Unit 12

SEC Rule 144

If a married couple (either individually or jointly) owns a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. U12LO4

fundamental analyst

charts the price-to-book ratio, the price-to-earnings ratio, and the management tenure. Also examining general economic conditions and the company's financial condition and growth prospects

Preferred stock advantages

-dividends must be paid before any distribution to common stockholders -a fixed rate of return that is likely higher than that for a debt security offered by the same issuer

Preferred stock disadvantages

-fixed return may not keep up with inflation -regardless of corporate earnings, the dividend will not change, so there is no hope for increased income.

bullish activity.

A price increase on heavy volume relative to the stock's normal trading volume

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except A) the recipient of the grant of the ISO has no income tax consequences at the time of the grant. B) the holder of an ISO can recognize capital gain (loss) as a result of exercise, whereas ordinary income (loss) is the result with an NSO. C) ISOs may only be granted to employees while NSOs may be given to virtually anyone. D) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO.

A) the recipient of the grant of the ISO has no income tax consequences at the time of the grant. Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least 1 year from the date of exercise and at least 2 years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes. U12LO3

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

B) Interest rate 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. U12LO5

One of your customers notices that the short interest on KAPCO common stock is high. When she asks you for an interpretation, you should tell her that this signals A) a shortage of enough stock to go around B) a bullish outlook C) a bearish outlook D) that a change in interest rates is coming

B) a bullish outlook Even though short interest represents the number of share sold short (typically by bearish investors), technical analysts believe that when it gets high, it is a bullish indicator. Each share that has been sold short must be replaced (covered) at some point. To replace the stock, an investor must go into the market to buy that stock. When all of those short sellers have to buy back the stock they shorted, it puts upward pressure on the price of that stock. U12LO6

The primary defining characteristic of an equity security is A) the ability to keep pace with inflation. B) it represents ownership in a corporation. C) voting rights. D) it pays dividends, usually quarterly.

B) it represents ownership in a corporation. What does the term "equity" mean? It means ownership and that is the single most significant fact about an equity security, whether common or preferred stock. Many pay dividends, but that is not at the core of being an equity security. Equity securities include preferred stock, which, with its fixed dividend, does not offer inflation protection and does not have voting rights. U12LO1

An analytical tool used to project the current value of a common stock using projected future dividends is A) the price-to-earnings ratio B) the dividend discount model C) the dividend payout ratio D) the future value computation

B) the dividend discount model There are two widely accepted forms of common stock price projection using dividends—the dividend discount model and the dividend growth model. U12LO6

The residual right of common stockholders refers to their right to A) examine the corporation's annual reports and other reports, and take legal action if irregularities are found B) vote in elections for the board of directors and in other important business decisions, such as changes to the charter C) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid D) receive all announced dividends in accordance with the number of shares held

C) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid The residual right of common shareholders refers to their position in the event of bankruptcy. U12LO2

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer A) non-qualified stock options B) portable stock options C) incentive stock options D) listed stock options

C) incentive stock options Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while non-qualified options are always treated as ordinary income. U12LO3

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has A) greater exposure B) a proportionately decreased interest in the company C) no effective change in the value of the position D) a proportionately increased interest in the company

C) no effective change in the value of the position When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same. U12LO2

Investments in which of the following offer the best long-term protection against inflation? A) Government bonds B) Corporate bonds C) Fixed annuities D) Common stock

D) Common stock Common stocks have historically offered returns that outpace inflation over the long term. U12LO2

Ownership in a corporation is evidenced by holding share of the company's A) warrants B) bonds with a first mortgage on the property C) common stock only D) common or preferred stock

D) common or preferred stock If you have equity in a corporation, it means you have an ownership interest. Equity securities, common and preferred stock, represent ownership in a corporation. A mortgage bond is a debt security and a warrant gives the holder to acquire equity, but, in itself, is not equity. U12LO1

One characteristic found in equity securities issued by a corporation is A) a history of keeping pace with inflation B) preemptive rights C) cumulative dividends D) limited liability

D) limited liability Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends. U12LO1

During the analysis of XYZ stock, a technical analyst concludes that XYZ's support level has been broken. Being a technician, the most appropriate decision should be to A) rate the stock as a hold. B) purchase additional shares of the stock. C) rate the stock as a buy. D) rate the stock as a sell.

D) rate the stock as a sell. If a support level is broken, this provides a sell signal. Once the stock has lost its support, expectations are that it will continue to fall. The breaking of a resistance level, as the price of the asset gathers momentum to the upside, indicates a buying opportunity. U12LO6

technical analyst

charts price and volume over time. identify trends and predict changes in the market

chartist

is interested in the volume of shares traded, and the short interest for that particular stock

stock dividend

number of shares owned to increase while the cost per share decreases

ADRs

receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank. Dividends are declared in the local currency, so exchange rate, or currency, risk is not completely eliminated. They are generally traded on one of the major exchanges ensuring liquidity. They are an alternative to investing directly in foreign companies or foreign mutual funds. If the investor desires the foreign shares, the ADR may be surrendered and the exchange made.