Series 7 - Equity Securities

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Security

Back 1

An investment that represents either an ownership or stake in a company

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Debt Security

Back 2

Usually acquired by buying a company's bonds

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Debt Investment

Back 3

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

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OTC

Back 4

Stocks and bonds are normally purchased and sold on a stock exchange or in the "Over the Counter" market.

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New York Stock Exchange

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is an auction market where buyers and sellers are matched by a specialist

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FINRA

Back 6

Financial Industry Regulatory Authority, the OTC market is an inter dealer market linked by computer terminals to FINRA members across the country

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Stock

Back 7

represents equity or ownership in a company

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Bonds

Back 8

are a loan to a company

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Balance Sheet

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Assets - What a company owns; casino the the bank, accounts receivable, investments, property, etc.

Liabilities - what the company owes; accounts payable, bills, short and long term debt, and other obligations

Equity - the excess of the value of assets over the value of liabilities(the company's net worth)

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Net Worth

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is computed by subtracting all liabilities from the value of total assets. This computation is summarized by the basic balance sheet equation: assets-liabilities= Net Worth.

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Board of Directors

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Each share of stock entitles its owner to a portion of the company's profits and dividends and an equal vote on directors and other important matters. Most corporations are organized in such a way that their stockholders regularly vote for and elect candidates to a board of directors to oversee the company's business.

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Stock Ownership

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An Individual's stock ownership represents his proportionate interest in a company. If a company issues 100 shares of stock each share represents an identical 1/100 or 1% ownership position in the company.

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Preferred Stock

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represents equity ownership in a corporation, but it usually does not have the same voting rights or appreciation potential as common stock. Preferred stock normally pays a fixed, semiannual dividend and has priority claims over common stock; that is the preferred stock is paid first if a company declares bankruptcy.

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Common Stock

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can be classified as :

Authorized

Issued

Outstanding

Treasury

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Authorized Stock

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refers to a specific number of shares the company has authorization to issue or sell. Should the company decide to sell more shares than are authorized, the charter must be amended through a stockholder vote.

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Issued Stock

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has been authorized and distributed to investors. When corporations issues, or sells, fewer shares than the total number of authorized, it normally reserves unissued shares for future needs.

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Outstanding Stock

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

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Treasury Stock

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is stock a corporation has issued and subsequently repurchased from the public. Treasury stock does not carry the rights of outstanding common shares ,such as voting rights and the rights to receive dividends.

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Treasury Stock 2

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A corporation buys back its stock for a number of reasons:

Increase earnings per share

Have an inventory of available stock to distribute as stock options

Use for future acquisitions

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Issued Stock - Treasury Stock = Outstanding Stock

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ABC company has authorized 1M shares of common stock. It issued 800k shares one year ago. It then purchased 200k, how many shares are outstanding?

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Par Value

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It is an arbitrary value the company gives the stock in the company's articles of incorporation and has no effects on the stock's market price. If a stock has been assigned a par value for accounting purposes, it is usually printed on the face of the stock certificate.

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Capital In Excess Par

Paid-In Surplus

Capital Surplus

Paid-In Capital

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

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Book Value

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A stock's book value per share is a measure of how much a common stockholder could expect to receive for each share if the corporation were liquidated. The book value per share is the difference between the value of a corporation's tangible assets and its liabilities dived by the number of shares outstanding.

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Market Price

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the price investors must pay to buy the stock, is the most familiar measure of a stock's value. Market value if influence by a company's business prospect and the consequent effect of supply and demand.

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Rights of Common Stock Ownership

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Stockholders are owners of a company and therefore have certain rights that protect their ownership interest.

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Voting Rights

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Common Stockholders use their Voting Rights to exercise control of a corporation by electing a board of directors and by voting on important corporate policy matters at annual meetings

-Issuance of Convertible Securities

-Substantial changes in the corporation's business

-Declaration of Stock Splits (forward and reverse)

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Calculating the Numbers of Votes

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A stockholder can cast one vote for each share of stock owned. Depending on the company's bylaws and applicable state laws, a stockholder may have either a statutory or cumulative vote.

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Statutory Voting

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Statutory Voting allows a stockholder to case one vote per share owned for each item on a ballot, such as candidates for the BOD. A board candidate needs a simple majority to be elected. Statutory Voting benefits larger shareholders

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Cumulative Voting

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Cumulative voting allows stockholders to allocate their total votes in any manner they choose. Cumulative voting benefits the smaller investor

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Proxies

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Stockholders often find it difficult to attain the annual stockholders' meeting, so most not eon company matters by means of proxy, a form of absentee ballot.

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Proxy Solicitation

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When a company sends proxies to shareholders, usually for a specific meeting.

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Securities and Exchange Common (Proxy)

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Companies that solicit proxies must supply detailed and accurate information to the shareholders about the proposal to be voted on. Before making a proxy solicitation, companies must submit the information to the SEC for review.

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Proxy Contest

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If a proxy vote could change control of a company, all persons involved in the contest must be registered with the SEC as participants or face criminal charges.

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Nonvoting Common Stock

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Companies may issue both voting and nonvoting common stock, normally differentiating the issues as Class A and Class B, respectively. Issuing nonvoting stock alls a company to raise additional capital while maintaining management control and continuity without diluting voting power

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Pre Emptive Rights

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When a corporation raises capital through the sale of additional common stock, it may be required by law or its corporate charter to offer the securities to its common stockholders before the general public. This is known as an anti dilution provision. Stockholders then have a preemptive right to purchase enough newly issued shares to maintain their proportionate ownership in the co

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Limited Liability

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Stockholders cannot lose more than the amount they have paid for the corporation's stock. Limited Liability protects stockholders from having to pay a corporation's debt in bankruptcy.

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Residual Claims to Assets

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If a corporation is liquidated the common stockholder has a residual right to claim corporate assets after all debt and other security holders have been satisfied. The common stocker holder is at the bottom of the liquidation priority list.

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Stock Splits

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To make the stock price attractive to a wider base of investors the company can declare a stock split.

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Forward Split

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A forward stock split increases the number of shares and reduces the price without affecting the total market value of shares outstanding; and investor will receive more shares, but the value of each share is reduced.

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Forward 2:1 Split

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Ex. 100 Shares X 2 / 1 = 200

to determine value

200x $ = $6000(Orignal Total Value)

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Reverse Splits

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Ex. 1:2

After a 1:2 reverse split, a stockholder who owned 100 shares with a market value of $5 per share will own 50 shares at $10 dollars

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Long the Stock

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Buy low sell high later

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Short the stock

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Sell high and buy low later

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Benefits of Owning Stock

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Growth - increase in the market price of shares is known as capital appreciation

Income - Many corporation pays regular quarterly cash dividends to stockholders. A company's dividends may increase over time as profitability increases

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Dividends

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Cash Dividends - pays regular quarterly cash

Property Dividends - Shares in subsidiary company or product sample

Stock Dividends - additional shares in the issuing company

Income Taxes are paid on dividends for individuals

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Tax Effects of Selling and Owning Stock

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Buying low and selling high - investor experiences capital gains. If the investor sells the stock at the higher price the investor has a realized gain. If the investor does not sell, they experience an unrealized gain, which is not taxed.

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Risks of Own Stock

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Regardless of their expectations, investors have no assurance of receiving the returns they expect from their investments

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Market Risk

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The chance that the stock will decline in price at a time the invest needs his money is one of owning common stock.

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Risk: Decreased or No Income

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Possibility of divided income decreasing or ceasing entirely if the company loses money.

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Risk: Low Priority at Dissolution

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Bonds and Preferred stocks have priority over Common Stock, making a company's debt and preferred shares considered to be senior securities.

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Long and Short Position

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When a customer purchases stock to open a position, the customer is said to be long the stock. To close the position, the customer would sell the stock(a long sale).

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Sells Short

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The customer is selling stock he does not own. he does this by borrowing stock from a stock lender and selling the borrowed shares. The customer is taking the view that the stock will decline in price.

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Preferred Stock

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Preferred Stock has features of both equity and debt securities. Preferred stock is an equity security because it represents ownership in the corporation. However it does not normally offer the appreciation potential associated with common stock.

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Preferred Stock

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Like a bond, a preferred stock is usually issued as a fixed income security with fixed dividend. Its price tends to fluctuate with changes in interest rates rather than with the issuing company's business prospects. Preferred stock is nonvoting

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Preferred Stock

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When the BOD declares dividends owners of preferred stock receive their dividends before common stockholders

If a corporation goes bankrupt, preferred stockholders have priority claim over common stockholders on the assets remaining after creditors have been paid.

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Preferred Stock Characteristics

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Fixed Rate of Return

Key attraction for income oriented investors. Normally a preferred stock is identified by its anuual payment stated as a percentage of its par value usually $100. Par value for Preferred stock is meaningful unlike common stock. `

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Preferred Stock Characteristics

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Adjustable-Rate Preferred

Some preferred stocks are issued with adjustable, or variable, dividend rates.

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Preferred Stock Characteristics

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Except for rare instances, preferred stock does not have voting or preemptive rights.

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Preferred Stock Characteristics

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No Maturity Date or Set Maturity Value

Although it is Fixed-Income investment, preferred stock, unlike bonds, has no preset date which it matures and no scheduled redemption date.

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Categories of Preferred

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Separate categories of preferred stock may differ in dividend rate, in profit participation privileges, or in other ways. All, however maintain a degree of preference over common stock.

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Straight Preferred

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Noncumulative has no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.

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Cumulative Preferred

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holders receive their current dividends plus the total accumulated dividends- dividends in arrear-before any dividends may be distributed to common stockholders.

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Convertible Preferred

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A preferred stock is convertible if the owner can exchange each preferred share for shares of common stock. Often issued with a lower stated dividend rate that that nonconvertible preferred because the investors may have the opportunity to convert shares and enjoy capital gains.

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Participating Preferred

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Offer its owners a share of corporate profits that remain after all dividends and interest due other securities are paid.

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Callable Preferred

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Corporations often issue callable or redeemable, preferred, which a company can buy back from investors at a stated price after a specified date. The right to call the stock allows the company to replace a relatively high fixed dividend obligation with a lower one.

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Return on Investment

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An Investment's total return is a combination of the dividend income and price appreciation or decline over a given period

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Dividends

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are distributions of a company's profits to its stockholders. Investors who buy stock are entitled to dividends only when the company BOD votes to make such distributions.

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Cash Dividends

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are normally distributed by check if an investor holds the stock certificate or are automatically deposited to a brokerage account if the shares are held in street name. Cash dividends are taxed in the year they are received.

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Stock Dividends

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If a company uses its cash for business purposes rather than to pay cash dividends, its BOD may declare a stock dividend. A stock's price market price declines after a stock dividend as with a stock split, but the company's total market value remains the same.

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Current Yield, Dividend Yield

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the annual dividend(four times the quarterly dividend) divided by the current market value of the stock.

Annual dividend/current market value of the stock

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Transferability of Ownership

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The cash with which stocks and other securities can be bought and sold contributes to the smooth operation of the securities market. When an investor buys are sells a security, the exchange of money and ownership requires little or no additional action on is part.

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The Stock Certificate

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A stock certificate indicates the shares of a corporation a person owns. The vast majority of stock transactions are for round-lot numbers of shares.

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CUSIP Numbers

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Committee Uniform Securities Identification Procedures number is a universal security identification number. Common Stock, Preferred, Corporate Bonds, and Municipal bonds have their own CUSIP number.

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Negotiability

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Shares of stocks are negotiable; stockholder can give, transfer, assign, or sell shares he owns with few or no restrictions.

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Stock Power

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To transfer ownership of a stock, the registered owner must sign the stock, certificate or a stock power.

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Transfer Procedures

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The transfer and registration of stock certificates are two distinct functions that by law cannot be performed by a single person or department operating within the same institution. Issuers typically use commercial banks and trust companies to handle these functions

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Transfer Agent

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The transfer Agent for a corporation is responsible for:

Ensuring that its securities are issued in the correct owner's name

canceling old and issuing new certificates

maintaining records of ownership

handling problems due to lost, stole, or destroyed certificates

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Registrar

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The registrar is a state entity. Independent of the issuing corporation. Any stock or bond transaction requiring the registration and issuance of new certificates is routed through the state registrar as well as the transfer agent. The registrar ensures that a corporation does not have more shares outstanding than have been authorized and is also responsible for certifying that bond represents legal debt of the issuer.

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Points

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A stock's market price is quoted in whole dollars, also known as points, plus cents.

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Range of Prices

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The range of prices is shown for the previous 52 weeks but does not include the latest trading day

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Stock Name and Dividend

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The dividend is quoted as an annual dollar amount based on the most rect quarter.

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P/E Ratio

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Price to Earning ration column follows the Yield column. It gives the ratio of the stock's current price to its most recent 12 month earnings per share.

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Ex-Dividend

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The x before the sales volumn indicates that the stock is selling ex-dividend, or ex rights, meaning that a buyer will not receive the next dividend check.

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Over the Counter

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OTC stocks that have both national and global interest are listed on the National Association of Securities Dealers Automated Quotation System

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The Nasdaq Global Select Market

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The newest for Nasdaq Effective July 2006, has initial listing standards both financial and with regard to liquidity, that are among the highest of any other market. The creation of tis market tier by Nasdaq with its stringent listing requirements is anticipated to compete directly with the NYSE

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The Nasdaq Global Market

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Largest of the three Nasdaq Market tiers was renamed to better reflect the global nature of the securities included. These OTC stocks have high interest and appeal.

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The Nasdaq Capital Market

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As of September 2005, the SEC approved the name change from Nasdaq Small Cap Market to the Nasdaq Capital Market. The change was requested by Nasdaq to better reflect the capitalization of the issuers included in this market tier.

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Dividend Department

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the Dividend Department collects and distributes cash dividends for stocks held in street name. In addition to processing cash dividends, the department handles interest payments, stock dividends, stock splits, rights offerings, warrants, and any special distribution to stock or bondholders.

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Dividend Disbursing Agent

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Stockholders are sent cash, property or stock dividends, or new shares after a split. If the broker/dealer holds the securities in street name, the DDA or transfer agent makes the appropriate distribution or transfers directly to the broker/dealer.

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Dividend Disbursing Process

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Declaration Date: BOD approves the dividend payment and also designates the payment date and the dividend record date. Must notify FINRA 10 days before the Record Date

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Dividend Disbursing Process 2

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On the basis of the dividend record date, FINRA or the change posts an EX-Date

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Ex-Date

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The Ex-Date is two business days before the record date. Because most trades settle regular way - three business days after the trade date- a customer must purchase the stock three business days before the record date to qualify for the dividend.

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Dividend: Record Date

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

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Dividend: Payable Date

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Three or four weeks after the record date, the dividend disbursing agent sends dividend checks to all stockholders whose names appear on the books as of the record date.

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Dividend: Cash Trades

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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.

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Dividends

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Declaration, record, and payment are determined by the board of directors and FINRA, or the exchange, determines the ex-date

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Stock Dividends and Splits

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Normal Stock Dividends are handled the same as cash dividends. A stock distribution of 25% or more of the shares outstanding is subject to special handling. The ex-date on stock dividends of 25% or more and stock splits of 5 for 4 or better is the first business day following the payable date

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Due Bills

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A due bill is a printed statement showing a buyer's right to a dividend. if securities are purchased before the ex-date but for whatever reason settle after the record day the wrong party will receive the dividend from the issuer.

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Characteristics of Rights

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A right offering allows stockholders to purchase common stock below the current market price. The rights are valued separately from the stock and trade in the secondary market during the subscription period

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Subscription Rights

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A subscription right is a certificate representing a short term typical 30 to 45 days privilege to buy additional shares of a corporation. One right is issued for each common stock share outstanding

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Rights: Terms of the Offering

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Terms of a rights offering are stipulated on the subscription right certificates mailed to the stockholder. The terms describe how many new shares a stockholder may buy, the price, the date the new stock will be issued, and the final date for exercising the rights.

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Cum Rights

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Market Price - Subscription Price/ Number of rights needed to purchase 1 share of common stock + 1

MP-SP/N+1

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Ex Rights

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Market Price - Subscription Price/ Number of rights to purchase 1 share.

MP-SP/N

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Standby Underwriting

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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

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Characteristics of Warrants

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A warrant 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 as of the date of issue of the warrant.

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American Depository Receipts

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U.S. securities that facilitate the trading of foreign stocks in US markets. An ADR is a negotiable security that rep represents a receipt for shares of stock in a non-U.S. corporation, usually from 1 to 10 shares. ADRs are bought and sold in the U.S. securities market like stock.

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Characteristics of ADRs

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Custodian Bank - Foreign branches of large commercial U.S. banks issue ADRs. A custodian, typically a bank in the issuer's country, holds the shares of foreign stock that the ADRs represent. The stock must remain on deposit as long as the ADRs are outstanding because the ADRs are the depository bank's guarantee that it holds the stock.

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Rights of ADR Owners

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ADR owners have most of the rights common stockholders normally hold. These include the right to receive dividends when declared. Generally, ADRs do not have voting rights, though some ADR issuer will pass on voting rights to the holders of ADRs. As for preemptive rights, the issuing bank sells off the rights and distributes the proceeds pro rata to holders

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Delivery of Foreign Security

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ADR owners have the right to exchange their ADR certificates for the foreign shares they represent. They can do this by returning the ADRs to the depository banks which cancels the ADRs and deliver the underlying stock.

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Taxes on ADRs

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In most countries a withholding tax on dividends is taken the source. In the case of investors holdings ADRs this would be a foreign income tax. The foreign income tax may be taken as credit against any U.S. income taxes owed by the investor.

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Currency Risk ADRs

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In addition to the normal risks associated with stock ownership, ADR investors are subject to currency risk, the possibility that an investment denominated in one currency could decline fi the value of that currency declines in exchange rate with the U.S. dollar.

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Registered Owner ADRs

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ADRs are registered on the books of the U.S. banks responsible for them. The individual investors in the ADRs are not considered the stock's registered owners.

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Sponsored ADRs

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all exchange-listed ADRs are sponsored- that is , the foreign company sponsors the issue to increase its ownership base. Issuers that sponsor ADRs are sometime referred to as American Depository Shares. Nonsponsored ADRs are issued by banks without the assistance and participation of the issuer.

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Real Estate Investment Trusts

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A REIT is a company that manages a portfolio of real estate investments in order to earn profits for shareholders. REITS are normally traded publicly and serve as a source of long-term financing for real estate projects.