Common Stock Flashcards
(190 cards)
1
Q
Issuer
A
Organization that distributes & sells securities to investors (Stocks, Bonds, etc…)
2
Q
Securities
A
Legal term for type of investment: Common Stock, Bonds, Mutual Funds, ETFs, REITs, Options, etc.)
3
Q
Retained Earnings
A
Profits retained by a company, often used to expand & reinforce business operations. Shown after dividends are paid.
4
Q
Retained Earnings & Growth Companies
A
Growth companies tend to not pay dividends. They reinvest the R.E. into the company. Investors prefer the chance of more capital appreciation.
5
Q
Retained Earnings & Value Companies
A
Value companies will typically pay a dividend, as they have reached their ceilings and are focused on running a successful business.
6
Q
Dividend Share Price Adjustment
A
Old Price / Stock Dividend Factor
Ex: Owning 100 shares at $20/share. 25% Stock Dividend given would make the SD Factor 1.25 (1 + 0.25).
Adjusted Price = $20 / 1.25 = $16
Adjusted Shares = 125
Both cases, total equity = $2,000.
7
Q
Types of Dividends
A
Cash, Stock, and Product (ex. Receiving 10 Amazon Kindles)
8
Q
Stock Dividend Consequences
A
- More Shares Outstanding (AKA more diluted)
- Lower price per share
- Same overall value
9
Q
Who determines the hiring/firing of senior-level employees & management?
A
Board of Directors
10
Q
Who manages the senior management’s compensation?
A
Board of Directors
11
Q
Who creates & implements the general company policies?
A
Board of Directors
12
Q
Who approves dividend payouts to investors?
A
Board of Directors
13
Q
Who/When votes for the Board of Directors & in what ways can they be voted for?
A
At the annual meeting, the stockholders vote for the open seats on the Board of Directors through cumulative & statutory voting.
14
Q
Statutory Voting
A
Every share the stockholder owns (ex. 100) has to be evenly distributed for each board seat.
For example, if there are 3 seats open, the investor has to put down 100 votes for each seat.
This is best for large investors.
15
Q
Cumulative Voting
A
Each stockholder can maximize the number of their votes for each seat.
For example, if the stockholder owns 100 shares and there are 3 seats open, they can cast 300 votes for one seat.
This is best for small investors.
16
Q
Audited Financial Report
A
10-K Annual Filing
17
Q
Unaudited Financial Report
A
10-Q Quarterly Report
18
Q
Authorized Shares
A
Number of shares the newly incorporated business can offer to investors.
19
Q
Do companies have to issue all their authorized shares?
A
No.
20
Q
Issued Shares
A
The number of authorized shares that are sold to investors.
21
Q
Where are issued shares traded?
A
Secondary Market
22
Q
Oustanding Shares
A
The number of issued shares that are owned by investors.
23
Q
Treasury Stock
A
The issued shares that are re-purchased by the company (buy-backs).
24
Q
What happens to the investors’ shares if the company decides to issue more authorized shares?
A
The investors’ ownership in the company become diluted.
Ex. An investor owns 10% of a company’s shares (50,000). If the company decides to sell an additional 500,000 of authorized shares, then the ownership goes from 10% to 5%.
25
Pre-emptive Rights
Gives current shareholders the right to buy newly-issued shares before they are sold to the public.
A way to protect current investors' ownership (think voting) in the case of dilution.
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How many rights can the investor buy from pre-emptive rights? At what price can they be purchased?
1 right per share owned. They can be purchased at the intrinsic value (at a discount to the current market price).
27
Does 1 pre-emptive right = 1 share?
No, it depends on the terms.
28
What is a main reason for selling rights at a discount?
No underwriter is needed, so the savings are factored into the discount.
29
What are the 3 options an investor have with pre-emptive rights?
Exercise, Sell, or Expire
30
Pre-emptive Rights Expiry
60-90 Days
31
What are warrants sold at?
Premium to the current market price.
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Warrants Timeline Expiry
5+ Years
33
How are warrants initially sold?
Usually attached to a security the company wants to push for selling (ex. Bond)
34
Who approves the issuance of warrants? What effect does it have to current investors?
Shareholders approve the issuance of warrants.
Ownership is diluted for investors.
35
Preferred Stock
A stock that pays a continual fixed dividend to shareholders.
36
What do convertible preferred stock & convertible bonds have in common?
They can be converted into common stock.
37
If a convertible bond is converted to common stock, does this dilute the ownership of other investors?
Yes.
38
In terms of distributions, what's a key difference between regular preferred stock and bonds vs convertible stocks and bonds?
Both pay semi-annually, but convertible securities offer a lower yield due to the added benefit of converting to common stock.
39
Do employer stock option plans dilute ownership?
Yes.
40
Intrinsic Value for Rights and Warrants.
* Exists for Rights
* Does not exist for Warrants
41
What happens to the number of outstanding shares when a company does a forward stock split?
They increase.
42
What happens to the number of outstanding shares when a company does a reverse stock split?
They decrease.
43
What's the main purpose of a forward stock split?
Stock is too expensive for retial investors, so a forward stock split will decrease the cost per share, allowing for them to jump in.
| Think Tesla at $2,000/share.
44
If Tesla's stock is at $500 and wants to appeal to retail investors, what should they do and what happens?
They would perform a forward stock split, which decreases the share price and increases shares for current stockholders.
Forward Stock Split: + Shares Owned by Investors; - Stock's Market Price
45
If Apple ($300/share) wants to do a 2:1 forward stock split, what happens to an investor if they own 100 shares?
The market price becomes $150 and the investor now owns 200 shares.
46
If the stock split is a 2:1, what is the calculation?
Stock Split Factor: 2 / 1 = 2.
of shares owned * 2 (SS)
Current Stock Price / 2 (SS)
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Stock Split Factor
1st Ratio Number / 2nd Ratio Number
48
Minus wages and taxes, who is paid first upon liquidation?
Secured Creditors
48
What are the main reasons for a reverse stock split?
1. To meet exchange requirements (ex. NASDAQ $1/share minimum)
2. To attract institutional investors.
48
If Phunware's stock is at $5 and the company wants to do a 1:5 reverse stock split, what happens to the investor who owns 100 shares?
The stock price increases to $25/share and the shareholder has 20 shares now.
48
What happens to outstanding shares from forward stock splits?
The amount of outstanding shares increase.
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Who needs to approve stock splits?
Shareholders.
48
Increase in share price, decrease in shares
Reverse Stock Split
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What happens to outstanding shares from reverse stock splits?
The amount of outstanding shares decrease.
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Common liquidation assets.
Building, factories, inventory, equipment, and vehicles.
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Liquidation
Bankrupt company must liquidate all of their assets.
49
What is the liquidation structure?
Wages, Taxes, Secured Creditors, Unsecured Creditors, Junior Unsecured Creditors, Preferred Stockholders, and Common Stockholders.
50
Minus wages and taxes, who is paid last upon liquidation?
Common Stockholders
51
Common type of collateral a secured creditor would issue to a company.
Lien
52
Lien
Right to a property if loan cannot be repaid.
53
Secured vs Unsecured Creditors
Secured: Have collateral (liens) on the business for loans.
Unsecured: Backed by full faith and credit, no collateral on loans.
54
For liquidation, what are debenture bondholders under?
Unsecured Creditors
55
Who is responsible for updating ownership of a stock?
Transfer Agent
56
Who hires a transfer agent?
The issuing company.
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What are the responsibilities of the transfer agent besides updating ownership?
1. Maintain book of stockholders
2. Make dividend payments.
3. Distribute proxies.
4. Keep accurate count of shares outstanding.
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Settlement Date
T + 1 (Trade Date + One Business Day)
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Process of a TA when stock is sold.
Redeems shares from seller and issues shares to buyer on settlement date.
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Book Entry
Computer databases that track of who owns what stock.
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What is an issuer responsible for?
Creating, registering and selling a security.
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Negotiable Security
When a security can be bought & sold among investors who are negotiating the price (bid/ask).
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Redeemable Security
When a security is bought & sold through the issuer. The issuer cashes out the shares (mutual funds, UITs).
64
How are negotiable securities traded?
Based on the market price & demand.
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How are redeemable securities traded?
At the NAV of a fund or UIT.
66
Primary Market
Where issuers offer securities to investors in return for money.
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Where do private placements take place?
Primary Market
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Who is generally allowed to invest in private placement offers?
Wealthy Individuals (accredited investors) and institutional investors.
69
Institutional Investor
Entity that invests on behalf of a group of investors.
I.e. Hedge Funds, Mutual Funds, Insurance Companies, and Banks
70
Are IPO's transacted in the primary or secondary market, for investors?
Primary Market.
71
IPO Primary Distribution
Shares sold to the investor and proceeds given to issuer (i.e. AirBnB)
72
IPO Secondary Distribution
Shares sold to the investor and proceeds given to 3rd party, such as a bank's shares they purchased in the private placement rounds or if a CEO sells their shares they acquired as being an owner of a company pre-IPO.
73
The 4 subsections of the Secondary Market
First, Second, Third and Fourth
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Stocks that are purchased on a secondary market exchange.
First Market
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Stocks that exist on an exchange (listed), but are purchased through an OTC-type transaction.
Third Market
76
Who operates in the third market?
Market Makers
77
How do market makers work and what is the benefit?
They purchase shares, not through an exchange, at a discounted price and try to sell at a higher price (think used cars).
The main benefit is to add liquidity to the market.
78
Stocks that are unlisted and sold on OTC only.
Second Market
79
Where institutions purchase large quantities of stock from other institutions
(Think Schwab wanting to purchase $1m shares of Netflix stock for one of their funds from a Hedge Fund who owns the shares).
Fourth Market
80
What do Fourth Market operations go through?
Electronic Communications Networks (ECNs)
81
Financial organizations that primarily help buy/sell securities.
Broker-Dealer
82
Top 5 Broker-Dealers (2024)
Vanguard, Schwab, Fidelity, JP Morgan, and Merrill
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Smaller broker-dealers that connect clients to broker-dealers and collect commissions from doing so.
Introducing brokers
84
Do Introducing Brokers own the securities they offer to the investors?
No, a clearing broker does.
85
Maintain custody, process trades, and provide clearing services from securities that their connected Introducing Broker "sold". These are hired by Introducing Brokers.
Clearing Broker (WeBull uses Apex)
86
Large broker-dealers who maintain custody, process orders, and provide clearing services AND facilitate trades for their customers and for the introducing brokers.
Clearing Brokers
87
What standards do Clearing Brokers have to follow?
Best execution. They have to transact on the best price available within multiple markets.
88
Ensure that all transactions are satisfied and collect any differences from broker-dealers. Ensure that buyer receives the shares and seller receives the cash.
Clearinghouses.
89
Primary Clearinghouse in the securities market.
Depository Trust & Clearing Corporation (DTCC)
90
Regular-way Settlement
T + 1
91
Cash Settlement
Investors who need settlement quickly (at a little more cost). Done by 2:30pm.
92
Declaration Date
When the BoD announce the issuance of dividends.
93
Record Date
The date when an investors needs to own shares (settled shares) by and be on the books (T+1), in order to receive the dividends.
94
Ex-Dividend Dates
Regular-settlement: Same day as the record date.
Cash settlement: One business day after record date.
95
If the record date for a dividend is Wed, February 16th, would an investor who sold be eligible for the dividend if they sold on the 16th?
Yes.
96
Empowered to enforce laws and regulations in finance. Regulate finance professionals and exchange markets
FINRA
97
What is FINRA considered?
Self-Regulatory Organization (SRO)
98
Ex-Dividend Dates are controlled by:
FINRA (OTC) and NYSE (NYSE Trades)
99
If a customer sells their stock on the ex-date, will they get the dividend?
Yes.
100
If a stock split is announced for Friday, January 31, when is the split's ex-date?
Monday, February 3
101
On the ex-date of a stock split, what happens to the shares?
They change based on forward/reverse.
102
ADR
American Depository Receipt
103
Law that requires most issuers to register their securities with the SEC.
Securities Act of 1933 (SA-33)
104
SEC
Securities & Exchange Commission
105
What trait do broker-dealers have to purchase and sell ADRs?
They own an office in the foreign market.
106
Where are the ADR stocks kept prior to becoming receipts?
Trust Account
107
What material, required by the SEC for disclosure, is required that would influence an investment decision?
Material Information
108
How are ADR pre-emptive rights managed?
The owning firm will receive the rights and sell them to the respective exchange (i.e. Hong Kong) and distribute the sales amongst the investors of the ADRs.
109
Do investors of ADRs have voting rights?
No, the owning firm does.
110
How are ADR dividends managed?
Paid in foreign currency to the owning firm, then exchanged to USD and distributed to investors through the trust.
111
When a foreign currency weakens or the domestic currency strengthens.
Exchange Risk
112
US Dollar to Japanese Yen would be unfavorable when:
Japanese Yen is strong
113
Tender Offer
When an investor, group of investors, or organization aim to obtain a large portion of an issuer's stock.
114
What are tender offers used for?
Hostile takeovers, due to owning a large percent of voting rights (can vote for their preferred BoDs to make decisions).
115
What is a way tender offers are approached?
Takeover party asks current LONG investors if they'd sell for a premium (sometimes giving shares of takeover company).
116
Can convertible bondholders sell their position to the takeover compay?
Only if they convert the bond to common stock.
117
What is the notice period for a tender offer?
20 days and an additional 10 days for new pricing.
118
When a company buys their shares from the open market:
Buyback
119
What happens to outstanding shares and EPS?
EPS increases and outstanding shares decrease.
120
EPS Formula
Earnings / Outstanding Shares
121
Measures profitability on a per share basis
EPS
122
What happens to shareholders' ownership after a stock buyback?
It increases, due to less outstanding shares.
123
Do shareholders need to approve a stock buyback?
No.
124
A security's benefits and risks, and determination if it suits a certain investor.
Suitability
125
B, R , TI (BRTI)
Benefits, Risk, and Typical Investor
126
Risks that apply to the entire stock market.
Systematic Risks
127
When an investment declines due to a market/economic circumstance, like the Great Depression & COVID.
Market Risk (Systematic Risk)
128
When rising goods & services prices negatively impact an investment.
Inflation Risk, or Purchasing Power Risk (Systematic Risk)
129
Where the government measures inflation.
Consumer Price Index (CPI)
130
What happens to CPI when prices of goods & services rise?
CPI Rises.
131
What level should the CPI be to consider inflation "healthy"?
2%
132
Why is inflation risk an issue for companies and their stock?
Higher inflation causes less revenue due to lower demand, and cuts profit because COGS are higher.
133
Type of general risk that applies to specific stocks and sectors.
Non-Systematic Risk
134
When a listed company owes a lot of debt.
Financial Risk (Non-Systematic Risk)
135
When a listed company has issues with managing the company or issues with their competition.
Business Risk (Non-Systematic Risk)
Think RadioShack v Amazon, or Blockbuster vs Netflix
136
When a listed company is subject to current or potential regulations.
Regulatory Risk (Non-Systematic Risk)
Think privacy regulations against the likes of Meta, X, etc.
137
When a listed company is hurt by a new law or regulation.
Legislative Risk (Non-Systematic Risk)
Think the increase on tariffs on Canadian Lumber or chips created in foreign countries.
138
EPA adding regulations against the Oil & Gas Industry is an example of what kind of risk?
Regulatory
139
A President enforces new laws on the Oil & Gas Industry is an example of what kind of risk?
Legislative
140
When a listed company is in the crosshairs from wars, military coups, and mass riots (mostly foreign).
Political Risk (Non-Systematic Risk)
141
When a company (usually OTC) doesn't produce enough volume for an investor to get in and out.
Liquidity Risk, or Marketability Risk (Non-Systematic Risk)
142
Companies with a market cap of $200B+
Mega-Cap
143
Companies with a market cap of $10B to $200B
Large-Cap
144
Companies with a market cap of $2B to $10B
Mid-Cap
145
Companies with a market cap of $250M to $2B
Small-Cap
146
Companies with a market cap of less than $250M
Micro-Cap
147
Cash & Cash Equivalents, A/R, Inventory, Prepaid Expenses
Current Assets
148
Real Estate, Equipment, Land, Hardware, Office Equipment, Furniture
Fixed Assets
149
Patents & Copyrights, Trademarks, Trade Secrets
Intangible Assets
150
A/P, Wages Payable, Taxes Payable, Interest Payable, Principal Payable for Expiring Bonds
Current Liabilities
151
Debentures, Pensions, & Mortgages
Long-Term Liabilities
152
Par Value of Common Stock, Capital in Excess of Par, Retained Earnings
Stockholder's Equity
153
Provides the Net Worth and value of a company at that point in time.
Balance Sheet
154
Shows how well a company performs from selling their products & services, within a period of time.
Income Statement
155
What is the Income Statement's structure?
Revenue - COGS = Gross Profit
Gross Profit - Operating Expenses = EBIT
EBIT - Interest (Bonds & Loan) Payments = EBT
EBT - Taxes = Net Income
Net Income - Dividends Paid = Retained Earnings
156
When a company discloses sudden increases & decreases over a period of time.
Footnotes
157
Determines if a company is undervalued or overvalued.
P/E Ratio (Price to Earnings)
158
P/E Ratio Formula
Current Market Price / EPS
EPS = (Net Income - Dividends) / Outstanding Shares
159
What does it mean if a P/E ratio is 50?
That the current market price is 50x more than what it should be. Aka, it is overvalued.
160
What types of companies have valid higher PE ratios?
Growth
161
Represents ownership (equity), but more of a fixed-income security that pays fixed dividends.
Preferred Stock
162
What is the typical par value of a preferred stock?
$100
162
How often are dividends on preferred stocks paid?
Quarterly
163
What is the difference between the dividend rate (coupon) and the current yield?
Dividend yield is based off the par value of a security, where the current yield is based off the market price of a security. Current yield highlights the full Rate of Return (RoR)
164
Dividend Yield Calculation
Annual Divided ($) / Par Value ($100)
165
Current Yield Calculation
Annual Dividend ($) / Market Price
166
When is the current yield higher than the dividend rate?
When the security is traded at a discount.
167
Yield > Dividend Rate
Discount
168
Yield = Dividend Rate
Par
169
Yield < Dividend Rate
Premium
170
What is the largest factor in market pricing and yields of preferred stock?
Interest Rates
171
IR to Preferred Stock Relationship
Inverse.
Stock prices rise when IR falls; vice verse.
171
172
If the market price on a preferred stock is low, what is the yield?
High
173
How are some ways the economy thrives on lower IR?
The government spends less and businesses increase profits on lower borrowing costs.
174
If Interest Rates stay low for too long, what occurs?
Inflation.
175
Why is inflation caused?
Because low inflation & IR mean people are willing to spend more, increasing demand and decrease supply. This causes price increases.
176
Are bond yields usually higher than preferred stock?
No.
177
What happens if there is a rise in IR?
The price of preferred stocks drop.
178
What happens to the current yield if IR rises and the preferred stock price drops?
It rises, due to it being discounted.
179
What makes a preferred stock / bond marketable?
If the current yield is greater than interest rates.
180
How would I find the current market price of a preferred stock (or bond)?
Annual Income / Current Yield
