Finra Series 6 Terms Pack 1

Front 1

What happens to bonds during inflationary periods?

Back 1

Yields go up; price of bonds go down. Bonds pay a fixed income stream. If consumer prices (CPI) rise, bonds are worth less, and market price drops.

Front 2

What is convertible preferred stock?

Back 2

Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date.  Also known as "convertible preferred shares" ; Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes there is a provision that allows the company (or issuer) to force conversion. The value of convertible common stock is ultimately based on the performance (or lack thereof) of the common stock.

Front 3

What is preferred stock?

Back 3

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares".
There are certainly pros and cons when looking at preferred shares. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation and they have a fixed dividend (paid before common stockholders), but investors must weigh these positives against the negatives, including giving up their voting rights and less potential for appreciation.

Front 4

What is participating preferred stock?

Back 4

A type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends receive as well as an additional dividend based on some predetermined condition.

The additional dividend paid to preferred shareholders is commonly structured to be paid only if the amount of dividends that common shareholders receive exceeds a specified per-share amount.

Furthermore, in the event of liquidation, participating preferred shareholders can also have the right to receive the stock's purchasing price back as well as a pro-rata share of any remaining proceeds that the common shareholders receive.

Front 5

What is cumulative preferred stock?

Back 5

A type of preferred stock with a provision that stipulates that if any dividends have been omitted in the past, they must be paid out to preferred shareholders first, before common shareholders can receive dividends.
A preferred stock will typically have a fixed dividend yield based on the par value of the stock. This dividend is paid out at set intervals, usually quarterly, to preferred holders. If a company runs into some financial problems and is unable to meet all of its obligations, it will likely suspend its dividend payments and focus on paying the business-specific expenses. If the company gets through the trouble and starts paying out dividends again, it will first have to pay back all of the dividends that are owed to preferred share holders.

Front 6

What are subscription rights?

Back 6

The right of existing shareholders in a company to retain an equal percentage ownership over time by subscribing to new stock issuances at or below market prices. The subscription right is usually enforced by the use of rights offerings, which allow shareholders to exchange rights for shares of common stock at a price generally below what the stock is currently trading for.

Also known as the "subscription privilege" or "preemptive right" of the shareholder.

Subscription rights are not necessarily guaranteed by all companies, but most have some form of dilution protection in their charters. If granted this privilege, shareholders may purchase their shares before they are offered to the secondary markets. This form of dilution protection is usually good for a few weeks before a company will go about seeking new investors in the broad market.

Investors will receive notification of their subscription right by mail (from the company itself) or through their brokers or custodians.

Front 7

What is pre-emptive right?

Back 7

A privilege extended to select shareholders of a corporation that will give them the right to purchase additional shares in the company before the general public has the opportunity in the event there is a seasoned offering. A preemptive right is written in the contract between the purchaser and the company, but does not function like a put option.

Also known as "preemption rights".

When shareholders, usually a majority shareholder or a shareholder committing large amounts of capital to a startup company, purchase shares, they want to ensure they have as much voting power in the future as they did when they initially invested in the company. By getting preemptive rights in its shareholder's agreement, the shareholder can ensure that any seasoned offerings will not dilute his/her ownership percentage.

Front 8

What is a depository receipt?

Back 8

A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. A depository receipt trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares. Depository receipts can be sponsored or unsponsored depending on whether the company that issued the shares enters into an agreement with the custodian bank that issues the depository receipt.

Front 9

Explain currency exchange risk

Back 9

'Foreign-Exchange Risk'

1. The risk of an investment's value changing due to changes in currency exchange rates.
2. The risk that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates. Also known as "currency risk" or "exchange-rate risk".

This risk usually affects businesses that export and/or import, but it can also affect investors making international investments. For example, if money must be converted to another currency to make a certain investment, then any changes in the currency exchange rate will cause that investment's value to either decrease or increase when the investment is sold and converted back into the original currency.

Front 10

Explain the two common forms of depository receipts

Back 10

Two common forms of depository receipts are the American Depository Receipt (ADR) and Global Depository Receipt (GDR). An ADR is listed and traded on exchanges based in the United States, while a GDR can be traded on established non-U.S. markets such as London and Singapore.

When a foreign listed company wants to create a depository receipt abroad, it follows a standard process. The firm will likely hire a financial advisor to help it navigate regulations, and will then choose a domestic custodian bank. A broker in the target country will purchase shares of the firm in the country where the firm is located, and then the domestic bank will register the shares on behalf of the broker. The bank then issues the depository receipt to the broker. The broker can have the shares listed on a local exchange, such as the NYSE, as an ADR.
http://www.investopedia.com/terms/d/depositaryreceipt.asp

Front 11

What is a warrant?

Back 11

A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors.

The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months.

Front 12

Explain limited liabilty

Back 12

A type of liability that does not exceed the amount invested in a partnership or limited liability company. The limited liability feature is one of the biggest advantages of investing in publicly listed companies. While a shareholder can participate wholly in the growth of a company, his or her liability is restricted to the amount of the investment in the company, even if it subsequently goes bankrupt and racks up millions or billions in liabilities.

In a partnership, the limited partners have limited liability, while the general partner has unlimited liability. The limited liability feature protects the investor's or partner's personal assets from the risk of being seized to satisfy creditor claims in the event of the company's or partnership's insolvency.

Front 13

What is a transfer agent?

Back 13

A trust company, bank or similar financial institution assigned by a corporation to maintain records of investors and account balances and transactions, to cancel and issue certificates, to process investor mailings and to deal with any associated problems (i.e. lost or stolen certificates).

Because publicly-traded companies, mutual funds and similar entities often have many investors who own a small portion of the organization, require accurate records and have rights regarding information provision, the role of the transfer agent is an important one. Some corporations choose to act as their own transfer agents, but most choose a third-party financial institution to fill the role.

Front 14

What is a registrar?

Back 14

An institution or organization that is responsible for keeping records of bondholders and shareholders. If you are the owner of a bond or a share in a company you will be registered as a owner by one of these institutions.

The role of the registrar is to make sure that the amount of shares outstanding in the market matches the amount of shares authorized by the company. For bonds, the registrar also makes sure that the company's obligation from a bond issue is certified as being an actual legal obligation.

Front 15

What are dividends?

Back 15

1. A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Also referred to as "Dividend Per Share (DPS)."

2. Mandatory distributions of income and realized capital gains made to mutual fund investors.

Front 16

What is a declaration date?

Back 16

1. The date on which the next dividend payment is announced by the directors of a company. This statement includes the dividend's size, ex-dividend date and payment date. It is also referred to as the "announcement date".
1. Once it is authorized, the dividend is known as a declared dividend and it becomes the company's legal liability to pay it.