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Series 7 - Corporate Ownership: Equity Securities
Understanding the types of equity securities, comparing common stock to preferred stock, Calculating certain values for stock questions
44
Finance
Professional
08/18/2011

Additional Finance Flashcards

 


 

Cards

Term
Equity Securities
Definition
  • Common stock and preferred stock
  • Represent ownership interest in the issuing company
Term
common stock
Definition
  • Corporations issue common stock to raise business capital
  • holders of common stock excersize control by electing a board of directors and voting on corporate policy
  • common stock holders are on the bottom of the priority list is the company fails
Term
understanding a stockholders voting rights
Definition
  • one of the most basic rights for common stockholders reveice is voting rights
  • stockholders vote by proxy, or absentee ballot
Term
2 types of voting for common stock holders
Definition
  • Statuatory (regular) voting
  • Cumulative Voting
Term
Statutory (regular) voting
Definition
  • most common type of voting
  • investors receive 1 vote for every share that they own multiplied  by the number of positions to be filled on the board of directors (or issues to be decided)
  • Investors must split the votes evenly for each ballot.
Term
Cumulative Voting
Definition
  • the stockholder gets 1 vote per share that they own multiplied by the number of positions to be filled on the board of directors (or issues to be decided).
  • the stockholder can vote the shares in any way he or she sees fit
  • gives smaller shareholders (in terms of shares) an easier chance to gain representation
Term
Remember!
Definition
  • cumulative voting doesnt give an investor more voting power, just more voting flexibility.
  • the only way to get more voting power is to buy more shares
Term
3 types of shares a corporation can sell based on their corporate charter
Definition
  • Authorized shares
  • Issued Shares
  • Outstanding Shares
Term
Authorized Shares
Definition
  • This is the number of shares of stock that a corporation can issue.
  • the issuers corporate charter states the number of authorized shares
Term
Issued Shares
Definition
  • the portion of authorized shares that the issuer has sold to the public to raise money
Term
Outstanding Shares
Definition
  • the number of shares that are in the issuers hands
  • may or may not have the same number as the issued shares
  • the issuer may decide to repurchase its stock to either help increase the demand (and the price) of the stock trading in the market or to avoid a hostile takeover

Outstanding Shares = issued shares - treasury stock

 

Term
Treasury Stock
Definition
  • may come from repurchase or buyback from shareholders, or it may have never been issued to the public in the first place
Term
considering the par value of common stock
Definition
  • not as important to investors as it is for bondholders and preferred stock holders
  • it is more or less a bookkeeping value for the issuer
  • the issuer can set the par value at whatever, but the selling price is usually much more
  • a stocks par value has no relation to the market price of the stock
  • the stated par value is printed on the stock certificate and it changes if the issuer splits the stock
  • issuer can issue no par value stock; a lack of par value doesnt affect investors
Term
Remember!
Definition
  • the amount over par value that an issuer recieves for selling stock is called paid-in capital, paid-in surplus, or capital surplus
Term

Why would a company split its stock? & two types

 

Definition
  • the company wants to make the market price of the security more atttractive
  • the normal unit of trading is 100 shares of stock (a round lot) and if the price of a security gets too high, the number of investors who can purchase becomes limited
  • there is a forward split and reverse split
Term
Remember!
Definition
  • Stockholders can vote on stock splits
  • after the split the investors may have more or fewer votes, but they still hold the same percentage of votes
  • when a company splits its stock the number of authorized shares needs to be changed on the corporate charter
Term
Forward Stock Split
Definition
  • the number of shares increases and the price decreases without affecting the total market value of outstanding shares
  • a forward split can be a 2-for-1, 3-for-1, 3-for2, and so on
Term
Tip!
Definition
  • A good way to double check your work is to make sure that the overall value of the investment doesnt change after the split
Term
Reverse Stock Split
Definition
  • the market price of the security increases and the number of shares decreases, however the overall value of the securities doesnt change
  • a company may reverse split its stock if the market price gets too low and potential investors may think there's a problem with the company
  • investors usually have to send in their old shares to the transfer agent to receive the new shares
Term
Sharing Corporate Profits Through Dividends
Definition
  • the investor may receive dividends in cash, stock, or property forms (stock of a subsidiary company or sample products made by the issuer)
  • Investors cannot vote on dividends, instead the borad of directors decides dividend payouts
Term
Cash Dividend
Definition
  • this is a taxable event
  • corporationgs arnt required to pay dividends; however dividends provide a good incentive for the investor to hold onto that stock
  • the market price of the stock falls on the ex-dividend date (the first day the stock trades without a dividend) to reflect the dividend paid:

Stock Price - Dividend = price on ex-dividend date

 

Term
Stock Dividends
Definition
  • act in the same way as a forward split in that the investor recieves more shares of the stock, only the corporation gives a percentage dividend (5%, 10%, ect) instead of splitting the stock 2-for-1, 3-for-1, or whatever
  • These dividends are not taxable, because the investors overall value of investment doesn't change
  • intended to make the market price more attractive to investors (if the market price gets too high, it limits the number of investors who can purcchase stocks), this adding liquidity to the stock.
Term
Preferred Stock
Definition
  • represents ownership in a comapany the same way that common stock does
  • investors receive money back before common stockholders do if the issuer declares bankruptcy
  • issuers of common stock are required to pay dividends
  • usually have a par value of $100 per share and tends to trade in the marke somewhere close to that par value
  • Cons: lack of voting rights, higher cost per share, and limited growth
  • dont receive voting rights unless they fail to receive their dividends
Term
Remember!
Definition
  • if the issuer doesnt dispurse a dividend because earnings are low, in most cases, owners of preferred stock are still owed the missing payments.
  • The dividend they receive is based on par value
  • par value is thus important when dealing with preferred stock
Term
7 types of preferred stock
Definition
  1. Noncumulative (straight) Preferred
  2. Cumulative Preferred
  3. Convertable Preferred
  4. Callable Preferred
  5. Participating Perffered
  6. Prior (senior) Preferred
  7. Adjustable (floating rate) Preferred
  • Some may be a combination of the different types; i.e cumulative convertable preferred stock

 

Term
Noncumulative (straight) Preferred
Definition
  • Rare
  • if the issuer fails to pay a dividend , the issuer doesnt owe it to investors.
  • an investor may choose this over common stock because the issuer is SUPPOSED to issue a consistent cash dividend
Term
Cumulative Preferred
Definition
  • more common
  • if the issuer misses a dividend the investor is owed that dividend.
  • if the issuer declares a common dividend, the issuer first has to make up all delinquint payments to cumulative preferred stockholders
Term
Note:
Definition
  • All preferred stock must be either noncumulative or cumulative
  • both types have other features that can be included such as the following note cards show
Term
Convertable Preferred
Definition
  • Allows investors to trade their preferred stock for common stock of the company at any time
  • investors usually receive a lower dividend  payment than with regular preffered stock
Term
Conversion Price
Definition
  • The dollar price at which a convertable preferred stock par value can be exchanged into a share of common stock
  • when a convertible preferred stock is first issued, the conversion price is specified and is based on par value
  • Conversion Price = price of common stock at that time
Term
Conversion Ratio
Definition
  • Tells you the number of shares of common stock that an investor receives for converting one share of preferred stock

Concersion Ratio = Par Value ÷ Conversion Price

 

Term
Remember!
Definition
  • the conversion ratio helps you determine the parity price where the convertable preferred stock and common stock would be trading equally
  • When there is a disparity in the exchange values, converting may be profitable
  • Example: if the convertable preferred is selling at $100 and the common stock is trading at $28, the common stock is trading above parity; convering makes sence because you are converting $100 worth of securities for more
Term
Callable Preferred
Definition
  • allows the issuer to buy back the preferred stock at any time at a price on the certificate
  • riskier because investors dont have control over how long they can hold the stock, so corporations usaully pay a higher dividend than on regular preferred stock
Term
Participating Preferred
Definition
  • rarely issued
  • allows the investors to receive common dividends in addition to the usual preferred dividends
Term
Prior (senior) Preferred
Definition
  • in this case senior preferred stockholders recieve compensation even before preferred stockholders in the case of the issuer filing for bankruptcy
  • These pay a slightly lower dividend than other preferred stock from the same issuer
Term
Adjustable (floating rate) Preferred
Definition
  • investors recieve a dividend that's reset every six months to match movements in the prevailing interest rates
  • because the dividend adjusts to changing interest rates, the stock price remains more stable
Term
American Depository Receipts (ADRs)
Definition
  • are receipts for foreign securities traded in the U.S
  • are negotiable certificates (they can be sold or transfered to another party) that represent a specific number of shares (usually 1 to 10) of foreign stock
  • owners are subject to currency risk
  • a great way to buy shares in a foreign company while realized any dividends and capital gains in U.S dollars
Term
Rights
Definition
  • allow existing stockholders to purchase new shares of the corporation at a discount directly from the issuer, before the shares are offered to the public
  • stockholders receive one right for each share owned
  • to determine the value of the right, you can use two basic formulas:
  1. the cum rights formula
  2. the ex-rights formula
Term
Cum rights formula
Definition
  • the value of the right while shares are still trading with rights attached
  • used to find out how much of a discount each right provides
  • Look in the question for a statement such as "prior to ex date" to use this formula

Value of rightcum rights= M(market price) - S(subscription price) ÷ N(number of rights needed to purchase one share) +1

 

Term
ex-rights formula
Definition
  • when you calculate the value of a right on the ex-date (the first day the stock trades without rights), the market price has already fallen by the value of the right

Value of rightex-rights= M(market price) - S(subscription price) ÷ N(number of rights needed to purchase one share)

 

Same as other formula but does not include +1

 

Term
Warrants
Definition
  • certificates that entitle the holder to buy a specific amount of stock at a fixed price; they're usually issued along with a new bond or stock offering
  • have no voting rights and receive no dividends
  • are considered sweeteners because they're something that the issuer throws into the new offering to make the deal more appealing
  • can also be sold seperatly on the market
Term
Stockholder rights
Definition
  • Voting power on major issues
  • Ownership in a portion of the company
  • the right to transfer ownership
  • an entitlement to dividends
  • opportunity to inspect corporate books and records
  • the right to sue for wrongful acts
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