Equity Securities: Common Stock, REITs, and DPPs

What is common stock?

Common stock is an equity security issued by corporations to raise capital, representing ownership in the company.

What are the primary reasons for investing in common stock?

Investors buy common stock to make a profit through dividends and capital gains.

What is a capital gain?

A capital gain is a profit from selling shares for more than the purchase price.

What is the maximum loss potential for common shareholders?

The maximum loss potential is limited to the total amount invested, as they cannot be held responsible for the corporation's debts.

What rights do common shareholders have?

Common shareholders have the right to receive a stock certificate, inspect certain corporate books, receive dividends, and vote on important matters.

What is the order of asset distribution upon liquidation of a company?

1. Taxes 2. Secured debt 3. Unsecured debt 4. Preferred stockholders 5. Common stockholders

What is the difference between statutory and cumulative voting?

Statutory voting gives 1 vote per director per share, while cumulative voting allows shareholders to allocate their votes across multiple candidates.

What are supervoting shares?

Supervoting shares provide shareholders with more than one vote per share, allowing certain stockholders to retain control.

What is authorized stock?

Authorized stock is the maximum number of shares a corporation can issue as defined in its corporate charter.

What is issued stock?

Issued stock is the amount of stock sold to the public from the authorized stock.

What is treasury stock?

Treasury stock refers to previously outstanding shares that a company has repurchased.

What are the risks associated with common stock?

Common stockholders face the risk of losing their entire investment if the stock price declines to zero.

What factors positively affect common stock?

Lower taxes, lower interest rates, increases in GDP, and low unemployment positively affect common stock.

What factors negatively affect common stock?

Higher taxes, rising interest rates, decreases in GDP, and high unemployment negatively affect common stock.

What is the normal round lot unit of trading for common stock?

The normal round lot unit of trading for common stock is 100 shares.

Are common stocks callable?

Common stocks are never issued as callable.

What is the role of dividends in common stock ownership?

Dividends are not guaranteed; they are paid at the discretion of the corporation's Board of Directors.

Can common shareholders vote on the dissolution of a company?

No, common shareholders do not have the right to vote on the dissolution of a company.

What is a shareholder's right to inspect corporate books?

Shareholders can inspect certain corporate books, such as the balance sheet and income statement.

What is the significance of limited liability for common shareholders?

Limited liability protects common shareholders from being personally liable for the corporation's debts.

What is the difference between registered form and street name for stock ownership?

Registered form issues a certificate in the shareholder's name, while street name registers the stock in the broker-dealer's name.

What is the importance of the Board of Directors for common shareholders?

Common shareholders elect the Board of Directors, who are responsible for major corporate decisions.

What is a capital loss?

A capital loss occurs when shares are sold for less than the purchase price.

What is the relationship between common stock and inflation?

Common stock has historically been the best hedge against inflation and offers high returns during inflationary periods.

What is the potential for long-term capital appreciation in common stock?

Common stock has the greatest potential for long-term capital appreciation compared to preferred stock and bonds.

What are Outstanding Shares?

Outstanding shares are the shares of a corporation's stock that are issued and held by stockholders, which vote, receive dividends, and are used to calculate Earnings per Share.

How do you calculate Outstanding Shares?

Outstanding Shares = Issued Stock - Treasury Stock.

What is a Long Position in stock trading?

A Long Position occurs when an investor buys and owns a security, expecting its price to rise.

What is a Short Position in stock trading?

A Short Position occurs when an investor borrows stock to sell it, expecting to buy it back later at a lower price.

What is Par Value?

Par Value is the stated fixed value printed on the face of the stock certificate, which has little relevance for investors.

What is Market Value?

Market Value is the price at which a stock can be sold in the open market, determined by supply and demand.

What does a 'Point' refer to in stock trading?

A 'Point' refers to a $1 change in the stock price.

What is the Trade Date?

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

What is the Regular Way Settlement Date for common stock?

The Regular Way Settlement Date is the 1st business day after the trade date (T+1).

What is Regulation T Settlement?

Regulation T requires that payment for purchases of securities must be received by the 3rd business day after the trade date (T+3).

What are Blue Chip Stocks?

Blue Chip Stocks are issued by nationally known companies with a reputation for quality management and consistent dividend payments.

What are Growth Stocks?

Growth Stocks are expected to have above-average increases in revenues and earnings, often paying little or no dividends.

What are Cyclical Stocks?

Cyclical Stocks are heavily affected by normal business and economic cycles, rising and falling with the economy.

What are Countercyclical Stocks?

Countercyclical Stocks move in the opposite direction of the economy.

What are Defensive Stocks?

Defensive Stocks are resistant to normal business cycles and stock market fluctuations, providing stable earnings.

What are Utility Stocks?

Utility Stocks are issued by companies providing essential services like electricity and water, typically offering above-average dividend yields.

What is the significance of a high level of debt in Utility Stocks?

A high level of debt means higher operational costs due to interest, making stock prices more susceptible to fluctuations from interest rate changes.

What are Special Situation Stocks?

Stocks that are undervalued and can increase dramatically in price due to factors like new management, popular product introduction, or discovery of resources.

What are American Depositary Receipts (ADRs)?

Receipts traded in the U.S. for foreign stocks held by an American bank, representing a ratio or fractional ownership of foreign shares.

What is a key feature of ADRs regarding voting privileges?

ADRs have no voting privileges.

How are dividends paid for ADRs?

Dividends are paid in U.S. dollars, not in the foreign currency.

What is the effect of a stock split on the number of outstanding shares?

A stock split increases the number of outstanding shares without changing the proportionate equity ownership.

What is the primary purpose of a stock split?

To increase the marketability of the stock by reducing its market price.

What happens to the par value of stock during a stock split?

The par value decreases proportionally to the split.

What is a Reverse Split?

A reverse split decreases the number of outstanding shares and increases the market price of each share.

What can a reverse split indicate about a company?

It can be a sign of trouble with the company.

What are Equity Security Derivatives?

Securities that derive their value from the underlying common stock.

What is a warrant in the context of equity security derivatives?

A long-term option to buy stock at a specified price from the issuing company.

What happens to the market premium of warrants when the market price exceeds the exercise price?

A market premium exists.

What are Subscription Rights?

A short-term privilege allowing existing shareholders to buy newly issued shares at a lower price before public offering.

What is the maximum maturity of subscription rights?

Rights generally have a maximum maturity of 90 days.

What is the effect of exercising subscription rights on ownership?

Shareholders who exercise their rights maintain their proportionate share of ownership.

What is the calculation for the number of rights needed to buy one new share?

Divide the number of outstanding shares by the number of new shares to be issued.

What is preferred stock?

A class of stock that has priority over common stock in receiving dividends and assets if the corporation is dissolved.

How is preferred stock classified in terms of security?

It is an equity security and a fixed income security.

What happens to the price of preferred stock when interest rates rise?

Prices will fall and yields will rise.

What is the relationship between preferred stock and common stock?

Preferred stock has priority over common stock in dividends and asset distribution.

What is a key characteristic of the dividend for preferred stock?

The cash dividend is fixed.

What is the effect of dilution on earnings per share (EPS) when warrants are exercised?

Dilution decreases the EPS on outstanding common shares.

What is the role of a transfer agent in a rights offering?

The transfer agent manages the subscription process for existing shareholders.

What is a Rights Offering?

The distribution of subscription rights to existing common shareholders.

What happens to rights if they are not exercised?

Shareholders who do not exercise their rights will decrease their proportionate share of ownership.

What is the difference between a regular split and a reverse split?

A regular split increases shares and decreases price, while a reverse split decreases shares and increases price.

What is the significance of the Preemptive Rights Clause?

It requires corporations to offer existing shareholders preemptive rights upon issuing new shares.

What are preferred stock and bonds classified as?

Fixed income securities.

How does an increase in interest rates affect preferred stocks?

If interest rates rise, prices will fall and yields will rise.

What type of dividend does preferred stock pay?

A cash dividend that is stated as a percentage of par or in a fixed dollar amount.

Do preferred stockholders usually have voting privileges?

No, preferred stock usually does not receive voting privileges.

How does the volatility of preferred stock compare to common stock?

Preferred stock is generally less volatile than common stock.

What is a cumulative preferred stock?

Dividends must be current on cumulative preferred stock before dividends are paid to common stockholders.

What happens to unpaid dividends on cumulative preferred stock?

They must be paid before any dividends are declared to common shareholders.

What is convertible preferred stock?

Preferred stock that can be converted into common stock at the option of the stockholder.

What is participating preferred stock?

Dividends are fixed as to a minimum but not a maximum amount, allowing participation in additional earnings distributions.

What does callable preferred stock mean?

It may be redeemed by the issuer at a set premium over par value after a specified date.

What is a dividend?

A portion of a company's net profit distributed to its stockholders.

In what forms can dividends be paid?

Cash, stock dividends, stock of other companies, treasury stock, or products.

What is the significance of the declaration date?

It is the date on which a dividend is declared by the Board of Directors.

What is the ex-dividend date?

The date on which the stock begins to trade without the dividend; buyers after this date do not receive the dividend.

What is the record date in relation to dividends?

The date on which the corporation closes the stock record book to determine who will receive the dividend.

What is the payable date for dividends?

The date that the dividend is actually paid to the investor.

What is the current yield on common stock?

The annual percentage rate of return from investing in a stock, calculated as Annual Dividend / Market Price.

What is a due bill?

A statement of money owed, used between broker-dealers to adjust for correct dividend payments.

What are Real Estate Investment Trusts (REITs)?

Companies that manage a portfolio of real estate properties to earn profits for shareholders.

What types of investments can REITs make?

Invest in long-term mortgages, own real property, make short-term real estate loans, or invest in other REITs.

What are equity REITs?

REITs that take equity positions in real estate, providing income from rents and capital gains.

What is the tax implication of qualified cash dividends?

They are fully taxable at the federal, state, and local level, generally taxed at 15% federally.

What must investors do to be entitled to dividends?

They must buy or own the stock at least one business day before the ex-dividend date.

What happens to dividends on common stock if the Board of Directors decides not to pay?

Corporations are not required to pay dividends to common stockholders.

What is the formula for calculating current yield?

Annual Dividend / Market Price.

What is the impact of a stock dividend on a short seller?

A short seller must buy additional shares to cover their position based on the dividend.

What is the relationship between dividends and liabilities on the balance sheet?

On the declaration date, a cash dividend becomes a current liability on the corporation's balance sheet.

What do shareholders of REITs receive?

Income from rents and capital gains when the property is sold at a profit.

What are Mortgage REITs?

REITs that lend money to building developers and pass the interest income on to shareholders.

What is a characteristic of Hybrid REITs?

They are a mix of equity and mortgage REITs.

What percentage of income must REITs pay out to qualify for tax exemption?

At least 90% of their income.