Series 7, Chapter 1 - Equity Securities

Front 1

Common Stock

Back 1

is issued by CORPORATIONS to raise capital.

People who have that stock are called shareholders. Shareholders own pieces of the company.

Front 2

Equity

Back 2

Means ownership

Front 3

Why do investors by common stock?

Back 3

- To make a profit!

- 2 ways to make this profit.
-Dividends
-Capital Gains

Front 4

Dividends

Back 4

A company never HAS TO pay dividends to their shareholders. It's the company's choice.

Front 5

Capital Gain

Back 5

A capital gain occurs when you buy a stock for an amount less than you sell it for.

A capital loss is also an outcome...

Front 6

Risk and Reward Potential

Back 6

When you buy a common stock on the open market, there is no limit how high a stock price could go.

You loss potential is limited. You can not lose more than you invested.

Front 7

Shareholders Have Rights:

Back 7

- Receive a stock cert. which will be issued in firm name or investor.

Registered form - Registered in shareholder's name.

Street name "Firm name" - security registered on issuer's books in name of broker-dealer holding the stock.

ALL SECURITIES PURCHASED ON MARGIN MUST BE HELD IN STREET NAME

- Inspect certain corporate books of the corporation

- Right to receive dividends as declared by board of directors.
--> Dividends are optional for the corporation to issue and are at the discretion of the Board of Directors.
---> Dividends are paid quarterly.
----> Common stock is NEVER referred to as fixed income.

- Right to your proportionate share of the company's assets if the company goes out of business.

- Right to vote

Front 8

The Order of Asset Distribution
(LIQUIDATION)

Back 8

1) Taxes

2) Secured Debt (generally bond backed by assets)

3) Unsecured debt (debtentures, general creditors)

4) Preferred stockholders

5) Common Stock holders

Front 9

Common Stockholders are always the last to be ________. This is why they are considered to be the ________ securities (LIQUIDATION POINT OF VIEW).

Back 9

PAID

RISKIEST

Front 10

Common Stock Voting

Back 10

You can vote

- in person
or
- by proxy (absentee)

Front 11

REGULAR / STATUTORY VOTING

CUMULATIVE / BLOCK VOTING

Back 11

The method of voting is chosen by the COMPANY.

Regular / Statutory Voting (MOST COMMON) - stockholders receive one vote per share per director and is most beneficial to substantial stockholders.

Cumulative / Block Voting -
stockholders receive one vote per share times the number of directors being voted on. Most beneficial to minority stockholders.

Front 12

6. Another right of the shareholder

Back 12

The right to sell their shares.

IF there is a buyer available!

Front 13

Rights that common shareholders DO NOT HAVE

Back 13

1. Are not entitled to receive dividends. Only the board of directors has the ability to make dividends happen.

2. Do not have the right to vote that the company dissolves

3. Do not have the right to vote for officers or management.
- You do have the right to elect the board of directors

Front 14

Common stock has HISTORICALLY...

Back 14

Always best hedge against inflation. Responds with the highest return during inflation periods.

Had the greatest potential for long - term capital appreciation.

Front 15

General information regarding common stock that is negative for the holder and the economy overall

Back 15

- Higher Taxes
- Rising interest rates
- Decreases in Gross Domestic Product
- High unemployment

Front 16

General information regarding common stock that is positive for the holder and economy overall

Back 16

Lower taxes
Lower interest rates
Increase in GDP
Low unemployment

Front 17

Stages of Common Stock

Back 17

1) Authorize stock - maximum number of shares a corporate may issue. They often authorize several million more than they need for later use.

2) Issued stock - the amount of the stock that is sold to the public. PRIMARY DISTRIBUTION - The first distribution - first holders of the stock.

3) Treasury stock - later down the road the company may buy back some of their own stock. This is called treasury stock.
Treasury stock just sits there. It does not vote, receive dividends, and it is not used in calculating the EPS of the corporation. It will appear on the balance sheet as a footnote.

Front 18

Treasury Securities

Back 18

Debt securities issued by the federal government. COMPLETELY DIFFERENT FROM TREASURY STOCK.

Front 19

Reasons a Company Would Repurchase its Own Stock

Back 19

1) Increase EPS

2) Finance future acquistions (TAKEOVER)

3) Provide stock for stock option plans

4) Fight a takeover attempt

****Required to notify the SEC if company buys back their own stock.

Front 20

EPS

Back 20

Net Earnings
______________
(Issued Stock - Treasury Stock)

Front 21

OUTSTANDING SHARES

Back 21

Issued Stock - Treasury Stock

The only shares that vote
Only shares that get dividends
Only shares used to calculate Earnings Per Share.

Front 22

Long Position

Back 22

When an investor buys and owns any security, he has a long position.

When you think stock prices are going to go up, you buy a stock and hold a long position. Thinking the price will go up is known as "BULLISH"

Front 23

Short Position

Back 23

When an investor borrows and sells any security, he has a short position. He is gambling that the market price would go down. He is referred to as "BEARISH"

Front 24

Covering

Back 24

When you pay back a short position of stock.

Front 25

A Point (Common Stock)

Back 25

= $1.00

Front 26

Trade Date

Back 26

The date on which a buy or sell order is executed.

Front 27

Regular Way Settlement Date

Back 27

T + 3 (business days)

Front 28

REG T

Back 28

Regulation T settlement. (T+5)
(business days)

Reg T applies to all securities

Front 29

Blue Chip Stock

Back 29

Stock issued by a company that is nationally well known for good quality management, products, services

Blue chips pay dividends in good and bad times. Blue chips often maintain a 50% payout ratio which means it pays out half of whaterver their earnings are.

Front 30

Growth Stock

Back 30

Stock issued by a company that is expected to have above-average increases in revenues and earnings.

- Have a high percentage of retained earnings, therefor

- pay little or no dividend, resulting in a low dividend yield

- Generally have a high price/earnings ratio

- Stock price may fluctuate widely and be volatile

Front 31

Cyclical Stock

Back 31

Stock price rises and falls with the economy
A) Auto Manufacturers
B) Steel Companies
C) Appliances
D) Housing
E) Paper Companies

Front 32

Countercyclical Stock

Back 32

Opposite direction of the economy

A) Gold and Silver
B) Budget Retailers
C) Temp Agencies

Front 33

Defensive Stock

Back 33

"TUF D"

Resistant to economical changes

- Tobacco
- Utilities
- Food Companies
- Drug Companies

Defensive Stock does not include steel companies

Front 34

Utitility Stock

Back 34

Electricity, Gas, Water.

A) Generally offer above average dividend yields

B) Less capital gain opportunity

C) Highly leveraged - lot of debt. Can do this because customers can't do without them.

D) Changes in interest rates will have more of an effect on utility stocks because of the high leverage

Front 35

Special Situations

Back 35

Stocks that are undervalued and whose price can increase in value suddenly due to a number of reasons
- New (better) Management
- Introduction of a POPULAR new product
- Discovery of a natural resource on corporate property - Big strike oil find on bowling ball company property

Front 36

Current Yield on Common Stock

Back 36

Yield - what you put in your pocket

Annual Dividend
---------------------------
Market Price

also referred to as "yield"

Front 37

DPS - Dividends Per Share

Back 37

Dividends Paid
_______________
Outstanding Common Shares

Front 38

Dividend Payout Ratio

Back 38

DPS
-------
EPS

Measurement of what percentage of a company's earnings (net income) it pays out to its shareholders.

Front 39

Dividend Pay out Ratio
Blue Chip
Growth Stocks
Public Utilities

Back 39

Blue Chip - General PayOut percentage.

Blue Chip 50% Divend Payout/ Ratio and 50% Retained Earnings

Growth Stocks <25% divned payout ratio / >75% Retained Earnings

Utilities - >75% dividend Payout ratio / <25% Retained Earnings

Front 40

Retained Earnings

Back 40

Net Income - Dividends Paid

Front 41

Stock Split

Back 41

A company splits its stock because it Increases marketability by reducing the market price of the stock

2) Upon a stock split, an investor will receive a new cert for the NEW stock

3) Par value decreases proportiantely to the split. A par value of $10.00 would go to $5.00 in a 2:1 split.

Front 42

Reverse Split

Back 42

Pushing the market price up artificially so it is more attractive. A reverse split can be a sign of trouble for company

Front 43

Ratio for regular and reverse splits

Back 43

New : OLD

Colon is "for"

Ex.
Regular Split - 3:2 Three new shares for every two old shares

Front 44

Equity Security Derivative

Back 44

Security that derives its value from the performance of COMMON STOCK

Front 45

Warrants / Subscription (WTS)

Back 45

Allows the holder to acquire additional shares of common stock.

It's long term, sometimes even lasting forever.

Warrants are frequently traded separately from the security to which they were attached when they were issued

Market premium = difference between exercise price of the warrant and market price.

At the time of issue, warrants exercise price will be below current market price. Meaning they have no intrinsic value at the time of issue. They may be valuable down the road.

Most often issued with DEBENTURES

Warrants are used as a sweetner. Issuer voluntary issues warrants.

Exercising the warrants will cause dilution of the earnings per share

Warrants are sometimes given to underwriters as compensation.

DIVIDENDS ARE NEVER PAID ON WARRANTS.

Front 46

Rights (RTS) / Preemptive Rights/ Subscription Rights

(ALL WORDS MEAN THE SAME THING)

Back 46

Rights are a SHORT - TERM PRIVILEGE GRANTED TO EXISTING SHAREHOLDERS. A RIGHT GIVES THEM AN OPPORTUNITY TO SUBSCRIBE TO NEWLY ISSUED SHARES AT A PRICE LOWER THAN THE PUBLIC OFFERING _BEFORE_ THE GENERAL PUBLIC IS ALLOWED TO PURCHASE NEW SHARES

Allows the holder to acquire additional shares of common stock.

Rights are always a have to. A company is obligated to offer rights if its in their charter.

If a company wants to raise money by issuing more common stock, they must first offer shares to EXISTING shareholders.

To do so, they will issue one right for each outstanding share of common stock.

Shareholders will have to decided among:
1)subscribing to (purchase) additional shares of the stock.
You would go through a transfer agent for this. You will need money from your own pocket.

2)Sell the rights to another investor

3)Let the rights expire - sometimes the commission to execute or sell the rights outweighs the profit you get.

**SHAREHOLDERS MAY NOT REDEEM RIGHTS FOR CASH WITH THE CORPORATION OR THE TRANSFER AGENT. YOU MUST SELL THEM TO AN INVESTOR OR SUBSCRIBE AND SELL THE UNDERLYING COMMON STOCK

RIGHTS GENERALLY HAVE A MAXIMUM MATURITY OF 90 DAYS

Existing Shareholders who excersise their rights will MAINTAIN their proportionate ownership within the corporation. Existing shareholders who don't exercise their rights will lose proportianate ownership of the corporation.

Front 47

Preemptive Rights Clause

Back 47

This is the clause that sets the requirement for issuing rights in a company's charter.

Front 48

Rights Offering

Back 48

The distribution of subscription rights to the existing common shareholders

Front 49

Calculating the number of rights required to buy one new share of stock

Back 49

Outstanding Shares
----------------------------- =
New Shares

# of rights needed to purchase each new share.

Front 50

Preferred Stock

Back 50

Another class of stock a corporation can use.

"Preferred" because it has priority over common stock in receiving dividends and asset distribution during liquidation.

PREFERRED STOCK IS A FIXED INCOME SECURITY - SET INTEREST RATE
- Equity security

ALL FIXED INCOME SECURITIES ARE MUCH MORE SENSITIVE TO CHANGES IN INTEREST RATES THAN COMMON STOCK.

FIXED INCOME PRICES HAVE INVERSE REACTIONS TO INTEREST RATES

INTEREST RATES UP -
FIXED INCOME PRICES DWN

INTEREST RATES DOWN -
FIXED INCOME PRICES UP

Pays a dividend that is stated as a % of par ($100) or in a fixed dollar amount.

Newer preferred stocks sometimes have a par value of $25.00

Sometimes preferred stock pays a variable dividend - if interest rates go up - your interest rate will go up a bit, and vice versa.

No preemptive rights or voting stock.

Preferred stock is generally less volatile than common stock.

Preferred stock has less potential for market appreciation than common stock.

Front 51

Preferred Stock Customizations

(Preferred stock could, but don't need to, have these qualities)

Back 51

Cumulative - all dividends in arrears must be paid before common stockholders are paid a dividend. (If company doesn't have money for a dividend - they have to make it up before giving common stockholders dividends. Most preferred stock is cumulative

Convertible - may be converted into common stock. MARKET PRICE OF CONVERTIBLE PREFERRED FLUCTUATES MORE THAN OTHER PREFERRED STOCK EVEN WITH STABLE INTEREST RATES

ALL Convertible securities try to maintain equal value with the underlying common stock. (PARITY) Convertible tries to "tag" (follow suit) with common stock.

Conversion increases number of common stock shares and dilutes the earnings per share

Participating - You're going to get your stated dividend, and you could possibly get more if the company does really well.

Callable - may be redeemed (called) by the issuer at a set premium over the par value after a specific date. Most preferred stock is callable.

Cumulative, convertible, and participating favor the investor. Callable favors the issuer.

Front 52

Dividends Are Paid In...

Back 52

1) Cash (most common)
2) Company's own stock - (stock dividend) usually paid by a company that has a small cash balance
3) Other stock that the corporation owns
4) Treasury Stock
5) Product that they manufacture.

Front 53

Dividends are Paid On

Back 53

1) Common Stock
2) Preferred Stock
3) Mutual Fund Shares
4) ADR's (American Depository Receipts) - FOREIGN SECURITIES

Front 54

ADR (American Depository Receipts)

Back 54

An American bank in the foreign country holds these securities and sells the receipts (proof that you hold them) to Americans here in the US.

ADR's don't have voting privileges

ADR's dividends are paid in US Dollars

ADR's
Yes on dividends
No on voting

Front 55

Dividend Key Info

Back 55

Corporations are not required to pay dividends to COMMON STOCKHOLDERS

A dividend must be declared by a board of directors before common stockholders are legally entitled to it.

Dividends are fully taxable at all levels.

********The date a corporation declares a dividend is the date it becomes a current liability of the corporation.********

Dividends - are paid quarterly but generally QUOTED AS ANNUAL RATES.

Investors who are long the stock are entitled to dividends and splits......
Investors who are short the stock owe dividends and owe splits.

The amount of the dividends significantly affect and determine a stock's market price.

Front 56

Dates Relating to Dividends

(DERP)

Back 56

Declaration Date

Ex-Dividend Date

Record Date

Payable Date

Front 57

Declaration Date

Back 57

The date on which a dividend is declared by the board of directors

Front 58

Ex-Dividend Date

Back 58

The date the stock begins to trade without the dividend. It is the second business day before the record date

Ex date is only date set by regulators. It always 2 days before record date.

Exception - cash transactions are the business day after the record date

Front 59

Record Date

Back 59

The date on which the corporation closes the updating of the stock record book. People whose name appears on the book as of this date will be sent the dividend check (correct or incorrect)

Front 60

Payable Date

Back 60

The date that the dividend is actually paid (and removed from a corporations liabilities)

Front 61

Due Bill

Back 61

A report of money that is owed. They are used between broker/dealers to adjust for incorrect dividend payments.

Front 62

Real Estate Investment Trusts

Back 62

REITs are REITS.. they are their own entity.

Companies that manage a portfolio of real estate to earn profits for their shareholders. When you buy a share of a REIT you're buying a small piece of all the real estate the company holds.

REITS are generally formed to invest in commercial real estate - or renting residential.

A REIT may:

Invest in long - term mortgages
Own real property
Make short-term real estate construction and development loans.
INVEST IN OTHER REITs

Three types of REITs
Equity, Mortgage, Hybrid

Front 63

Equity REITs

Back 63

Hold an equity position in the real estate. Actually buy the property.

Shareholders receive income from rents receive and capital gains when property is sold at property. Capital losses are not passed onto investors.

Front 64

Mortgage REITs

Back 64

Mortgage REITs lend money to building developers

and pass the interest income on to shareholders

They are generally highly-leveraged

Front 65

Hybrid REITs

Back 65

Hybrid REITs - combination of both Equity and Mortgage REITs.

Some equity positions in the real estate and some lending.

Front 66

Common Facts of a REIT

Back 66

1. A REIT must pay out at least 90% of earnings and must have at least 75% of assets in real estate activities.

2. REITs can provide investors with income, diversification, growth, and professional management.

3. Considered to be an income EQUITY security.
- Investors are generally seeking income and capital appreciation, but not write offs.

4. REITs do not provide depreciation write-offs.. LOSSES ARE NOT PASSED THROUGH TO INVESTORS.

Front 67

Advantages of Investing in REITs:

Back 67

1) Appreciation in property values
2) Dividend income to investors
3) Liquidity - it's common stock and can sell their shares.
4) An increased demand for real estate

Front 68

More REITS

Back 68

REITs have a low correlation to other financial assets because real estate investments react inversely to stocks and bonds

Anyone can invest in a REITs - No specific tax bracket is needed. No minimum investment requirements

Some REITs are traded OTC, others are traded on the exchanges.

IF A REIT IS PUBLICALLY TRADED, IT MUST BE REGISTERED WITH THE SEC

REITs are not
-Redeemable
-not investment companies
-not regulated under
-Investment Company Act of 1940
-Not a direct participation program

Front 69

Limited Partnership (other name)

Back 69

Direct participation program