Must Study 1 Flashcards
What is the Order of Asset Distribution
1- Taxes 2- Secured Debt 3- Unsecured Debt 4- Preferred Stockholders 5- Common Stockholders
Which corporate Asset has the greatest risk (in liquidation)?
Common Stocks
What Right do Common Stockholders NOT have?
The right to vote for senior officers or senior management. Person’s who hold these positions are selected by the Board of Directors.
Common stockholders DO have the right to elect the Board of Directors.
If a client’s investment objective is capital appreciation. What would you recommend as a class of investment for this client?
Common stock. always offers the best opportunity for capital appreciation. Particularly when compared to Preferred stock and bonds.
Is Common Stock “callable”?
Common Stock is NEVER CALLABLE!
What is the name of the stock that:
1- Doesn’t vote.
2- Does not receive dividends
3- Is not used to calculate Earnings Per Share,
4- Appears on the balance sheet as a deduction from issued stock?
Treasury Stock (or Repurchased Stock)
A company buys back its shares that are traded on the open (Secondary market). BTW this is perfectly legal!
it basically “sits” on the balance sheets of the company.
CAUTION: DO NOT confuse Treasury Stock with anything related to U.S. Treasury Securities or Treasury Securities.
Issued stock - (minus) Treasury stock = ???
Outstanding stock
Issued by a nationally known company with a reputation for quality management, products, and services?
Blue Chip stocks
a) High percentage of retained earnings.
b)Pay little or no dividend resulting in low dividend yield and increases shareholder’s equity
c) Generally have a high P/E ratio
d) Stock price may fluctuate widely and typically have high volatility
e) Emerging growth company is a fast growing company.
Generally high risk, high return, and high failure rates.
Issued by a company that is expected to have an above-average increases in revenues and earnings.
Growth Stocks
Heavily affected by normal business and economic cycles. Rise and decline along with the rise and decline in the economy.
a) Auto manufacturers
b) Steel companies
c) Appliance manufacturers
d) Housing companies
e) Paper companies
f) Tool and die manufacturers
Cyclical Stocks
The opposite of Cyclical stocks. Stocks that move in the opposite direction of the economy.
a) Gold mining companies
b) Budget retailers (Walmart)
c) Temp agencies
Countercyclical stocks
Issued by a company that is resistant to normal business cycles and general stock market fluctuations. No significant increase or growth, but stable and consistent earnings year after year can be expected.
a) Tobacco companies
b) Utilities
c) Food companies
d) Pharmaceutical companies
e) Auto-repair companies
Defensive/Non-cyclical stocks
Provide electricity, gas, water, etc. to customers.
a) Generally, offer above-average yields, but less capital appreciation compared to growth stocks.
b) Highly leveraged (debt) because customers are dependent.
c) Changes in interest rates will have more effect on common stock.
High levels of debt mean high cost of operations (includes interest costs).
Utility stocks
Stocks that are undervalued and their price can increase in value suddenly due to a number of reasons.
1- New management
2- Introduction of a popular new product
3- Discovery of a natural resource on corporate property.
Special Situations
Receipts traded in the U.S. for foreign stocks held in bearer form by an American bank in the foreign country.
a) Have no voting priveledge
b) Dividends paid in U.S. dollars, not the foreign currency
c) Taxed as security and gains & losses reported on IRS form 1099b
American Depository Receipts (ADR’s)
What is the formula for calculating Stock Splits?
Ex: 200 shares of ABC stock trading at $20 pr/shr there is a 2:1 split.
Take number of shares 200 over 1 x (times the split ratio) 2/1 = ???
200 / 1 = 200
2 / 1 = 2
2 x 200 = 400
What is the formula for Rights Calculation? The calculation that will allow you the privilege to purchase additional stock of new additional offering by a company?
Outstanding shares / New shares = # of Rights needed
to purchase each new
share of stock
Preferred stock. Which classes of Preferred stock are “beneficial to” the owners of preferred stock?
Cumulative, Convertable, and Participating Preferred
Which Preferred stocks are more “beneficial to” the issuer?
Callable
What 4 securities are dividends paid on?
Common stock, Preferred stock, Mutual Funds, ADR’s.
What are dividends not paid for? What securities?
Warrants and Bonds
It the payment made to a bond owner a dividend or interest?
Interest
What does it mean to be Long Stock?
You receive dividends and stock splits (because you bought share is a normal fashion and held the stock as normal… You didn’t borrow stock from broker and then resell as in the Short position).
What does it mean to be Short Stock (or Short the stock)?
You are Short stock if you borrow the stock from your broker, and sell it on the open market (at a higher price) make a profit and then purchase more of the stock and return the stock to your broker.
IMPORTANT: You are not entitled to the dividend(s) or the stock splits that might occur (unlike those who hold the Long position).
What is the calculation (formula) for covering the short position in a Short stock sale?
Ex: Investor is short 200 shares of ABC stock. ABC pays 10% dividend. How many shares will the investor have to buy to cover their short position?
200 shard x .10 = 20 (additional shares owed based on the dividend). 200 + 20 = 220
The investor would need to buy 220 shares
What is the Declaration date as to common stocks?
On the date that a corp (Board of Directors) declares a cash dividend o common stock. It becomes a current liability on the balance sheet of the corp.
What is the Record Date as regards common or preferred stocks?
The date that the corp closes the updating of the stock record book. Person’s whose names appear will be sent a dividend check (whether entitled or not). BTW Dividends on stocks are paid? Quarterly
On bonds? Semi-annually
What is the Payable date?
The date the dividend is actually paid.
Who sets the Ex-dividend date?
What does “EX” mean?
FINRA (Unlisted stocks) or the Stock Exchange (for listed stocks).
EX = Without!
Who sets the Declaration Date,
the Record Date, and
the Payable Date?
The Board of Directors/Corporation sets the:
Declaration Date,
the Record Date, and
the Payable Date.
If an investor buys a stock on or after the Ex-dividend date, what does it mean for the dividend?
It is being bought without the dividend being paid.
If an investor wants to be entitled to the dividend, what must he do with regard to the ex-dividend date?
Must buy and own the stock at least (1) business day before the ex-dividend date.
What is the exception to the Ex-dividend date being the date that you won’t receive the dividend being paid?
If you execute a cash transaction.
The ex-date for “cash” transactions is the business day after the record date.
How do you calculate the Annual Dividend on a Preferred Stock?
EX: Mr. ______ owns 100 shares of 5% XYZ preferred stock trading at $50 per/share. Par value of the preferred stock is $100. How much will Mr. ____ receive in annual dividends from his stock position?
$100 par value x .05 = $5.00 per share
$5.00 per share x 100 shares = $500 annual Dividend income.
How do you calculate the Current Yield on Common Stock?
The measurement of the annual % rate of return you receive from investing in a stock. Also referred to as Dividend Yield.
Formula:
Annual Dividend / Market Price = Current Yield (%)
Current Yield is what the investor puts in his pocket (what she makes).
[Use annual dividend not quarterly dividend unless stated otherwise.]
What is a DPP a fancy name for?
An investment in a limited partnership. DPP’s are Limited Patnerships. DPP = Direct Participation Programs
With Bonds (corporate) what is a point equal to?
One point is equal to $10.00
Ex:
Corp bond quoted @98 1/2
98 x $10 = $980.00
1/2 x $10 = $5.00
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
$985.00What are the 3 different values that bonds trade at (in the open market)?
Discount = less than Par or $1,000
