Chapter 1 Definitions Flashcards
(147 cards)
1
Q
Stock
A
Equity capital which means it gives buyers an ownership stake in the corporation
2
Q
If you hold one share of stock what is a perk of that?
A
You will have claim on the company’s assets and profits
3
Q
Common Stock
A
Equity security that represents ownership, giving investors a claim on the company’s assets and earnings, and offering the potential for growth (capital gain) and/or income (dividends)
4
Q
Preferred Stock
A
Equity security that represents ownership that is senior in priority to common stock. It pays a regular, fixed dividend payment
5
Q
Rights
A
Allows shareholders to buy shares to maintain their proportionate ownership in the company if the company issues additional shares (Keep you percentage ownership)
6
Q
Warrants
A
Gives an investor the ability to purchase a company’s stock at a fixed price for a set period of time - they are often provided by the company in conjunction with another security to make the security more attractive
7
Q
ADRs
A
American depository receipts
8
Q
American Depository Receipts
A
Facilitate the US trading of foreign common stock
9
Q
Dividends
A
Distributions of a company’s profits to shareholders - usually paid in cash or additional shares of stock
10
Q
Do dividends have to be declared by the company’s board of directors?
A
Yes
11
Q
Ex-dividend date
A
First date that when an investor buys common stock, the investor will not receive the dividend because they will not be on the books and records of the company intime
12
Q
Stock split
A
An artificial adjustment of a company’s stock price and number of shares with no actual change to the total value of the issuer or of an investor’s position
13
Q
Short sale
A
A transaction in which an investor, believing the price will decline sells borrowed shares in the market, hoping to buy back and replace the shares at a lower price than what they were initially sold for
14
Q
What is the most widely held equity security?
A
Common stock
15
Q
How are almost al common stockholders handled?
A
In book entry form
16
Q
What is book entry form?
A
Rather than the investor receiving a certificate, the broker-dealer keeps a record in its books of the ownership of that particular security
17
Q
When a company decides to offer stock to the public what is the approved number of shares called?
A
Authorized stock
18
Q
What do you call the shares of authorized stock that are sold to the public?
A
Issued stock
19
Q
What are issued stock referred to as when they are in the hands of investors?
A
Outstanding shares
20
Q
What do you call shares that are issued to investors and subsequently repurchased by the company?
A
Treasury shares
21
Q
What is not included when calculating a company’s total outstanding shares?
A
Treasury stock
22
Q
As treasury stock increases, the company’s outstanding share count ______
A
Decreases
23
Q
Par Value
A
The nominal value that some states require be assigned to provide a minimum amount of legal capital to pay creditors
24
Q
A stock’s par value is usually _____
A
$1 or less
25
In what case is par value not at all relevant to investors?
Common stock
26
Why is par value set low?
Because the stock cannot be issued for less than par value
27
Who owns a company's common stock?
Shareholders
28
As shareholders what are you entitled to?
Certain legal rights of ownership and the right to transfer the ownership of shares to someone else by sale or gguft
29
Who has limited liability?
Shareholders
30
Limited liability
Shareholders are only on the hook for the amount invested and cannot lose more than their original investment
31
How do shareholders (owners of common stock) exercise control?
By electing a board of directors and voting on corporate policy
32
What are the two methods by which shareholders vote?
Statutory voting and Cumulative Voting
33
Statutory Voting
Allows the shareholder to vote one time per share for each seat on the board of directors
34
What type of voting is this an example of: An investor owns 10 common shares and two board seats are to be filled. The investor has up to 10 votes to cast for each of two directors seeking election to the board
Statutory
35
Cumulative Voting
Allows the shareholder to pool votes together and then allocate them as desired
36
What type of voting is this an example of: The shareholder has a total of 20 votes for the 10 shares that are held (10 votes for each of the two seats). The shareholder can cast 20 votes for one candidate, 15 for one candidate and 5 for another
Cumulative
37
If a shareholder cannot attend a meeting to vote in person __________
Votes can be cast by proxy through an absentee ballot
38
If a company decides to increase the size of its board of directors, the new board members are elected by _______
Shareholders
39
Most securities positions are held in _____ name
Street
40
Street name
The broker-dealer with the customer's account is the nominal owner and the customer is the beneficial owner
41
Beneficial owner
Customer retains all rights of ownership, including the right to vote
42
In the case of street name ownership, the broker-dealer must promptly forward all proxy statements to the _________________
Beneficial owner
43
Proxy statements
SEC-required disclosures that are sent to solicit shareholder votes for the election of corporate directors at annual meetings and for material corporate events such as mergers
44
Shareholders have the right to access certain financial information about the company and to receive audited financial reports, for example a ______________________
Form 10-k
45
A 10-K must typically be filed with the SEC within ____ days of a company's fiscal year-end
90
46
Who is at the bottom of the priority ladder for ownership claims?
Common stockholders
47
What are the 2 ways investors that buy stock can earn profit?
Dividends and Capital gains
48
Capital gains
The process of buying a stock at one price and selling it at a higher price
49
Investors only pay taxes on _____ capital gains
Realized
50
When are realized capital gains generated?
When an investor sells a security for a profit
51
Are unrealized capital gains taxed?
No
52
Unrealized capital gains
The increase in value of a security
53
Dividends
Share of the corporation's profits; if they are to be paid, a specified amount is allocated for each outstanding share
54
What are pre-emptive rights also known as?
Subscription rights
55
Rights offerrings
Give shareholders the right to acquire additional shares, proportionate to their current holdings
56
For rights offerings what is the usual time frame to decide if you want to exercise these rights?
30-45 days
57
What do rights offerings grant customers?
The option of maintaining their ownership interest in the company and preventing dilution
58
Dilution
The reduction of their ownership interest
59
Pre-emptive rights are rare for _______
US companies
60
Lance owns 1,000 shares of ABC common stock, and he has pre-emptive rights. The company currently has 1 million common shares authorized and outstanding. if the company is issuing 100,000 new common shares in a public offering, how can Lance maintain his proportionate ownership in the company?
A. He must subscribe to the public offering
B. He must exercise the rights he is awarded
C. He must go into the market and buy more shares at the best available price.
D. He probably will not be able to maintain his proportionate ownership
B
61
Lance owns 1,000 shares of ABC common stock, and he has pre-emptive rights. The company currently has 1 million common shares authorized and outstanding. if the company is issuing 100,000 new common shares in a public offering. If ABC common stock currently is trading at $50 per sahre just before the new stock offering, at which price will Lance be able to buy new shares, assuming he tries to maintain proportionate ownership?
A. Below $50 per share
B. At $50 per share
C. At $50 per share plus commission
D. Above $50 per share
A
62
Warrant
Entitles the holder to buy the issuer's stock at a specified price for a period of time
63
Is a warrant a long-term instrument?
Yes
64
The exercise price of the warrant is usually substantially ______________ than the stock price at the time of issue
Higher
65
When do warrants become exercisable only if the stock ____________________
Appreciates over the long term above the exercise price
66
Warrants are frequently attached to ___________________________________
Bonds or preferred stock as a sweetner, allowing the issuer to pa a lower interest or dividend
67
Like rights, warrants may also ___________________________
Trade separately on the open market
68
Rights and warrants may trade as _____________ in the secondary market
Independent securities
69
When are warrants valuable?
When the stock's price increases above the warrant price which incentivizes you to get in on the warrant
70
Blue Chip Stocks
Stocks of large, stale companies with a long history of steady earnings and dividends
71
Blue chip stocks are issues of well known companies like __________
General Electric, IBM, Coca Cola, and Pfizer
72
Income stocks
Produce income typically in the form of dividends for their investors
73
Income stocks are ________
Generally companies that operate in mature industries and have low investments in research and development
74
Cyclical Stocks
Mirror the economy, strengthening when the economy is growing and declining in value as the economy contracts
75
Defensive stocks
Resistant to changes in economic cycles - usually stocks of staple consumer items, and stocks of discount retailers like Wal-Mart
76
Growth Stocks
Stocks of companies that reinvest most of their earnings into the businesses - considered risky
77
Penny Stock
Unlisted stock trading for less tan $5 a share
78
If a security is unlisted that means it is not found on a _______________
National stock exchange such as Nasdaq or NYSE
79
Penny stocks trade in the ____________ marketplace
OTC (Over the counter)
80
Investors purchase penny stocks with the goal of ________
Capital appreciation
81
Because of their low stock price and general lack of liquidity, penny stocks are considered __________ securities
Extremely risky
82
What is systematic risk also referred to as?
Market risk, systematic risk or systemic risk
83
Systemic risk
Performance of an individual security will be impacted by the performance of the overall market
84
Can market risk be avoided through diversification?
No
85
What are some common sources of systemic risk?
Recessions, wars, significant political events and interest rate changes
86
Though systematic risk cannot be avoided through diversification it can be hedged with investments in ______
Derivatives
87
What is a common measure of a stock's volatility relative to the broader market?
Beta
88
A stock with a beta greater than 1 is _______
More volatile than the market
89
A stock with a beta less than 1 is _________
Less volatile than the market
90
A stock with a beta of 0 means the stock is _______
Uncorrelated to the market
90
A beta less than 0 means ___________
The stock is negatively correlated to the market
90
Growth stocks usually have a _____ beta than value stocks
Higher
90
Higher beta comes with higher risk but the potential for _________
Higher returns
91
What is non-systematic risk also referred to as?
Business risk
91
Will non-systematic risk impact an investor's entire portfolio?
No
91
What is the best protection against non-systematic risk?
Portfolio diversification
91
What do depository receipts do?
Provide domestic investors convenient access to foreign shares
91
Like US stocks, foreign stocks offer the potential for ______
Capital appreciation and dividend income
91
American Depositary Receipts
Represent ownership in the shares of non-US companies that trade in US financial markets
91
Whats the tax situation with ADRs?
It is possible for an ADR holder to receive a lower dividend than was actually declared by the foreign company because the foreign government might have withheld a percentage of the dividend for taxes
91
What are the risks of owning ADRs?
Political risk, currency risk, inflationary risk
91
Preferred Stock
Categorized as an equity security, it features characteristics of both stocks and bonds.
91
Unlike common stockholders, preferred stock holders usually have no _______
Voting privileges
91
Preferred shareholders have priority over ___________________ in the event of a corporate liquidation
Common stockholders
91
If assets remain, preferred shareholders will receive at least the _______ of their shares and possibly ___________ before common shareholders receive anything
Par value, dividends in arrears (missed dividend payments)
91
The biggest difference between preferred stock holders and common stock is that preferred stock almost always pays _______
A quarterly dividend
91
Par value is more significant to preferred stockholders than to common stockholders because the dividend rate is expressed as a percentage of ______
Par value
91
Because of the fixed dividend, preferred stock trades like a _______________ which means ___________
Debt security, susceptible to changing interest rates
92
When interest rates increase, dividend payments __________ to compete with higher-yielding debt securities
Increase
92
Common stock has the potential for (limited/unlimited) upside
Unlimited
92
The returns on preferred stock is tied primarily to the ___________, which ____________
Dividend payments, caps the investors upside appreciation
92
Cumulative preferred stock
Includes a provision that gives shareholders to receive dividends in arrears
93
Dividends in arrears
If a dividend is skipped or cancelled, the cumulative preferred shareholder must receive dividends of both the current period and any previously skipped dividends before a payment can be made to common stockholders
94
Participating preferred stock
Allows the holder to receive an extra dividend distribution
95
Convertible preferred stock
Gives the holder the option to exchange preferred shares for shares of the issuers common stock according to a defined ration that is based on par value (If a preferred share has par val 100 - it can be exchanged into common shares of 20 per share)
96
Shares of convertible preferred stock offer investors the _________ of common stock
Upside potential
97
Convertible stock generally pays a ______ dividend than nonconvertible
Lower
98
Callable preferred stock
Can be repurchased/recalled by the issuing company at its discretion
99
What type of stocks face call risk?
Callable preferred stock
100
Callable preferred stock generally pays a _____ higher dividend than non-callable preferred stock from the same issuer
Higher
101
Adjustable-rate preferred stock
Pays dividends that are determined by an underlying benchmark (usually the US Treasury bill)
102
Negotiable security
One that can be freely transferred, assigned, or delivered to another entity
103
Registrar
Maintains records of ownership of securities by matching each share of stock against ownership record and ensuring there is no unauthorized issuance
104
Transfer agent
Records changes of ownership in securities and may maintain records of ownership
105
Given a stock split or stock dividend, who is responsible for ensuring that investors receive the appropriate shares in a corporate event?
Transfer agent
106
Declaration date
Date on which the board of directors declares that a dividend will be paid
107
At the time that the board decides on the declaration date, they also decide on _______
The record date and the payable date
108
Record Date
The date which upon a stockholder must be a registered owner of the stock (holder of record) to receive the dividend
109
Payable date
Date the payment is actually made, generally about three weeks after the record date
110
The declaration date must be at least __ business days before the record date
10
111
What does the ex-dividend date do?
Governs who will receive a dividend
112
Who is the ex-dividend date decided by?
The exchange
113
The record date is the same as ____
The ex-dividend date
114
If a trade occurs before the ex-dividend date, the ____ receives the dividend because the trade will settle by the record date
Buyer
115
If the trade takes place on or after the ex-dividend date, the _____ receives the dividend because settlement will take place after the record date
Seller
116
On the morning of the ex-dividend date, the price of the stock ____ by the amount of the dividend
Drops
117
What are the most common type of dividend?
Cash
118
Stock dividends are made pro rata to all shareholders. What does that mean?
Each shareholder's proportionate stake in the company remains the same
119
For the company, what is the main advantage of a stock dividend?
Its earnings can be reinvested for growth and development
120
For the buyer, what is the main advantage of a stock dividend?
No taxes are paid on the stock dividend until he shares are sold
121
Stock split
An adjustment in an issuer's outstanding share count - after : each investor's ownership position remains unchanged, but the number of shares and the stock price are adjusted
122
Forward split
Stock split in which the shareholder receives additional shares
123
How to calculate new number of shares after a split?
Multiply price times split
124
How to calculate new price after a split?
Divide price by first split then multiply by second
125
Are stock dividends takes when received by a shareholder?
No
126
In a short sale an investor sells _____ shares in the market hoping the replace the position at a _____ price than the shares initially sold for
Borrowed, lower
127
Because the price of the stock can rise indefinitely, short sellers have _______ risk potential
Unlimited
