Chapter 1 – Equity – Flashcards

Is an investment that represents either an ownership of a debt stake in the company.

Is usually acquired by buying a company's bonds.

Is a loan to a company in exchange for interest income and the promise to repay the loan at a future maturity date.

Represents Equity

Represents Debt

What the company owns: Cash, accounts receivable, investments, property...

What the company owes: accounts payable, short/long-term investments.

the excess of the value of assets over the value of liabilities.

Assets - Liabilities = Net worth.

Represents equity ownership in a corporation, but it usually does not have the same voting rights or appreciation potential as common stock. Also, It pays a fixed, semi annual dividend (every 6 months) and has priority claims over common stock.

Authorized; Issued; Outstanding; and treasury.

Refers to a specific number of shares the company has authorization to issue or sell.

Has been authorized and distributed to investors. 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.

Includes any shares that a company has issued but has not repurchased--that is, stock that is investor owned.

Is a stock a corporation has issued and subsequently repurchased from the public. The corporation can hold this stock forever or can reissue or retire it. Also, it doesn't carry the rights of outstanding common shares, such as voting rights and dividends. By buying it's own shares in the open market, the corporation reduces the number of shares outstanding. If fewer shares are outstanding and income remains the same, EPS increases. Issued Stock - TS = Outstanding Stock.

For investors, a common stock's par value is meaningless. An Arbitary value

When a corporation sells stock, the money received exceeding par value is recorded on the corporate balance sheet as.

Current liquidation value of a share.

Supply (the number of shares available to investors) and demand (the number of shares investors want to buy) value.

To exercise control of a corporation by electing a board of directors and by voting on issues, such as -- Issuance of convertible securities or additional common stock; changes in the corporations business, such as M&A; and stock splits.

Allows a stockholder to cast one vote per share owned for each item on a ballot.

Allows stockholders to allocate their total votes in any manner they choose. *Cumulative Voting benefits the smaller investor, whereas statutory voting benefits larger shareholders.

when a corporation raises capital through the sale of additional common stock, it may be required by law or its charter to offer securities to its common stockholders before the general public.

Give investors the right to maintain a proportionate interest in a company's stock.

Has lowest claims to the assets. Most junior security

Increases the # of shares and reduces the price without affecting the total market value of shares outstanding; an investor will receive more shares, but the value of each share is reduced. More Shares, less value = same ovenship

Has the opposite effect on the # and price of shares. The investor owns fewer shares worth more per share.

When the stock goes up.

Pay regular quarterly dividends to stock holders.

Stock D - additional shares in the company. Property D - Lease common form, but shares in subsidiary company you receive.

Capital Gains - When the investor sells at a higher price than purchased. Realized Gain - if the investor sells at a gain, he will have to pay taxes on the gain. Unrealized gain - has no tax effect. Dividends are taxed.. income tax. Corporations receive a 70% exclusion on dividends from other companies.

Market RIsk - stock price drops based on people. The dividend could decrease or stop paying out. Low prioirty when the company defaults.

Has features of both debt and equity. It's an equity because it reps ownership in the stock; however, it does not normally offer the appreciation potential as common stock. Preferred stock is issued as a fixed income product with fixed dividend. PS is nonvoting. However, PS has two advantages: When BOD declares dividends, owners of PS receive their payment before CS. If they go bankrupt, PS have a priority claim over over the common stockholders. If a corporations misses several payments, the shareholders are given a chance to vote.

has no special features beyond the stated dividends.

In times of financial stress i.e, a company cant pay dividend. When a company can resume payment, these holders of CF receive their current dividends plus the total accumulated before anyone else. therefore, its safer.

A preferred stock is convertible if the owner can exchange each preferred share for common stock. CP is often issued with a lower stated dividend rate than nonconvertible preferred because the investor may have the opportunity to convert to common shares and enjoy capital gains. Additionally, the conversion of PS into CS increases the total number of CS outstanding, which decreases eps

In addition to fixed dividends, PP stock offers its owners a share of corporate profits that remain after all dividends and interest have been paid.

Callable or redeemable, preferred, which a company can buy back from investors at a stated price after a specific date.

1. Callable preferred; when the stock is called, dividend payments are no longer made, so the issue has to be higher to compete. 2. Stright Preferred; since it has no safe feauters it will be higher. 3. Cumulative Preferred; it has the safest features.

Is the annual dividend (normally, 4 times the quarterly dividend) divided by the current value of the stock. Dividend yield = Annual dividend/Current Market value of the stock.

A Committee on Uniform Securities Identification Procedures. It's a universal ID number. It helps keep track of securities.

A form that duplicates the back of a stock. the broker takes care of this.

The transfer and registration of stock certificates are two distinct functions that cannot be performed by a single person or department in the same institution.

1. ensuring that its securities are issued in the correct owner's name. 2. canceling old and issuing new certificates. 3. maintaining records of ownership 4. dealing with lost, stolen, or destroyed certificates. The transfer agent distributes additional shares in the event of a stock split or new certificates in the event of a stock split. if a split result in a fractional split, a transfer agent will send a check to the owner for the difference

Ensures that a corporation does not have more shares outstanding than have been authorized and is also responsible for certifying that a bond represents a legal debt of the issuer. The registrar will audit the transfer agent. Must be independent of the issuing corporation.

8,313.00 Peek: page 22.

National Automated Quotation System.

1. Effective july 2006. Stringent listing requirements for both financial and liquidity competes with NYSE. 2. The largest of three nasdaq market tiers was renamed to better reflect the global nature of securities included. These OTC stocks have high interest and appeal. They could be on the GLobal Select market, but choose to stay on OTC 3. As of sept. 2005, use to be called nasdaq smallcap market, but was changed to NCM to better reflect capitalization of the issues included in this market tier.

Collects and distributes cash dividends for stocks held in the street name.

Makes the appropriate distributions or transfers directly to the broker dealer.

The SEC requires FINRA to notify them at least 10 days before the record date.

The EX-Date is two business days before the record date. A customer must purchase a stock three business days before the record date to qualify. *Hes the owner as of the settlement date not the trade date.*

The stockholders of record on the record date receive the dividend distribution.

Three or four weeks after the record date, the dividend disturbing agents sends checks to the stockholders on record.

Cash trades settle the same day, so they go ex-dividend on the day after the record date because no lag occurs between the trade date and the transaction settlement.

Declaration, EX, Record, Payable. *Declaration, Record, and payment are determined by the BOD, and FINRA determines the ex-date.

A stock distribution of 25% or more of the shares outstanding is subject to special handling.

is a printed statement showing the buyer's right to a dividend. If a stock is purchased before the ex-date, but settle after the record date, the wrong party (seller) will receive the dividend. In this case a due bill will be issues.

existing shareholders are entitled to maintain their proportionate ownership in a company by buying newly issued shares before the company offers them to the public.

Allows stockholders to purchase common stock below the current market price. A stock holder who receives rights may: 1. Exercise the rights to buy stock by sending the rights certificate and a check for a required amount to the rights agent. 2. sell the rights and profit from their market value. 3. Let the rights expire and lose their value.

is a certificate representing a short-term (typically 30 - 45 days) privilege to buy additional shares of a corporation.

Market Price - Subscription Price / Number of rights to purchase 1 share + 1 41 - 30 / 10 + 1 = 11/11 = 1 2. If abc stock dropped to $40 (reduce the $1 value of the right), the solution is: Market Price - Subscription Price / Number of rights to purchase 1 share 40 - 30 / 10 = 10/10 = 1

is done on a firm commitment basis, meaning the underwriter buys all unsold shares from the issuer and then resells them to the general public. DOne if the stockholders do not subscribe to all the additional stock.

is a certificate granting its owner the right to purchase securities from the issuer at a specified price (normally higher than the current market price.) Unlike a right, a warrant is usually a long-term investment. Typically have a life of five years. They're usually offered as SWEETENERS to the public to securities more attractive. The long-term nature of warrants is said to be attractive to speculators because of the leverage it offers. Warrants also allow the issuers to offer bonds or PS at a lower rate because its offering something extra. The long-term right to buy a stock at a fixed price.

American Depositary Receipts are U.S. securities that facilitate the trading of foreign stocks. usually 1 -10 shares.

Custodian Bank - A custodian, typically a bank in the issuer's country, holds the shares of foreign stock that the ADRs represents.

most rights stockholders normally hold. these include the right to receive dividends when declared. THey cannot vote. only if the issuers wants them too. 2. WIll get taxed foreign income tax, but can use this as a tax deferred tool against usa tax.

is a company that manages a portfolio of real estate. Serve as a source of long-term financing for real estate projects. Under guidelines of Subchapter M of the interal revenue codr, a REIT can avoid being taxed as a corporation by having 75% of total investment assets in real estate. and distributing 90% to investors.

When the trusts own property, they're known as Equity REIT's. When trusts own mortgages on property, they're known as mortgage REIT's THose that own both are hybrid reit's

1. gives investors the opportunity to invest in real estate without incurring the degree of liqudity risk. 2. can provide some hedge to price movments in other equity markets. Usually, are negatively correlated to stocks. 3. Provide a reasonable expectation of income from dividends and capital appreciation due to the appreciation of the assets the trust holds.

the investor has no direct control over the portfolio. ALL on manager. 2. Problematic loans within mortgage REIT portfolios can cause decreases in income flow and diminish capital returns. Dividends are paid by the trust do not meet the requirements of qualified dividends and therefore are taxable as ordinary income.