Series 65: Unit 1

What is a security?

A security is a tradable investment that represents ownership (like stocks) or debt (like bonds).

What is common stock?

equity (ownership) in a corporation

What is preferred stock?

different type of equity in a corporation that has less voting rights or appreciation potential as common stock

What is the difference between preferred stock and common stock?

Preferred stock holders recieve

• fixed dividends

• usually no voting rights

• payment priority

• limited growth/volatility

• less liquid

Common stock holders recieve

• may or may not receive dividends

• voting rights

• unlimited growth

• highly liquid

True/False: All stockholders are owners of a corporation and all bondholders are creditors.

True

What is capital appreciation

An increase in the market price of securities

What is a property dividend?

An alternative to cash or stock dividends, where a company gives shareholders property in lieu of cash or cash equivalents.

What is a stock split?

When a company increases the number of its outstanding shares to boost the stock's liquidity.

Which of the following statements regarding rights is true?
A. Common stockholders would not generally receive preemptive rights.
B. Preferred stockholders would not generally receive preemptive rights.
C. Both common and preferred stockholders would generally receive preemptive rights.
D. Neither common nor preferred stockholders would receive preemptive rights.

B. Preferred stockholders have no right to maintain a percentage of ownership when new shares are issued (no preemptive rights).

What is liquidity?

How easily assets can be converted into cash.

What is limited liability?

Business owners (e.g., of a corporation or LLC) aren't personally liable for debts beyond their investment.

What is market risk?

The chance that a stock price will decline from fluctuations in the market.

What is business risk?

The chance that a stock price will decline from company earnings/news.

What are senior securities?

A company’s debt and preferred shares

Why is it called senior securities?

If a company enters bankruptcy, the holders of its bonds and preferred stock have priority over common stockholders.

What are residual rights?

Right of the company owners to claim the remaining assets. Common stockholders have residual rights.

Holders of each of the following are creditors except
A. investors owning preferred stock.
B. investment companies owning corporate bonds
C. corporations owning municipal bonds
D. states owning U.S. government bonds

A. all stock holders are owners and bonds are a debt security (making bond holders creditors)

Why would you include common stock in a client’s portfolio?

1. Potential capital appreciation

2. Income from dividends

3. Hedge against inflation

Common stock in a portfolio would incur what potential risks?

1. Market Risk

2. Business Risk

3. Low Priority at Dissolution

Limited liability regarding ownership in a U.S. corporation means all of the following except
A. investors might lose more than the amount of their investment.

B. investors might lose their investment.

C. creditors of the corporation cannot seek relief from the shareholders.

D. investors are not liable to the full extent of their personal property.

A. An advantage of owning stock is that an investor’s liability is limited to the amount of money they invested when the stock was purchased.

What are dividends in arrears?

Unpaid dividends on cumulative preferred stock that have not been paid in past periods and must be paid out before any dividends can be given to common shareholders.

For investors looking for fixed income through preferred stocks, what would be the least appropriate choice of preferred stock.

Adjustable-Rate Preferred, because the dividend will likely fluctuate.

An investor who has purchased preferred stock with the goal of receiving steady quarterly income would be most interested in the
A. seniority of the stock compared to other securities
B. ability of the company to continue paying the stated dividend
C. voting power of the shares
D. par value of the shares

B. They are most concerned with whether the company can sustain the dividend, since it represents a fixed percentage return based on the par value of their preferred shares.

Why would you include preferred stock in a client’s portfolio?

1. Fixed income from dividends

2. Prior claim ahead of common stock

3. Convertible preferred sacrifices income in exchange for potential appreciation

Preferred stock in a portfolio would incur what potential risks?

1. Market Risk - fear of maintaining dividend

2. Possible loss of purchasing power

3. Interest rate (money rate) risk

4. Business difficulties leading to possible reduction or elimination of the dividend and even bankrupty leading to loss of principal.

What are the different types of preferred stock?

1. Straight preferred stock

2. Cumulative preferred stock

3. Callable preferred stock

4. Convertible preferred stock

5. Adjustable-Rate preferred stock

Straight preferred stock

Has no special features beyond the stated dividend payment. Missed dividends are not paid to the stockholder.

Cumulative preferred stock

Accrues payments to shareholders if dividends are reduced or suspended.

Callable (redeemed) preferred stock

Generally higher dividends, but company can buy back from investors at a stated price after a specified date.

Convertible preferred stock

Owner can exchange their shares for a fixed number of shares of common stock of the issuing corporation. Often has lower dividend rate than non-convertible.

Adjustable-Rate preferred stock

Preferred stock with floating dividend rates. Stock price remains stable in exchange.

Owners of a corporation’s equity securities
A. are always assured dividends if the company is profitable
B. are creditors of the corporation.
C. have limited liability
D. have the right to vote their shares

C. have limited liability

A company that has issued cumulative preferred stock
A. pays past and current preferred dividends before paying dividends on common stock
B. pays the preferred dividend before paying the coupons due on its outstanding bonds
C. pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common.
D. forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends.

A. pays past and current preferred dividends before paying dividends on common stock.

Restricted Securities

Securities that cannot be sold until having them for a certain period of time. (generally 6 months and sometimes volume restrictions as well).

Control person

A corporate director, an officer, a large stockholder, or the immediate family of any of the preceding residing in the same home.

Control stock

Stock held by a control person.

American depositary share (ADR)

A negotiable security that represents a receipt for shares of stock in a non-U.S. corporation. ADRs are bought and sold in the U.S. securities markets like any domestic stock.