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Capital Appreciation
Increase in the market price of shares.
Realized Capital Gain
When an investor sells a security that’s exceeded its market price.
Realized Capital Loss
When an investor sells a security for less than what they paid for it.
Unrealized Capital (Gain or Loss)
The value of the security has changed, but the investor hasn’t sold it yet.
Adjustable-rate Preferred Stock
The dividend payments adjust based on interest rates.
Are corporations required to issue preferred stock?
No, just common stock.
Preferred stocks are suitable for what type of investor?
Income-orientated investors.
Common stocks are suitable for what type of investor?
Growth-orientated investors who are willing to assume moderate risk.
What is the par value of a preferred stock?
$100.
Straight/Noncumulative Preferred
Pays a fixed dividend; if the company misses a dividend, the shareholder losses out.
Cumulative Preferred
The company pays back accumulated dividends they’re able to pay them.
Convertible Preferred
An investor can convert each share of preferred stock for common stock.
Participating Preferred
Shareholders can have a piece of the corporation’s profits after dividends and interest rates after they’ve been paid.
Callable Preferred
The company can call back the stock at a set price after a certain date.
Put Feature
Investor sells back security to the issuer when interest rates rise.
Convertible Feature
Allows the investor to convert a preferred stock or bond into a fixed number of common shares.
Which feature(s) benefit the issuer?
I. Put Feature and Convertible Feature
II. Put Feature
III. Call Feature
III. Call Feature and Put Feature
III. Call Feature
Which feature(s) benefit the bondholder?
I. Put Feature and Convertible Feature
II. Put Feature
III. Call Feature
III. Call Feature and Put Feature
I. Put Feature and Convertible Feature
Does the issuer pay a higher or lower coupon rate with a call feature?
Higher.
Does the issuer pay a higher or lower coupon rate for Convertible and Put Features?
Lower.
Money Market Instruments
Debt securities with less than a year of maturity.
Bankers’ Acceptance
Used by American corporations to finance international trade where the bank guarantees the payment.
What are Money Market Instruments suitable for?
Emergencies and taking advantage of investing opportunities,
What risk do money market instruments have?
Inflation risk.
BA Maturity
1 to 270 days.
Commercial/Prime Paper
Short-term unsecured promissory note (loan) issued by corporations to raise quick cash.
When do Commerical Papers mature?
1 to 270 days—usually 90 days.
Negotiable CDs
Issued by the bank—a large-denomination certificate of deposit (usually $100,000 or more).
Index Options
Investors can profit from the movements of markets or market segments and hedge against market swings.
When do index options settle?
Next business day.
When do equity options settle?
One business day.
How do you calculate capital gains and losses?
Sales proceeds - Adjusted cost basis
Securities Act of 1933
Require issuers of new securities to file registration statements with SEC to provide investors with accurate information about the investment.
What is allowed during the cooling off period?
Distributing red herrings, publishing tombstone advertisements, and gather indications of interest.
Can you offer securities for a sale during the cooling-off period?
No.
Can you disseminate sales literature and advertising material during the cooling-off period?
No.
Can you take orders during the cooling-off period?
No.
Preliminary Prospectus
Used to gauge investor interest and indicators of interest after filing with the SEC.
Final Prospectus
Official document investors receive before purchasing shares of a new offering.
What 6 issuers are exempt from registration?
U.S. Government
Municipalities
National and State Bank securities
Building, savings, and loan securities
Charitable, religious, educational, nonprofit securities
Interests in common carriers
Regulation A
Eases registration requirements for medium to small-sized companies to raise capital.
Regulation A Tier 1
Securities offerings up to $20 million
No more than $6 million can be sold on behalf of existing selling shareholders
Regulation A Tier 2
Securities offerings up to $75 million
No more than $22.5 million can be sold on behalf of existing selling shareholders.
Rule 147
Company sells securities within one state.
What are the qualifications for Rule 147?
Company must be based in the state
80% of revenue, assets, and proceeds must be in that state
Majority of its employees work within the state
What’s the 6 month rule for Rule 147?
Securities can’t be resold to out-of-state residents for 6 months.
Regulation D
A company sells securities privately to specific investors (35 accredited), not the general public.
Who has to approve changes made to an order?
A principal or branch manager.
Cash Settlement
Delivery of securities from the seller and payment from the buyer on the same day a trade is executed if it occurs before 2:30 pm EST.
Interpositioning
Adding another broker-dealer to a transaction when there is no benefit to the buyer or seller.