Equity Securities and Investment Fundamentals

Practice flashcards covering stock splits, equity derivatives, preferred stock characteristics, dividend mechanics, REITs, and Direct Participation Programs.

Stock Split

A corporate action that increases the number of outstanding shares but does not change the proportionate equity ownership of the shareholders.

Marketability

The primary purpose of a stock split, achieved by reducing the stock's market price to make it more affordable for investors.

Capitalization

Also known as market cap, it is calculated as the number of outstanding shares times the current market price of the stock, which remains unchanged during a split.

Transfer Agent

The entity responsible for maintaining an accounting of the shareholders who are entitled to a stock split or dividend.

Reverse Stock Split

Also known as stock consolidation, this action decreases the number of outstanding shares and increases the market price per share.

Equity Security Derivatives

Securities such as warrants, rights, and options that get their value from the underlying common stock.

Warrants

A long-term option to buy stock at a specified price from the issuing company, often used as a sweetener in a securities offering.

Preemptive Rights Clause

A provision in a company's indenture that requires the issuer to offer existing shareholders the opportunity to buy new shares before they are offered to the public.

Rights Offering

The distribution of subscription rights to existing common shareholders, typically having a maximum maturity of $90$ days.

Preferred Stock

An equity security that represents ownership in a corporation and has priority over common stock regarding dividends and liquidation assets.

Fixed Income Security

A type of investment, such as preferred stock or bonds, where the dividend or interest income is known upfront.

Cumulative Preferred Stock

A class of preferred stock that requires all unpaid dividends from previous years to be paid before common stockholders receive any dividends.

Convertible Preferred Stock

Preferred stock that can be exchanged for common stock at the stockholder's discretion.

Parity

A concept where a convertible security maintains equal value with the common stock it can be converted into.

Participating Preferred Stock

A type of preferred stock where owners are entitled to a minimum fixed dividend but have the right to participate in additional earnings distributions.

Callable Preferred Stock

A feature that allows the issuing company to demand the return of the preferred stock, which is most beneficial to the issuer when interest rates fall.

Qualified Cash Dividend

A type of dividend payment that is fully taxable, generally at a federal rate of $15\%$.

Short Position Dividend Obligation

The requirement for investors who are short a stock to owe dividends if a dividend is paid and to owe stock if the stock splits.

Ex-Dividend Date

The date set by the stock exchange or FINRA on which a stock begins to trade without the dividend for the buyer.

DERP Chart

A study aid used to remember the sequence of dividend-related dates: Declaration, Ex-dividend, Record, and Payable.

Current Yield on Common Stock

Also called dividend yield, it is calculated by taking the annual dividend and dividing it by the current market price: $\frac{\text{Annual Dividend}}{\text{Current Market Price}}$.

REIT (Real Estate Investment Trust)

A company that manages a portfolio of real estate properties to earn profits for shareholders by issuing common stock and buying income-producing properties.

Equity REIT

A classification of REIT that buys real estate and provides shareholders with income from rents and capital gains from property sales.

Mortgage REIT

A classification of REIT that lends money to building developers and passes interest income on to the shareholders.

DPP (Direct Participation Program)

A business entity, such as a limited partnership, that provides investors with tax advantages by flowing income and expenses through to the partners.

General Partner

The manager or sponsor in a limited partnership who has unlimited liability for the entity's debts.

Limited Partner

An investor in a DPP whose liability is restricted to the amount of their at-risk investment.

Adjusted Basis

The cost basis of a partnership interest used to determine the maximum amount of losses a limited partner can write off.

Recourse Loan

A loan for which the investor is held personally responsible, commonly found in highly leveraged DPPs.

Non-Recourse Loan

A loan where the lender accepts the partnership property held as collateral as payment in case of default, rather than holding the investor personally responsible.

Form K-1

The tax form issued to limited partners that reports their share of the partnership's net income or net loss.