Unit One: Equity Secuities Part 1

Notes from unit one

Security

an intangible financial asset that may be bought, sold, or gifted between persons

Securities may be represented by…

a paper certificate or held in an electronic record

What are some items that are NOT securities that may appear on the exam?

• commodities

• precious metals

• currency

• futures

• a personal residence

Stocks

represent EQUITY, means the investor holding the security has an ownership interest in something (usually a corporation)

Bonds

represent DEBT, the investor is owed something (usually money) and the person that owes (debtor) will have to pay according to the terms of the IOU

Investors can benefit by ______ shares that increase in price and by ________ in company earnings through a distribution of profits called _________

selling, sharing, dividends

One unit of stock is called

share

a company issues (sells) stock to raise

capital (money)

Stockholders or Shareholders

investors who buy stock are buying a share of ownership in the company

Common stock can be classified as:

• authorized

• issued

• outstanding

• treasury

Authorized Stock

In the beginning, a corporation charter specifies the number of shares the company is authorized to issue

• Usually, a company will issue enough of them to raise sufficient capital for its needs at the time

• If they want to issue more shares than are authorized, the charter must be amended through a stockholder vote

Issued Stock

Authorized stock that has been sold to investors

• Company has received the money

Outstanding Stock

Includes all shares that a company has issued and that are in the hands of investors

Treasury Stock

Stock a corporation has issued and then later bought back

How can you hold Treasury Stock?

indefinitely, reissue it, or retire it

What does Treasury Stock not have compared to other shares?

DOES NOT carry the rights of outstanding shares, such as voting rights and receive dividends

Shares Outstanding Formula

issued shares - treasury stock = shares outstanding

Identifying types of common stocks by the size of the corporation is called…

Market Capitalization

A corporation’s market cap is determined by…

multiplying the number of outstanding shares by the current market value (CMV) of a share

Large Cap Stocks

largest companies, rapidly growing technology companies, or big, long-established firms

The stocks of large-cap companies that have a long history of steady dividend payments are often referred to as…

Blue Chip Stocks

Large Cap Stocks have a market capitalization of

$10 billion

Mid Cap Stocks

In-between large and small corporations (not large but too large to be a small cap)

Mid Cap Stocks have a market capitalization of

from $2 billion to $10 billion

Small Cap Stocks

Oriented toward growth and produce very few dividends

Small Cap Stocks have a market capitalization of

$250 million to $2 billion

Penny Stock

Unlisted security trading of less than $5 per share

Penny stocks are considered

Highly speculative

Broker Dealer must send a statement including the following information:

• penny stock name

• number of shares purchased

• current quotation (price)

• amount of commission the form and the representive will receive

• established customers are exempt from this statement but NOT the disclosure requirements

Dividends may be paid in three ways:

cash, stock, and product dividends

Cash Dividends

normally distributed through checks if an investor holds the stock certificate or they are automatically deposited into a brokerage account if the shares are held in a brokerage account

When declared, cash dividends are paid ______ and are taxed _______________________

quarterly and are taxed in the year they are distributed

Cash Dividends MUST BE TAXED AS EITHER

nonqualified or qualified

• the higher the investor’s income tax bracket, the higher the tax on qualified dividends will be