Unit 1 - Equity Securities

Security

An intangible financial asset that may be bought, sold, or gifted between persons, represented by paper certificate or held electronically

Securities are…

• stocks and other equities

• bonds and other debts

• mutual funds

• limited partnerships

• options

• municipal backed

Securities are not….

• commodities (oils, orange juice, pork bellies, etc.)

• precious metals (gold, silver, etc.)

• currency (actual money, US and foreign)

• futures (derivatives of commodities, precious metals, and currency)

• a personal residence

Stocks

Equal equity, investor holding the security has an ownership interest in something (usually a corporation)

Bonds

Equal debt, the investor/creditor is owed something (usually money) and the person that owes (debtor) will have to pay according to the terms of the IOU

Equity securities

Securities that represent ownership

Debt Securities

Fixed income securities because interest payment is usually a fixed amount of money

Common Stock

Allows investors to participate in the company's success benefiting by selling shares at increased price and sharing company earnings through dividends (authorized, issued, outstanding, or treasury)

Stockholders/Shareholders

Investors who buy the stock are buying a share of ownership, the company's owners

Authorized stock

Securities issued by a corporation, a corporate charter will specify the number of shares the company is authorized to issue

Issued stock

Authorized stock that has been sold to investors and the company has received money

Outstanding stock

All shares a company has issued and are in the hands of investors, not all issued stock

Treasury stock

Stock a corporation has issued and then later bought back, corporation can hold indefinitely, reissue it, or retire it

Market capitalization (market cap)

Categorization of the size of a corporation (large, mid, or small). Determined by outstanding shares x CMV (current market value)

Large-Cap stocks

Largest companies often called blue-chip stocks, market cap in excess of $10 billion

Blue-chip stocks

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

Mid-Cap stocks

Reflect characters of both small and large caps, market cap from $2 billion to $10 billion

Small-Cap stocks

Smallest companies that are large enough to be listed on national exchanges, oriented toward growth and produce very few dividends, market cap of $250 million to $2 billion

Penny stocks

An unlisted security trading at less than $5/share, considered highly speculative

Unsolicited transactions

Those not recommended by a BD or the registered representative (RR), exempt from suitability and disclosure rules

Dividends

Distributions of a company's profits to its shareholders, entitled to investors who buy stock if the BOD votes to make a distribution (a declaration)

Cash dividends

When declared, typically paid quarterly and taxed the year they are distributed, distributed by check for stock certificate holder and automatically deposited for those holding shares in brokerage account

Stock dividends

Company issues additional shares of its common stock to its current stockholders instead of cash resulting in shareholder owning more shares after distribution

Product dividends

Companies will pay a dividend by sending a sample of the company's product to shareholders

Declaration date

When a company's board approves a dividend payment, it is recognized as the date the dividend was declared, also designating the payable date and the record date

Ex-dividend date

When a stock begins trading without the dividend attached, declared by the exchange where the stock trades or FINRA if the stock is not traded on an exchange, usually same day as record date

Record date

Date an investor would need to be a holder of a stock on the records of the transfer date

Payable date

Date a corporation sends dividends to all stockholders who appear in the record as owners as of the record date

Proxy

An absentee ballot made available for shareholders who want to vote but cannot attend the meeting, commonly done online or by mail

Statutory voting

Allows a stockholder to cast one vote per share owned for EACH item on a ballot, benefits larger shareholders

Cumulative voting

Allows stockholders to allocate their total votes in any manner they choose, benefits the smaller investor

Preemptive right

Stockholder's legal right to maintain a proportionate ownership by purchasing newly issued shares before the new stock is offered to the public

Capital gains (growth)

Profit from selling assets at price higher than purchased, an increase in the market prices of a security

Limited liability

Protects shareholders if the company were to go bankrupt, their personal assets are not at risk as one cannot be forced to sell any personal assets to help pay the debts of the business

Value risk

The chance that a stock will decline in price, an investor has no assurances they will be able to recoup the investment

Preferred stock

Equity security issued by a corporation that represents ownership in the corporation in a limited way, owner owns an interest in the cash flow of the company - fixed and stated as a percentage of its par value

Straight (non cumulative) preferred stock

Has no features beyond stated dividend payment, missed dividends are not paid to the holder as the company is not required to make them up

Cumulative preferred stock

Accrues payments due to its shareholders if dividends are reduced or suspended, unpaid dividends add up until paid.

◦ dividends accumulate on the company's books until the BOD decides to pay them

◦ stockholders would receive the accrued dividends plus any dividends for the current year

Callable preferred

A company can buy back from investors at a stated price after a specific date allowing the company to replace a high fixed-dividend obligation with a lower one when interest rate has gone down

Convertible preferred

Owner can exchange the shares for a fixed number of shares of the issuer's common stock, generally issued with a lower stated dividend, allows holder to reduce risk of inflation

Adjustable-rate preferred

Stocks issued with adjustable (or variable) dividend rates, usually tied to the rates of other interest rate benchmarks like Treasury bills

◦ payment adjust to current interest rates allowing the price of the stock to remain relatively stable since rate of return stays in line with other investment options

Participation preferred stock

Offers its owners an additional share of corporate profits after all other dividends are paid, outlined when preferred stock is first issued

Purchasing power risk

Potential that, because of inflation, the fixed income produced will not purchase as much in the future as it does today