SIE Chapter 1 - Equity Securities
Perpetual Preferred Stock
Preferred stock, unlike bonds, is perpetual with 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.
Name of the issuing company Number of shares owned Name of the owner of record CUSIP number
Ownership of common stock is evidenced by a stock certificate which identifies the:
Par-value preferred stock 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.
Cum Rights Formula
(market price - subscription price) / (number of rights to purchase 1 share + 1)
Cash Dividend 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 investors account. Securities held in the name of the brokerage firm are said to be held in street name. To determine the amount that an investor will receive, simply multiply the amount of the dividend to be paid by the number of shares.
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
A corporation may elect to repurchase its own shares for any of the following reasons:
Property/Product Dividend
A corporation may send out to its shareholders samples of its products or portions of its property. This is the least likely way in which a corporation would pay a dividend, but it is a permissible dividend distribution.
Stock Dividend 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 Stock dividends are not taxed until stock is sold.
A corporation that wants to reward its shareholders—but also wants to conserve cash for other business purposes—may elect to pay a stock dividend to their shareholders. Each investor will receive an additional number of shares based on the number of shares that they own. 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, but the total market value of the company will remain the same.
Global Depositary Receipts (GDR) - what is it
A global depositary 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. FOREIGN company shares trading in FOREIGN country (NOT the USA)
Warrant 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. 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. If at time of issuance the subscription price of a warrant is $75 but the stock price is only $25. But 5 years later when the stock price is $100 you can use your warrants and buy the stock at the $75 subscription prices
A long-term security that gives the holder the right to purchase the common shares of a corporation for up to 10 years.
Interest Rate Sensitivity - Preferred Stock
A measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. 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.
Cumulative Voting Cumulative voting favors smaller investors by allowing them to have a larger say in the election of the board of directors. Your votes can all go to one candidate, or spread out
A method of voting that allows stockholders to cast all of their votes for one director or to distribute them among the candidates they wish to vote for.
Statutory Voting Your votes have to be evenly spread across candidates.
A method of voting that requires investors to cast their votes evenly for the directors they wish to elect. allows a stockholder to cast one vote per share owned for each item on a ballot
The priority of payment will be as follows: Secured lenders General creditors Limited partners' profits first, then return of investment General partner for fees first, then profits, then return of capital
A partnership will terminate on the date set forth in partnership agreement, unless earlier terminated. A partnership may dissolve if a majority of the limited partners vote for its dissolution. If the partnership terminates its activities, the general partner must cancel the certificate of limited partnership and liquidate the partnership assets.
Callable Preferred Stock 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 their discretion or after some period of time has expired. Most callable preferred stock may not be called in during the first few years after its issuance. This feature, which does not allow the stock to be called in its early years, is known as call protection. 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 their 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 preferred share issued with a feature allowing the issuing corporation to retire it under certain conditions.
Cumulative Preferred Stock 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, they must first pay the dividends in arrears, as well as the stated preferred dividend, before common holders receive anything.
A preferred stock that entitles the holder to receive unpaid dividends prior to the payment of any dividends to common stockholders.
Convertible Preferred Stock 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.
A preferred stock that may be converted or exchanged for common shares of the corporation at a predetermined price.
Limited Liability Stockholders cannot be held liable for any amount past their invested capital
A protection afforded to investors in securities that limits their liability to the amount of money invested in the securities.
common stock Common stockholders vote to elect the board of directors and to institute major corporate policies.
A security that represents the ownership of a corporation. All publicly traded companies must issue this before issuing any other type of equity security.
Cum Rights
A stock that is the subject of a rights offering and is trading with the rights attached to the common stock.
Straight/Noncumulative Preferred Stock 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.
A type of preferred stock whose dividends do not accumulate in arrears if the issuer misses the payment.
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
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. 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.
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
Additional authorized shares may be issued in the future for any of the following reasons:
Expired Rights 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.
After a rights offering, in no one wants to purchase the stock.
A power of attorney appointing the general partner A statement of the prospective limited partner's net worth A statement regarding the prospective limited partner's income A statement from the prospective limited partner that they understand and can afford the risks related to the partnership
All investors wishing to become a limited partner must complete the partnership's subscription agreement. The subscription agreement will include:
Taxation of Dividends
All qualified dividends received by investors are taxed at a rate of 15% for ordinary income earners and at a set rate of 20% for high-income earners. A key to determine which rate applies will be the investor's marginal tax rate. If a question asks you about an investor who is in a high tax bracket such as 39% the 20% rate will apply for the year the dividend is received. It is important to note that stock dividends received by investors are not taxed until the investor sells the shares.
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.
How Does Someone Become a Stockholder?
Although some people purchase the shares directly from the corporation when the stock is offered to the public directly, 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. Although the transaction in many cases only take seconds to execute, trades actually take several days to fully complete.
Issuance of bonds or additional common shares Stock splits Mergers and acquisitions Major changes in corporate policy
Among electing the board of directions, Common stockholders may also vote on:
Par Value
An accountant uses this as a way to credit the money received by the corporation from the initial sale of the stock to the balance sheet.
Limited Partnerships
An entity that allows all of the economic events of the partnership to flow through to the partners Economic events include :Income, Gains, Losses, Tax Credits, Deductions
Real Estate Investment Trusts/REITs 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. A real estate investment trust is organized as a conduit for the investment income generated by the portfolio of real estate.
An entity that is organized for the specific purpose of buying, developing, or managing a portfolio of real estate.
Economic viability of the program Tax considerations Management's ability Lack of liquidity Time horizon Whether it is a blind pool or a specified program Internal rate of return A blind pool is a partnership in which less than 75% of the assets that the partnership is going to acquire have been identified. In a specified program, more than 75% of the assets that the partnership is going to acquire have been identified.A partnership's internal rate of return is the discounted present value of its projected future cash flow.
Before investing in a limited partnership, the investor should analyze the key features of the partnership to ensure that the partnership's objectives meet their investment objectives. The investor should review:
Freely Transferable 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 their 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.
DPPs allow the losses to flow through to the investors. Losses from DPPs can only be used to offset the investor's passive income. Investors may not use the losses to shelter or offset the ordinary income. Investors should not purchase DPPs simply for the tax benefits; they should purchase them to earn a return. Any DPP that is found to have been formed simply to create tax benefits may subject the investors to strict penalties. Investors could owe back taxes, fines, or be prosecuted for fraud.
Direct participation programs are organized as either limited partnerships or as Subchapter S corporations. These entities allow for the flow-through of income and losses and the DPP has no tax consequences. The DPP will only report the results of its operation to the IRS. The responsibility for paying any taxes due rests with the partners or shareholders.
If there is a 10.5 cent dividend the stock price would be adjusted down to 11 cents
Ex-dividend date is Thursday 8/12 and Record date is Friday 8/13. If XYZ closed at $15.20 on Wednesday 8/11, the stock will open at $15.10 on Thursday 8/12 if there is a $0.10 dividend
Par Value Payment of Dividends Distribution of Assets Perpetual Nonvoting Interest Rate Sensitive
Features of All Preferred Stock
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 Par value for all preferred shares is $100 unless otherwise stated.
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?
Issued Stock - Outstanding stock = Treasury stock Issued Stock - Treasury Stock = Outstanding Stock
How do you determine the amount of treasury stock?
Dividend Distribution
If a corporation decides to pay a dividend to its common stockholders, they may not discriminate as to who receives the dividend. The dividend must be paid to all common stockholders of record. An investor who already owns the stock does not need to notify the company that they are entitled to receive the pending dividend, because it will be sent to them automatically. 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.
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.
With a nonrecourse loan, if the partnership defaults, the lender has no recourse to the limited partners. With a recourse loan, in the event of the partnership's default, the lender can go after the limited partners for payment. A recourse loan can increase the investor's cost base. Partners must monitor their cost base and adjust it for: Cash or property contributions to the partnership Recourse loans Any cash or property received from the partnership Investors are responsible for any gain on the sale of their partnership interest in excess of their cost basis.
If a limited partnership has used up all of its deductions and has a gain on the sale of a depreciated asset, the sale above the asset's depreciated cost basis may subject the limited partners to a taxable recapture. There are two types of loans that a partnership may take out: a nonrecourse loan and a recourse loan.
Violation After the 90 days have expired, the customer is considered to have reestablished good credit and then may conduct business in the regular way and take up to four business days to pay for their 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 for which the customer failed to pay. 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 then will freeze the customer's account, which means that the customer must deposit money up front for any purchases they want to make in the next 90 days.
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.
Stock Price and the Ex-Dividend Date
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 of this, the stock price will be adjusted down on the ex-dividend date in an amount equal to the dividend.
Continuity of life Profit motive Central management Limited liability Associates Freely transferable interest Several of the characteristics cannot be avoided, such as associates and a profit motive. The easiest two characteristics of a corporation to avoid are continuity of life and freely transferable interest. The LP can put a termination date on the partnership and substitute limited partners may not be accepted or may only be accepted once the general partner has agreed.
It is important to note that there are no tax consequences at the partnership level. In order to qualify for the preferential tax treatment, a Direct Participation Program DPP or Limited Partnership LP must avoid at least two of the six characteristics of a corporation. These characteristics are:
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% The investor in this example is receiving 10% of the purchase price of the stock each year in the form of dividends, which, by itself, would be a nice return for the investor. Some investors may elect to have their shares enrolled in a corporation's dividend reinvestment program (DRIP). The dividends received by the investor will be used to purchase additional shares of the corporation. The investor will be liable for taxes on the dividend and the amount of the dividends reinvested will be added to their cost base for tax purposes. So long as the corporation pays a dividend the investor will have more shares of the company at the end of each year.
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.
Warrants 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.
Arrears
Money that is owed and should have been paid earlier
All investors who purchase a limited partnership though a public offering must receive a prospectus. If the partnership is sold through a syndicator, the syndicator is responsible for filing the partnership documents. The maximum fee that may be received by the syndicator is limited to 10% of the offering. If a secondary market develops for a partnership, the partnership will be known as a master limited partnership or MLP.
Most limited partnerships will be offered to investors through a private placement. All investors who purchase a limited partnership through a private placement must receive a private placement memorandum. Private placements, with very limited exceptions, may only be offered to accredited investors. However, a few limited partnerships will be offered to the public through a standard public offering.
Nonvoting Preferred Stock
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 reporrs (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 shares 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.
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 market place. Subscription price is always below the market value of stock when issued
Price at which existing shareholders of a corporation are entitled to purchase additional common shares in a RIGHTS OFFERING. price at which the current shareholders of a company are authorized to buy its common stock in a rights issue. Maximum duration of a right is 45 days
Name and address of the partnership A description of the partnership's business The life of the partnership Size of limited partner's investments (if any) Conditions for assignment of interest by limited partners Conditions for dissolving the partnership Conditions for admitting new limited partners The projected date for the return of capital if one is set A material change to any of these conditions must be updated on the certificate within 30 days.
Prior to forming a limited partnership, the general partner will have to file a certificate of limited partnership in the state in which the partnership is formed. The certificate will include:
It receives 75% of its income from real estate. To avoid double taxation it must distribute at least 90% of its taxable income to shareholders. As long as the REIT meets these 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 losses or expenses to shareholders, only income. REIT investors own an undivided share of the underlying real estate portfolio. An investor may elect to invest in a REIT rather than directly in real estate ownership because of the greater liquidity provided by the REIT and the quality of the property manager.
REITs are entitled to special tax treatment under Internal Revenue Code Subchapter M. A REIT will not pay taxes at the corporate level as long as:
Term: Rights up to 45 days. Warrants up to 10 years Subscription Price: Rights - below the market. Warrants - above the market Trading: Rights - May trade with or without common stock. Warrants - May trade with or without common stock or bonds Who: Rights - Issued to existing shareholders to ensure preemptive rights Warrants - Offered as a sweetener to make securities more attractive
Rights vs Warrants
Selling Dividends
Selling dividends is a violation! An investment adviser may not use the pending dividend payment as the sole basis of their 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. 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 they receive the dividend.
Preemptive Right Should the company wish to sell additional shares to raise new capital, they 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.
Stockholders' right to maintain their percentage interest in a corporation with any additional shares issued.
Number of shares = par/conversion price (CVP) $100/$20 = 5 The investor may receive five common shares for every preferred share.
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?
$23.80
TRY declares a $.20 dividend payable to shareholders of record as of Thursday, August 22. The ex-dividend date will be one business day prior to the record date. In this case, the ex date will be Wednesday, August 21. If TRY closed on Tuesday, August 20 at $24 per share, what would the stock open at on Wednesday.
Tax Deductions vs. Tax Credits
Tax deductions that are generated by partnerships are used to lower the investor's taxable income. A tax credit results in a dollar-for-dollar reduction in the amount of taxes due from the investor.
Dividend Disbursement Process
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. For convenience, most investors have their securities held in the name of the broker dealer, also known as 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.
Trade Date 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 date on which a securities transaction is executed.
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.
The date when a securities ownership changes. The date when a buyer of a security actually becomes the owner of record.
Payment of Dividends for Preferred Stock
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 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. Because it takes two business days for a trade to settle, the ex date is always one business days prior to the record date. This is one business day prior to the record date.
The first day when purchasers of a security will no longer be entitled to receive a previously declared dividend. The stock is not with the dividend anymore.
The partnership agreement will spell out all of the terms and conditions, as well as the business purpose for the partnership. The powers and limitations of the general partner's authority will be one of the main points detailed in the partnership agreement.
The foundation of every limited partnership is the partnership agreement. All limited partners must be given a copy of the partnership agreement.
General Partner
The general partner is the person or corporation that manages the business and has unlimited liability for the obligations of the partnership business.
Exercised their rights
The investor decides to purchase the additional shares and sends in the money, along with the rights to receive the additional shares. What has the investor done?
Why Do People Buy Common Stock? Example: An investor purchases 100 shares of XYZ at $20 per share on March 15, 2014. On April 20 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.
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. 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. 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 stockholder.
Currency risk of 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 less in U.S. dollars when the security is sold. 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.
Sold their rights
The rights have value and 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. What has the investor done?
Existing property New construction Raw land Government-assisted housing Historic rehabilitation
There are several types of real estate partnerships. They are:
American Depositary Receipts (ADR)/American Depositary Shares (ADS) 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.
These facilitate the trading and ownership of foreign securities and trade in the United States on an exchange or in the over-the-counter markets. A receipt representing the beneficial ownership of foreign securities being held in trust overseas by a foreign branch of a U.S. bank.
Participating Preferred Stock Receives common dividends paid to common stockholders as well
These preferred stock holders 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.
Record Date All stockholders whose name is on the stock certificate (owners of record) will be entitled to receive the dividend. 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 that 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.
Payment Date The payment date is controlled and set by the board of directors of the corporation and is usually four weeks following the record date.
This is the day when the corporation actually distributes the dividend to shareholders and it completes the dividend process.
Risk: Low Advantages: Immediate predictable cash flow Disadvantages: Rental problems and repairs Tax Benefits: Deductions for mortgage interest and depreciation
Type of LP: Existing property Purchase income property Risk? Advantages? Disadvantages? Tax Benefits?
Risk: Low Advantages: Government rent subsidies and tax credits Disadvantages: High maintenance costs and risk of a change in government programs Tax Benefits: Tax credits and any losses on the property
Type of LP: Government-assisted housing Low-income housing Risk? Advantages? Disadvantages? Tax Benefits?
Risk: Higher Advantages: Tax credits Disadvantages: Financing trouble, no rental history Tax Benefits: Tax credits deductions and depreciation
Type of LP: Historic Rehabilitation Restore sites for use Risk? Advantages? Disadvantages? Tax Benefits?
Risk: Higher Advantages: Potential capital gains and low maintenance Disadvantages: No deduction for current expenses and no promise of rental or sale Tax Benefits: Deduction of expenses and depreciation only after completion
Type of LP: New construction Build units for appreciation or rental Risk? Advantages? Disadvantages? Tax Benefits?
Risk: Highest Advantages: Only appreciation potential Disadvantages: No tax deductions or income Tax Benefits: No tax benefits
Type of LP: Raw land Purchase land for appreciation Risk? Advantages? Disadvantages? Tax Benefits?
Invest in real estate Invest in oil and gas wells Engage in equipment leasing
Types of Limited Partnershi A limited partnership may be organized for any lawful purpose. The limited partnerships that are most common are set up to:
Straight/Noncumulative Cumulative Preferred Participating Preferred Convertible Preferred Callable Preferred
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.
Warrants attached to the Secondary Market
Warrants often will 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.
Put up the investment capital Losses are limited to their investment Receive the benefits from the operation May not exercise management over the operation May vote to change the objective of the partnership May vote to switch or remove the general partner May sue the general partner, if the general partner does not act in the best interest of the partnership A limited partner may never exercise any management or control over the limited partnership. Doing so would jeopardize their limited status and they may be considered a general partner.
What all goes into being a limited partner?
Warrants attached to 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).
What is a common share that comes with a warrant attached to purchase an additional common share?
Buy and sell property for the partnership Receive compensation for managing the partnership Enter into legally binding contracts for the partnership The general partner also must maintain a financial interest in the partnership of at least 1%.
What may the General Partner do?
Commingle funds of the general partner with the funds of the partnership Compete against the partnership Borrow from the partnership
What may the General Partner not do?
Dividends in arrears on cumulative issues
Which dividend is paid first
FINRA
Who controls the ex-dividend date?
5,000,000 shares of stock issued and 5,000,000 shares outstanding.
XYZ corporation has 10,000,000 shares authorized and has sold 5,000,000 shares to the public during its initial public offering. How many shares of stock are issued and how many are outstanding?
3,000,000 shares
XYZ corporation has 10,000,000 shares authorized and has sold 5,000,000 shares to the public during its initial public offering. If the company decides to repurchase 3,000,000 of its own shares then how many shares of treasury stock do they have?
$1 Stock price− Subscription price / The number of rights required to purchase one share $50− $48 = $2 $2/2 rights = $1 You have to purchase one of your original shares plus one of the new shares 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.
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. What is the value of a right ex rights?
$1 Stock price− Subscription price / The number of rights required to purchase one share + 1$ 51− $48 = $3 $3/3 rights = $1 You have to purchase one of your original shares plus one of the new shares +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 market place.
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. What is the value of a right cum right?
Preferred Stock 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. 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 has a dividend of $100. A 6% preferred stock will pay $6 per year in dividends. $6 per share for each share they own
an equity security with a fixed income component. stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends. The objective is not capital appreciation, it is income.
Security 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.
any investment product that can be exchanged for value and involves risk.
Equity or Stock Once an investor has purchased stock in a corporation, they become an owner of that corporation. 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 there is no maturity date for the shares and the investor may own the shares until they decide to sell them. Most corporations use the sale of equity as their main source of business capital.
creates an ownership relationship with the issuing company
Direct Participation Programs and Limited Partnerships There is generally no active secondary market for these investments, so it's important that investors understand the risks and can afford the risks associated with direct participation programs and limited partnerships.
entities that allow income, expenses, gains, losses, and tax benefits to be passed through to the investors.
CUSIP Number The Committee on Uniform Securities Identification Procedures CUSIP numbers must also appear on trade confirmations.
numbers that are printed on the stock or bond certificates to help identify the security.
issued stock 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. It's important to note that the total number of issued shares may never exceed the total number of authorized shares.
stock that has been authorized for sale and that has actually been sold to the investing public
outstanding stock
stock that has been sold or issued to the investing public and that actually remains in the hands of the investing public
Treasury Stock 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, it is also not calculated in earnings per share.
stock that has been sold to the investing public, which has subsequently been repurchased by the corporation.
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 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.
Transfer Agent 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 company that is in charge of transferring the record of ownership from one party to another.
Declaration Date The declaration date is the starting point for the entire dividend process. The company must notify the regulators at the exchange or FINRA (depending where the stock trades) at least 10 business days prior to the record date.
the day that the board of directors decides to pay a dividend to common stockholders of record.
Payment Date Under 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. Payment dates are regulated by the Federal Reserve Board under Regulation T of the Securities Exchange Act of 1934. Although 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 day when the buyer of the security has to have the money in to the brokerage firm to pay for the purchase.
authorized stock The number of authorized shares is arbitrarily determined and is set at the time of incorporation. 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.
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.
Book Value 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. To determine the book values per share, divide the total book value by the total number of outstanding common shares.
the theoretical liquidation value of the company. This is what someone would be willing to pay for the entire company
