the liquidation line. It is always issued with a par value of $100, and the annual dividend is printed on the certificate.

Which of the following are characteristics of Real Estate Investment Trusts (REITs)? I. Illiquid II. Pass through income to shareholders III. Pass through losses to shareholders

II only A Real Estate Investment Trust (REIT) is a company that owns a portfolio of properties and sells shares in the operation to investors. REITs are fairly liquid (can be sold almost as readily as stock), so Statement I is not true. REITs pass through income to shareholders, so Statement II is true. In contrast to Real Estate Limited Partnerships (RELPs), which pass through losses to the partners, REITs do not pass through losses to shareholders, rather the loss would be reflected in downward pressure on the stock price, so Statement III is not true.

Which of the following rights do owners of unsponsored ADRs enjoy? I. Voting rights II. Rights to dividends III. Preemptive rights IV. Right to buy stock at a set price in the futureMy

II only Investors in unsponsored ADRs are only entitled to dividends. They are not entitled to voting rights, preemptive rights, or the right to buy stock at a set price in the future. Unsponsored ADRs are often issued by more than one depository bank with each depository bank responsible for only the shares that it issues. The depository bank has no formal agreement with the foreign company that has issued the underlying foreign stock. Unsponsored shares trade on the OTC market. In contrast, sponsored ADRs are issued by one depository bank. Most sponsored ADRs give voting rights.

A stock split must be approved by the: I. board of directors II. shareholders III. SEC IV. FINRA

II only Only the shareholders must approve a stock split, because it is not considered to be an operational decision.

Inflation risk would be applicable to investing in what type of vehicle?

Money market fund. Inflation risk is a concern when investing in vehicles that are considered more conservative and that pay lower interest rates. With a generally low yielding money market fund, there is a much higher risk that your rate of return will not keep up with inflation, compared to the return potential of REITs, junk bonds, and small cap stocks.

Which of the following are types of money market securities?

Money market securities generally mature in less than 365 days, are utterly liquid and ultra-safe.

All of the following securities settle on the next business day except: A. T-Bonds B. Municipal Bonds C. Index Options D. Treasury Bills

Municipal Bonds Treasuries and Index Options settle the next business day (T+1). Corporate and Municipal Bonds settle in 3 business days (T+3).

Tony is a conservative investor who earns enough income to place him in a high tax bracket. Which of the following investments should you recommend Tony to buy?

Municipal general obligation bond Municipal bonds are subject to state tax but exempt from federal tax. This makes them attractive for people who are in a high tax bracket or have tax concerns. Additionally, municipal general obligation bonds are less risky than revenue bonds because they are backed by municipality taxes. A zero-coupon bond would not be ideal for Tony because his profits would be taxed by the federal government annually. Furthermore, while a bond rated at Baa is not considered junk, it may be too risky for a conservative investor. Therefore, the best investment for Tony from the choices is the municipal general obligation bond.

An investor purchases a stock with a record dividend date of Wednesday, March 31st. The investor buys the stock on Monday, March 29th. Will the investor qualify to receive the next dividend?

No, because the investor's trade will not settle until one day after the record date Regular Way Settlement mandates that a trade does not settle until 3 business days after the trade date. Therefore the investor will not go on record as owning the stock until Thursday, the day after the record date. Investors who purchase stock on the ex-date as this investor did, do not receive the dividend.

The terms "earnings per share" and "voting shares" refer to

Outstanding shares Authorized shares are identified in the corporate charter. Fewer than that number are issued. Some of the issued shares are re-purchased by the company for treasury stock. The remaining shares are the outstanding shares. These shares are in the hands of the public and are used for voting and EPS calculations.

For stocks, which of the following methods of valuation is arbitrary?

Par value Par value is an arbitrary amount that is assigned in the articles of incorporation. The book value is commonly used by fundamental analysts and is calculated by using the following formula: assets - liabilities / outstanding shares. The market value is the most useful to investors and is derived from the supply and demand of the stock on the open market. Street value is not a common industry term for stock valuation.

Compared to owners of preferred stock, owners of common stock enjoy all of the following rights and privileges except:

Priority in bankruptcy Owners of preferred stock rank higher than owners of common stock if the company enters liquidation. In bankruptcy, common stockholders are at the bottom of the food chain.

A common stock share's liquidity is established by which of the following rights to stock ownership?

Right to transfer Common stock shareholders hold all of the above rights. However, the right to transfer establishes liquidity in stock ownership. The easier it is to sell shares of a particular stock, especially at the price you bought it at or above, increases that stock's liquidity.

Which of the following is not a right of stock ownership? A. Right to protect against mismanagement B. Right to use company property C. Right to transfer D. Right to vote

Right to use company property All of the above describe rights that stock ownership ascribes to shareholders except for the right to use company property.

Which of the following is NOT a type of equity security? A. Rights B. STRIPS C. REITs D. ADRs

STRIPS STRIPS are US Treasury debt securities which are bought at a discount and mature at face value. American Depository Receipts (ADRs) are foreign equity securities that trade on U.S. markets. Real Estate Investment Trusts are equity securities that allow the shareholder to buy into a piece of a portfolio of real estate. REITs generally offer high dividend yields and are relatively liquid. Rights refer to the right to purchase equity securities at a discounted price. Rights are typically granted to existing shareholders before an issue is offered to the public. Rights may be bought and sold and they may have a limited life.

The stated rate of interest that an issuer promises to pay bondholders is often referred to as the:

The coupon rate is another name for nominal yield. The coupon rate represents the stated rate of annual interest that an issuer promises to pay the bondholder on a bond.

An American purchases an ADR for a dividend-paying stock listed on a European exchange. The US dollar strengthens against the Euro. To the American investor, what has happened to the value of the dividend due to this strengthening?

The dividend is worth less. ADRs can pay dividends, but the dividends must be converted into US dollars. If the US dollar strengthens against the euro, you can buy more euro per dollar. Another way of stating this is it takes more euro to purchase each dollar. So when the dividend payment is converted from euro to dollar after the strengthening of the dollar, the American investor gets fewer dollars, so the dividend is worth less to the American.

An investor would want to buy an ADR under what circumstance?

The dollar is weak and the investor believes that an ADR will enhance the value of any dividends paid ADRs are purchased on an American exchange in US dollars, but dividends are paid in the foreign country's currency, creating currency risk. When the dollar is strong, the foreign currency doesn't work out to many dollars when exchanged. When the dollar is weak, the foreign currency would exchange into more dollars. Bottom line, owner of an ADR is better off with a weak dollar.

Which of the following never changes throughout the life of a bond?

The nominal yield is also known as the coupon rate and does not change over the life of the bond. The others are updated according to the market.

The term "bid" refers to:

The price a market maker is willing to buy a stock at The "bid" refers to the price that a market maker in a particular security is willing to pay to purchase that security. In effect, this becomes the price that an individual investor is able to sell their security for in the open market.

ADRs trade in:

U.S. dollars American Depository Receipts (ADRs) are foreign securities that trade on U.S. markets. Instead of investors having to purchase the foreign security in the foreign currency, ADRs trade the security in U.S. dollars. This makes trading in foreign securities easier and more convenient for U.S. investors.

Not taking into consideration market conditions, which of the following would be considered a reverse split?

Value per share increases In a reverse split, the value per share increases and the number of shares decrease. For example, in a 1 for 2 reverse split the value per share doubles and the number of shares is cut in half.

Which of the following statements is MOST accurate regarding warrants? A. Warrants must always be given to investors during an initial public offering. B. Warrants give an investor the right to buy shares of a security at a particular price. C. Warrants cannot be traded as a separate security. D. Warrants are typically issued to employees of a corporation.

Warrants give an investor the right to buy shares of a security at a particular price. Warrants give an investor the right to buy shares of a security at a particular price in the future. The price is usually higher than the market price at the time that the warrant is issued, but warrants typically have long lives (e.g., 10 years) so there is ample time for the underlying stock to rise above the price on the warrant.

When is a company most likely to call back callable preferred stock?

When interest rates go down A company will call back callable preferred stock when interest rates go down. This is so the company can reissue the stocks at the new lower rate.

Which of the following are open market operations? A. When foreign securities are traded on U.S. exchanges through ADRs B. When exchange listed securities are traded over-the-counter C. The fact that the national best bid on a security must be publicly displayed D. When the Fed buys and sells U.S. treasury bonds on the secondary market

When the Fed buys and sells U.S. treasury bonds on the secondary market Open market operations is when the Fed buys and sells U.S. treasury bonds on the secondary market.

A bond denominated in U.S. dollars and issued in the United States by foreign banks and corporations is a

Yankee bond A Eurobond is issued in a currency other than the currency of the country or market of issue. A Eurodollar bond is a dollar-denominated bond issued by a foreign company and held in a bank in a country besides the US and the issuer's home country. To the best of my knowledge, there is no such animal as an ADR bond.

A business entity effecting transactions in securities for the account of others or for its own account is known as

a broker-dealer A business entity effecting transactions in securities for the accounts of others or its own account is known as a broker-dealer. Note a broker effects securities for the account of others, while a dealer effects transactions for its own account. An investment adviser is a firm that provides advice on investing in securities. A securities exchange is part of the secondary market, where investors buy and sell securities at no direct financial benefit to the issuer, in a physical location, such as the New York Stock Exchange (NYSE). Dealer-trader is not a typical term used to describe a player in the financial market.

American Depository Receipts may best be described as

receipts for shares of foreign stock held in a foreign branch of an American bank American Depository Receipts (ADRs) are receipts for shares of foreign stock held in a foreign branch of an American bank. ADRs are traded on U.S. exchanges. Although the dividends are paid in US currency, ADRs are subject to currency risk because they are converted from foreign currency, and thus the value of the dollar relative to the foreign currency comes into play.

Stockholders have all of the following rights EXCEPT: A. right to be paid continuous dividends B. right of inspection C. right to proportional ownership in the company D. right of transfer

right to be paid continuous dividends Stockholders have certain rights because they have partial ownership in the company. With that ownership, the stockholder has the right to inspect the company financials, normally offered through a prospectus. In addition, stockholders have the right to ask for a physical stock certificate, and they can transfer ("gift") their ownership to anyone they wish. However, stockholders do not have the right to be paid continuous dividends. This is determined by the board of directors, depending on whether the company has been profitable and other factors.

All of the following statements are true regarding convertible preferred stock EXCEPT: A. convertible preferred stock gives investors an option to convert the preferred shares of stock to the company's bonds B. convertible preferred stock shareholders can convert their shares to a fixed number of common stock shares C. convertible preferred stock is the same as regular preferred stock, but it has an additional convertible feature that regular preferred stock shares do not offer D. convertible preferred stock shareholders can only convert their shares after a certain date that has been predetermined

convertible preferred stock gives investors an option to convert the preferred shares of stock to the company's bonds Convertible preferred stock is the same as preferred stock except that it has an additional option for the shareholder to convert the preferred shares into a fixed number of common stock shares after a certain date that has been predetermined.

The voting process by which an investor may use their total number of votes (number of shares owned times number of seats) to vote for just one candidate even when there are multiple seats open is known as:

cumulative voting Common stockholders have voting rights on important matters such as electing the board of directors. Depending on the corporation, investors will use either statutory or cumulative voting. The total number of votes that an investor gets is the number of shares owned times the number of open seats on the board. Under cumulative voting, shareholders can allocate their total number of votes unevenly among the number of open seats. For example, if ABC company has four seats open on the board of directors, and an investor owns 100 shares of ABC company, this investor will get a total of 400 votes. The investor could allocate the 400 votes unevenly among the four seats, even choosing to use all 400 votes for a single candidate. Under statutory voting, an investor can only vote up to the number of shares owned for each open seat. So, in our example, the investor would only get 100 votes for each of the four seats.

The proxy statement sent to shareholders would be unlikely to contain which of the following:

the amount per share of the dividend that will be received in the next quarter The SEC requires US companies to provide proxy statements ahead of annual meetings so that shareholders can make informed voting decisions at the annual meetings. A proxy statement may contain all of the above information except the amount per share of the dividend because shareholders do not vote on a dividend.

The price of a putable bond is __________ the price of a comparable traditional bond.

greater than The price of a putable bond is always greater than the price of a comparable traditional bond. The price of a putable bond is greater than a traditional bond because it offers the option to turn the bond in early if the investor wishes.

Which of the following is the most commonly used method for the Fed to alter interest rates?

open market operations Open market operations is when the Fed buys and sells U.S. treasury bonds on the secondary market, and it is the most commonly used method by the Fed to alter interest rates.

The rights that common stock shareholders have to buy shares of newly issued stock are considered:

preemptive rights Preemptive rights allow existing shareholders to buy a sufficient amount of new stock that is issued in a follow-on offering so that they can keep a proportionate share of ownership in the company. For example, if a company has 1 million shares of stock outstanding and one shareholder holds 300,000 of those shares, then that shareholder would be allowed to buy another 300,000 shares of a new 1 million share issue before it reaches the public. These shares are usually issued at a discount to the public offering price.