Chapter 5: Equity Securities

Question 1

Equity Security

Answer 1

Represent an ownership interest in a trust or company

Question 2

Common Stock

Answer 2

-Shares that represent ownership in the company
-Have a claim to any residual cash
-Limited liability

Question 3

Preferred Stock

Answer 3

-Higher claim on earnings and assets to a company
-Limited or no voting rights
-Received dividends before common shareholders
-Dividends are often fixed

Question 4

Corporation

Answer 4

Business organization that operates as a legal entity separate from its owners and which the law treats as an individual

Question 5

Debt Financing

Answer 5

Raising funds through borrowing

Question 6

Advantage of Debt Financing

Answer 6

Shareholders’ control is not affected and retain full control of the company

Question 7

Disadvantage of Debt Financing

Answer 7

Company has to pay fixed charges even if it is not doing well financially

Question 8

Equity Financing

Answer 8

Getting funds by selling ownership in the company in the form of shares

Question 9

Stock Issue

Answer 9

Raising funds by offering securities

Question 10

Share Buyback

Answer 10

Company repurchases own shares

Question 11

Rights of Common Shareholders

Answer 11

-Right to Inspect Corporate Documents
-Evidence of Ownership
-Transfer of Ownership
-Participation in Corporate Earning

Question 12

Right to Inspect Corporate Documents

Answer 12

Can investigate admin and financial records but have to ask for governing documents or financial statements

Question 13

Evidence of Ownership

Answer 13

Stock certificates show ownership; includes purchase date, number of shares owned, ID, and signatures

Question 14

Transfer of Ownership

Answer 14

Stockholders can sell their shares without any restriction from the company unless subject to restrictions

Question 15

Participation of Corporate Earning

Answer 15

Share in gains if company produces a profit

Question 16

Statutory Voting

Answer 16

Allows investors to vote based on how many shares they have

Question 17

Cumulative Voting

Answer 17

Number of shares is multiplied by number of director seats available

Question 18

Restricted Securities

Answer 18

Acquired privately in an unregistered manner from the issuing company or affiliate

Question 19

Lock-Up Agreement

Answer 19

Ensures that company insiders do not sell their shares for a set period of time

Question 20

How long do lock-up agreements typically last?

Answer 20

90-180 days

Question 21

Investment Letter

Answer 21

Establishes that the securities are being bought for a minimum duration of time and are not for resale

Question 22

Restricted Stock

Answer 22

Shares issued to the employees as part of their pay but cannot be transferred until certain terms and conditions are met

Question 23

What are the two types of restricted stock?

Answer 23

Units and Awards

Question 24

Restricted Stock Units

Answer 24

Grants a given number of shares to an employee in the future

Question 25

Restricted Stock Awards

Answer 25

Grant of company's stock in which recipient's rights in stock are restricted until shares are vested or lapse in restrictions

Question 26

Controlled Stock

Answer 26

Shares owned by major shareholders of a publicly held company

Question 27

Who typically owns controlled stocks?

Answer 27

Affiliates

Question 28

Rule 144: Restricted Stock

Answer 28

Holding period of 6 months; Afterwards, no sale restrictions

Question 29

Rule 144: Controlled Stock

Answer 29

Holding period of 6 months; Afterwards, sale limitations still apply

Question 30

American Depository Receipt (ADR)

Answer 30

Certificate that represents a specific number of shares of a foreign company's stock

Question 31

Sponsored ADR

Answer 31

Legal association is established between ADR and foreign company, where foreign company assumes expenses related to issuing the security

Question 32

Unsponsored ADR

Answer 32

Issued by a depository bank without the involvement or participation of a foreign company

Question 33

Blue Chip Stock

Answer 33

Shares of large companies with well-known brands and successful track records

Question 34

Growth Stock

Answer 34

Shares of companies that are expected to grow at a significant rate, typically above average

Question 35

Income Stock

Answer 35

Regular and steady income, mostly dividends over a period of time, with low risk exposure

Question 36

Defensive Stock

Answer 36

Reliable, stable earnings and consistent returns, even in economic crisis

Question 37

Cyclical Stock

Answer 37

Price is affected by the economy

Question 38

Noncumulative Preferred Stock

Answer 38

Dividend does not accumulate, paid at a set rate

Question 39

Cumulative Preferred Stock

Answer 39

Accumulate dividends each year until paid

Question 40

Callable Preferred Stock

Answer 40

Issuer has the right to redeem stock at a preset price after a set period of time

Question 41

Participating Preferred Stock

Answer 41

Preferred shareholders must share additional dividends with common shareholders

Question 42

Convertible Preferred Stock

Answer 42

Gives the option to convert to a specified number of common stock shares

Question 43

Preemptive Rights

Answer 43

Allow existing shareholders to purchase additional shares before the company offers them to other investors during a new round of financing

Question 44

Shareholders' Right to Maintain Percentage Ownership

Answer 44

Allows stockholders to maintain their percentage of ownership of the shares

Question 45

Percentage Ownership

Answer 45

Number of shares divided by outstanding shares

Question 46

Discount

Answer 46

Amount that share price is lower than the net asset value

Question 47

Short-Term

Answer 47

Involves stocks that are traded on a frequent basis

Question 48

How long is the holding period for short-term trading stocks?

Answer 48

< 1 year

Question 49

Tradable

Answer 49

Shares that are fully paid and duly issued

Question 50

Warrant

Answer 50

Derivative issued by a company that gives buyers the right to purchase a company's stock at a certain price before an expiration date

Question 51

Put Warrant

Answer 51

Allows holders to sell the underlying security at a fixed price

Question 52

Call Warrant

Answer 52

Allows investors to purchase the intrinsic asset or share of common stock at a fixed price

Question 53

FINRA 2261

Answer 53

Directs the disclosure of financial information to customers

Question 54

Under FINRA 2261, what are members required to do?

Answer 54

Make important information available to customers and other members in the members' most recent balance sheet

Question 55

SEC Rule 10b-18

Answer 55

Reduces liability for companies when they repurchase common stock