Securities Industry Essentials Exam (Unit 1)

Stocks

Equity; a type of security that represents ownership in a corporation and constitutes a claim on part of the company's assets and earnings.

Bonds

Debt; debt securities that represent a loan made by an investor to a borrower, typically a corporation or government.

Common stocks

represent ownership in a company and typically come with voting rights, reflecting a claim on the company's assets and profits.

Things that are securities

Stocks, bonds, mutual funds, limited partnerships, options, municipal backed securities

Things that are not securities

Commodities, precious metals, currency, futures, a personal residence

Authorized stock

refers to the maximum number of shares that a corporation is legally allowed to issue as specified in its articles of incorporation.

Classifications of common stock

authorized, issued, outstanding, treasury

Issued stock

authorized stock that has been sold to investors

Outstanding stock

refers to the total shares of a company's stock that are held by shareholders, including institutional investors and company insiders, but excludes treasury stock.

Treasury stock

stock a corporation has issued and then later bought back

CMV

Current Market Value, the price at which a security is currently trading on the market

blue-chip stocks

stocks on large-cap companies that have a long history of steady dividend payments

Large, mid, and small-cap stocks

stocks categorized by their market capitalization, where large-cap refers to companies with a market value of over $10 billion, mid-cap to those between $2 billion and $10 billion, and small-cap to under $2 billion.

Penny stock

unlisted security trading at less than $5 per share

Penny stock cold-calling rules

name, shares, current quotation (price), amount of commission that the firm and representative will receive

cash dividend

distributed by check if stock certificate is held. directly deposited if shares are held in a brokerage account. paid quarterly. taxed as qualified or non-qualified (taxed at investor’s oridinary income tax rate)

stock dividend

additional shares that are distributed to shareholders instead of cash, increasing the number of shares owned but diluting the value of existing shares

product dividend

a sample of a company’s product that is distributed to shareholders

process of distributing cash dividends

declaration date: when a company’s board approves a dividend payment, ex-dividend date: date beyond which purchasing a stock no longer qualifies the buyer to receive a dividend, record date: date on which stockholders receive the dividend distribution, payable date: the dividend disbursing agent sends dividend checks to all stockholders whose names appear in the records as owners as of the record date

Rights of common stockholders

the right to vote for who sits on the board, the right to freely transfer shares, right to information, preemptive rights (right to maintain proportional ownership)

types of voting

statutory, cumulative

statutory voting

allows stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the BOD

cumulative voting

allows stockholders to allocate their total votes in any manner they choose

benefits of commons stock ownership

capital gains, dividends (income), limited liability

risks of owning common stock

value risk, decreased or no dividend income, low priority or dissolution

preferred stock

ownership of an interest in the cash flow of a company. rate of return is fixed (defined by dividend payment). rate of returned is defined as a percentage of par (par is $100 unless otherwise stated)

straight (noncumulative) preferred

no special features beyond dividend payment

cumulative preferred

cumulative preferred stock accrues payments due to its shareholders if dividends are reduced or suspended

callable preferred

stock a company can buy back from investors at a stated price after a specified date; corporation may pay a premium exceeding the stock’s par value at call

convertible preferred

owner can exchange the shares for a fixed number of shares of common stock; generally issued with a lower stated dividend

adjustable-rate preferred

preferred stock with variable dividend rate; rate is tied to other interest rate benchmarks

participating preferred

offers its owners an additional share of corporate profits after all other dividends are paid

benefits of owning preferred stock

dividend preference, priority at dissolution over common stock

risks of owning preferred stock

purchasing power risk, interest rate sensitivity, decreased or no dividend income, decreased or no dividend income, priority at dissolution