Securities Industry Essentials (SIE) Comprehensive Study Notes - Unit 1: Equity Securities

Definition of a Security: An intangible financial asset that may be bought, sold, or gifted between persons. It may be represented by a paper certificate or held in an electronic record.
Examples of Securities:
- Stocks and other equity securities.
- Bonds and other debt securities.
- Mutual funds and options.
- Limited partnerships and municipal backed securities.
Items That Are NOT Securities:
- Commodities (oil, orange juice, beef).
- Precious metals (gold, silver).
- Currency (actual money).
- Futures (derivatives of commodities/currency).
- Personal residences.
Basic Types of Securities:
- Stocks (Equity): Represents ownership interest in a corporation.
- Bonds (Debt): Represents an IOU; the investor is a creditor owed money according to specific terms.

Basic Characteristics:
- Investors participate in company success via capital appreciation (selling shares for a higher price) and dividends (sharing in profits).
- One unit of stock is a "share."
- Shareholders elect a Board of Directors (BOD) to oversee business management but are not involved in day-to-day operations.
Classifications of Common Stock:
- Authorized Stock: The max number of shares a company can issue as specified in the corporate charter.
- Issued Stock: Authorized stock that has been sold to investors.
- Outstanding Stock: All issued shares held by investors. Formula: \text{Issued Stock} - ext{Treasury Stock} = ext{Outstanding Stock}.
- Treasury Stock: Stock the corporation has issued and later bought back. It has no voting rights and receives no dividends.

Market Capitalization: Found by multiplying outstanding shares by Current Market Value (CMV).
- Large-Cap: Over 10 billion. High-quality, long history of dividends often called "blue-chip."
- Mid-Cap: 2 billion to 10 billion.
- Small-Cap: 250 million to 2 billion. Typically oriented toward growth.
Penny Stocks: Unlisted securities (not on a U.S. exchange) trading at less than 5 per share.
- Risk Disclosure: Customers must receive and sign a risk disclosure document before the initial transaction.
- Suitability: BD must determine suitability based on financial objectives before solicitation.
- Established Customer Exemption: Suitability statements are not required if the customer has held an account for at least one year or made at least three penny stock purchases of different issuers on different days.

Types of Dividends:
- Cash Dividends: Typically paid quarterly. Taxed in the year distributed (Qualified vs. Nonqualified).
- Stock Dividends: Reinvested profits. Total cost of shares remains the same, but the cost basis per share is adjusted downward. Not immediately taxable.
- Product Dividends: Sending samples of products (rare).
Dividend Disbursing Process (DERP):
1. Declaration Date: BOD approves payment.
2. Ex-Dividend Date: Set by SRO/FINRA. Usually the same as the record date. Must purchase before this date to get the dividend.
3. Record Date: Owners of record receive the dividend.
4. Payable Date: Checks are sent to stockholders.
Voting Rights:
- Statutory Voting: One vote per share for each item (benefits large shareholders).
- Cumulative Voting: Total votes can be allocated in any manner (benefits small shareholders).
Preemptive Rights: Right to maintain proportionate interest in the company by buying shares of a new issuance before the general public.

Benefits:
- Capital appreciation (growth).
- Income (dividends).
- Hedge against inflation.
- Limited Liability: Can only lose the amount invested; personal assets are not at risk.
Risks:
- Market/Value risk: Price may decline.
- Decreased or no dividend income.
- Low priority at dissolution: Common stockholders are the most junior class (residual claim).

Characteristics: Fixed rate of return (stated as fixed dollar amount or % of par). Par is assumed to be 100. No voting or preemptive rights.
Types:
- Straight (Noncumulative): No makeup for missed dividends.
- Cumulative: Accrues unpaid dividends (dividends in arrears); these must be paid before common shareholders receive any.
- Callable: Company can buy back at a stated price after a specific date (usually done if interest rates fall).
- Convertible: Can be exchanged for a fixed number of common shares (fluctuates in value with common stock).
- Adjustable-Rate: Tied to benchmarks like Treasury Bill rates. Least volatile price.
- Participating: Offers extra share of profits based on BOD decision.
Risks: Purchasing power risk, interest rate sensitivity (inverse relationship), and priority behind all creditors.