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Unit 2 > Unit 2 > Flashcards

Unit 2 Flashcards

1
Q

What are 4 classes of common stock for a corporation?

A
  1. Authorized
  2. Issued
  3. Outstanding
  4. Treasury
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2
Q

How are corporations formed?

A

Through filing of a corporate charter

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3
Q

What does a corporate charter specify?

A

The number of shares the company is authorized to issue

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4
Q

What is issued stock?

A

Stock that has been sold to investors

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5
Q

Three reasons corporations issue fewer shares than the total number authorized?

A
  1. Raise new capital for expansion
  2. Paying stock dividends
  3. Exchanging common stock for outstanding convertible. bonds or p referred stock
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6
Q

What is outstanding stock?

A

All shares. that a company has issued that are in the hands of investors

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7
Q

What is treasury stock?

A

Stock a corporation has issued and subsequently reacquired

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8
Q

Why are analyst not concerned with treasury stock?

A

Because they do not carry the voting rights etc. of outstanding common shares

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9
Q

What are 2 of the rights of outstanding common shares?

A
  1. Voting rights
  2. Receive dividends
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10
Q

By what metric are common stocks classified?

A

Size of the corporation

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11
Q

What is the equation for a corporation’s market cap?

A

Outstanding Shares * Current Market Value

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12
Q

What are the three stock size categories?

A
  1. Large cap
  2. Mid Cap
  3. Small Cap
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13
Q

What must be given to customers before customers buy penny stock?

A

Customers must be given a copy of a risk disclosure document before their initial transaction

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14
Q

What must BDs do if an account holds a penny stock?

A
  1. They must provide a monthly account statement to the customer
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15
Q

What 3 things does the monthly account statement for Penny Stocks include?

A
  1. Market Value of shares
  2. Number of shares
  3. Issuer’s name
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16
Q

What must a Bd do before cold calling for a penny stock?

A

They must first determine suitability on the basis of information about the buyer’s financial situation and objectives

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17
Q

What 4 things must a BD disclose when. cold calling penny stocks?

A
  1. Name of. the penny stock
  2. Number of shares to be purchased
  3. Current quotation
  4. Amount of commission that the firm and the representative received
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18
Q

What must a customer due to buy a cold called penny stock?

A

Sign and date a suitability statement

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19
Q

What are two possible requirements for established customers in Penny Stock cold calling rules?

A
  1. Held an account with the BD for at least one year and has made deposit of funds or securities
  2. has made at least three penny stock purchases of different issuers on different days
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20
Q

What are established penny stock customers exempt from? What are they not exempt from?

A

Exempt from the suitability statement required but not from the disclosure requirements.

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21
Q

What type of transactions are exempt from penny stock rules on suitability and disclosure?

A

unsolicited transactions

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22
Q

What are three ways dividends can be paid?

A
  1. Cash dividends
  2. Stock dividends
  3. Product dividends
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23
Q

What are the two ways cash dividends are paid and situation for each?

A
  1. By check if an investor holds the stock certificate
  2. Automatic deposit into a brokerage account if the shares are held in street name
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24
Q

At what frequency are cash dividends paid?

A

Quarterly

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25
Q

When are stock dividends used instead of cash dividends?

A

When a company wishes to reinvest its profits for business purposes rather than pay cash.

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26
Q

What is the net result of a company delivering stock dividends?

A

The shareholder now owns more shares but the cost per share is adjusted downwards

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27
Q

From where 2 places do the shares of stock dividends come?

A
  1. Authorized shares that have never been issued
  2. Treasury stock
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28
Q

In what two ways are cash dividends taxed?

A
  1. Qualified
  2. Nonqualified
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29
Q

How much is a nonqualified tax rate?

A

Taxed at the investor’s ordinary income tax

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30
Q

Is the nonqualified tax rate or qualified tax rate lower?

A

qualified

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31
Q

What are the four important dates of dividend distribution?

A
  1. Declaration date
  2. Ex-dividend date
  3. Record Date
  4. Payable date
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32
Q

What is the declaration date?

A

When a company’s BOD approves a dividend payment

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33
Q

What two things does the BOD designate on the declaration date?

A
  1. Payment date
  2. Dividend record date
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34
Q

When is the ex-dividend date?

A

One day before the record date

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35
Q

What is the record date?

A

The date of record is the day on which the company checks its records to identify shareholders of the company

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36
Q

What is the payable date?

A

The dividend delivers checks to all stockholders whose names appear on the books as owners as of the record date

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37
Q

When are dividends taxed?

A

Same years the dividend is paid

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38
Q

Who sets the ex-dividend date?

A

A regulator: exchange or FINRA

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39
Q

What are 4 things common stockholders enjoy?

A
  1. Voting rights
  2. Capital appreciation
  3. current income
  4. limited liability
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40
Q

What does preempt mean?

A

It means to put oneself in front of another

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41
Q

What are four rights common stockholders have?

A
  1. Examine the minutes of meetings of the BOD
  2. Examine the list of stockholders for a credible
  3. Right to receive an audited set of financial statements of the company’s performance each year
  4. Preemptive right to maintain their proportionate share of ownership in the corporation
  5. If a corporation wants to issue additional shares, existing shareholders have the right to purchase those shares in an amount that would keep their proportionate ownership in the corporation unchanged.
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42
Q

What are the 3 financial benefits offered by ownership of common stocks?

A
  1. Capital gain
  2. Income
  3. Limited liability
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43
Q

Three reasons you would include common stock in a client’s portfolio?

A
  1. Potential capital appreciation
  2. Income from dividends
  3. Hedge against inflation
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44
Q

When is the right to examine the minutes of meetings credible?

A

If the performance of the corporation’s management declines seriously

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45
Q

What does it mean to have preemptive rights?

A

If a corporation issues additional shares, existing shareholders have the right to purchase those shares in an amount that would keep their proportionate ownership in the corporation unchanged

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46
Q

What is Capital Gain?

A

An increase in the market price of securities

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47
Q

Why do investors with a long term investment horizon keep common stock?

A

Because it provides investors with returns well in excess of the inflation rate

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48
Q

What are the 3 risks of owning common stock?

A
  1. Value risk
  2. Decreased or no dividend income
  3. Low priority at dissolution
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49
Q

What are considered senior securities?

A

A company’s debt and preferred stock

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50
Q

Who are the most junior class of investors in a company?

A

Common stockholders

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51
Q

Who declares the ex-date?

A

Finra or the exchange if the stock is listed on an Exchange

52
Q

Why are bonds and preferred stocks better suited cor conservative investors?

A

Because each is primarily an income investment and has limited growth prospects.

53
Q

How are preferred stock and common stock different in their rate of return?

A

The rate of return on a preferred stock is fixed rather than being subject to variation like common stock

54
Q

What is a preferred stock annual dividend called?

A

its fixed rate of return

55
Q

Why are income-oriented investors attracted to preferred stocks?

A

Because they have a fixed rate of return

56
Q

How is a preferred stock identified?

A

Based upon its dividend payment stated as a percentage of its par value

57
Q

What is the assumed par value?

A

100 dollars

58
Q

What are two bad things about owning preferred stock?

A
  1. No voting or preemptive rights
  2. No right to purchase shares in an amount that would keep their proportionate ownership incorporation issues APO.
59
Q

All corporations issue what kind of stock, and only some corporations issue what kind of stock?

A

Common stock, preferred stock

60
Q

2 Benefits of preferred1 stock over common?

A
  1. Dividend Preference: Paid dividends before common shareholders
  2. Priority at dissolution: Priority claim over common stockholders on remaining assets if a business goes broke
61
Q

Who are paid before preferred stock holders if business goes broke?

A

Creditors

62
Q

4 Risks of owning preferred stock?

A
  1. Purchasing power risk
  2. Interest rate sensitivity
  3. Decreased or. no dividend income
  4. Priority at dissolution
63
Q

What is purchasing power risk?

A

The potential that the fixed income produced will not purchase as much in the future as it does today b/c of inflation

64
Q

What is interest rate sensitivity?

A

When interest rates rise, the value of preferred shares declines.

65
Q

2 Reasons to include preferred stock in client’s portfolio?

A
  1. Fixed income from dividends
  2. Prior claim ahead of common stock
66
Q

3 Risks of investing in preferred stock?

A
  1. Possible loss of purchasing power
  2. Interest rate risk
  3. Business difficulties and bankruptcy
67
Q

What two risks of common stock investors might business difficulties lead to?

A
  1. Reduction or elimination of dividend
  2. Loss of principle
68
Q

What are 6 types of preferred stock?

A
  1. Straight (non cumulative)
  2. Cumulative
  3. Callable preferred
  4. Convertible preferred
  5. Adjustable-rate preferred
  6. Participating preferred
69
Q

What are cumulative preferred stock?

A

Accrues payments due to its shareholders in the event dividends are reduced or suspended and then gives them out after resolving problems.

70
Q

What does the right to call a stock allow?

A

it allows the company to replace a relatively high fixed-dividedn obligation with a lower one when the cost of money has gone down.

71
Q

What does the company give in return for call privelage?

A

Corporation may pay a premium exceeding the stock’s par value at the call.

72
Q

When do dividends cease when a corporation calls a stock?

A

The day of the call date

73
Q

What does it mean thst s preferred stock is convertible?

A

If the owner can exchange the shares for a fixed number of shares of the issuing corporation’s common stock

74
Q

What is the downside to the investor of preferred convertible?

A

There is a lower stated dividend rate

75
Q

What is the benefit of a convertible preferred?

A

Investor can convert co common shares and enjoy greater capital gain potential

76
Q

What are two interest benchmarks?

A

Interest benchmarks like T bills and money market rates.

77
Q

Why does the price of adjustable rate preferred stock maintain stable?

A

Because the payment adjusts to current interest rates

78
Q

What type of investor would not use adjustable preferred?

A

One who is looking for fixed income

79
Q

What do participating preferred stocks offer in addition to fixed dividends?

A

A share of corporate profits that remain after all dividends and interest due other securities are paid

80
Q

Where is it listed on the percentage to which participating preferred stock participates?

A

The stock certificate

81
Q

How much would an XYZ 6% preferred participating to 9% stock company pay its holders in a profitable year?

A

3% in additional dividends

82
Q

When do investors start tracking preferred convertible stocks and why?

A

When the common stock price surpasses the preferred stock because it will most likely be converted then.

83
Q

What is an ADR?

A

A kind of equity security designed to simplify foreign einvesting for US investors.

84
Q

What is the three step process of ADR creation?

A
  1. Shares are purchased in foreign company’s market
  2. Shares are deposited in a foreign branch of a US bank and a
  3. receipt is created
85
Q

Benefits of ADR

A
  1. Ease of use
86
Q

3 Drawbacks of ADR

A
  1. Taxation
  2. Currency and
  3. political risk
87
Q

What 3 reasons ADRS still subject to currency risk if they are issued and paid in USD?

A
  1. Currency rate exchange changes
  2. Value of ADR itself will rise and fall with value of stock
  3. Political Risk
88
Q

What defines restricted securities?

A

Securities acquired through some means other than a registered public offering

89
Q

What is an example of a restricted security

A

A private placement

90
Q

Two categories of restrictions under rule 144

A
  1. Resale restrictions
  2. Sales by insiders
91
Q

How long must restricted securities be held and under what rule?

A

Restricted securities may not be sold until they have been held fully paid for six months

92
Q

WHy are restricted stocks called legended certs?

A

Shares have to have a restrictive legend on the certificate warning about the holding period

93
Q

What phrase frees restricted stock?

A

“The sale effectively registers the stock”

94
Q

What define control stocks?

A

Stocks that are owned by directors, officers, or persons who own or control 10% or more of issuer’s stock

95
Q

How do families determine percentage of ownership?

A

They aggregate their positions

96
Q

What must a control person do to sell shares?

A

Fill out form 144

97
Q

What does the form 144 is used to?

A

To determine the number of shares the control person may sell over a 90-day period

98
Q

What are the two volume limitations under rule 144?

A
  1. Those who are affiliate can only sell 1% of the outstanding shares of the company or
  2. The average weekly trading volume over the most recent four weeks
99
Q

Where are ADRs traded/isted?

A

On the NYSE or NAsdaq, but some may be OTC.

100
Q

What are preemptive rights?

A

Entitle existing common stockholders to maintain their proportionate ownership share in a company by buying newly issued shares before the company offers them to the general public.

101
Q

What is the benefit to the investor of having a rights ofering?

A

it allows stockholders to purchase common stock below the current market price.

102
Q

Where do preemptive rights trade?

A

In the secondary market

103
Q

How long is the subscription period for rights trading?

A

30-45 days

104
Q

How many rights do existing shareholders receive?

A

One right per share owned

105
Q

What two things determine the number of rights required to purchase one share of the new issue?

A
  1. Depends on the number of outstanding shares
  2. and the number of new shares offered
106
Q

What three things can a stockholder who receives rights do?

A
  1. Exercise the rights to buy stock by sending the rights cetificates and a check for the required amount to the rights agent
  2. Sell the rights and profit from their market value
    Let the rights expire and lose their value
107
Q

What is a warrant?

A

A certificate to purchase securities from the issuer at a specified price sometime in the future.

108
Q

Three characteristics of rights

A
  1. Short term
  2. Given to existing shareholders
  3. Allows one to purchase. shares below market price
109
Q

Three things about warrants

A
  1. Long term
  2. Bundled with other securities
  3. Purchase at price that is above current market value
110
Q

What is a stock split?

A

When a company divides each. existing share of its stock into several new shares

111
Q

What is a forward stock split?

A

Increases the number of shares and reduces the price without affecting the total market value of shares outstanding

112
Q

Why would a company do a forward split?

A

To make a high market price more attractive to a wider base of investors

113
Q

What are two ways a forward split can be characterized?

A
  1. Even
  2. Uneven
114
Q

What is an even split?

A

The investor will always be given a certain number of shares for each share owned. For example, 2:1 or 3:1

115
Q

What is an uneven split?

A

The split can be designated in any ratio, like 3:2 or 5:4

116
Q

What is a reverse split?

A

When the number of shares is decreased and the price per share is increased.

117
Q

Why would a company do a reverse split?

A

Because the low stock price might meet the listing criteria of a stock exchange.

118
Q

What happens in shares

A
119
Q

What are the tax implications at the time of a stock dividend or split?

A

THERE ARE NON

120
Q

What happens to the shares of two companies in a merger?

A

The shareholders of both companies receive new shares of the combined company and the old are cancelled.

121
Q

What happens to the shares in an acquisition?

A

The shareholders of the acquired company will receive shares of the company that did the acquiring and old shares are cancelld

122
Q

What is a spin-off?

A

A corporation forms a subsidary company out of some of the corporation’s assets and operations.

123
Q

What happens to shares in a subsidary company?

A

Issues shares of newly formed corporation to sharefholders of original company

124
Q

Why would a company do a buyback?

A

Doing so reduces the number of shares available and increases the value of shares still available

125
Q
A

Unit 2 (18 decks)

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