Unit 1

Question 1

What is an equity security?

Answer 1

An investment that represents an ownership stake in a corporation

Question 2

What is a debt security?

Answer 2

An investment usually acquired by buying an issuer’s bonds in exchange for interest income and the promise to repay the loan at a future maturity date.

Question 3

What benefits do investors receive from owning stock in a corporation?

Answer 3

Sharing in earnings through dividends and potential increase in share price

Question 4

Fill in the blank: An investor can participate in a company’s prosperity by receiving _______.

Answer 4

[dividends]

Question 5

Common stock is?

Answer 5

Equity in a corporation

Question 6

Why does a company issue stock?

Answer 6

To raise capital

Question 7

What rights does a share in common stock entitle its owner?

Answer 7

1. Dividends
2. Voting Rights
3. Preemptive Right to maintain their proportionate share of ownership
4. Limited Liability
5. Liquidity

Question 8

What are the two types of stock that corporations may issue?

Answer 8

Common stock and preferred stock

Question 9

What does preferred stock usually not have compared to common stock?

Answer 9

Voting rights or appreciation potential

Question 10

How often does preferred stock typically pay dividends?

Answer 10

Quarterly

Question 11

In the event of bankruptcy, who has priority claims over remaining assets?

Answer 11

Preferred stockholders

Question 12

What is the risk associated with preferred stock’s?

Answer 12

Interest rate change or money rate risk

Question 13

True or False: Most preferred stock has voting rights.

Answer 13

False

Question 14

What do common stock and preferred stock have in common?

Answer 14

Both represent ownership in a company

Question 15

Who are considered creditors?

Answer 15

Owners of debt securities, such as bonds

Question 16

What is the order in which dividends are paid out between common and preferred stockholders?

Answer 16

Common cannot receive dividends until preferred shareholders are paid

Question 17

What is the main reason preferred stock prices fluctuate?

Answer 17

Changes in interest rates

Question 18

What is capital appreciation??

Answer 18

An increase in the market price of securities

Question 19

What are dividends in the context of common stock?

Answer 19

Regular payments made by corporations to stockholders, which may increase over time as profitability increases.

Question 20

What are stock dividends?

Answer 20

Dividends paid in additional shares of common stock.

Question 21

What are property dividends?

Answer 21

Dividends paid in shares of a subsidiary company or in company products.

Question 22

What is a realized gain?

Answer 22

A price increase that becomes taxable once the stock is sold.

Question 23

What is the maximum tax rate on most dividends and long-term capital gains under current tax law?

Answer 23

15%.

Question 24

What happens to the stock price when a company issues a stock dividend?

Answer 24

The stock price drops to maintain the overall value.

Question 25

Are stock dividends taxed when received?

Answer 25

No, they are not taxed until sold.

Question 26

In a 2-for-1 stock split, how many shares does an investor own after the split?

Answer 26

Twice as many shares, each worth half as much.

Question 27

True or False: A stock split increases the amount of money an investor has.

Answer 27

False.

Question 28

What person facilitations the transfer of ownership of equity securities?

Answer 28

Transfer Agent

Question 29

Who is often registered as a transfer agents under the Securities Exchange Act of 1934?

Answer 29

Large commercial banks ## Footnote Transfer agents handle the issuance of stock certificates to new owners.

Question 30

What right do common stockholders have regarding their share of ownership?

Answer 30

Preemptive rights ## Footnote This allows them to maintain their proportionate share of ownership in the corporation.

Question 31

Which type of stockholders generally do not receive preemptive rights?

Answer 31

Preferred stockholders ## Footnote Preferred stockholders have preference in dividend payments and liquidation but not in ownership percentage when new shares are issued.

Question 32

What is the record date in relation to dividends?

Answer 32

The date by which an investor must be an owner of record to vote or receive dividends ## Footnote It is established by the company prior to a vote or dividend payment.

Question 33

What is a key feature of equity ownership that protects stockholders in case of bankruptcy?

Answer 33

Limited liability ## Footnote Stockholders' personal assets are not at risk in the event of corporate bankruptcy.

Question 34

What happens to an investor's personal assets if a corporation they invested in goes bankrupt?

Answer 34

They are not at risk ## Footnote Investors can only lose the amount they invested, unlike in sole proprietorships or partnerships.

Question 35

What does it mean for shares of stock to be freely transferable?

Answer 35

Shareholders can sell their stock without needing permission ## Footnote This is particularly true for shares traded on major stock exchanges.

Question 36

What is one exception to the rule of freely transferable stock?

Answer 36

Restricted stock ## Footnote Sales of restricted stock are contingent upon meeting the requirements of SEC Rule 144.

Question 37

True or False: Common stockholders generally receive preemptive rights.

Answer 37

True ## Footnote Common stockholders typically have the right to maintain their ownership percentage.

Question 38

Fill in the blank: The _______ is the date by which an investor must be an owner of record to vote or receive dividends.

Answer 38

record date

Question 39

What does the Securities Exchange Act of 1934 grant investors?

Answer 39

The right to receive an audited set of financial statements of the company’s performance each year (annual reports)

Question 40

Why was the Securities Exchange Act of 1934 created and what rules did it set in place?

Answer 40

Opportunities for fraud. Transfer agents must be registered as such with the SEC.

Question 41

Limited liability

Answer 41

Stockholders personal assets are not at risk when a company cannot meet debt obligations.

Question 42

What is market risk?

Answer 42

The chance that a stock will decline in price

Question 43

What are the potential benefits of including common stock in a portfolio?

Answer 43

* Potential capital appreciation * Income from dividends * Hedge against inflation

Question 44

What is market risk in relation to common stock?

Answer 44

The chance that a stock will decline in price

Question 45

What influences the daily fluctuations in a stock's price?

Answer 45

Perceptions of the company's business prospects

Question 46

What is business risk for common stockholders?

Answer 46

Possibility of a decline in the company's earnings

Question 47

What happens to dividends if a company's earnings decline?

Answer 47

Reduction or elimination of the dividend

Question 48

What is the priority of common stockholders if a company enters bankruptcy?

Answer 48

Low priority at dissolution

Question 49

Who has priority over common stockholders in the event of a company's bankruptcy?

Answer 49

Holders of bonds and preferred stock

Question 50

What are common stockholders entitled to upon dissolution of a company?

Answer 50

Residual rights to corporate assets

Question 51

True or False: Limited liability means investors might lose more than the amount of their investment.

Answer 51

False

Question 52

What does limited liability protect investors from in a U.S. corporation?

Answer 52

Liability to the full extent of their personal property

Question 53

Fill in the blank: An advantage of owning stock is that an investor's liability is limited to the _______.

Answer 53

amount of money invested

Question 54

What is a key benefit of owning common stock? (Three points)

Answer 54

Potential capital appreciation Income from dividends Hedge against inflation

Question 55

What does limited liability mean for common stockholders?

Answer 55

Liability is limited to the amount invested ## Footnote Investors are not personally liable for the corporation's debts beyond their investment.

Question 56

What is market risk in the context of common stock ownership?

Answer 56

The chance that a stock will decline in price ## Footnote Market risk is influenced by changes in investors' perceptions of a company's business prospects.

Question 57

What is business risk associated with owning common stock?

Answer 57

Possibility of a decline in the company's earnings ## Footnote A decline in earnings can lead to reduced or eliminated dividends.

Question 58

True or False: Common stockholders have priority over bondholders and preferred stockholders during bankruptcy.

Answer 58

False ## Footnote In bankruptcy, bondholders and preferred stockholders have priority over common stockholders.

Question 59

In the event of a company's dissolution, what rights do common stockholders have?

Answer 59

Residual rights to corporate assets ## Footnote Common stockholders are last in line to claim any remaining assets after all debts and senior securities are settled.

Question 60

Fill in the blank: Investors have no assurance that they will be able to _______ the investment in a stock at any time.

Answer 60

recoup ## Footnote This highlights the inherent risk involved in stock investments.

Question 61

What are the risks associated with owning common stock?

Answer 61

* Market Risk * Business Risk * Low Priority at Dissolution ## Footnote Each of these risks can negatively impact the investor's returns.

Question 62

Why the SEC Rule 144 of the Securities Act of 1933 created?

Answer 62

So that certain resales of already existing securities could be made without have to file a complete registration statement with the SEC.