SIE Ch. 2 Flashcards
(51 cards)
What are two common benefits to owning equities?
Capital gain and dividends
How is a companies net worth calculated?
Business assets - liabilities
what is ownership percentage in relation to a single stock?
Each stock is equal to the next
Benefits to owning common stock? 4
- Capital gains
- Dividends
- Limited liability (only loose what you invest)
- Protection from inflation (if the money were to remain in cash)
Define limited liability?
Clients only can loose the amount invested. Essentially can own a company without putting personal assets on the line.
Forms of dividends?
- Cash
- Stock
- Property
- Sample products
When are dividends generally paid?
Quarterly
Rights of common stock holders?
- Vote for board of directors
- Freely transferable
- Access to books
- Access to financial statements
- Preemptive rights to any additionally issued shares
What are the risks of common stock?
- Market fluctuation
- Loss of dividend
- Loss of complete principle (bankruptcy)
Who decides what dividends are and when to receive them?
Board of directors
In the event of bankruptcy, what is a common stock holders right to assets?
The lowest of all stock holders
What are the two main types of bankruptcy?
Reorganization and liquidation
Differences between those two?
Reorganization means the company will keep its property and keep doing business; liquidation means cease in business activities and sell of all assets and property
General formula for repayment after bankruptcy?
- Taxes and wages
- Debt holders
- equity holders
In what ways is preferred stock like a debt security?
It has a fixed rate of return, unlike common stock.
How is the dividend stated? How often are they?
Annually, and they are stated as a percentage of par value.
What is typically par value?
$100 unless otherwise stated
How would you identify a preferred stock with a $100 par value that pays $6 annual dividends?
6% preferred
How would you identify a preferred stock with NO par and a $6 annual dividend?
$6 no-par preferred
Which has higher growth potential, common or preferred?
Common
Two main advantages of preferred?
- Dividends are paid first over common
2. Priority over common in bankruptcy
Four risks associated with preferred?
- Purchasing Power (inflation may make the dividend less appealing over time)
- Interest rate sensitivity (rates go up the value of PS goes down)
- Possible loss of dividend
- Still not paid ahead of debtors in bankruptcy
What is straight preferred stock?
NON cumulative; in the event of missed dividends nothing is paid back.
What is cumulative preferred stock?
Dividends have to be paid back, anything that’s missed will be paid when the next dividends are paid (missed + new).
