Series 65: Unit 12- Equity Securities

what is the maximum time limit for exercise of an ISO

10 years

typical length of restriction stocks

6 months

Securities Exchange Act of 1934

An act that regulates the trading of securities such as stocks and bonds in the secondary market (Its greatest impact is on the securities firms and the people who sell securities (i.e., broker-dealers and their agents) in the secondary market.)

Investing in emerging market stocks is least likely to expose your client to which of the following risks? A) Political B) Liquidity C) Currency D) Interest rate

Interest rate risk -Interest rate risk applies primarily to fixed income securities. Stock, unless it specifies preferred stock, are not normally considered to have interest rate risk. However, any foreign investment incurs currency risk and, when dealing with emerging markets, there is a higher degree of liquidity and political risk than with developed economies.

Dividend Discount Model

States that the current MV of a stock should be equal to the PV of all future dividends

senior securities

a company's debt (bonds) and preferred stock

the rate of return on preferred stock is _____

fixed

______ (high or low) short interest is a bearish indicator

low

Securities Act of 1933 covers

requirements relating to new issues

common stockholders have _____ to corporate assets upon dissolution

residual rights

market risk

the chance that a stock will decline in price

record date

the date by which an investor must be an owner of record in order to vote or receive dividends

technical analysts attempt to predict what?

the direction of prices on the basis of charts reflecting price and trading volume patterns of specific securities without regard to issuer's profitability

ADRs are used to facilitate the:

the domestic trading of foreign securities

short interest

the number of shares sold short

When are stock dividends taxable?

they're taxed once sold, not when received

dividend models

-analysts believe the value of a stock can be determined using current or anticipated dividends -two models are used 1. Dividend Discount Model -value of a stock should equal PV of all future dividends 2. Dividend Growth Model -assumes the annual dividend will grow at a constant rate -forecasts HIGHER stock price

4 foreign risks

1. country risk 2. exchange controls 3. currency risk 4. withholding taxes and fees

3 reasons to include common stock in a portfolio

1. potential capital appreciation 2. income from dividends 3. inflation hedge

resistance level

A price level where the price of a futures contract tends to stop increasing because there is more supply than demand. It is a price "ceiling" or barrier to price advancement.

KAPCO common stock is listed on the New York Stock Exchange. If an executive vice president of the company buys 400 shares of the company's stock on the NYSE, she A) may not sell until she leaves the company B) may sell immediately without restriction C) may sell immediately subject to Rule 144 volume limitations D) may sell under Rule 144 only after a 6-month holding period

C- If purchased in the open market, such as on the NYSE, the transaction is not a private placement and the stock does not have a holding period restriction. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.

American Depository Receipts (ADRs)

Certificates (negotiable security) representing ownership of foreign stock held in trust.

preferred stock normally pays dividends how frequently?

a fixed quarterly dividend

Dividend Growth Model

a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate

what's the most important determination when analyzing a specific preferred stock?

ability of the company to meet its dividend payments

for investors looking for fixed income through preferred stocks, ______ would be the worst

adjustable-rate

security

an investment that represents an ownership or debt stake

how are the employee profits from NSOs taxed?

as ordinary income-- basically treated as a form of compensation

moving average

attempts to modify the fluctuations of stock prices into a smoothed trend

fundamental analysts evaluate what?

broad-based economic trends, current business conditions in an industry, quality of a corporation's business, finances, and management

A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of ______ market

bullish

when odd-lot traders ______ (buy or sell), odd-lot analysts are bearish

buy

an investor seeking steady income would want what type of preferred stock?

cumulative preferred

what are the two biggest risk with ADRs

currency risk and market risk

what do fundamental and technical analysis attempt to do?

forecast the prices or values of securities or markets

convertible preferred stock

gives holders the option to exchange their preferred shares for common shares at a specified rate

______ (high or low) short interest is a bullish indicator

high

convertible preferred is issued with a _____ stated dividend rate than nonconvertible preferred

lower

you own the stock as of the ____ date

record (NOT trade date)

if the stock price moves below the moving average, it's usually a signal of a change from ____ to _____ markets

rising to declining

property dividends

shares in a subsidiary company or a product sample

the dividend growth model assumes the amount of the annual dividend will grow by what?

that the amount of the annual dividend will grow at a constant rate

capital appreciation

an increase in the market price of securities

what's the primary objective met by investing in preferred stock?

income from dividends

_____ stock is nonvoting

preferred

2 of the most important conclusions drawn from a chart are what?

support levels and resistance levels

A technical analyst would be least concerned with A) advance/decline B) S&P 500 index C) book value per share D) short interest

C- A technical analyst is not concerned with any fundamental aspects of a company, including company financials. Open short interest theory, overall market movements, and advance/decline ratios are of concern to technical analysts.

Investing in an emerging market mutual fund subjects the investor to all of the following risks EXCEPT A) market volatility B) political instability C) liquidity D) currency fluctuations

C- Although direct investment in emerging market securities would have liquidity risk, the benefit of doing so through a mutual fund is that, under federal regulations, the fund must redeem at NAV upon request.

shareholders have the right to receive what each year?

audited set of financial statements of the company's performance

which dividend model computes a higher current stock price?

dividend growth model

who issues ADRs

domestic branches of US banks

who can purchase NSOs?

employees, board members, suppliers

callable preferred stock

gives the issuing corporation the right to purchase (retire) this stock from its holders at specified future prices and dates

how are ISOs gains capital?

if held at least one year and sold at least two years after grant

technical analysis

method of attempting to predict stock price trends over the near term (4-6 weeks)

who can purchase ISO?

only employees

In the technical analysis of the value of securities, which of the following items is NOT important? A) Resistance and support levels B) A prevailing market trend in response to shifts in supply and demand C) The amount of a company's past earnings D) The breadth of market volume

C- The amount of a company's past earnings is a factor used in the fundamental analysis of securities, but not technical analysis. Technicians rely on market trends and supply and demand factors, as well as chart indications such as resistance and support levels.

when declines > advances by a large amount, the market is ______

bearish

can the dividend growth model be used to value preferred stock?

no because stock dividends are fixed

control person

(1) A director, an officer, or immediate family of any of the preceeding (2) A stockholder who owns at least 10% of any class of a corporation's outstanding securities. Related item(s): affiliate; insider.

Ex: if you have a $100 par, 6% preferred stock and the required RoR is 8%, what should the current market price of the stock be?

(100 * 6% = $6 = annual dividend) and E(r) is 8%. $6/ 0.08 = $75

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of A) a preferred stock B) a AAA corporate bond C) a large-cap stock D) a small-cap stock

C- The dividend growth model is a method to value the common stock of a company on the basis of assumed constant growth of dividends in the future. Therefore, it can only be applied to a corporation whose dividends might be expected to increase. It is far more likely that a large-cap stock will be paying dividends than a small-cap. Bonds don't pay any dividends, and in any event, their interest, just like the dividends on preferred stock, is fixed; there is no growth possible.

Which of the following statements about technical analysis are TRUE? 1. Technical analysis tries to identify trends and predict market changes. 2. Technical analysis is often accomplished by reviewing data in the form of charts. 3. Technical analysis looks primarily at past performance to predict future trends.

all the above

which type of stockholders have the preemptive right to maintain their proportionate share of ownership in the corporation?

common

emerging markets

markets in lesser developed countries (currency restrictions) -low levels of income & capitalization -questionable market liquidity -high volatility -high taxes and commission costs for foreign investor -lower regulation --> lack transparency **usually have rapid growth rates making them more attractive**

developed markets

markets with highly developed economies with stable political and social institutions (no currency restrictions) -low commission rates -highly liquid markets -large levels of equity capitalization -defined regulation > transparency

What makes a stockholder a large stockholder (or control)

ownership of more than 10% of voting stock

because the spread between the market price and strike price for NSOs are considered salary, it's subject to what type of taxes?

payroll and income taxes

noncumulative preferred stock

preferred stock whose owners do not receive passed dividends

cumulative preferred stock

preferred stock whose owners must receive all dividends in arrears plus the current year dividend before the corporation pays dividends to the common stockholders

a technical analyst charts a stock's ____ and ____ over a period of time

price and volume

support level

price where the stock price bottoms (once it gets that low, there becomes an imbalance between buyers and sellers (more investors want to buy than sell) and the price begins to rise

how frequently can adjustable-rate preferred dividends be adjusted?

quarterly

what are adjustable-rate preferred dividends tied to?

rates of other interest rate benchmarks (t-bill and money market rates)

exchange controls

regulations that restrict the amount of currency that can be bought or sold (currency conversion)

if a breakout through ________ can be spotted, it's a good buying opportunity

resistance

what type of stock isn't freely transferable?

restricted stock and stock owned by control persons

In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable rate preferred stock, changes in interest rates would be most likely to affect the market price of the

straight preferred stock- Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.

fundamental analysis

study of the business prospects of an individual company within the context of its industry and the overall economy

odd-lot theorists believe what?

that small investors invariably buy and sell at the wrong times

Form 144

those who wish to sell control or restricted stock must file this

why would companies want to call back their stock?

to replace a relatively high dividend obligation with a lower one when the cost of money has gone down

odd-lot trading

transactions of fewer than 100 shares

breakout

when the price movement penetrates the support or the resistance level

when are ISOs taxed?

when the stock is sold (not when the option is exercised)

what makes a stock a control stock?

who owns it -- NOT how it was acquired

do transfer agents need to be registered?

yes, with the SEC