Investments Flashcards
(143 cards)
1
Q
What is a security?
A
An INTANGIBLE FINANCIAL ASSET that may be bought, sold, or gifted between persons. It may be represented by a paper certificate or held in an electronic record.
2
Q
What is the difference between commodities and securities?
A
While a security is a financial asset, a commodity is generally a hard asset such as gold, beef, orange juice, or oil. There is an active market in a derivative investment in commodities called futures, but futures are based on commodities and so are not considered a security.
3
Q
What is the Howey Test?
A
A legal test for what is considered a security
4
Q
Give an example of a security
A
So, if people pool their money together with the expectation that a third party (usually a manager) will make a profit for them, a person’s interest in that enterprise is a security
5
Q
Describe the steps for the HOWEY TEST
A
The Howey Test is a FOUR-PART TEST, as described here.
A security is
- an INVESTMENT OF MONEY made into
- a COMMON ENTERPRISE
- with the EXPECTATION OF PROFIT
- through the EFFORTS OF A THIRD PARTY.
6
Q
What are crypto currencies defined as? (security or investment?)
A
It appears that cryptocurrency would likely meet our basic definition of a security, but you should note that there is no third-party management. Currently the Securities and Exchange Commission (SEC) treats cryptocurrency as a commodity. If you should see cryptocurrencies on the exam,
remember that they are a commodity not a security.
7
Q
What are some examples of items mistaken as investments but are actually a security?
A
■ Stocks ■ Bonds, notes, and debentures (all types of debt) ■ Options ■ Mutual funds ■ Jumbo CDs ■ Depositary receipts ■ Units in an investment ■ Variable life and variable annuities
8
Q
What are the two basic forms of securities?
A
two basic securities are called
stocks (also called equities) and bonds (debt)
9
Q
All of the following are considered securities except
A. U.S. minted gold coins.
B. common stock of XYZ Corporation.
C. 15 British pound put contracts. D. Treasury bonds.
A
A Stocks, bonds, and options are all examples of securities. Gold and gold coins are a commodity, not a security.
10
Q
Give examples of items NOT considered as securities
A
■ Cash and currency ■ Fixed annuities ■ Life insurance (whole and term) ■ A personal residence ■ Commodities and futures contracts
11
Q
Another term for stocks and bonds is A. equity and debt. B. shares and units. C. voting and nonvoting. D. taxable and tax free.
A
A. equity and debt.
Equity is a common term for securities that represent ownership interest, such as stocks. Bonds are the most common type of debt security.
12
Q
Which of the following is not a security that an investor would purchase? A. Common shares of ABC Petroleum, Inc. B. Debt issue by ABC Petroleum C. Bitcoins D. Windmill Growth Fund
A
C. Bitcoins
Bitcoin is considered a commodity, not a security.
13
Q
What are the VARIOUS CLASSES of COMMON STOCK?
A
AIOT
■ authorized;
■ issued;
■ outstanding; and
■ treasury.
14
Q
What are the BENEFITS of PURCHASING SHARES IN A COMPANY?
A
They can benefit from an INCREASE IN THE PRICE OF THE SHARES (capital appreciation)
and by SHARING IN EARNINGS through a DISTRIBUTION OF PROFITS called DIVIDENDS.
15
Q
What are share considered to be?
A
They are called equities because they represent ownership in the company.
16
Q
Individuals who purchase shares in a company are considered as ?
A
These investors are called stockholders or shareholders; they are the company’s owners
17
Q
Why does a company sell shares?
A
A company issues (sells) stock to raise capital (money).
18
Q
If a corporation issues 100 shares of stock, each share represents an identical 1/100—or 1%—ownership position in the company. An investor who owns 10 shares of stock would own _____a___of the company; an investor who owns 50 shares of stock would own __b__ of the company.
A
a. 10%
b. 50%
19
Q
What is the benefit of having a Board of Directors ?
A
By electing a BOD, stockholders have a say in the company’s management but are not involved in the day-to-day details of its operations.
20
Q
What is AUTHORIZED STOCK?
A
The corporate charter specifies the number of shares the company is AUTHORIZED TO ISSUE it is a decision made by the founders of the business.
21
Q
How is a corporation formed?
A
through the preparation of a CORPORATE CHARTER.
22
Q
What is the benefit gained from being a corporation against being a sole trader?
A
RAISE MONEY by ISSUING SECURITIES
23
Q
What is an ISSUED STOCK?
A
Issued stock is AUTHORIZED STOCK that has been SOLD TO INVESTORS. Those investors have bought the stock and the company has received the money.
24
Q
How is COMMON STOCK normally CLASSIFIED?
A
CLASSIFIED by the SIZE OF THE CORPORATION
25
What are some needs for use of UNISSUED STOCK?
■ raising new capital for expansion,
■ paying stock dividends, or
■ exchanging common stock for outstanding convertible bonds or preferred stock.
26
What is OUTSTANDING STOCK?
OUTSTANDING STOCK includes ANY SHARES that a company HAS ISSUED and are IN THE HANDS OF INVESTORS.
27
What is the MEASUREMENT used for COMMON STOCK called?
MARKET CAPITALIZATION, or just MARKET CAP
28
What is treasury stock?
Treasury stock is stock a corporation has issued and subsequently reacquired.
29
How is MARKET CAP calculated?
by multiplying the NUMBER OF OUTSTANDING SHARES by the CURRENT MARKET VALUE (CMV) of a share
(outstanding shares x CMV) = Market Cap
30
What is Large cap stock?
Large-cap stocks are the largest companies. These can be rapidly growing technology companies or big, long-established firms.
31
What is penny stock?
A penny stock is an UNLISTED (not listed on a U.S. stock exchange) security trading at LESS THAN $5 per share.
32
What is cash dividend?
Cash dividends are normally distributed by check if an investor holds the stock certificate, or they are automatically deposited to a brokerage account if the shares are held in street name (held in a brokerage account in the firm's name to facilitate payments and delivery)
33
What is mid cap stock?
large by most standards, just not as huge as the large-cap stocks. A company that is too large to be a small cap, but not large enough to be large cap, are the mid caps. They tend to reflect characteristics of both small and large caps, as you might expect with a label like "mid cap."
34
What is stock dividend?
If a company wishes to reinvest its profits for business purposes rather than to pay cash dividends, its BOD may declare a stock dividend.
35
What is small cap stock?
The smallest stocks that are still large enough to be listed on national exchanges are small caps. They tend to be oriented toward GROWTH and produce VERY LITTLE DIVIDENDS.
36
If the company wishes to ISSUE MORE STOCK THAN AUTHORIZED what is the process?
If the company wants to issue more shares than are authorized, the CHARTER must be AMENDED through a STOCKHOLDER VOTE.
37
True or False
AUTHORIZED BUT UNISSUED STOCK does NOT carry the RIGHTS AND PRIVILEGES of ISSUED SHARES and is NOT CONSIDERED in determining a company's total capitalization.
True
38
What are BLUE CHIP stock?
Large-cap companies that have a long history of steady dividend payments
39
What stock can be HELD INDEFINITELY?
TREASURY STOCK
| The corporation can hold this stock indefinitely or can reissue or retire it.
40
Describe the rights of AUTHORIZED BUT UNISSUED STOCK?
Authorized but unissued stock DOES NOT carry the RIGHTS AND PRIVILEGES of ISSUED SHARES and is NOT considered in determining a company's TOTAL CAPITALIZATION.
41
Describe the RIGHTS FEATURE of TREASURY STOCK
Treasury stock DOES NOT carry the rights of OUTSTANDING COMMON SHARES, such as voting rights and the right to receive dividends. For that reason, ANALYSTS are only concerned with OUTSTANDING SHARES.
42
Define dividends
distributions of a company's profits to its shareholders
43
Equity securities defined as PENNY STOCKS are considered _________
highly speculative.
44
What is the PENNY STOCK DISCLOSURE AGREEMENT?
describes the risks associated with penny stock investments.
45
Based on penny stock cold calling, who is an ESTABLISHED CUSTOMER?
■ has held an account with the BD for at least ONE YEAR (and has made a deposit of funds or securities) or
■ has made AT LEAST THREE penny stock purchases of different issuers on different days.
46
When penny stock cold calling, what should the broker-dealer disclose?
■ the name of the penny stock,
■ the number of shares to be purchased,
■ a current quotation, and
■ the amount of commission that the firm and the representative received
47
SEC rules regarding cold-calling customers state that when a BD's representative contacts a potential customer to purchase penny stocks the representative must first
DETERMINE SUITABILITY on the basis of information about the buyer's financial situation and objectives.
48
The provisions of the penny stock rules apply only to _____1_______ such as those that might occur during a cold call.
Unsolicited transactions—those not recommended by the BD or the registered representative (RR)—are _2_____ from these rules on suitability and disclosure.
1 solicited transactions
2 exempt
49
How are CASH DIVIDENDS treated AFTER BEING DECLARED?
cash dividends are typically PAID QUARTERLY and are TAXED IN THE YEAR THEY ARE DISTRIBUTED.
50
Our client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of the following are true about the position EXCEPT
A. they will receive dividends in U.S. dollars.
B. the security may be traded in U.S. markets.
C. they have the same voting rights as an owner of the common stock.
D. they have the right to request the underlying common shares be issued to them directly
C. they have the same voting rights as an owner of the common stock.
It is important to remember that ADRS are issued by a depository bank and the bank is the registered owners of the shares. Depository banks are NOT REQUIRED TO PASS VOTING PROXIES through to the ADR holders.
TRUE
A. they will receive dividends in U.S. dollars.
B. the security may be traded in U.S. markets.
D. they have the right to request the underlying common shares be issued to them directly
51
For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a CUMULATIVE voting system. Your customer owns 300 participating PREFERRED SHARES of Big Trucks. He has
A. 900 votes he can divide anyway he wants among the three seats.
B. no voting rights.
C. 300 votes each for the open seats.
D. 300 votes total to spread among the three open seats.
B. no voting rights.
Your customer owns preferred stock. Preferred stock carries no voting rights.
52
In 2011, RST Corporation had both common stock and $100 par value 4% noncumulative preferred stock outstanding. The preferred, like the common stock, pay dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of
A. $1.00. B. $4.00. C. $17.00. D. $20.00.
A. $1.00
In the case of a NONCUMULATIVE PREFERRED STOCK, skipped dividends are FOREVER LOST. So, when the company is able to pay a dividend, as is always the case, it must pay the CURRENT PREFERRED DIVIDEND before paying to the common shares. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00—an amount that must be paid before the quarterly common dividend can be paid.
53
CASH DIVIDENDS can be TAXED as either
NONQUALIFIED (taxed at the investor's ordinary income tax rate) or as
QUALIFIED
54
The MAXIMUM TAX RATE on qualified specified is based on
CURRENT IRS TAX CODE and will depend on the investor's INCOME TAX BRACKET
55
If a PREFERRED STOCK is described as XYZ 6% PREFERRED PARTICIPATING to 9%, the company pays its holders up to ______________ if the BOD declares so.
3% in ADDITIONAL DIVIDENDS in PROFITABLE YEARS
56
What is a PRODUCT DIVIDEND?
some companies will pay a dividend by SENDING A SAMPLE of the company's product to shareholders.
57
I. An investor buys 200 shares of XYZ at $60 per share for a total cost of ______.
II. If XYZ were to declare and pay a 20% STOCK DIVIDEND, the investor would now have a total of ___________ shares.
III. What is the NEW COST BASIS? In this light, when the shares are later sold, the investor will list $__ per share as the cost.
I. Total cost $12,000
(200 shares x $60)
II. Total shares after 20% 240 shares
(200 shares x 20% = 40 additional shares).
III. $50 per share
Dividing $12,000 by 240 shares results in a NEW COST BASIS of $50 per share
(12,000/240 = 50)
58
The difference between the COST and the SALE PRICE will be the
investor's GAIN OR LOSS PER SHARE.
59
PRIORITY AT DISSOLUTION over COMMON STOCK
If a corporation goes bankrupt, PREFERRED STOCKHOLDERS have a PRIORITY CLAIM over COMMON STOCKHOLDERS on the assets remaining AFTER CREDITORS have been paid.
60
RISKS of owning PREFERRED STOCK
■ PURCHASING POWER RISK—This is the potential that, because of INFLATION, the fixed income produced will not purchase as much in the future as it does today.
■ INTEREST RATE SENSITIVITY—Like a fixed-income security, when INTEREST RATES RISE, the VALUE OF PREFERRED SHARES DECLINES. (This will be discussed in greater detail later in this unit.)
■ DECREASED OR NO DIVIDEND INCOME—As with common stock ownership, there is the possibility of dividend income decreasing or ceasing entirely if the company loses money. The decision to pay a dividend rests with the BOD, and while the dividend percentage is fixed, if is not guaranteed to be paid.
■ PRIORITY AT DISSOLUTION—While preferred shareholders are paid before common shareholders if a company enters bankruptcy, the preferred shares are paid behind all creditors
61
What are the types of preferred stock?
■ Straight (noncumulative)—Straight preferred stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.
■ Cumulative—Cumulative preferred stock accrues payments due its shareholders in the event dividends are reduced or suspended.
62
When the company resumes dividend payments, CUMULATIVE PREFERRED STOCKHOLDERS receive
CURRENT DIVIDENDS plus the TOTAL ACCUMULATED DIVIDENDS—dividends in arrears—before any dividends may be distributed to COMMON STOCKHOLDERS.
63
What is CALLABLE PREFERRED?
stock which a company can BUY BACK from investors at a STATED PRICE AFTER A SPECIFIED DATE.
The right to call the stock allows the company to replace a relatively high fixed-dividend obligation with a lower one when the cost of money has gone down.
64
Why would you include PREFERRED STOCK in a client's portfolio?
■ FIXED INCOME from DIVIDENDS
■ PRIOR CLAIM AHEAD of COMMON STOCK
■ Convertible preferred stock SACRIFICES INCOME in exchange for POTENTIAL APPRECIATION (discussed shortly)
65
A PREFERRED STOCK is CONVERTIBLE if the OWNER can EXCHANGE THE SHARES for a FIXED NUMBER OF SHARES of the ISSUING CORPORATION'S COMMON STOCK.
Convertible preferred
66
What are the FOUR DATES associated with DIVIDEND DISBURSEMENT?
DERP
declaration,
ex-dividend,
record, and
payable.
67
Declaration date
When a company's BOD APPROVES A DIVIDEND PAYMENT, it is recognized as the DATE THE DIVIDEND WAS DECLARED.
68
Ex-dividend date (ex-date)
On the basis of the dividend record date, Financial Industry Regulatory Authority (FINRA)—or the exchange if the stock is listed on an exchange—declares an ex-date.
The ex-date is ONE BUSINESS DAY BEFORE THE RECORD DATE.
If the stock is purchased on or after the ex-date, the new owner has purchased the stock "ex" without the dividend and is therefore nor entitled to receive it.
69
Record date
The STOCKHOLDERS OF RECORD (those who own the stock) on the record date RECEIVE THE DIVIDEND DISTRIBUTION.
70
On the ______ date, the DIVIDEND DISBURSING AGENT sends DIVIDEND CHECKS to ALL STOCKHOLDERS whose names appear on the books as owners as of the record date.
Payable date
71
What is a simple abbreviation for the DIVIDEND DISBURSEMENT DATE PROCESS in the ORDER OF THEIR OCCURRENCE?
DERP will help you remember the order in which the dates involving dividend distributions occur.
```
The order of dates are:
declaration,
ex-dividend,
record, and
payable
```
72
What are some BENEFITS of OWNING COMMON STOCK?
Common shareholders enjoy numerous benefits, including
voting rights,
the opportunity for capital appreciation,
current income,
as well as limited liability
73
An ABSENTEE BALLOT, known as a ____, is made available for those SHAREHOLDERS who want to vote but CAN'T ATTEND THE SHAREHOLDER MEETING
proxy
74
COMMON STOCK is known to be _______ to anyone who wants to BUY IT or RECEIVE IT AS A GIFT
freely transferable
75
True or False
| SHAREHOLDERS of COMMON STOCK need the PERMISSION OF THE CORPORATION to SELL THEIR STOCK?
False
| SHAREHOLDERS have the RIGHT TO SELL OR GIVE AWAY their shares WITHOUT PERMISSION of the corporation
76
What are the TWO TYPES of VOTING?
Depending on the company's BYLAWS and APPLICABLE STATE LAWS, a STOCKHOLDER may have either a:
STATUTORY VOTE or a
CUMULATIVE VOTE.
77
What is STATUTORY VOTING?
STATUTORY VOTING allows A STOCKHOLDER to CAST ONE VOTE PER SHARE OWNED for EACH ITEM ON A BALLOT, such as candidates for the BOD.
A BOARD CANDIDATE needs a SIMPLE MAJORITY to be ELECTED
78
True or False
| A STOCKHOLDER can cast ONE VOTE for EACH SHARE OF STOCK OWNED
True
79
What is CUMULATIVE VOTING?
allows STOCKHOLDERS to ALLOCATE THEIR TOTAL VOTES in ANY MANNER THEY CHOOSE.
80
EXAMPLE:
Mr. X Owns 100 Shares
STATUTORY VOTING
Board of directors: seat 1 ____
Board of directors: seat 2 ____
Board of directors: seat 3 100
Board of directors: seat 1 100
Board of directors: seat 2 100
Board of directors: seat 3 100
81
EXAMPLE:
Mr. X Owns 100 Shares
CUMULATIVE VOTING
Board of directors: seat 1 175
Board of directors: seat 2 _ii__
Board of directors: seat 3 __i_
OR
Board of directors: seat 1 300
Board of directors: seat 2 __iii_
Board of directors: seat 3 0
i) 75
ii)50
TOTAL OF 300
iii) 0
TOTAL OF 300
82
XYZ Corporation will be electing THREE DIRECTORS at its annual meeting. EACH XYZ shareholder has a NUMBER OF VOTES EQUAL to the NUMBER OF SHARES OWNED TIMES the NUMBER OF DIRECTORSHIPS up for election.
Assume that a shareholder owns 100 shares. Under STATUTORY VOTING the shareholder may use a MAXIMUM of __a__ votes for ANY ONE SEAT on the board.
Under CUMULATIVE VOTING, the shareholder may allocate __b__ votes any way they choose (ie., to one director or split between two or more), giving the shareholder a greater impact.
a. 100
| b. 300
83
CUMULATIVE VOTING benefits the _______a_______,
whereas STATUTORY VOTING benefits _____b_____.
a. smaller investor
| b. larger shareholders
84
What is GROWTH (capital gain)?
An INCREASE in the MARKET PRICE of securities is CAPITAL APPRECIATION
85
WHY would you include COMMON STOCK in a client's portfolio?
■ Potential CAPTIAL APPRECIATION
■ INCOME from DIVIDENDS
■ HEDGE against INFLATION
86
What are the RISKS associated with owning COMMON STOCK?
■ LOW PRIORITY at DISSOLUTION
■ DECREASED or NO DIVIDEND INCOME
■ Market risk
87
Explain the RISK of LOW PRIORITY at DISSOLUTION
a company enters BANKRUPTCY, the holders of its BONDS AND PREFERRED STOCK have PRIORITY over COMMON STOCKHOLDERS.
A company's DEBT AND PREFERRED SHARES are considered SENIOR SECURITIES.
88
Explain the RISK of DECREASED or NO DIVIDEND INCOME
A RISK OF STOCK OWNERSHIP is the possibility of DIVIDEND INCOME decreasing or ceasing entirely if the company LOSES MONEY.
The COMMON STOCKHOLDERS have the LAST CLAIM on EARNINGS.
89
Explain the risk of MARKET RISK associated with OWNING COMMON STOCK
Chance that a stock will DECLINE IN PRICE is one risk of owning common stock.
A stock's price FLUCTUATES DAILY as PERCEPTIONS of the COMPANY'S BUSINESS PROSPECTS change and influence the actions of BUYERS AND SELLERS.
90
Which of the following would most likely REQUIRE SHAREHOLDER APPROVAL?
A. Declaring a dividend
B. Firing the CEO
C. Hiring a new CFO
D. Changing the corporation's name
D. Changing the corporation's name
Changing the corporation's name is a SIGNIFICANT MATTER that will likely need SHAREHOLDER APPROVAL.
DECLARING A DIVIDEND and the HIRING AND FIRING OF SENIOR EXECUTIVES is WELL WITHIN THE BOARD'S POWER
91
```
All Big Company, Inc.. an NYSE-listed manufacturer of large objects, has declared a 50.cents.a.share dividend payable next month. All Big also has options available for trade. The actual ex-dividend date will be declared by
A. the OTC.
B. the NYSE.
C. FINRA
D. the CBOE
```
B
Ex-dates are set by the market center where trades will likely take place. In the case of an NYSE-listed stock, the New york Stock Exchange will determine the ex-date.
92
Which of the following securities would likely provide the greatest potential for capital appreciation?
A. A preferred stock B. A U.S. Treasury STRIP C. A common stock D. A convertible bond
C
| Common stocks would be the most suitable for investors seeking capital appreciation (growth).
93
What are STOCKS RIGHTS sometimes considered as?
sometimes known as PREEMTIVE RIGHTS or simply RIGHTS
94
What is stock rights?
entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company otters them to the general public.
95
What is a warrant?
a certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the time the warrants arc issued, and at some time in the future.
96
The rights are valued separately from the stock and trade in the secondary market during the subscription period, which is typically ___days.
30-45
97
A stockholder who receives rights may
■ exercise the rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent;
■ sell the rights and profit from their market value (rights certificates are negotiable securities); or
■ let the rights expire and lose their value (not a likely scenario).
98
What is the difference between a warrant and a right?
Unlike a right, a warrant is usually a long-term instrument that gives the investor the option of buying shares at a later date at the specified (exercise) price.
99
What is RIGHTS OFFERING?
allows STOCKHOLDERS to PURCHASE COMMON STOCK BELOW THE CURRENT MARKET PRICE
100
Seabird Shipping, Inc., currently has 1,000,000 common shares outstanding. The shares are trading at $50 a share. Seabird will raise money by selling an additional 100,000 shares via a rights offering. The right allows the shareholder to purchase shares of the new offering for 10 rights and $48 per share. If all the rights are exercised, Seabird will receive______i_____ and will have __ii__ shares outstanding.
i $4,800,000 ($48* 100,000)
ii 1,100,000
101
Shane Seabird, Jr., owns 20% of Seabird Shipping's outstanding shares (200,000 shares). He will receive__i__ rights (one per share he owns). In order to maintain his percentage of ownership, he will need to buy 20% of the new offering (20,000 shares) to bring his total up to ___ii___shares 20% of the 1.100,000 outstanding shares after the offer is complete). To do this, he will exercise all 200,000 rights and pay $960,000.
i 200,000
ii 220,000
102
short term, given to existing shareholders, allows one to purchase shares below current market value
Rights
103
long term, bundled with other securities, allows someone to purchase shares at a price that is above the current market value at the time the _______ were issued
Warrants
104
What are control stocks?
those owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock.
105
applies to SHARES THAT ARE SOLD THROUGH a NONSTANDARD OFFERING and are subject to RESALE RESTRICTIONS and to sales by persons who are classified as a CONTROL PERSON (insider) of the issuer.
Rule 144: Restricted stock and control persons
106
What is restricted stock?
Restricted securities are those ACQUIRED THROUGH SOME MEANS other than a REGISTERED PUBLIC OFFERING.
A security purchased in a PRIVATE PLACEMENT is a restricted security.
107
Restricted stock is sometimes referred to as
legended, or legended certs
108
According to Rule 144, after holding restricted stock fully paid for six months, an investor may
begin selling shares.
109
How can restricted stock be SOLD?
BEFORE these shares may he sold, the ISSUER MUST RELEASE (remove) the restriction, allowing the shares to trade freely.
110
If an UNAFFILIATED INDIVIDUAL owns 7% of the voting stock of xYZ, that person is NOT A CONTROL PERSON. However, If that person's SPOUSE owns 4% of the voting stock, then
then BOTH would be considered CONTROL PERSONS.
In other words, if there is a 10% or more interest held by IMMEDIATE FAMILY MEMBERS, then ALL those family members owning voting stock are control persons
111
What is CONTROL PERSON also referred to as?
Affiliate
112
What FORM is be completed in the event an AFFILIATE would like to SELL SHARES?
And what is the USE of this form?
When a control person wants to sell shares, that person must complete a Form 144.
The form is used to determine the number of shares the control person may sell over a 90-day period.
113
The VOLUME LIMITATIONS under Rule 144 are the greater of
■ 1% of the OUTSTANDING SHARES of the company or
■ the AVERAGE WEEKLY TRADING VOLUME over the MOST RECENT FOUR WEEKS.
114
Mrs. Davidson owns 8% of Copper Mountain Metals Corporation and her husband, Mr. Davidson, owns 4%.
Mr. Davidson would like to sell some of his shares.
When he files Form 144 he discovers that Copper Mountain has 2,400.000 outstanding shares.
The recent trading volume of the company is as follows:
Week Ending Volume
April 7
23,000
March 31
25,000
March 24
26,000
March 17
24,000
March 10
30,000
How many shares may Mr. Davidson sell in the next 90 days under Rule 144?
A. 24,000 shares
B. 24,500 shares
C. 32,000 shares
D. 26,250 share
The answer is 24,500 shares and is found by first determining 1% of 2.4 million shares (2,400,000 x 0.01124,000 shares.
The next step is to find the simple mean (average) of the most recent four weeks. In this question, you would not use the week of March 10 information.
The average is 24.500 shares (23K • 25K • 26K • 24K = 98K; 98K /4 = 24,500 shares). The volume limit is the higher of these two numbers, or 24,500 shares.
115
Under Rule 144. which of the following sales are subject to volume limitations on the number of shares sold?
I. Control person selling registered stock held for 1 year
II. Control person selling restricted stock held for 2 years
III. Nonaffiliate selling registered stock held for I month
IV. Nonaffiliate selling restricted stock held for more than 6 months
A. III and IV B. I and II C. land III D. I and IV
C. l and III
Control persons (insiders) are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted, the volume limits for nonaffiliates end after six months. Registered shares sold by nonaffiliates have no Form 144 filing requirement.
116
American Liquidators Corporation (Ticker MT) has 100 million outstanding common shares.
The company would like to raise capital by selling 100 million new shares.
In order to accomplish, this they would
A. offer warrants to existing shareholders.
B. suggest that existing shareholders go to the market and double their existing position.
C. offer stock rights to existing shareholders.
D. perform a stock split.
C. offer stock rights to existing shareholders.
LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering.
Warrants are long term and normally attached to a fixed-income offer.
117
Because the VALUE of a CONVERTIBLE PREFERRED STOCK is LINKED TO THE VALUE of a COMMON STOCK, the CONVERTIBLE PREFERRED SHARE PRICE tends to
fluctuate IN LINE with COMMON STOCK.
118
For example, as a convertible preferred issue is convertible at $40, once the common stock crosses $40 the preferred will
track the value of the common stock because investors assume that at some point, the preferred will be converted into the common.
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What is ADJUSTABLE RATE PREFERRED ?
Some PREDERRED stocks are issued with adjustable (or variable) DIVIDEND RATES.
Such dividends are usually tied to the rates of other interest rate benchmarks, such as TREASURY BILLS and MONEY MARKET rates
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What would be the LEAST APPROPRIATE choice for any investor looking to EARN INCOME through PREFERRED STOCKS?
For investors looking for income through preferred stocks, ADJUSTABLE RATE PREFERRED would be their least appropriate choice.
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Describe preferred stock
In addition to fixed dividends, participating preferred stock offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid. The percentage to which participating preferred stock participates is noted on the stock certificate.
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What are the risks associated with owning preferred stock?
■ Purchasing power risk
■ Interest rate sensitivity.
■ Decreased or no dividend income
■ Priority at Dissolution
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Squidco, Inc., is issuing 100 million dollars in 4V% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at 550 per share anytime in the next 10 years. Squid co common is currently trading at $29.95 a share. This is an example of A. a warrant. El. a stock right. C. a follow-on offering. D. a call.
A
A warrant is normally issued attached to a fixed-income security to attract more interest in the debt issue. Warrants are generally longer term (five or more years)
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What is American depositary receipts?
ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares are purchased in the foreign company's home market.
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Describe the ease of use of ADRs'
ADRs will be listed on the NYSE or Nasdaq.# but some may be traded over the counter (OTC). This U.S.-based trading means the investor gets to execute her trade in a familiar well-regulated setting
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Describe ADR taxation
Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability. Any trading profits (capital gains) from the ADR would only be taxable in the United States.
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Describe ADR currency and political risk
ADRs are issued and pay dividends in U.S. dollars. That means these securities eliminate the complications of currency conversion. However, ADRs arc still subject to currency risk. The company pays dividends in its home currency and the issuing bank converts to and pays out those dividends in U.S. dollars. When the currency exchange rate changes, so will these dividends (in U.S. dollar terms). Also, the value of the ADR. itself will rise and fall in conjunction with the value of the underlying foreign stock, which is also influenced by currency swings.
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A preferred stock's annual dividend represents its
fixed rate of return. This is a key attraction for income-oriented investors.
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Preferred stock is
an equity security because it represents a class of ownership in the issuing corporation. Although it is an equity security, it shares some characteristics with a debt security. As with debt securities, the rate of return on a preferred stock is fixed rather than subject to variation, as with common stock.
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How is a preferred stock identified?
by its annual dividend payment stated as a percentage of its par value
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A preferred stock with a par value of $100 that pays $6 in annual dividends is known as a
6% preferred ($6 dividend / 9100 par).
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Unlike common shareholders what is the difference for a preferred shareholder?
unlike common shareholders, preferred shareholders generally have no voting rights nor do they have preemptive rights. With few exceptions, the right to vote for board members or on other corporate issues is reserved for common shareholders.
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True or False
| All corporations issue common stock, but not all corporations issue preferred stock.
True
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What are the benefits associated with preferred stock?
Dividend preference—When the BOD declares dividend, owners of preferred shares must be paid before any payment to common shareholders.
Priority at dissolution over common stock—If a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders on the assets remaining after creditors have been paid.
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Describe Purchasing power risk for preferred stock
This is the potential that, because of inflation, the fixed income produced will not purchase as much in the future as it does today.
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What are the two types of preferred stock?
Straight (non-cumulative) and Cumulative
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Describe non-cumulative preferred stock
Straight preferred stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.
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Describe Interest rate sensitivity based on preferred stock
Like a fixed-income security, when interest rates rise, the value of preferred shares declines.
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Describe Decreased or no dividend income based on preferred stock
there is the possibility of dividend income decreasing or ceasing entirely if the company loses money. The decision to pay a dividend rests with the BOD, and while the dividend percentage is fixed, it is not guaranteed to be paid.
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Priority at Dissolution risk related to preferred stock
While preferred shareholders are paid before common shareholders if a company enters bankruptcy, the preferred shares are paid behind all creditors.
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Describe cumulative preferred stock
Cumulative preferred stock accrues payments due its shareholders in the event dividends are reduced or suspended.
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why would you include preferred stock in a client's portfolio?
■ Fixed income from dividends ■ Prior claim ahead of common stock ■ Convertible preferred stock sacrifices income in exchange for potential appreciation (discussed shortly)
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True or False
When the company resumes dividend payments, cumulative preferred stockholders receive current dividends plus the total accumulated dividends—dividends In arrears—before any dividends may be distributed to common stockholders.
True
