Chapter 1 - Equity Securities

Income Example: ABC pays a $.50 quarterly dividend to its shareholders. The stock is currently trading at $20 per share. What is its current yield (also known as dividend yield)? current yield = annual income/current market price $.50 × 4 = $ 2.00 $2/$20 = 10%

Many corporations distribute a portion of their earnings to their investors in the form of dividends. This distribution of earnings creates income for the investor, and investors in common stock generally receive dividends quarterly. The amount of income that an investor receives each year is measured relative to what the investor has paid, or will pay, for the stock and is known as the dividend yield or the current yield.

Attached to Bonds

Many times, companies will attach warrants to their bond offerings as a sweetener to help market the bond offering. The warrant to purchase the common stock makes the bond more attractive to the investor and may allow the company to issue the bonds with a lower coupon rate.

Units

Many times, companies will issue warrants to people who have purchased their common stock when it was originally sold to the public during its initial public offering (IPO). A common share that comes with a warrant attached to purchase an additional common share is known as a unit.

Nonvoting

Most preferred stock is nonvoting. Occasionally the holder of a cumulative preferred stock may receive voting rights in the event the corporation misses several dividend payments.

Non-Traded REITs Holding periods can be eight years or more and the opportunities to liquidate the investments may be very limited. Furthermore, the distributions from the REITs themselves may be based on the use of borrowed funds and may include a return of principal which may be adversely impacted and cause the distributions to be vulnerable to being significantly reduced or stopped altogether. Distributions may exceed cash flow and the amount of the distributions, if any, are at the discretion of the Board of Directors. Non-traded REITs like exchange traded REITs must distribute 90% of the income to shareholders and must file annual reports (10-Ks) and quarterly reports (10-Qs) with the SEC. Broker dealers who sell non-traded REITs must provide investors with a valuation of the REIT within 18 months of the closing of the offering of shares.

Non-traded real estate investment trusts or REITs lack liquidity, have high fees, and can be difficult to value. The fees for investing in a non-traded REIT may be as much as 15% of the per share price. These fees include commissions and expenses which cannot exceed 10% of the offering price. Investors are often attracted to the high yields offered by these investments. Firms who conduct business in these products must conduct ongoing suitability determination on the REITs they recommend. Firms must react to red flags in the financial statements and from the REIT's management and adjust the recommendation process accordingly or stop recommending if material changes take place that would make the REIT unsuitable.

Characteristics of a Rights Offering During a rights offering, each share will be issued one right. The subscription price and the number of rights required to purchase one additional share will be detailed in the terms of the offering on the rights certificate. During a rights offering, the issuer will retain an investment bank to act as a standby underwriter, and the investment bank will stand by, ready to purchase any shares that are not purchased by the rights holders.

Once a rights offering has been declared, the company's common stock will trade with the rights attached. The stock in this situation is said to be trading "cum rights." The company's stock, which is the subject of the rights offering, will trade cum rights between the declaration date and the ex date. After the ex date, the stock will trade without the rights attached, or "ex rights." The value of the common stock will be adjusted down by the value of the right on the ex rights date.

Outstanding Stock Example: XYZ corporation has 10,000,000 shares authorized and has sold 5,000,000 shares to the public during its initial public offering. In this case, there would be 5,000,000 shares of stock issued and 5,000,000 shares outstanding.

Outstanding stock is stock that has been sold or issued to the investing public and that actually remains in the hands of the investing public.

Par Value Example: How much would the following investor receive in annual income from the investment in the following preferred stock? An investor buys 100 shares of TWT 9% preferred $100 × 9% = $9 per share × 100 = $900

Par value on preferred stock is very important because that's what the dividend is based on. Par value for all preferred shares is $100 unless otherwise stated. Companies generally express the dividend as a percentage of par value for preferred stock.

Par Value

Par value, in a discussion regarding common stock, is only important if you are an accountant looking at the balance sheet. An accountant uses the par value as a way to credit the money received by the corporation from the initial sale of the stock to the balance sheet. For investors, it has no relationship to any measure of value that may otherwise be employed.

Preferred Stock Preferred stock has a stated dividend rate or a fixed rate that the corporation must pay to its preferred shareholders. Growth is generally not achieved through investing in preferred shares.

Preferred stock is an equity security with a fixed-income component. Like a common stockholder, the preferred stockholder is an owner of the company. However, the preferred stockholder is investing in the stock for the fixed income that the preferred shares generate through their semiannual dividends.

Perpetual

Preferred stock, unlike bonds, is perpetual, having no maturity date. Investors may hold shares for as long as they wish or until the shares are called in by the company under a call feature.

Types of Preferred Stock

Preferred stock, unlike common stock, may have different features associated with it. Most of the features are designed to make the issue more attractive to investors and, therefore, benefit the owners of preferred stock.

Rights vs Warrants Rights Term - Up to 45 days Subscription Price - Below the market Trading - May trade with or without common stock Who - Issued to existing shareholders to ensure preemptive rights

Rights vs Warrants Warrants Term - Up to 10 years Subscription price - Above the market Trading - May trade with or without common stock Who - Offered as a sweetener to make securities more attractive

Selling Dividends If the investor were to purchase the shares just prior to the ex-dividend date simply to receive the dividend, the investor in many cases would end up worse off. The dividend in this case would actually be a return of the money that the investor used to purchase the stock and then the investor would have a tax liability when the dividend is received.

Selling dividends is a violation! A registered representative may not use the pending dividend payment as the sole basis of his or her recommendation to purchase the stock. Additionally, using the pending dividend as a means to create urgency on the part of the investor to purchase the stock is a prime example of this type of violation.

Adjustable Rate Preferred

Some corporations will issue preferred shares that pay a stated dividend that adjust based on the prevailing interest rates paid in the marketplace or on a benchmark index. The rate of the dividend will be adjusted on the reset date and may be done semiannually or at longer set intervals as determined by the issuer. The adjustable rate protects the owners in times of raising interest rates and can benefit the corporation when interest rates fall. Certain adjustable rate preferred shares may have a stated floor or cap rate that set the minimum and maximum amount for the dividend rate.

CUSIP Numbers

The Committee on Uniform Securities Identification Procedures issues CUSIP numbers, which are printed on the stock or bond certificates to help identify the security. CUSIP numbers must also appear on trade confirmations.

Callable Preferred Many callable preferred shares will be called at a premium price above par. For example, a $100 par preferred stock may be called at $103. The main reasons a company would call in its preferred shares would be to eliminate the fixed dividend payment or to sell a new preferred stock with a lower dividend rate when interest rates decline. Preferred stock is more likely to be called by the corporation when interest rates decline.

A call feature is the only feature that benefits the company and not the investor. A call feature allows the corporation to call in or redeem the preferred shares at its discretion or after some period of time has expired. Most callable preferred stock may not be called in during the first few years after their issuance. This feature, which does not allow the stock to be called in its early years, is known as call protection.

Cash To determine the amount that an investor will receive, simply multiply the amount of the dividend to be paid by the number of shares. Example: JPF pays a $.10 dividend to shareholders. An investor who owns 1,000 shares of JPF will receive $100: 1,000 shares × $.10 = $100.

A cash dividend is the most common form of dividend, and it is one that the test focuses on. A corporation will send out a cash payment in the form of a check, directly to the stockholders. For those stockholders who have their stock held in the name of the brokerage firm, a check will be sent to the brokerage firm and the money will be credited to the investor's account. Securities that are held in the name of the brokerage firm are said to be held in "street name."

Values of Common Stock

A common stock's market value is determined by supply and demand and may or may not have any real relationship to what the shares are actually worth. The market value of common stock is affected by the current and future expectations for the company.

Junior Claim on Corporate Assets

A common stockholder is the last person to get paid if the company is liquidated. It is very possible that after all creditors and other investors are paid there will be little or nothing left for the common stockholders.

Convertible Preferred Example: TRW has issued a 4% convertible preferred stock, which may be converted into TRW common stock at $20 per share. How many shares may the preferred stockholder receive upon conversion? number of shares = par/conversion price (CVP) $100/$20 = 5 The investor may receive five common shares for every preferred share.

A convertible feature allows the preferred stockholder to convert or exchange their preferred shares for common shares at a fixed price known as the conversion price.

Stock Example: If HRT pays a 5% stock dividend to its shareholders, an investor with 500 shares will receive an additional 25 shares. This is determined by multiplying the number of shares owned by the amount of the stock dividend to be paid. 500 × 5% = 25 the stock dividend is not taxable until the owner sells it

A corporation that wants to reward its shareholders but that also wants to conserve cash for other business purposes may elect to pay a stock dividend to its shareholders. Each investor will receive an additional number of shares based on the number of shares the investor owns. The market price of the stock will decline after the stock dividend has been distributed to reflect the fact that there are now more shares outstanding; however, the total market value of the company will remain the same.

Book Value To determine the book values per share, divide the total book value by the total number of outstanding common shares.

A corporation's book value is the theoretical liquidation value of the company. The book value is found by taking all of the company's tangible assets and subtracting all of its liabilities. This will give you the total book value.

Cumulative Preferred Example: GNR has an 8% cumulative preferred stock outstanding. It has not paid the dividend this year or for the prior three years. How much must the holders of GNR cumulative preferred be paid per share before the common stockholders are paid a dividend? The dividend has not been paid this year nor for the previous three years, so the holders are owed four years' worth of dividends, or: 4 × $8 = $32 per share

A cumulative feature protects the investor in cases when a corporation is having financial difficulties and cannot pay the dividend. Dividends on cumulative preferred stock accumulate in arrears until the corporation is able to pay them. If the dividend on a cumulative preferred stock is missed, it is still owed to the holder. Dividends in arrears on cumulative issues are always the first dividends to be paid. If the company wants to pay a dividend to common shareholders, it must first pay the dividends in arrears, as well as the stated preferred dividend, before common shareholders receive anything.

Global Depositary Receipts

A global depository receipt or GDR Is similar to American depository receipt. However, the GDR is issued by an international depository and allows the underlying shares to trade globally in many different countries and markets. Global depository receipts do not trade in the United States.

Real Estate Investment Trusts (REITs) A REIT is organized as a conduit for the investment income generated by the portfolio of real estate. REITs are entitled to special tax treatment under Internal Revenue Code subchapter M. A REIT will not pay taxes at the corporate level so long as: It receives 75% of its income from real estate. It distributes at least 90% of its taxable income to shareholders. So long as the REIT meet the above requirements, the income will be allowed to flow through to the shareholders and will be taxed at their rate. Dividends received by REIT shareholders will continue to be taxed as ordinary income. It is important to note that REITs do not pass through gains and losses only income to investors.

A real estate investment trust, or REIT, is a special type of equity security. REITs are organized for the specific purpose of buying, developing, or managing a portfolio of real estate. REITs may also be organized to provide mortgage financing and are known as mortgage REITs. Some hybrid REITs hold both a portfolio of real estate and mortgages. REITs are organized as a corporation or as a trust, and publicly traded REITs will trade on the exchanges or in the over-the-counter market just like other stocks.

What Is a Security?

A security is any investment product that can be exchanged for value and involves risk. In order for an investment to be considered a security, it must be readily transferable between two parties and the owner must be subject to the loss of some, or all, of the invested principal. If the product is not transferable or does not contain risk, it is not a security.

Preemptive Rights There are three possible outcomes for a right. They are: 1. Exercised - The investor decides to purchase the additional shares and sends in the money, along with the rights to receive the additional shares. 2. Sold - The rights have value. If the investor does not want to purchase the additional shares, they may be sold to another investor who would like to purchase the shares. 3. Expire - The rights will expire when no one wants to purchase the stock. This will only occur when the market price of the share has fallen below the subscription price of the right and the 45 days has elapsed.

A shareholder's preemptive right is ensured through a rights offering. The existing shareholders will have the right to purchase the new shares at a discount to the current market value for up to 45 days. This is known as the subscription price. Once the subscription price is set, it remains constant for the 45 days, while the price of the stock is moving up and down in the marketplace.

Limited Liability

A stockholder's liability is limited to the amount of money that has been invested in the stock. Stockholders cannot be held liable for any amount past their invested capital.

Warrants A warrant has a much longer life than a right, and the holder of a warrant may have up to 10 years to purchase the stock at the subscription price. The long life is what makes the warrant valuable, even though the subscription price is higher than the market price of the common stock when the warrant is issued.

A warrant is a security that gives the holder the opportunity to purchase common stock. Like a right, the warrant has a subscription price. However, the subscription price on a warrant is always above the current market value of the common stock when the warrant is originally issued.

Possible Outcomes of a Warrant

A warrant, like a right, may be exercised or sold by the investor. A warrant may also expire if the stock price is below the warrant's subscription price at its expiration.

Functions of the Custodian Bank Issuing ADRs Foreign corporations will often use ADRs as a way of generating U.S. interest in their company. The issuance of the ADR allows them to avoid the long and costly registration process for their securities.

ADRs are actually issued and guaranteed by the bank that holds the foreign securities on deposit. The custodian bank is the registered owner of the foreign shares and must guarantee that the foreign shares remain in the bank as long as the ADRs remain outstanding.

Taxation of Dividends Investors who are classified as high income earners will have dividends taxed at a set rate of 20%. The tax rate for dividends is a hotly debated topic and may be subject to change. It is important to note that stock dividends received by investors are not taxed until the investor sells the shares.

All qualified dividends received by ordinary income earners are taxed at a rate of 15% for the year the dividend is received.

Inspection of Books and Records

All stockholders have the right to inspect the company's books and records. For most shareholders, this right is ensured through the company's filing of quarterly and annual reports. Stockholders also have the right to obtain a list of shareholders, but they do not have the right to review other corporate financial data that the corporation may deem confidential.

American Depositary Receipts (ADRs)/American Depositary Shares (ADSs) Each ADR represents ownership of between one to 10 shares of the foreign stock, and the holder of the ADR may request the delivery of the foreign shares. Holders of ADRs also have the right to vote and the right to receive dividends that the foreign corporation declares for payment to shareholders.

American depositary receipts (ADRs) facilitate the trading of foreign securities in the U.S. markets. An ADR is a receipt that represents the ownership of the foreign shares that are being held abroad in a branch of a U.S. bank.

Preemptive Rights When a corporation decides to conduct a rights offering, the board of directors must approve the issuance of the additional shares. If the number of shares that are to be issued under the rights offering would cause the total number of outstanding shares to exceed the total number of authorized shares, then shareholder approval will be required. Existing shareholders will have to approve an increase in the number of authorized shares before the rights offering can proceed.

As a stockholder, an investor has the right to maintain a percentage interest in the company. This is known as a preemptive right. Should the company wish to sell additional shares to raise new capital, it must first offer the new shares to existing shareholders. If the existing shareholders decide not to purchase the new shares, then the shares may be offered to the general public.

Rights of Common Stockholders

As an owner of common stock, investors are owners of the corporation. As such, investors have certain rights that are granted to all common stockholders.

Authorized Stock A corporation may sell all or part of its authorized stock. If the corporation wants to sell more shares than it's authorized to sell, the shareholders must approve an increase in the number of authorized shares.

Authorized stock is the maximum number of shares that a company may sell to the investing public in an effort to raise cash to meet the organization's goals. The number of authorized shares is arbitrarily determined and is set at the time of incorporation.

Interest Rate Sensitive

Because of the fixed income generated by preferred shares, their price will be more sensitive to changes in interest rates than the price of their common stock counterparts. As interest rates decline, the value of preferred shares tends to increase, and when interest rates rise, the value of the preferred shares tends to fall. This is known as an inverse relationship.

Freely Transferable Ownership of common stock is evidenced by a stock certificate that identifies: The name of the issuing company. The number of shares owned. The name of the owner of record. The CUSIP number. In order to transfer or sell the shares the owner must endorse the stock certificate or sign a power of substitution known as a stock or bond power. Signing the certificate or a stock or bond power makes the securities transferable into the new buyer's name.

Common stock and most other securities are freely transferable. That is to say that one investor may sell shares to another investor without limitation and without requiring the approval of the issuer. The transfer of a security's ownership, in most cases, is facilitated through a broker dealer. The transfer of ownership is executed in the secondary market on either an exchange or in the over-the-counter market.

Dividends May Be Stopped or Reduced

Common stockholders are not entitled to receive dividends just because they own part of the company. It is up to the company to elect to pay a dividend. The corporation is in no way obligated to pay a dividend to common shareholders.

Voting Common stockholders may also vote on: The issuance of bonds or additional common shares. Stock splits. Mergers and acquisitions. Major changes in corporate policy. Stockholders do not get to vote on executive compensation, or if the company is going to file for bankruptcy protection.

Common stockholders have the right to vote on the major issues facing the corporation. Common stockholders are part owners of the company and, as a result, have a right to say how the company is run. The biggest emphasis is placed on the election of the board of directors.

Participating Preferred It's as if these stockholders get a bonus

Holders of participating preferred stock are entitled to receive the stated preferred rate, as well as additional common dividends. The holder of participating preferred receives the dividend payable to the common stockholders over and above the stated preferred dividend.

Dividend Distribution However, new purchasers of the stock may or may not be entitled to receive the dividend, depending on when they purchased the stock relative to when the dividend is going to be distributed. We will now examine the dividend distribution process.

If a corporation decides to pay a dividend to its common stockholders, it may not discriminate as to who receives the dividend. The dividend must be paid to all common stockholders of record. Investors who already own the stock do not need to be notified by the company that they are entitled to receive the pending dividend, because it will be sent to them automatically.

Distribution of Assets

If a corporation liquidates or declares bankruptcy, the preferred shareholders are paid prior to any common shareholder, giving the preferred shareholder a higher claim on the corporation's assets.

Becoming a Stockholder Monday - Trade date - day the order is executed Wednesday - Settlement date - buyers name is on the certificate T+2 Friday - Payment date - Day money must be in T+4 - FRB Regulation T Next Monday - Violation stock sold out. Account (credit) is frozen for 90 days

If a customer is unable to pay by the payment date, The request must be made by the broker dealer on behalf of the customer before the expiration of the 4th business day.

If all other factors are the same the callable preferred stock will have the highest stated dividend rate to compensate investors for the fact that the shares may be called in by the issuer. The next highest rate will be paid to holders of straight preferred stock.

If all other factors are the same the callable preferred stock will have the highest stated dividend rate to compensate investors for the fact that the shares may be called in by the issuer. The next highest rate will be paid to holders of straight preferred stock.

Violation The customer is responsible for any loss that may occur as a result of the sell out, and the brokerage firm may sell out shares of another security in the investor's account in order to cover the loss. The brokerage firm will then freeze the customer's account, which means that the customer must deposit money up front for any purchases for the next 90 days. After the 90 days have expired, the customer is considered to have reestablished good credit and may then conduct business in the regular way and take up to four business days to pay for the trades.

If the customer fails to pay for the purchase within the four business days allowed, the customer is in violation of Regulation T. As a result, the brokerage firm will "sell out" and freeze the customer's account. On the fifth business day following the trade date, the brokerage firm will sell out the securities that the customer failed to pay for.

Determining the Value of a Right Ex Rights Example: XYZ has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common shares through a rights offering. XYZ is trading in the marketplace at $50 per share, and the rights have a subscription price of $48 per share. The value of a right is determined as follows: (stock price − subscription price) / (the number of rights required to purchase 1 share) $50− $48$ 2$ 2/2 rights = $1

In order to determine the value of one right after the ex rights date, subtract the subscription price of the right from the market price of the stock. Once the discount (if any) has been determined, divide the discount by the number of rights required to purchase one share. This will determine the value of one right. The price of the stock on the ex rights date is adjusted down by the value of the right to reflect the fact that purchasers of the stock will no longer receive the rights.

Determining the Value of a Right Cum Rights Example: XYZ has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common shares through a rights offering. XYZ is trading in the marketplace at $51 per share, and the rights have a subscription price of $48 per share. Keep in mind that the stock price reflects the value of the right that is still attached to the stock. The value of a right is determined as follows: (stock price − subscription price) / (the number of rights required to purchase 1 share + 1) $51 −$48 $3 $3/3 rights = $1 Because each one of the 10,000,000 shares is entitled to receive one right and the company is offering 5,000,000 additional shares, it will require $48, plus two rights, to subscribe to one additional share. The rights agent will handle the name changes when the rights are purchased and sold in the marketplace.

In order to determine the value of one right before the ex rights date, you must use the cum rights formula. Subtract the subscription price of the right from the market price of the stock. Once the discount (if any) has been determined, divide the discount by the number of rights required to purchase one share plus one. This will determine the value of one right.

Residual Claim to Assets

In the event of a company's bankruptcy or liquidation, common stockholders have the right to receive their proportional interest in residual assets. After all the other security holders have been paid, along with all creditors of the corporation, common stockholders may claim the residual assets. For this reason, common stock is the most junior security.

Number of Existing Shares Number of New Shares Total Shares After Offering ---------- 100,000 100,000 200,000 --------- 10,000 10% ownership --------- 10,000 10% of offering -------- 20,000 10% ownership

In the example above, the company has 100,000 shares of stock outstanding and an investor has purchased 10,000 of those original shares. As a result, the investor owns 10% of the corporation. The company wishing to sell 100,000 new shares to raise new capital must first offer 10% of the new shares to the current investor (10,000 shares) before the shares may be offered to the general public. So, if the investor decides to purchase the additional shares, as is the case in the example, the investor will have maintained a 10% interest in the company.

Issued Stock Additional authorized shares may be issued in the future for any of the following reasons: Pay a stock dividend. Expand current operations. Exchange common shares for convertible preferred or convertible bonds. To satisfy obligations under employee stock options or purchase plans.

Issued stock is stock that has been authorized for sale and that has actually been sold to the investing public. The total number of authorized shares typically exceeds the total number of issued shares so that the corporation may sell additional shares in the future to meet its needs. Once shares have been sold to the investing public, they will always be counted as issued shares, regardless of their ownership or subsequent repurchase by the corporation. corporation. It's important to note that the total number of issued shares may never exceed the total number of authorized shares.

Stock Price and the Ex Dividend Date Example: TRY declares a $.20 dividend payable to shareholders of record as of Thursday, August 22nd. The ex-dividend date will be one business day prior to the record date. In this case the ex date will be Wednesday August 21st. If TRY closed on Tuesday, August 20th at $24 per share, the stock would open at #23.80 on Wednesday.

It is important to note that the value of the stock prior to the ex-dividend date reflects the value of the stock with the dividend. On the ex-dividend date, the stock is now trading without the dividend attached, and new purchasers will not receive the dividend that had been declared for payment. As a result, the stock price will be adjusted down on the ex-dividend date in an amount equal to the dividend.

Settlement Date

The buyer of a security actually becomes the owner of record on the settlement date. When an investor buys a security from another investor, the selling investor's name is removed from the security and the buyer's name is recorded as the new owner. Settlement date is two business days after the trade date. This is known as T + 2 for all regular-way transactions in common stock, preferred stock, corporate bonds, and municipal bonds. Government bonds and options all settle the next business day following the trade date.

Dividend Disbursement Process For convenience, most investors have their securities held in the name of the broker dealer, also known as the "street name." As a result, the dividend disbursement agent will send the dividends directly to the broker dealer. The broker dealer's dividend department will collect the dividends and distribute them to the beneficial owners.

The corporation's dividend disbursement agent is responsible for the distribution of dividends and will send the dividends to the shareholders of record on the record date.

Declaration Date

The declaration date is the day that the board of directors decides to pay a dividend to common stockholders of record. The declaration date is the starting point for the entire dividend process. The company must notify the regulators at the exchange or FINRA, depending on where the stock trades, at least 10 business days prior to the record date.

Payment of Dividends

The dividend on preferred shares must be paid before any dividends are paid to common shareholders. This gives the preferred shareholder a priority claim on the corporation's distribution of earnings.

Ex-Dividend Date Because it takes two business days for a trade to settle, the ex date is always one business day prior to the record date. If a stock is purchased prior to the ex dividend date but delivered late the buying broker dealer will send the selling broker dealer a "due bill" for the amount of the dividend owed.

The ex-dividend date, or the ex date, is the first day when purchasers of the security are no longer entitled to receive the dividend that the company has declared for payment. Stated another way, the ex date is the first day when the stock trades without (ex) the dividend attached. The exchange or FINRA set the ex date for the stock, based on the record date determined and announced by the corporation's board of directors.

Corporate Timeline

The following is a representation of the steps that corporations must take in order to sell their common stock to the public, as well as what may happen to that stock once it has been sold to the public.

Why Do People Buy Common Stock? Example: An investor purchases 100 shares of XYZ at $20 per share on March 15, 2014. On April 30th of 2015, the investor sells 100 shares of XYZ for $30 per share, realizing a profit of $10 per share, or $1,000 on the 100 shares.

The main reason people invest in common stock is for capital appreciation. They want their money to grow in value over time. An investor in common stock hopes to buy the stock at a low price and sell it at a higher price at some point in the future.

What Are The Risks of Owning Common Stock?

The major risk in owning common stock is that the stock may fall in value. There are no sure things in the stock market and, even if you own stock in a great company, you may end up losing money.

Currency Risks It's important to note that the dividend on the ADR is paid by the corporation to the custodian bank in the foreign currency. The custodian bank will convert the dividend to U.S. dollars for distribution to the holders of the ADRs.

The owner of an ADR has currency risk along with the normal risks associated with the ownership of the stock. Should the currency of the country decline relative to the U.S. dollar, the holder of the ADR will receive fewer U.S. dollars when a dividend is paid and fewer U.S. dollars when the security is sold.

Payment Date Payment dates are regulated by the Federal Reserve Board under regulation T of the Securities Exchange Act of 1934. While many brokerage firms require their customers to have their money in to pay for their purchases sooner than the rules state, the customer has up to four business days to pay for the trade.

The payment date is the day when the buyer of the security has to have the money in to the brokerage firm to pay for the purchase. Under the industry rules, the payment date for common and preferred stock, and corporate and municipal bonds is four business days after the trade date or T + 4.

The Registrar In the case of a bond issue, the registrar will certify that the bond is a legally binding debt of the company. The function of the transfer agent and the registrar may not be performed by a single department of any one company. A bank or a trust company usually performs the functions of the transfer agent and the registrar.

The registrar is the company responsible for auditing the transfer agent to ensure that the transfer agent does not erroneously issue more shares than are authorized by the company.

Methods of Voting The cumulative method allows shareholders to cast all of their votes in favor of one candidate, if they so choose. The cumulative method is said to favor smaller investors for this reason. Some corporations will issue both voting and non-voting common stock. Raising additional capital through the sale of non-voting shares allows management to retain control of the company. In a two share class structure the voting shares are known as "A" shares and non-voting shares are known as "B" shares.

The statutory method requires that the votes be distributed evenly among the candidates that the investor wishes to vote for. So you would have exactly 200 votes for each candidate

Straight/Noncumulative

The straight preferred stock has no additional features. The holder is entitled to the stated dividend rate and nothing else. If the corporation is unable to pay the dividend, it is not owed to the investor.

Equity = Stock The corporation sells off pieces of itself to investors in the form of shares in an effort to raise working capital. Equity is perpetual, meaning that there is no maturity date for the shares and the investor may own the shares until he or she decides to sell them. Most corporations use the sale of equity as their main source of business capital.

The term equity is synonymous with the term stock. Equity or stock creates an ownership relationship with the issuing company. Once an investor has purchased stock in a corporation, he or she becomes an owner of that corporation.

Market Capitalization

The total value of all outstanding shares. If a company had 10,000,000 shares outstanding and were selling at $20/share the market capitalization would be $200,000,000

Trade Date

The trade date is the day when your order is actually executed. Although an order has been placed with a broker, it may not be executed on the same day. There are certain types of orders that may take several days or even longer to execute, depending on the type of order. A market order will be executed immediately, as soon as it is presented to the market, making the trade date the same day the order was entered.

The Transfer Agent Cancels old certificates registered to the seller. Issues new certificates to the buyer. Maintains and records a list of stockholders. Ensures that shares are issued to the correct owner. Locates lost or stolen certificates. Issues new certificates in the event of destruction. May authenticate a mutilated certificate.

The transfer agent is the company that is in charge of transferring the record of ownership from one party to another. The transfer agent:

Common Stock The two types of equity securities are common stock and preferred stock. Although all publicly traded companies must have sold or issued common stock, not all companies may want to issue or sell preferred stock.

There are thousands of companies whose stock trades publicly and who have used the sale of equity as a source of raising business capital. All publicly traded companies must issue common stock before they may issue any other type of equity security.

Stock Splits Alternatively, if a corporation has seen its share price decline significantly, it may declare a reverse stock split. A corporation would declare a reverse stock split to increase the price of its shares to make its shares more attractive to institutional investors. Many institutions have investment policies that don't allow the institution to purchase shares of low price stocks. With a reverse stock split the price of the stock increases and the number of outstanding shares decrease.

There are times when a corporation will find it advantageous to split its stock. A corporation that has done well and seen its stock appreciate significantly may declare a forward stock split to make its shares more attractive to retail investors. Most retail investors would be more comfortable purchasing shares of a $25 stock rather than purchasing shares of a $100 stock. When a corporation declares a forward stock split the share price declines and the number of outstanding shares increase.

Methods of Voting Example: An investor owns 200 shares of XYZ. Two board members are to be elected, and there are four people running in the election. Under both the statutory and cumulative methods of voting, you take the number of shares owned and multiply them by the number of people to be elected to determine how many votes the shareholder has. In this case, 200 shares × 2 = 400 votes. The method used dictates how those votes may be cast.

There are two methods by which the voting process may be conducted: the statutory method and the cumulative method. A stockholder may cast one vote for each share of stock owned, and the method used will determine how those votes are cast. The test focuses on the election of the board of directors, so we will use that in our example.

Record Date The investor would have had to have purchased the stock before the ex dividend date in order to be an owner of record on the record date. The record date is determined by the corporation's board of directors and is used to determine the shareholders who will receive the dividend. It takes 2 business days for someone to become an owner of record

This is the day when investors must have their name recorded on the stock certificate in order to be entitled to receive the dividend that was declared by the board of directors. All stockholders whose name is on the stock certificate (owners of record) will be entitled to receive the dividend.

Payment Date

This is the day when the corporation actually distributes the dividend to shareholders and it completes the dividend process. The payment date is controlled and set by the board of directors of the corporation and is usually four weeks following the record date.

Property/Product

This is the least likely way in which a corporation would pay a dividend, but it is a permissible dividend distribution. A corporation may send out to its shareholders samples of its products or portions of its property.

Treasury stock does not vote does not receive dividends does not calculate in earnings per share

Treasury stock does not vote does not receive dividends does not calculate in earnings per share

Treasury Stock To determine the amount of treasury stock, use the following formula: issued stock − outstanding stock = treasury stock Example: If in the case of XYZ above, the company decides to repurchase 3,000,000 of its own shares, then XYZ would have 5,000,000 shares issued—2,000,000 shares and 3,000,000 shares of treasury stock. It's important to note that once the shares have been issued, they will always be counted as issued shares. The only thing that changes is the number of outstanding shares and the number of treasury shares.

Treasury stock is stock that has been sold to the investing public and then subsequently repurchased by the corporation. The corporation may elect to reissue the shares or it may retire the shares that it holds in treasury stock. Treasury stock does not receive dividends nor does it vote. A corporation may elect to repurchase its own shares for any of the following reasons: To maintain control of the company. To increase earnings per share. To fund employee stock purchase plans. To use shares to pay for a merger or acquisition.

Types of Securities Common Stocks Preferred Stocks Bonds Mutual Funds Variable Annuities Variable Life Insurance Options Rights Warrants Exchange-traded funds/Exchange-traded notes Real estate investment trusts Collateralized mortgage obligations

Types of Nonsecurities Whole life insurance Term life insurance IRAs Retirement Plans Fixed Annuities Prospectus Confirmations

Secondary Market

Warrants will often trade in the secondary market just like the common stock. An investor who wishes to participate in the potential price appreciation of the common stock may elect to purchase the corporation's warrant instead of its common shares.

How Does Someone Become a Stockholder? Although the transaction in many cases only takes seconds to execute, trades actually take several days to fully complete. Let's review the important dates regarding transactions, which are done for a "regular-way" settlement.

While some people purchase the shares directly from the corporation when the stock is offered to the public, most investors purchase the shares from other investors. These investor-to-investor transactions take place in the secondary market on the exchange or in the over-the-counter market.

Stock Splits Type of Split Old New Value 2:1 Long 100 Shares @50 Long 200 shares at 25 $5,000 100*2/1 = 200 New shares $50*1/2 = $25 new price 4:1 Long 100 @ 100 Long 400 @ 25 $10,000 100*4/1 = 400 New shares $100*1/4 = $25 new price 3:2 Long 100 shares @ 100 Long 150 shares @ 66.67 $10,000 100*3/2 = 150 new shares $100*2/3 = $66.67 new price 1:4 Long 1000 shares @ 5 Long 250 @ 20 $5,000 1000*1/4 = 250 new shares $5*4/1 = $20 new price

With any split the overall market capitalization (the total value of all of the outstanding shares) and the value of an investor's holdings are not affected by the decision to split the stock. The following table details the effect of various types of splits on an investor's holdings, notice how the value has not changed, only the number of shares and price have changed.

the Registrar ensures the corporation does not issue more shares than authorized

the Registrar ensures the corporation does not issue more shares than authorized