Corporate Ownership: Equity Securities (Ch. 6)

Cash dividend

A dividend paid in cash to a company's shareholders. The amount is normally based on profitability and is taxable as income.

Paid-in capital (also known as paid-in surplus or capital surplus)

Funds and property contributed to a firm by its stockholders. _______ is generated when a firm issues stock in the primary market, not when the stock is traded in the secondary market.

Stock dividend

Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. They are similar to forward stock splits, only the corporation gives a percentage dividend (5 percent, 10 percent, etc) instead of splitting the stock 2-for-1, 3-for-1, etc. _____ are often used to conserve cash needed to operate the business. Unlike a cash dividend, _____ are not taxed until sold. The primary reason for a company to give investors a ____ is to make the market price more attractive to investors, thus adding liquidity (ease of trading) to the stock.

Blue chip stocks

Stock in a well-known and highly respected publicly-traded company. ____ companies are usually financially sound and are thought to be relatively low-risk investments. They tend to be less volatile than other companies and to provide solid growth to portfolios. Examples in the United States include General Electric and Coca-Cola. They take their name from the most valuable poker chips. In the United Kingdom, in contrast, comparable firms are called alpha companies.

Cyclical stock

Stock that tends to rise quickly when the economy turns up and fall quickly when the economy turns down. Examples are housing, automobiles, and paper.

Hostile takeover

The acquisition of one company by another without the consent of the target company's board of directors. Generally speaking, a ______involves the acquiring company buying stock directly from shareholders, sometimes by offering a particularly high price. The acquiring company may buy up to 5% of the target company without registering the move with the SEC.

Ex-dividend date

The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment. The length of time ensuing between the _____ and the date of actual payment may be up to a month. Stock price - dividend = price of stock on ____

Conversion ratio

The number of shares of stock into which a convertible security may be exchanged. It is determined at the time of issue. The ratio for a convertible bond is calculated by dividing the par value of the security by the conversion price. ____ = par value / conversion price

Liquidity

a high level of trading activity, allowing buying and selling with minimum price disturbance. Also, a market characterized by the ability to buy and sell with relative ease.

Outstanding shares

the number of shares that are in investors' hands. This quantity may or may not be the same number as the issued shares. ______ = issued shares - treasury shares

Issued shares

the portion of authorized shares that the issuer has sold to the public to raise money.

Anti-dilution agreement (as it applies to warrants)

the right of a shareholder to buy a specific amount of stock at a fixed price.

Corporate spin-off

A situation in which a company sets up one of its existing subsidiaries or divisions as a separate company. The parent company may or may not maintain a portion of ownership in the newly made company. The motives for ____ vary. A company may want to refocus its core businesses, shedding those that it sees as unrelated. Or it may want to set up a company to capitalize on investor interest. In other cases, a corporation may face regulatory hurdles in expanding its business and create a new company from one of its units to be in compliance.

Speculative stock

A stock in a new, small, or otherwise obscure company with a high likelihood of failure but a small possibility of experiencing an extraordinary return. Many IPOs, especially in small companies, are considered _____. By definition, _____ carry a great deal of risk.

Participating preferred stock

Preferred stock that provides the holder with a specified dividend plus the right to additional earnings under specified conditions. Unlike most other preferred stock owners, ______ holders sometimes have voting rights in the company.

Residual claims

The right of a shareholder or some other party to the profit of a company after all prior obligations have been paid. ____ are perhaps most important in the event of the company's liquidation.

Parity

The state of being equal. For example, ____ is achieved when the value of a convertible security equals the value of the underlying common stock.

Special-situation stock

A currently undervalued stock that can suddenly increase in value because of imminently favorable circumstances. For example, a firm may be about to bring a new, potentially profitable product to market. If everything turns out favorably, the gains in the firm's stock could be quite large. Another _____ might derive from the impending liquidation of a company. _____ are usually quite risky.

Escrow receipt

A document provided by a bank in options trading to guarantee that the writer (or seller) of the option has deposited the underlying asset with the bank. This guarantees that delivery will be made in proper course should the holder exercise the option.

Shelf registration

A method the SEC uses to allow a publicly-traded company to register several new issues of stock and actually offer them at any time over a two-year period, subject to compliance with other appropriate regulations. These offerings are covered by a single prospectus, but may be offered to the public in different tranches. One of several related securities offered at the same or different time.

Dividend

A portion of a publicly-traded company or fund's earnings that is distributed to shareholders in the form of cash, stock, or property. The amount of earnings distributed as ______ is usually determined by the board of directors and divided by the number of shares (pro rata), but preferred stock often has guaranteed _____. ______ exist in order to encourage investment in the company and to allow shareholders (who are really co-owners) to participate in the profits. A rapidly expanding company often pays little or nothing in _______, as most of its earnings are reinvested in the company. On the other hand, a well-established company with solid profits likely pays relatively high ______.

Equity securities

A portion of ownership in a corporation. The holder of a stock is entitled to the company's earnings and is responsible for its risk for the portion of the company that each stock represents. Investors love these securities because they've historically outperformed most other investments.

Variable or adjustable (floating rate) preferred stock

A preferred stock paying a dividend that varies from time to time (e.g., every 6 months) to match movements in the prevailing interest rates. Because the dividend adjusts to changing interest rates, the stock price remains more stable.

Prior (senior) preferred stock

A preferred stock that has priority over other preferred stock. Thus, _____ receives dividends before other preferred stock. ____ holders also receive compensation before before preferred stockholders in the event of corporate bankruptcy. Because of the extra safety factor, ____ pays a slightly lower dividend than other preferred stock from the same issuer.

Stock acquired through a consolidation or transfer

An acquisition by one company of another in which the acquiring company buys the target company's stock. That is, rather than paying with debt or some other means, _____ occurs when the acquiring company buys a majority of the target company's shares outstanding. This may be associated with a hostile takeover, where the acquiring company buys shares directly from stockholders, but this is not always the case.

Callable preferred stock

An issue of preferred stock that may be repurchased by the issuer at a specific price, usually par value or slightly above. A company may issue callable preferred stock to protect itself from the possibility that its obligations to pay guaranteed dividends may become too expensive in the future. This stock is a little riskier for investors because they don't have control over how long they can hold the stock, so corporations usually pay a higher dividend on _____ than on regular preferred stock.

Cum (with) rights

Describing the sale of a share with rights attached to it. That is, any rights that are attached to the share but have not been distributed go to the buyer, rather than remaining with the seller. Value (discount) of a right = M - S / N + 1 M = market price S = subscription price N = number of rights needed to purchase one share 1 accounts for later drop in the market price on the ex-date (the first day the stock trades without rights)

Convertible preferred stock

Preferred stock that can be converted into common stock at the option of the holder. Because the issuers are providing investors with another way to make money, investors usually receive a lower dividend payment than with regular preferred stock.

Cumulative preferred stock

Preferred stock whose dividends accrue, should the issuer not make timely dividend payments. Most preferred stock is _____.

Noncumulative preferred stock

Preferred stock whose holders must forgo dividend payments when the company misses a dividend payment. _____s are rare because they are unattractive to preferred stock investors.

Odd lot

A trading order for less than 100 shares of stock

Par value

1. The minimum contribution made by investors to purchase a share of common stock at the time of issue. _____ is of no real consequence to investors; in fact, many new common stock issues have no stated ______. It is more or less a bookkeeping value for the issuer. 2. The stated value of a security as it appears on its certificate. A bond's ______ is the dollar amount on which interest is calculated and the amount paid to holders at maturity. _______ of preferred stock is used in a similar way in calculating the annual dividend (e.g., 8% preferred stock x $100 par = $8 per year in dividends).

Reverse stock split

A proportionate decrease in the number of shares, but not the total value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1-for-3 split would result in stockholders owning one share for every three shares owned before the split. After the _______, the firm's stock price is, in this example, three times the pre-______ price. A firm generally institutes a ______ to boost its stock's market price. Some think this supposedly attracts investors. Shares after a split = shares x A/B Price after a split = Stock price x B/A

Sinking-fund provisions for preferred stock

A provision requiring the issuer to put money aside to pay preferred stockholders when dividends are due. A fund or account is set up into which an issuer deposits money on a regular basis to make the necessary payments to preferred stockholders.

Warrant

A security that permits its owner to purchase a specific number of shares of stock at a predetermined price. Corporations may issue warrants that allow you to buy a company's stock at a fixed price during a specific period of time, often 10 or 15 years, though sometimes there is no expiration date. Warrants are generally issued as an incentive to investors to accept bonds or preferred stocks that will be paying a lower rate of interest or dividends than would otherwise be paid. How attractive the warrants are -- and so how effective they are as an incentive to purchase -- generally depends on the growth potential of the issuing company. The brighter the outlook, the more attractive the warrant becomes. When a warrant is issued, the exercise price is above the current market price. For example, a warrant on a stock currently trading at $15 a share might guarantee you the right to buy the stock at $30 a share within the next 10 years. If the price goes above $30, you can exercise, or use, your warrant to purchase the stock, and either hold it in your portfolio or resell at a profit. If the price of the stock falls over the life of the warrant, however, the warrant becomes worthless. Warrants are listed with a "wt" following the stock symbol and traded independently of the underlying stock. If you own warrants to purchase a stock at $30 a share that is currently trading for $40 a share, your warrants are theoretically be worth a minimum of $10 a share, or their intrinsic value.

Income stock

A stock that has a relatively high dividend yield. The stock's issuer is typically a firm having stable earnings and dividends and operating in a mature industry. They are able to pay the high dividends because there is little reason to reinvest earnings in a new product. The price of an _____ is heavily influenced by changes in interest rates; when interest rates increase, ____ decrease, and vice versa.

Defensive stock

A stock that is resistant to general stock market declines. Stocks of electric utilities, gold and silver producers, and some consumer goods companies are considered _____. Although ____ resist downturns, they generally move up more slowly than other stocks during bull markets.

Counter-cyclical stock

A stock that tends to increase in price during recessions and decrease in price during economic expansions. The stocks of companies with relatively stable sales and profits are generally considered _____. Likewise, utility stocks, which generally have stable earnings and dividends, tend to be _____. By including some ____ in one's equity portfolio, this person can balance the potential volatility of cyclical investments.

Round lot

A trading order typically of 100 shares of a stock or some multiple of 100

Units

Bundled bonds and warrants, or bundled stock and warrants

American Depositary Receipts (ADRs)

Certificates representing a specific number of shares (usually one to ten) of a foreign stock. ____ can be traded like any other security, but they may or may not have voting privileges. US banks issue them; therefore, investors receive dividends in US dollars. The stock certificates are held in a foreign branch of a US bank (the custodian bank). In addition to risks associated with stock ownership in general, ____ owners are subject to currency risk, economic risk, political risk, etc.

Statutory voting

In common stock, a method of voting at the annual meeting and/or in elections for the board of directors in which there is one vote per share. Thus, if a shareholder has 10 shares, he/she receives 10 votes at meetings. This gives persons and companies with more equity in a company a greater voice in its decisions. Note that these investors must split the votes evenly for each item on the ballot.

Cumulative voting

In electing members of a board of directors, a system where common shareholders have one vote per share multiplied by the number of directors to be elected. ______ allows shareholders to apply all votes to one person or to divide them up between candidates. For example, if a person owns a single share and there are five empty seats on the board, that person has five votes.

Proxy

In publicly-traded companies, the transfer of a right to vote to another individual or group of individuals. At the annual meeting, shareholders who are unable to attend may give _____ to other shareholders, the board of directors, or some other representative. The persons with ____ are usually expected to vote as the shareholder would wish. Most companies encourage shareholders to vote by _____ if they are unable to come to the annual meeting, as this gives decisions the greatest possible legitimacy.

If a corporation issues 1 million shares of stock, each share represents how much ownership of the issuing corporation?

One-millionth

Common stock

Stock in a publicly-traded company that entitles holders to vote in the annual meeting, to elect the board of directors, and to generally exercise control of the company. While _______ holders are important in terms of their level of control, they have the least precedence in the event of liquidation. That is, if the company goes bankrupt, ______ holders do not receive any money until all bondholders, other debt holders, and preferred shareholders are paid in full. Likewise, ______ is not entitled to a guaranteed dividend.

Preferred stock

Stock in a publicly-traded company without voting rights, but otherwise with more rights than common shares. ______ receive dividends before common shares and sometimes have guaranteed dividends, while common shares only receive the leftovers. _____ also have a prior claim on capital in the event of liquidation; if the company is liquidated, all ________ holders must be paid off before a single common shareholder. Some _______ are convertible, which means they can be changed into common shares at a certain ratio so that even ________ holders without voting rights have the possibility of gaining them. ______ tend not to appreciate (increase in value) as fast as common stocks.

Emerging-growth stock

The common stock of a relatively young firm that is operating in an industry that has very good growth prospects. Although this kind of stock offers unusually large returns, it is very risky because the expected growth may not occur or the firm may be swamped by the competition.

Limited liability

The liability of a firm's owners for no more capital than they have invested in the business. Essentially, the legal separation of ownership and liability means that a stockholder can lose no more than he or she has paid for the shares of ownership regardless of the firm's financial obligations. A _____ company, where all partners and owners have ____, is one of the most common corporate structures in the United States. It is designated by the letters "LLC" after its name.

Authorized shares

The maximum number of shares a company is allowed to issue. Generally, the company's charter specifies the number of ______, but shareholders can increase or decrease it according to procedures listed in the charter. Typically, the number of ______ is larger than the required amount in order to give a company the greatest amount of flexibility. Note, the issuer usually holds back a large percentage of the ________ (which it can sell later through a primary stock).

Currency risk

The risk that the value of a security may decline because the value of the currency of the issuing corporation may fall in relation to the US dollar

Treasury stock

The shares of a firm's stock that have been issued and then repurchased. A company may buy back its stock for a number of other reasons, ranging from preventing a hostile takeover to having shares available if employees exercise their stock options.

Growth stock

The stock of a firm that is expected to have above-average increases in revenues and earnings. These firms usually retain most earnings for reinvestment and therefore pay small dividends.

Right

To maintain their proportionate ownership of the corporation, ____s allow existing stockholders to purchase new shares of the corporation at a discount directly from the issuer, before the shares are offered to the public. Stockholders receive one ____ for each share owned. The ____s are short-term (usually 30 to 45 days). The ____ are marketable and may be sold by the stockholders to other investors. If existing stockholders don't purchase all the shares, the issuer offers any unsold shares to a standby underwriter.

Ex (without)-rights

Used to describe a stock that trades without giving the stockholder the privilege to receive rights to buy shares of a new stock issue. Because new shares are sold at below market price to rights holders, the rights have value. Thus, a stock trading ____ is worth less than the same stock with rights attached. A stock trading ____ is indicated in stock transaction tables in newspapers by the symbol x near the volume column. Value (discount) of a right = M - S / N M = market price S = subscription price N = number of rights needed to purchase one share

Stock split

When a company wants to make its shares more attractive and affordable to a greater number of investors, it may authorize a ______ to create more shares selling at a lower price. Announcements of ______, or anticipated ______, often generate a great deal of interest. Buyers may simply want to take advantage of the lower share price, or they may believe that the _______ will increase in value, moving back toward its presplit price.

Forward stock split

When the number of shares increases and the price decreases without affecting the total market value of the outstanding shares. A _____ may be a 2-for-1, a 3-for-1, a 3-for-2, and so on, where A represents the first number and B represents the second number. Shares after a split = shares x A/B Price after a split = Stock price x B/A

Standby underwriter

a broker-dealer that purchases any stock that wasn't sold in the rights offering and then resells the shares to other investors. This guarantees that the issuer will raise the capital it intends to raise, but leaves the underwriter with the possibility that it must purchase an issue with low value. As a result, ______ charge a standby fee.