Module 1 - Equities

Question 0

Outstanding Stock

Answer 0

Shares of the company that are owned by the investors

Question 1

Issued Stock

Answer 1

Authorized stock that has been issued to shareholders in either private placements or public Offerings

Question 3

Treasury Stock

Answer 3

Shares of stock that the company issues and later repurchases

Question 4

Corporate Charter

Answer 4

Provides a description of the company’s purpose, the articles of incorporation, by-laws and other material information at the time of incorporation

Question 5

Board of Directors

Answer 5

Are elected by the stockholders/owners of the company. The board of directors is responsible for advising the company and appointing officers to carry out corporate policies

Question 6

CAPITALIZATION indicates the company’s sources of funds for long-term use. The company receives EQUITY CAPITAL through the sale of stocks, DEBT CAPITAL through the sale of bonds, and EARNED SURPLUS through retained profits

Answer 6

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Question 7

Equity

Answer 7

Means ownership; a corporation’s equity is composed of shares of preferred stock and shares of common stock that are issued by the company

Question 8

Shareholders

Answer 8

Are the owners of the company, and the number of shares owned by an investor constitutes the amount of ownership the investor has in the company

Question 9

Every corporation must issue COMMON STOCK. Corporations issue common stock to establish ownership and to raise money to do business

Answer 9

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Question 10

Investors buy common stock in one of two ways:

Answer 10

• When it is issued by the corporation (the company receives the money from the sale).
• Through the securities market (the seller, usually another investor or a broker/dealer, receives the money from the sale).

Question 11

People buy common stock because they want to:

Answer 11

• Be owners of the company.
• Earn income through dividends, if they are paid (yield).
• Profit from any potential appreciation in the value of the stock (capital gains).

Question 12

A corporation is not obligated to issue PREFERRED STOCK

Answer 12

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Question 13

Authorized Stock

Answer 13

Is the maximum number of shares of stock that has been authorized for issuance by the corporate charter

Question 14

UNISSUED STOCK

Answer 14

Which is an additional number of shares that can be issued with the approval of the common stockholders

Question 15

ISSUED STOCK

Answer 15

Is authorized stock that has been issued to shareholders in either private placements or public offerings

Question 16

OUTSTANDING STOCK

Answer 16

Shares of the company that are owned by investors

Question 17

TREASURY STOCK

Answer 17

Shares of stock that have been issued by the corporation but repurchased by the company

Question 18

A company may buy back stock for any of the following reasons:

Answer 18

• To distribute for stock option plans
• For use in acquisitions or takeovers
• To increase the earnings per share, which should increase the market value of the outstanding stock

Question 19

PAR VALUE

Answer 19

• A bookkeeping term used to show the dollar value assigned to the issued and outstanding common and preferred stock on the balance sheet
• Preferred stock is ordinarily issued with a par value of $100

Question 20

Common stockholders have the following rights:

Answer 20

• The right to receive dividends, if dividends are declared by the board of directors and paid by the corporation (dividends are not guaranteed to any shareholder)
• The right to elect the board of directors and to vote on major management decisions, such as a change in the nature of the business
• The right to maintain their proportionate ownership in the corporation, known as the preemptive right
• The right to transfer ownership in their stock (sell or give their stock to someone else)
• The right to receive copies of the corporation’s annual report
• The right to inspect the financial records of the corporation

Question 21

PRIVATELY HELD COMPANY

Answer 21

A company is considered private when its founders (or those who purchase private placements) own all the stock

Question 22

CLOSELY HELD

Answer 22

When only a few people hold a majority of the stock

Question 23

THINLY TRADED STOCK

Answer 23

Stock that allows few public shareholders

Question 24

Preferred stock differs from common stock in four major ways:

Answer 24

• In the case of liquidation, preferred stockholders are always paid off before common stockholders.
• Preferred stockholders are paid dividends before common stockholders.
• Different types of preferred stock may provide additional rights to the preferred stockholders.
• Preferred stockholders have limited voting rights

Question 25

The best way to remember the preferred dividend amount is: The amount you see, whether percent or dollar, is the amount paid

Answer 25

• 5% = $5 and 6% = $6

Question 26

CUMULATIVE PREFERRED STOCK

Answer 26

- A preferred stock that will pay dividends every year, when declared by the board of directors. In the event that a dividend payment is either missed or partially paid, the unpaid portion of the dividend will accrue until fully paid. No dividends can ever be paid to common stockholders until cumulative preferred stock is completely paid up on all past and current dividends. - Cumulative preferred stock is the only preferred stock that will receive past dividends that have been missed. The word “cumulative” means that missed dividends “accumulate” until paid in full.

Question 27

CONVERTIBLE PREFERRED STOCK

Answer 27

Can be converted (exchanged) into shares of common stock if requested by the holder of the preferred stock

Question 28

PARITY PRICE

Answer 28

- Is the price at which the common and preferred stocks are equal - Divide the preferred stock’s market price by the conversion ratio.

Question 29

CONVERSION RATIO

Answer 29

- Used to determine the number of common shares a holder of preferred stock can get for a convertible preferred stock. - This ratio is calculated as follows: Divide the par value of the preferred stock by the conversion price

Question 30

CALLABLE PREFERRED STOCK

Answer 30

Preferred stock that gives the company the option (provision) to call the stock back at any time

Question 31

PARTICIPATING PREFERRED STOCK

Answer 31

- Type of stock that is rarely issued. - It guarantees that a fixed amount will be paid if any dividend is declared and also participates in a percentage of the dividends paid to common stock

Question 32

DIVIDENDS

Answer 32

Distribution of current year or prior year earnings (profits). Payments are made to stockholders in the form of cash or more shares of stock of the issuing company

Question 33

A dividend may be paid to the stockholders only if the board of directors votes and declares the dividend. The board of directors picks a date (called the RECORD DATE) on which all of the owners will be entitled to the dividend. Then the board will determine the date the checks will be sent,called the PAYMENT DATE. To receive the dividend the person must own the stock on the RECORD date (they are the “holder of record”)

Answer 33

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Question 34

CASH DIVIDEND

Answer 34

- A money distribution that is usually a portion of the EARNINGS. Earnings are the profits of a corporation after taxes are paid - Cash dividends, if paid, are usually paid quarterly

Question 35

STOCK DIVIDEND

Answer 35

A stock dividend is the distribution of more shares of stock to current shareholders

Question 36

When cash or stock dividends, are distributed to shareholders, the price of the shares is reduced in the open market

Answer 36

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Question 37

MARKET CAPITALIZATION

Answer 37

The number of shares outstanding multiplied by the price per share

Question 38

STOCK SPLITS

Answer 38

Like stock dividends, increase the number of shares outstanding without affecting earnings, but the price of the underlying stock in the market is still reduced

Question 39

Calculating Stock Splits

Answer 39

100% stock dividend = 2-for-1 stock split If an investor had 300 shares of stock and a 100% stock dividend is declared, the investor would own 600 shares, but the price per share would be cut in half. The total value of the investor’s holdings would remain the same. 25% stock dividend = 5-for-4 stock split To calculate this, start by using 100 shares: 25% of 100 shares is 25 more shares. Add those 25 to the original 100 owned and the investor now has 125 shares versus 100 previously owned shares. Another way of looking at this increase is to divide the new number of shares by the old number of shares, or 125/100. This fraction reduces to the ratio of 5/4. If an investor owned 400 shares and the board granted a 25% stock dividend (or 5-for-4 stock split), the investor would now own 500 shares: 400 × 5 ÷ 4 = 2,000 ÷ 4 = 500`

Question 40

CURRENT YIELD

Answer 40

The percentage of return an investor receives based upon the dividends received divided by the current market price

Question 41

STATUTORY VOTING

Answer 41

Allows a stockholder to cast one vote per share for each director to be elected

Question 42

CUMULATIVE VOTING

Answer 42

- Allows stockholders to combine all of their votes and vote in any manner they choose - This allows the MINORITY SHAREHOLDERS to get better representation on the board of directors because they can band together and cast all their votes for one director.

Question 43

PROXY SOLICITATION

Answer 43

A process that allows all absentee voting owners of a corporation (the stockholders) to vote for the board of directors

Question 44

PREEMPTIVE RIGHT

Answer 44

This allowed stockholders to maintain their proportion of ownership in the event that the company issued new shares of common stock

Question 45

NUMBER OF RIGHTS A STOCKHOLDER OWNS

Answer 45

- A stockholder is issued one right for every share of stock that is owned - 1 share of stock = 1 right in a rights offering. - The rights offering allows the investor to maintain proportionate interest in the company.

Question 46

WARRANTS

Answer 46

- The privilege of buying common stock at a preset price for a period of years or an indefinite period of time - The warrants make the bonds they are attached to more marketable because they may be used to purchase stock at a discount in the future - They have no right to dividends, nor do they have voting rights or preemptive rights.

Question 47

PRICE/EARNINGS RATIO

Answer 47

PRICE/EARNINGS RATIO = MARKET VALUE PER SHARE/EARNINGS PER SHARE

Question 48

LIQUIDATING VALUE

Answer 48

The theoretical value of a company’s assets if it were to go out of business

Question 49

ORDER OF LIQUIDATION

Answer 49

When a company goes bankrupt, it is important to remember that the creditors come before stockholders in the distribution of whatever value is remaining. The order of liquidation is as follows: 1. Taxes — all taxes must be paid first. 2. Secured bondholders — those who have their bonds backed by an asset, such as land. 3. Secured creditors — those who have sold the company goods, and thus the goods are the collateral for the creditor. 4. Debenture bondholders — those bondholders who have no security for the bond. The bond is only backed by the good name of the company. A debenture bond is only backed by whatever assets are left to pay the bondholders with. These will be discussed in the Corporate Bond Module. 5. Unsecured creditors — those who have provided services to the corporation with no collateral: utility and phone companies, etc. 6. Subordinated debenture holders — similar to the debenture bondholders above, except they are subordinated to all other creditors, which means they come after all other creditors and bondholders. 7. Preferred stockholders 8. Common stockholders

Question 50

A small company can break-off from a large corporation in two ways:

Answer 50

* The large company spins-off the smaller company. * The small company buys itself out from the large corporation, through issuing shares of the new company and issuing bonds with the company’s assets as collateral in a leveraged buy-out

Question 51

AMERICAN DEPOSITARY RECEIPTS (ADRs)

Answer 51

- Used to “facilitate the trade of foreign securities in American markets.” - The holders of the ADRs have all the rights of a regular stockholder, except for preemptive rights and voting rights. - ADRs can have a specific ratio of shares of underlying stock per ADR, and this ratio is determined by the issuing bank at the time of issue. - If a foreign company declares a dividend, it will be declared in the foreign currency of that country; however, the holding bank will convert the dividend into U.S. dollars, and the holder of the ADR will be paid in U.S. dollars.

Question 52

* Blue chip stocks * Growth stocks * Cyclical stocks * Defensive stocks * V alue stocks * Small cap stocks * Large cap stocks

Answer 52

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Question 53

BLUE CHIP STOCK

Answer 53

Stock of well-established companies with large market capitalization (a high number of shares and a high dollar value per share)

Question 54

GROWTH STOCK

Answer 54

Refers to a stock that is issued by a fast-growing company • Emerging growth companies - have just gone public • Aggressive growth companies - have been in business for a long- enough period of time to be stable, but their earnings are growing faster than other businesses in general • Growth companies - have been in business more than two years, are more likely to do well, and are growing faster than other companies in their industry

Question 55

CYCLICAL STOCKS

Answer 55

Stocks whose prices fluctuate in response to business cycles

Question 56

DEFENSIVE STOCKS

Answer 56

Stocks whose prices decline less in recessionary periods. Shares of utilities, food, and tobacco are common examples.

Question 57

DEFENSE STOCKS

Answer 57

Stocks of a corporation that manufactures or works on equipment for the defense and aerospace industries.

Question 58

CONSERVATIVE COMPANY

Answer 58

Refrains from borrowing too much money because the company’s management does not want to burden the company with too much debt.

Question 59

LEVERAGED COMPANY

Answer 59

Uses borrowed funds (usually through bonds) to attempt to make more money than what it costs in interest charges for the borrowed money.

Question 60

With the exception of the utility companies, a highly leveraged company is considered to be a speculative investment, because the company is gambling that increased borrowing will generate enough profits to cover the interest and other charges on the borrowed funds.

Answer 60

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