SIE Exam Lesson 1: Equities

Trick for calculating new metrics after a stock split.

5:1 Split. 5 = A, 1=B. New shares = Old shares X A/B. New Price = Old Price X B/A

Treasury Stock

A corporation's own stock that it has issued and later reacquired.

Negotiable Security

A financial instrument that can easily be sold into a deep and liquid secondary market

What is preferred stock?

A preferred stock is an equity security that provides regular, steady income because it has features of both equity and debt securities. Preferred stock is an equity security because it represents ownership in the corporation. Preferred stock usually has no voting rights. Has higher liquidity preference than common stock in the event of liquidation. Preferred stock is usually issued as a fixed-income security with a fixed dividend.

Street name

AKA nominal owner. An arrangement under which a broker is the registered owner of a security, but the customer is the beneficial owner. Street name allows for trading efficiency since the securities are technically held in the broker's name, the customer can easily sell without having to sign or endorse physical certificates of ownership. In the case of street name ownership, the BD must promptly forward all proxy materials to the beneficial owner.

Stock Split

Adjust a company's stock price and # of shares, but do not create or destroy any stockholder value. There can be normal, "forward," and reverse splits.

What are ADRs

American Depositary Receipts--dollar denominated receipts for the stock of foreign firms held in vaults of home-Country banks. A great way for US investors to hold stock in a foreign company. These companies trade in the U.S. financial markets and save investors the inconvenience of cross-border and cross-currency transactions. Dividends are paid in U.S. dollars. There is political, currency, and inflationary risk (of the home country) associated with ADRs.

ADS

American Depository Shares

Open order and stock splits

Anytime there is a reverse split, all open orders to trade the stock are cancelled.

Transfer Agent

Assists with purchases and sales of shares by receiving and issuing certificates as necessary to record changes in ownership. The transfer agent is responsible for ensuring that investors receive the appropriate shares in a corporate event like a stock split or stock dividend.

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

At least 10 days prior to the record date

Where do stock holders fall in the order of liquidation?

Behind bonholders, general creditors, and preferred stockholders.

Important Dividend Dates

Date of Declaration -- Board announces dividend amount. Ex-Dividend Date-- One day before the Record Date for regular way settlement. One day after the Record date for cash settlement. It is the first date a security trades w/o the dividend included in contract price, buyer on or after Ex-Date will not receive the dividend. Date of Record -- All holders of the stock (not just buyers of the stock) on this date will receive a dividend Date of Distribution

What are ways that equities generate a return?

Dividends (Paid Quarterly), Capital Gain / Loss

Taxes in relation to stock and cash dividends.

For stock dividends, taxes are not applied until the newly acquired shares are sold. However, cash dividends are taxed when received by the owner.

Does preferred stock have voting rights?

Generally, no.

Participating Preferred Stock

Has a feature allowing preferred stockholders to share with common stockholders in any dividends paid in excess of the percent or dollar amount stated on the preferred stock.

Penny Stocks

Less than $5 per share, unlisted on exchanges -- only traded OTC, speculative, low liquidity, high fraud risk and volatile

What is the registrar and what does it do?

Maintains records of ownership of securities by matching each share of stock against an ownership record.

Cyclical Stocks

Mirror the economy, strengthening when the economy is growing and declining as the economy contracts. Car companies, large appliances

Can common shareholders be held responsible if the company gets into legal trouble?

No, because of limited liability structure

In terms of capital gains, what is taxed?

Only realized gains -- when an investor sells a security for profit. Unrealized capital gains are not taxed.

What is another word for unrealized capital gains?

Paper gains

Adjustable rate preferred stock

Pays dividends that are determined based on an underlying benchmark. Because the dividends vary based on market conditions, the share price tends to remain stable.

Physical Stock Certificate and endorsement

Physical stock certificates must be endorsed with the owner's signature on the back. Once endorsed stock certificates can be assigned or sold.

How is preferred stock priced?

Preferred is priced similarly to a bond in that it has a par value and the price of the preferred fluctuates based on prevailing interest rates. The potential for unlimited upside on a preferred stock is much less than common stock. The return on the preferred is tied primarily to the dividend payments which cap the upside and downside risk.

cumulative preferred stock

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid.

convertible preferred stock

Preferred stock with an option to exchange it for common stock at a specified rate. Generally pay lower dividend.

Straight preferred

Preferred stock with noncumulative feature

What is Book-Entry Ownership?

Procedure that holds investors' shares in book-entry form, rather than issuing a physical paper certificate of ownership

Stock Settlement

Regular way settlement--After a stock has been traded on the market, the buyer does not receive official ownership and the seller does not receive money until the transaction settles, which is typically T+2 days after the sale. "Cash settlement" is same day payment, same day settlement.

Defensive stocks

Resistant to changes in economic cycles. Utility stocks are defensive as well as staple retailers like walmart.

Rights Offering

Rights are short term instruments that allow the holder to buy the stock at a price that is typically lower than the current market price of the stock. 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

What are proxy statements?

SEC-required disclosures that are sent to solicit shareholder votes for the election of corporate directors at annual meetings and for corporate events like M&A. The information must be filed with the SEC prior to being sent to investors and must disclose all important facts upon which shareholders are voting. Formal proxys can be dozens of pages long, but can also come in condensed form.

Statutory vs Cumulative Voting

Statutory voting is having one vote per share for each seat on the board of directors. For example if you have 10 shares and there are two board seats, you can cast ten votes for each available seat. Cumulative Voting is being able to pool your votes for a single board seat. So in the example above, you could cast 20 votes for one seat.

What are the two types of shareholder risk?

Systematic / Market Risk (Protected with derivatives to provide hedging), Non-Systematic / Specific Risk (Protected by diversification)

Authorized Shares

The maximum number of shares a corporation may issue as approved by the state in which the company is incorporated.

Dividend

The portion of corporate profits paid out to stockholders. Paid quarterly.

pre-emptive right

The right of current common stockholders to maintain their proportional ownership if the company offers more shares of stock. Avoid dilution.

Short Sale

The sale of shares not owned by the investor but borrowed through a broker and later purchased at a, hopefully, lower price to replace the borrowed shares.

What happens to stock price on the ex-dividend date?

The stock price and certain types of orders for the stock will drop by the dividend amount.

What things can common stockholders vote on?

They can vote on Board of Directors and Corporate Events (M&A). They cannot vote on management (CEO) and dividend payments

How do stock dividends impact cost basis?

Upon receipt of a stock dividend, the investor must adjust the cost basis of the entire position downward, and there is no current tax liability incurred for the additional shares.

When is a stock said to be trading ex-rights?

When pre-emptive rights are trading separately from the stock, therefore the stock is worth less than the same stock with rights attached.

When must a company file a 10-k?

Within 90 days of its company's fiscal year end.

If a person buys a security on record date via cash settlement will they receive the dividend? When is the ex-dividend date for cash settlement?

Yes they will receive the dividend and the ex-dividend date is the business day after the record date.

Stock warrant

a type of security issued by a corporation (usually together with a bond or preferred stock) that gives the holder the right to purchase a certain amount of common stock at a stated price. When issued, the strike price is normally far above the current stock price. Freely trade-able on the secondary market. Warrants are generally not issued with intrinsic value, meaning they are not valuable until the stock price increases substantially.

callable preferred stock

gives the issuing corporation the right to purchase (retire) this stock from its holders at specified future prices and dates. This presents call risk to investors so typically comes with a higher dividend payment.

Growth Stocks

stocks in corporations that reinvest their profits into the business so that it can grow Risky. Potential to produce capital gains.

Income Stocks

stocks that have a consistent history of paying high dividends Mature industries that have low investments in R&D. Utilities, REITs

Outstanding Shares

the number of shares issued less the number of shares held as treasury stock

Blue Chip Stock

the stock of a large, well-established and financially sound company that has operated for many years. Offer modest growth potential but can also produce a steady income through dividends.

dividends in arrears

unpaid dividends on cumulative preferred stock