Equity And Debt Securities Flashcards
(33 cards)
What is a security
A security is any investment product that can be exchanged for value and involves risk. In order for an investment to be considered a security, it must be readily transferable between two parties and the owner must be subject to the loss of some or all of their invested principal. If the product is not transferable or does not contain risk, then it is not a security.
What is equity
Equity or stock creates an ownership relationship with the issuing company. Once an investor has purchased stock in a corporation, he or she becomes an owner of that corporation. The corporation sells off pieces of itself to investors in the form of shares in an effort to raise working capital.
What is debt
A bond, or any other debt instrument, is actually a loan to the issuer. By purchasing a bond, the investor has made a loan to the corporation and becomes a creditor of the issuing company.
Does debt have a expiration date
Debt instruments, unlike their equity counterparts, have a time frame or maturity date associated with them.
What is capitalization
The term capitalization refers to the sources and makeup of the company’s financial picture.
What is the balance sheet equation
assets − liabilities = net worth Assets
What is an asset
Assets are everything that a company owns, including cash, securities, investments, inventory, property, and accounts receivable.
What is a liability
Liabilities are everything that a company owes, including accounts payable and both long-and short-term debt, as well as any other obligations.
What is authorized stock
Authorized stock is the maximum number of shares that a company may sell to the investing public in an effort to raise cash to meet the organization’s goals. The number of authorized shares is determined arbitrarily and is set at the time of incorporation.
What is issued stock
Issued stock is stock that has been authorized for sale and has actually been sold to the investing public.
What is treasury stock
Treasury stock is stock that has been sold to the investing public and that has subsequently been repurchased by the corporation. The corporation may elect to reissue the shares or it may retire the shares that it holds in treasury stock. Treasury stock does not receive dividends nor does it vote.
Why do corporations repurchase stock
A corporation may elect to repurchase its own shares to: Maintain control of the company. Increase earnings per share. Fund employee stock purchase plans. Use shares to pay for a merger or acquisition.
What is book value
The book value of a corporation is the theoretical liquidation value of the company. It is calculated by taking all of the company’s tangible assets and subtracting all of its liabilities. To determine the book value per share, divide the total book value by the total number of outstanding common shares.
What is par value
Par value, in a discussion regarding common stock, is only important if you are an accountant looking at the balance sheet. For investors, it has no relationship to any measure of value that may otherwise be employed.
What are the rights of common shareholder
Preemptive rights
Exercise rights
Voting rights
What are preemptive rights
As a stockholder, an investor has the right to maintain a percentage interest in the company. Should the company wish to sell additional shares to raise new capital, it must first offer the new shares to existing shareholders. If the existing shareholders decide not to purchase the new shares, they may be offered to the general public.
What is the difference between exercised, sold, and expired rights
Exercised The investor decides to purchase the additional shares and sends in the money as well as the rights to receive the additional shares. Sold The rights have value, and if the investor does not want to purchase the additional shares they may be sold to another investor who would like to purchase the shares.
Expire The rights will expire if no one wants to purchase the stock. This will only occur when the market price of the share has fallen below the subscription price of the right and the 45 days have elapsed.
What are statuatory and compilation voting rights
The statutory method requires that the votes be distributed evenly among the candidates the investor wishes to vote for. The cumulative method allows the shareholder to cast all of their votes in favor of one candidate if they so choose. The cumulative method is said to favor smaller investors for this reason.
What is preferred stock
Preferred stock is an equity security with a fixed-income component. Like a common stockholder, the preferred stockholder is an owner of the company. However, the preferred stockholder is investing in the stock for the fixed income that the preferred shares generate through their semiannual dividends. Preferred stock has a stated dividend rate, or a fixed rate, that the corporation must pay to its preferred shareholders.
What s par value for preferred stock
Par Value Par value on preferred stock is very important because it is what the dividend is based on. Par value for preferred shares is $ 100. Companies generally express the dividend as a percentage of par value for preferred stock.
What are the features of preferred stock
Payment of Dividends The dividend on preferred shares must be paid before any dividends are paid to common shareholders. This gives the preferred shareholder a priority claim on the corporation’s distribution of earnings. Distribution of Assets If a corporation liquidates or declares bankruptcy, the preferred shareholders are paid prior to any common shareholder, giving the preferred shareholders a higher claim on the corporation’s assets. Perpetual Preferred stock, unlike bonds, is perpetual, with no maturity date. Investors may hold shares for as long as they wish or until they are called in by the company under a call feature. Nonvoting Most preferred stock is nonvoting.
Types of preferred stock
Straight/ Noncumulative Preferred Straight, or noncumulative, preferred stock has no additional features. The holder is entitled to the stated dividend rate and nothing else. If the corporation is unable to pay the dividend, it is not owed to the investor.
Cumulative Preferred A cumulative feature protects the investor in cases when a corporation is having financial difficulties and cannot pay the dividend. Dividends on cumulative preferred stock accumulate in arrears until the corporation is able to pay them. If the dividend on a cumulative preferred stock is missed, it is still owed to the holder. Dividends in arrears
Participating Preferred Holders of participating preferred stock are entitled to receive the stated preferred rate as well as additional common dividends. The holder of participating preferred stock receives the dividend payable to the common stockholders over and above the stated preferred dividend.
Convertible Preferred A convertible feature allows the preferred stockholder to
Callable Preferred A call feature is the only feature that benefits the company and not the investor. A call feature allows the corporation to call in or redeem the preferred shares at its discretion or after some period of time has expired. Most preferred stock that is callable cannot be called in the first few years after its issuance. This is known as call protection.
What are the types of dividends
Cash dividend
Stock Dividend
What are warrants
A warrant is a security that gives the holder the opportunity to purchase common stock. Like a right, the warrant has a subscription price; however, the subscription price is always above the current market value of the common stock when the warrant is originally issued.
