Unit 1: Equity Securities — Vocabulary Flashcards

34 vocabulary flashcards summarizing key equity-security terms from Unit 1, covering common stock, special share classes, ADRs, Rule 144 provisions, stock options, and all major types of preferred stock.

Common Stock

Basic ownership in a corporation; offers growth potential and voting rights but no guaranteed income.

Voting Rights

Shareholder ability to elect the board of directors and approve major corporate changes.

Market Risk

Possibility that a stock’s price will decline due to overall market movements.

Dilution

Reduction of existing shareholders’ ownership percentage when new shares are issued.

Class A Stock

A share class that usually carries superior voting power or other preferential terms.

Class B Stock

A share class that generally has reduced voting power or different dividend terms compared with Class A.

Authorized Shares

Maximum number of shares a corporation may legally issue, as approved in its charter.

Issued Shares

Portion of authorized shares that has actually been sold to investors.

Outstanding Shares

Issued shares that remain in investors’ hands; equals issued shares minus treasury shares.

Treasury Stock

Previously issued shares repurchased by the company; carries no voting rights or dividends.

Rights (Preemptive Rights)

Short-term privilege allowing existing shareholders to buy new shares below market price to maintain ownership percentage.

Warrants

Long-term derivative giving the holder the right to buy stock above current market price; often issued with bonds or preferreds.

American Depositary Receipt (ADR)

U.S. security representing shares of a foreign company, trading in dollars on U.S. markets.

Sponsored ADR

ADR issued with the foreign company’s cooperation; typically listed on an exchange.

Unsponsored ADR

ADR issued solely by a depositary bank without issuer involvement; usually trades OTC.

Currency Risk

Potential loss from fluctuations in exchange rates affecting ADR holders.

Political Risk

Possibility that political events abroad will adversely affect foreign investments such as ADRs.

Control Stock

Equity held by insiders owning 10 % or more, directors, or officers; subject to resale limits.

Restricted Stock

Unregistered shares acquired through private placement; resale governed by Rule 144.

Rule 144

SEC rule that sets holding periods and volume limitations for sales of restricted or control stock.

Form 144

SEC notice insiders must file before selling restricted or control shares under Rule 144.

Rule 144 Holding Period

Six-month minimum (for reporting companies) before restricted stock can be resold.

Rule 144 Volume Limits

Cap on control stock sales: the greater of 1 % of outstanding shares or average weekly trading volume over four weeks.

Incentive Stock Option (ISO)

Employee option with favorable tax treatment—no tax at grant or exercise; gains taxed as long-term capital gains if holding requirements met.

Nonqualified Stock Option (NSO)

Option whose exercise spread is taxed as ordinary income; commonly granted to consultants or board members.

Cumulative Preferred Stock

Preferred share on which unpaid dividends accumulate and must be paid before common dividends.

Non-Cumulative (Straight) Preferred Stock

Preferred share where missed dividends are forfeited permanently.

Participating Preferred Stock

Preferred share that may receive additional dividends once common shareholders get a specified amount.

Convertible Preferred Stock

Preferred share that can be exchanged for a predetermined number of common shares, offering equity upside.

Conversion Ratio

Number of common shares received when converting a preferred share; calculated as par value ÷ conversion price.

Callable Preferred Stock

Preferred share that the issuer can redeem early at a stated price, exposing investors to reinvestment risk.

Reinvestment Risk

Risk of having to reinvest proceeds at lower yields when a callable security is redeemed.

Adjustable-Rate Preferred Stock

Preferred share whose dividend resets periodically based on a benchmark such as the T-bill rate, reducing interest-rate sensitivity.

Benchmark Rate

Reference interest rate (e.g., 3-month Treasury-bill rate) used to set the adjustable dividend on certain preferred shares.