Individual Securities - Equities

Question 1

What is a Security?

Answer 1

An intangible financial asset - may be bought, sold, or gifted between persons. It may be represented by a paper certificate or held in an electronic record.

Question 2

What is the difference between and Security and a Commodity?

Answer 2

A security is a financial asset whereas a commodity is generally a hard asset such as gold, beef, orange juice, or oil.

Question 3

Is the active market derivative, Futures, considered a Security?

Answer 3

No, Futures are based on commodities and therefore are not considered Securities.

Question 4

What is the name and premise of the 1946 case that defined Securities?

Answer 4

SEC v. W.J. Howey Co.: SEC accused WJ Howey Co of violating federal law by not registering the sale of an interest in the profits of a section of the company’s orange groves to the public. Howey did not sell the grove or the produce directly, but an interest in the profits. The court found that the interest Howey sold was in fact a Security.

Question 5

What is the legal test to define a Security?

Answer 5

The Howey Test
A four part test whereas a Security defined as (ICET):
1.  An investment of money made into
2. a common enterprise
3. with the expectation of profit
4. through the efforts of a third party.

Question 6

Which of these are not examples of Securities? Why?

1. Stocks
2. Bonds, notes, and debentures
3. Jumbo CDs
4. Fixed Annuities

Answer 6

Fixed Annuities; a Fixed Annuity is more of a savings account with an agreed upon payout in at a set date, rather than an interest in profits/performance. Key word being Fixed.

Question 7

What are other examples of non-securities?

Answer 7

Cash and currency, fixed annuities, life insurance (whole and term), personal residence, and commodities/future contracts.

Question 8

What are other examples of securities?

Answer 8

Stocks
Bonds, notes, debentures (all types of debts)
Options
Mutual Funds
Jumbo CDs
Depositary Receipts
Units of investment
Variable Life and Variable Annuities

Question 9

Name the two major types of securities.

Answer 9

Stocks and Bonds.

Question 10

What’s another word for bond?

Answer 10

Debt

Question 11

What’s another word for stocks?

Answer 11

Equities

Question 12

What is the most common type of debt?

Answer 12

Bonds

Question 13

All of the following are considered securities except:
A. US Minted Gold Coins
B. Common Stock of XYZ Corp.
C. 15 British Pound Put Contracts
D. Treasury Bonds

Answer 13

A. Us Minted Gold Coins (commodity).

C. is an example of Options.

Question 14

Which of the following is not a security that an investor would purchase?
A. Common shares of ABC Petroleum, Inc.
B. Debt issue by AMC Petroleum
C. Bitcoins
D. Windmill Growth Fund

Answer 14

C. Bitcoins - cryptocurrency is a commodity not a security because they are still an open question.

Question 15

What is Equity defined as?

Answer 15

common term for securities that represent ownership interest - think shares in a company. Stocks are shares in a company.

Question 16

How do individual’s participate in the success of a company?

Answer 16

Purchasing shares of stock.

Question 17

What is capital appreciation?

Answer 17

The increase in the price of the shares one holds.

Question 18

What is a sharing of earnings through a distribution of profits called?

Answer 18

These are called dividends.

Question 19

Why does a company issue stock?

Answer 19

They sell stock to raise money (capital). When you buy stock you are becoming a stockholder or shareholder, a part company owner.

Question 20

Each share of stock gives its owner a portion of the company’s earnings and what other thing?

Answer 20

This gives the individual a vote in major management decisions of a corporation. Usually by electing a Board of Directors to make their decisions and oversee day to day operations.

Question 21

What are the classes of common stock for a company?

Answer 21

(TIAO)
Authorized
Issued
Outstanding
Treasury

Question 22

The __________ specifies the number of shares the company is authorized to issue.

Answer 22

The Corporate Charter. It is a decision made by the founders of the business.

Question 23

Does a company issue all authorized stocks?

Answer 23

Not typically, it only issues enough to raise sufficient capital for expected needs.

Question 24

Can a company issue more shares than are authorized?

Answer 24

Not unless they have amended their charter through stockholder vote.

Question 25

What is authorized stock?

Answer 25

The number of stock authorized/available in a charter to be issued.

Question 26

What is issued stock?

Answer 26

Issued stock is authorized stock that has been sold to investors.

Question 27

What are reasons a company might reserve authorized stock?

Answer 27

Future use for raising new capital. Paying stock dividends. Exchanging common stock for outstanding convertible bonds or preferred stock.

Question 28

What is treasury stock?

Answer 28

Stock that a corporation has issued and reacquired. The corporation can hold this stock indefinitely, reissue, or retire it.

Question 29

``` Which types of stock entitle the owner to all rights and privileges such as voting and dividends? A. Authorized Stock B. Issued Stock C. Treasury Stock D. Outstanding Stock ```

Answer 29

D. Outstanding Stock

Question 30

What is Outstanding Stock

Answer 30

Outstanding stock is any stock that is in the hands still of investors. This differs from Issued stock because a company can buy issued stock back, it is still issued, but it now becoems Treasury Stock.

Question 31

What is market cap?

Answer 31

How we measure types of common stock. I.e. Large-cap, Mid-Cap, Small-cap.

Question 32

How is a corporation's market cap determined?

Answer 32

number of outstanding shares x current market value (CMV) of a share, or, (outstanding x CMV)

Question 33

These companies have a long history of steady dividend payments.

Answer 33

Blue-Chip stocks

Question 34

What are the characteristics of a mid-cap company?

Answer 34

Too large to be small, but not as huge as the large-caps. These reflect characteristics of both large and small caps.

Question 35

Small-caps

Answer 35

still large enough to be listed on national exchange, oriented to growth and produce very little dividends.

Question 36

What's a penny stock?

Answer 36

Unlisted stock trading at less than $5 per share. (Highly speculative)

Question 37

What is required before investing in penny stocks?

Answer 37

Customers must be given copy of risk-disclosure document. The member must receive the signed and dated acknowledgment from the customer that the document has been received. Broker Dealer's (BDs) must provide monthly account statement indicating market value and number of shares for each penny stock held in the account, and issuer's name.

Question 38

What are dividends? How and when are dividends paid?

Answer 38

1. Dividends are distributions of a company's profits to its shareholders. 2. Dividends are paid when the BOD votes to pay dividends and can be paid in 3 ways: a. Cash Dividends - paid by check or brokerage account and typically paid quarterly. b. Stock Dividends - Growth oriented companies may choose to issue common stock to shareholders, reinvesting in themselves, the cost per share is adjusted downward. c. Product Dividends - Some companies will pay dividend by sending sample of the company's product.

Question 39

How are the types of dividends taxed?

Answer 39

Cash Dividends are taxed nonqualified or qualified within the year they are distributed. Stock Dividends are not taxable in and of themselves, but if/when the share is sold, the profit is taxable. Specifically the adjusted cost per share (new cost basis) impacts taxes. Drops the cost of their shares and increases the margin between cost and profit. Product Dividends will be taxed in the same year, with a 1099 for the value of the product.

Question 40

What does it mean to be taxed Qualified and NonQualified?

Answer 40

To be taxed nonqualified means to be taxed at the regular income rate. The maximum tax on qualified dividends is specified by a special IRS tax code and depends on income tax bracket. It will always be lower than nonqualified.

Question 41

What are the steps to dividend disbursement?

Answer 41

DERP Declaration - when the BOD approves the dividend payment, recognized as date dividend is declared Ex-Dividend Date - FINRA requires investors to purchase the stock two business days before the Record Date to qualify to receive the dividend. Record - stockholders of record receive the dividend on this date. Payable - On the payable date, dividend checks are sent to stockholders as of the record date. Investors are taxed for the tax year the dividend is paid, based on payable date.

Question 42

Common Stock is freely transferable to anyone who want to buy it or receive it as a gift. True or False?

Answer 42

True. Shareholders have the right to sell or give away their shares without permission of the corporation.

Question 43

How many votes does each stockholder have?

Answer 43

One vote per share.

Question 44

Allows the stockholder to cast one vote per share owned for each item on the ballot, such as candidates for BOD.

Answer 44

Statutory Voting

Question 45

Allows stockholders to allocate their total votes in any manner they choose.

Answer 45

Cumulative Voting