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Ser 7 > Ch 1 - Common Stock > Flashcards

Ch 1 - Common Stock Flashcards

1
Q

Equity

A

Ownership
ex: common stock

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2
Q

Security

A

Legal term for a financial investment.

Defined by characteristics:
*Investment of money
*Common enterprise (mult. investors in a venture)
*Expectation of profit
*Third-party effort

Examples of securities:
*Common stock
*Preferred stock
*Debt securities
*Mutual funds
*Exchange-traded funds (ETFs)

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3
Q

Negotiable vs Redeemable

A

btw-investors vs with issuers
@ market price vs @ NAV
commission vs sales charge

*Net Asset Value =
(asset - liability) / outstanding shares

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4
Q

Regular-way trades of common stock settle

A

one business day (T+1), unless performed on a cash settlement basis (finalizes same day, if performed by 2:30pm ET)

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5
Q

Rights of Common stockholders

A

1/ Right to pro-rata share of dividends
**Cash - paid quarterly
**Stock - pre- and post-div value of ownership=same)
**Products

2/Right to vote for Board of Directors
**Statutory - up to # shares of stock per position
**Cumulative - favors smaller holders

3/Right to inspect books and records
**10k = annual, audit
**10q = quarterly, unaudited

4/Right to maintain proportionate ownership
**Pre-emptive Rights
**Warrants

5/Right to vote for stock splits
**Fwd = inc share, lower value

6/Right to assets upon dissolution
**Unpaid wages
**Unpaid taxes
**Secured creditors
**Unsecured creditors
**Junior unsecured creditors
**Preferred stockholders
**Common stockholders

7/Right to transfer ownership

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6
Q

Shares of common stocks

A

*Authorized - amount of stock a company is permitted to sell to investors
*Issued - sold to investors
*Outstanding - Shares owned by investors
*Treasury - repurchased from investor/market by issuers
*Issued = outstanding + treasury

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7
Q

earnings per share (EPS)

A

company’s net income / outstanding shares

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8
Q

Securities are registered in _________ format

A

book-entry

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9
Q

Statutory V.S. Cumulative  
voting structures

A

Beneficial for large V.S. small shareholders

ex:
own 100 stocks, 3 position BOD to vote
so 100x3 votes
S: apply up to 100 votes per open position
C: up to 300 votes in any manner

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10
Q

actions “+” outstanding shares & “-“ price/share

A

*forward stock splits
(stock splits require shareholder approval)
*stock divid
(does not)

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11
Q

dividends are decided by?

A

BOD
thus NOT requires shareholder approval/vote

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12
Q

Pre-emptive Rights

A

Rights value (ex-rights) formula（Used on or after ex-date）

*gives current stockholders the right to buy the new shares the company is issuing before they’re publicly offered.
*exercise price < lower than current market price (thus there is intrinsic value)
*The company automatically provides this value because they’re saving money by avoiding the services of an underwriter.

**Right to purchase new shares at a fixed price
**Intrinsic value exists at issuance
**Low time value at issuance
**Short-term (typically 60-90 days or less)
**Can be exercised, traded, or expire
**Stockholders receive one right for every share owned
**one RIGHT = one share owned
Rights value (cum-rights) formula （Used prior to ex-date）
=
Market price - subscription price
———————————————-
​Rights needed per new share +1

Market price - subscription price
———————————————-
Rights needed per new share

​

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13
Q

Warrants

A

**Right to purchase new shares at a fixed price
**No intrinsic value at issuance
**High time value at issuance
**Long-term (typically 5 years or longer)
**Can be exercised, traded, or expire
**Usually as sweetener of another issued security

**if given many choices, chose the one most out of the money (most more expensive than current market price)
issuing = Dilutive action requiring stockholder approval

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14
Q

Forward stock splits result in

A

More shares outstanding
Lower price per share
Same overall value

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15
Q

Reverse stock splits result in

A

Fewer shares outstanding
Higher price per share
Same overall value

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16
Q

Stock dividend consequences

A

More shares outstanding
Lower price per share
Same overall value

NON DILUTIVE:
no shareholder approval
require BOD approval

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17
Q

Ex-date for any stock split

A

business day after stock split

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18
Q

American depositary receipts (ADRs)

A

US-registered receipts for foreign investments
Created by domestic financial firms with foreign branches
Trade in US dollars in US markets
Subject to currency exchange risk
No voting or pre-emptive rights
Foreign government tax withholding creates a US tax credit

SPONSORED ADRs created with foreign issuer’s participation, provide translated stmts, eligible to trade on X (Sometimes refer as A.D. shares)

UNSPONSORED ADRS without, trade OTC-only, no translated stmt
STRONG USD negatively effect ADR paying divid in foreign-currency

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19
Q

currency exchange risk (also known as foreign currency risk) applies when

A

The currency being exchanged out of = weakens
The currency being exchanged into = strengthens

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20
Q

Subsidiaries

A

Company owned by a larger company
Also known as a “child company”

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21
Q

Spin-offs

A

Larger company releases part of its business as its own company

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22
Q

Merger

A

Two or more companies merge together
Company 1 + company 2 = company 1

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23
Q

Consolidation

A

Two or more companies merge together as a new company
Company 1 + company 2 = company 3

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24
Q

Acquisition

A

Large company buys out a smaller company

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25
Tender offers
Proposal to purchase security from current investors Offered at a premium to market price Participants must be long the security (common stock, cannot be long call or convertible pref stock) Must be available for at least 20 business days Must be available for an additional 10 business days if offer changes tender offer relates to hostile takeover
26
Primary market
Sale of securities where issuer keeps proceeds Where initial public offerings (IPOs) occur
27
Secondary market
Sale of securities where a party other than the issuer keeps proceeds Where securities trade after their initial sale
28
Subdivisions of the secondary market
**First market *****Listed stocks trading on exchanges **Second market *****Unlisted stocks trading OTC **Third market *****Listed stocks trading OTC **Fourth market *****Institutions trading through ECNs
29
Cash dividend dates
The BOD determines: **Declaration date **Record date **Payable date The NYSE determines: **Ex-dividend date for NYSE trades FINRA determines: **Ex-dividend date for OTC trades
30
Ex-dividend date (cash dividends)
Same day as the record date Dividend not received if buying Dividend kept if selling
31
Ex-dividend date (stock splits)
Day after the payable date
32
Order of dividend dates =DERP
D - declaration date (BOD approves divd, announce public) E - ex-dividend date (Investors buying = do NOT recv dividend & Investors selling the stock keep the dividend) R - record date (shareholder must be owner of the stock to get divd) P - payable date
33
BOD sets what dates
D (not E) R P
34
Ex-Date Regular-way settlement Cash settlement
T+1 & record date=ex-date (buy the day before ex-date to get divd) V.S. ex-date = day after record date
35
suitability of common stock
*moderate-high risk/return *younger=better *longer time horizon (to recover losses, negative correlation btw suitability & age) *hedge against inflation risks
36
Benefits of common stock
*Capital appreciation (Investment value rises above the cost @ buying) AKA - Growth, Capital gains *Income from cash dividends (usually paid by larger, successful comp, ref to as "value stock"; smaller comp usually won't, ref to as "growth stock;) blue-chip stocks=high long-term capital gain potential, largest and valuable sto ks *usually lower income tax rate than bond
37
Dividend payout ratio=
annual dividend per share -------------------------------------- annual earnings per share ​
38
Systematic risks
Cannot diversify out of systematic risk *Market Risk *Inflation Risk
39
Market risk
An investment is negatively affected by a general downturn in the stock market =Systematic risks
40
Inflation risk
AKA purchasing power risk General prices rise more than expected Common stock tends to outpace inflation over long-term periods =Systematic risks
41
Financial risk
High debt levels negatively affect company performance =non-systematic risks
42
Business risk
Products or services in low demand due to competition or mismanagement =non-systematic risks
43
Regulatory risk
Potential or current government regulation negatively affects an investment =non-systematic risks
44
Liquidity risk
AKA marketability risk Inability to sell a security without dropping price dramatically =non-systematic risks
45
Concentration risk
Lack of diversification Amplifies relevant non-systematic risks
46
Market capitalization
Large-cap: More than $10 billion Mid-cap: $2 billion to $10 billion Small-cap: $300 million to $2 billion Micro-cap: $50 million to $300 million Nano-cap: Less than $50 million
47
rule of 100 (asset allocation)
100-age = common stock ratio in alloc age = fixed income investments
48
Fundamental analysis
Inspection of a company’s finances
49
10-K report vs 10-Q report
10-K =annual report =Audited financial report *includes balance sheet, cash flow stmt, income stmt 10-Q =quarterly report =Unaudited financial report *part of fundamental analysis
50
Balance sheet
Compares company assets and liabilities Indicates a company’s net worth =assets - liabilities include taxes payable, inventory, fixed assets *part of fundamental analysis
51
Footnotes
Provides additional context for the information in financial statements *part of fundamental analysis
52
Income (cash flow) statement
Displays company income and expenses (COGS) *part of fundamental analysis
53
Current Ratio
=current assets / current liabilities Measures ability to pay short-term obligations *part of fundamental analysis
54
Net working capital
=current assets - current liabilities Determines liquid cash and marketable assets on hand *part of fundamental analysis
55
Quick assets
QA=current assets - inventory like looking in the wallet of a company. *part of fundamental analysis
56
Quick ratio
Also known as the acid test ratio Used to determine a company’s liquidity =current assets - inventory / current liabilities *part of fundamental analysis ​
57
Debt service coverage ratio
=net operating income/debt service requirements ​Measures ability to pay debts ( net operating income = gross income (profit) - operating expenses.) *part of fundamental analysis
58
Earnings per share (EPS)
Reports an issuer’s profitability on a per share basis *Basic EPS only considers outstanding shares *Fully diluted EPS considers: *****Outstanding shares, plus *****Shares to be received by option exercise or conversion *part of fundamental analysis
59
Earnings per share (EPS)
= (Net income - pref divs) / ( Outstanding shares) ​ net income=gross - expenses MINUS pref div = earnings avilable to common stock shareholder *part of fundamental analysis
60
Price-to-earnings (PE) ratio
Compares a security’s market price to earnings =COMMON STOCK Market price/EPS *High PE Ratio (v.s. low) ***May indicate an overpriced investment (v.s. underpriced) ***Typical of growth companies (v.s. value comp) *part of fundamental analysis
61
Technical analysis
Identifying and predicting market trends Technical analysts are known as “chartists”
62
Market trend
Identifies general market movement Trend lines depict bullish or bearish directions *pt of Technical analysis
63
Advance/decline line
Details the number of stocks up/advance vs. down/decline Helps determine overbought or oversold markets Overbought market **Rising market, but starting to trend downward (# inc is falling) **Bearish indicator *U的后面半段 Oversold market **Falling market, but starting to trend upward **Bullish indicator *U的前面半段 *pt of Technical analysis
64
Consolidation
Market moves within narrow parameters (price fluctuations seem to be indecisive and stay within a specific range) Indicates uncertain or neutral market *pt of Technical analysis
65
Saucer bottom formation
Stock price falls, flattens, reverses upward A reverse downward trend Bullish indicator "U" shaped *pt of Technical analysis
66
Head & shoulders top formation
Outline of a person A reverse upward trend Bearish indicator *pt of Technical analysis
66
Saucer top formation
Stock price rises, flattens, reverses downward A reverse upward trend Bearish indicator "n" shaped *pt of Technical analysis
67
Head & shoulders bottom formation
Outline of an upside-down person A reverse downward trend Bullish indicator *pt of Technical analysis
68
Resistance levels vs Support levels
好像一个区间。 Resistance levels **The market price where stock avoids going above **Breakout above is a bullish indicator Support levels **The market price where stock avoids going below **Breakout below is a bearish indicator *pt of Technical analysis
69
Round & odd lots
A round lot is a standard trading denomination Typical round lot (stock) = 100 shares Odd lot denomination is less than a round lot *pt of Technical analysis
70
Odd lot theory
Investors trading in odd lots are wrong Do the opposite of odd lot trends to profit *pt of Technical analysis
71
Short interest & Short interest theory
Percentage of shares sold short -High short interest = bullish indicator -Low short interest = bearish indicator (When investors sell short securities, they are obligated to buy them back at some point in the future (to return the borrowed shares to their financial firm). If a stock has a high short interest level, the influx of sales has already been factored into the market price. All of those short sellers must buy back the stock at some point, which will drive demand and the stock price upward.) *pt of Technical analysis
72
Efficient markets theory
Market prices instantly reflect new public info
73
Dow theory
Three types of market trends: **Main trend **Medium trend **Short trend Trend changes confirmed with Dow averages: **DJ Industrial Average (30 stocks) **DJ Transportation Average (20 stocks) **DJ Utilities Average (15 stocks) If Dow averages move in: **Same direction: confirmation of new trend **Different directions: uncertainty

Ser 7 (8 decks)

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