Lesson 1: Equities

Convertible Preferred Stock

Investor can convert the preferred share into a fixed number of common shares -benefits investor (rate down; lower yield)

Types of Risk

systematic (market risk) vs. non-systematic

Regular way

Most equity trades settle regular way T + 2, meaning two business days after the trade date.

No Par Value

Par value is set low because the stock cannot be issued for less than par value. In some states, stock can also be issued as

Who is allowed to buy stock rights during the ex-rights period?

Any interested investor

Payable Date

date payment is actually made, generally about three weeks after the record date.

dividends in arrears

dividends on cumulative preferred stock that have not been declared

Adjustable-rate preferred stock

pays dividends that are based on an underlying benchmark. This benchmark is typically the US Treasury Bill. Dividends vary based on market conditions, but share price tends to remain stable.

The shares of authorized stock that are sold to the public are known as A) Redeemed shares B) Issued stock C) Preferred stock D) Treasury stock

B) Issued stock

Common stock is most often purchased to satisfy which of the following investment objectives? A) Growth B) Income C) Tax Minimization D) Principal protection

A) Growth

Pre-emptive rights

ABC issues rights with a subscription period of Mar 21-Apr 7 with a $12 strike price. 1. The strike price is below the current market value 2. Rights are short-term Investor's choices 1.) Exercise at $12...then s

All of the following are characteristics of American Depositary Receipts EXCEPT A) they pay dividends in U.S. dollars. B) they represent ownership in shares of a non-U.S. company. C) they trade on exchanges outside of the U.S. D) they may be sponsored or unsponsored.

they trade on exchanges outside of the U.S.

Settlement Date

Date by which payment for the purchase of securities must be made; date by which delivery of securities sold must be made

Beta

Beta measures the volatility of a security or portfolio vs. the overall market

Capital gains

Buying of stock at one price and selling it at a higher price. Take note, investors only pay taxes on realized capital gains, which is generated when an investor sells a security for a profit.

ABC Corporation common shares tend to increase during stronger economic times and decrease during weaker economic times. ABC common shares might best be described as A) growth B) defensive C) cyclical D) value

Cyclical

Adjustable-Rate Preferred Stock

Dividends rate is adjusted based on a predetermined benchmark (eg., 3-month treasury) -Market Neutral

Risks of Owning ADRs (3)

Political risk, currency risk, inflationary risk

Features of Preferred Stock

Preferred stock differs from common in three particular ways: Voting rights Liquidation priority Dividend payments

Ex-dividend date.

The ex-dividend date governs who, upon the execution of a trade, will receive a dividend

declaration date

the date on which the board of directors officially approves a dividend

Rights vs. Warrants

- Rights and warrants may trade as independent securities in the secondary market. • Warrants typically remain outstanding longer than rights. • Warrants are generally not issued with intrinsic value, meaning they are issued with an exercise price above the current market value of the stock. They are not valuable until the stock's price increases. • The market value of a warrant is connected to the value of the underlying stock. • Warrants are typically issued by a company in conjunction with another security to make that other security more attractive to investors. Unlike pre-emptive rights, warrants do not prevent dilution.

Dividends

A share of the corporation's profits; if they are to be paid, a specified amount is allocated for each outstanding share.

An investor who owns shares in ABC company is notified of a rights offering. If the investor decides to participate in this offering I. her stake in company ownership will not be diluted II. she must sell all her ABC shares III. she will acquire more ABC shares IV. she will convert her equity holdings to a senior debt position A) I and III B) II and IV C) II and III D) I and IV

A) I and III

Which of the following statements is not accurate with respect to a warrant? A) There is no secondary market available for these securities. B) They usually have longer timeframes than a right, another type of equity security. C) They will have value if the share price appreciates above the exercise price. D) They are typically issued in connection with other securities

A) There is no secondary market available for these securities.

Which holders of a stock, as of the record date, are entitled to receive a quarterly dividend paid on the record date? A) Those who held before the ex-dividend date B) All holders of the stock C) Those who have held for at least one full quarter D) Those who bought after the ex-dividend date

A) Those who held before the ex-dividend date

A stable share price along with a fluctuating dividend based on market conditions is associated with A) Cumulative preferred stock B) Callable preferred stock C) Adjustable-rate preferred stock D) Convertible preferred stock

C) Adjustable-rate preferred stock

Cumulative Preferred Stock

Any skipped, missed, or accrued dividends must be paid before a dividend is paid to common. -benefits investor (rate down; lower yield) -company will slowly start repaying missed dividend payments back to the dividend payment percent you would expect would be LOWER

Common vs. Preferred Stock

Common stock is always riskier than preferred stock Common stock always has greater potential upside But preferred has quarterly dividend payments

ABC Corp. issues 4.5% preferred stock with a par value of $100. If the shares are currently trading at $90, the annual dividend each share can be expected to pay is

Correct Answer: $4.50. Explanation: Preferred stock dividends are quoted as a percentage of par value, not the market value of the shares. Therefore, it is calculated as par value multiplied by the dividend rate. $100 X 4.5% = $4.50.

A company has issued 8% preferred stock with a par value of $30 per share. The preferred stock currently is selling for $40 per share. The annual dividend paid to holders of the preferred shares will be

Correct Answer: 2.4 Explanation: The annual dividend in preferred stock is expressed as a percentage of par value. "8% preferred stock" would pay 8% of par value annually. 8% x $30 = $2.40 per year.

Systematic risk can often be attributed to all of the following factors except

Correct Answer: Changes in corporate management Explanation: Systematic risk focusses on large scale events which can have negative consequences for markets in general. Changes in corporate management would be attributable to non-systematic, or company specific risk.

No-par value stock is characterized as stock which

Correct Answer: Has not been assigned a par value by the corporation Explanation: No-par value stock is simply shares that have not been assigned a par value by the corporation. Some states permit this to occur.

In order to receive a dividend, a shareholder must own stock as of the

Correct Answer: Record date Explanation: An investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business days before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process.

An issuer will send proxy statements directly to the beneficial owner of the securities when they are held in all of the following forms EXCEPT

Correct Answer: Street name Explanation: When securities are held in street name the broker-dealer is the nominal, or named, owner, and the issuer sends proxy statements and all other information about the securities to the firm, which must then distribute the information to the customer, who is the beneficial owner. DRS, DWAC and registered physical securities all list the customer as the named owner, so the issuer can communicate with the customers directly.

A cash dividend will be paid to shareholders of record on Thursday, June 24. What is the ex-dividend date?

Correct Answer: Wednesday, June 23rd Explanation: The ex-dividend date normally is one business day before the dividend record date. For transactions on or after the ex-date, the buyer will not receive the dividend.

Issuers are required to provide to FINRA notice of stock splits and stock dividends

Correct Answer: at least 10 days prior to the record date Explanation: Issuers are required to provide notice of a dividend distribution, stock split or stock dividend no fewer than 10 days before the record date.

Public corporations must make sure that their stock ownership records are accurate by matching each share of stock with an owner. This task is performed by

Correct Answer: the registrar. Explanation: The registrar maintains records of ownership by matching each share of stock against an ownership record. The registrar also makes sure there is no unauthorized stock issuance.

All of the following statements are true of a callable convertible preferred issue EXCEPT that

Correct Answer: the stockholder must surrender the preferred when called or lose the right to par value Explanation: The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question.

The entity responsible for ensuring that investors receive the appropriate number of shares in a stock split is

Correct Answer: the transfer agent. Explanation: The transfer agent records changes of ownership in securities and maintains records of ownership. During events such as stock splits and stock dividends, the transfer agent is responsible for allocating the appropriate number of shares to each investor.

In order to receive a cash dividend payment based on regular way settlement process, an investor must purchase stock no later than A) The record date B) The business day before the record date C) The ex-dividend date D) The business day before the ex-dividend date

D) The business day before the ex-dividend date

Rights Offering

Existing shareholders are given the right to buy new shares at a discount to the current market price; Dilutes ownership unless option is exercised; Sometimes the option can be sold

When must proxy materials be filed with the SEC? A) Within five days after the shareholder vote B) There is no requirement to file proxy materials C) Within ten days of posting proxy materials online D) In advance of the shareholder solicitation

In advance of the shareholder solicitation

Participating Preferred Stock

Investors receive an additional (special) dividend in certain circumstance (eg., the sale of the company) -benefits investor (rate down; lower yield)

Callable Preferred Stock

Issuer can "call" or redeem the preferred at a set price (typically par) before maturity. -Benefits issuer (rate up; high yield) -allows issuer to demand that preferred shares go back, and the issuer can stop paying dividends

Types of Preferred Stock

Quarterly Dividend Payments with preferred

American depositary receipts (ADRs)

Represent ownership in the shares of non-US companies that trade in US financial markets. ADRs are made available to US markets by major commercial banks that provide depositary services.

If a company pays a quarterly cash dividend of 12 cents per share to shareholders of record on Wednesday, April 4, assuming regular way settlement, who will receive the dividend if shares are purchased on the previous day, Tuesday? A) The buyer B) The brokerage firm C) It cannot be determined from the information given D) The seller

The Seller

A security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue is a(n)

Warrant

Which of the following does not pay a dividend? A) Mutual fund B) ADR C) Unit investment trust D) Warrants

Warrants

What type of instrument is being described? 1. Dividends will accrue if skipped 2. Investor can exchange shares into common and is entitled to a special dividend in certain circumstances 3. Skipped dividends are lost forever 4. The dividend payment will vary based on market conditions 5. The issuer can redeem the share at its discretion 6. Offers the best potential for growth 7. Represent Equity Ownership

What type of instrument is being described? 1. Dividends will accrue if skipped =Cumulative Preferred Stock 2. Investor can exchange shares into common and is entitled to a special dividend in certain circumstances = Convertible stock, Participating Preferred Stock 3. Skipped dividends are lost forever = Preferred Stock (also Common Stock) 4. The dividend payment will vary based on market conditions = Adjustable-Rate Preferred Stock (also common stock) 5. The issuer can redeem the share at its discretion = callable preferred stock 6. Offers the best potential for growth = Common Stock 7. Represent Equity Ownership = common stock and Preferred stock

Registrar

maintains records of ownership of securities by matching each share of stock against an ownership record and ensuring there is no unauthorized issuance.

Transfer Agent

records changes of ownership in securities and may maintain records of ownership. When securities are transferred or sold, the record of ownership is changed on the books of the issuer, as maintained by the transfer agent.

record date

the date when the company determines ownership of outstanding shares for dividend purposes