Series 7 – Equities

Common Stock
 Authorized stock: company has authorization to issue or sell. Laid out in the company’s original charter. To increase this there
needs to be shareholder vote.
 Issued stock: authorized and distributed to investors. Authorized but unissued stock is not considered in determining the
company’s total capitalization.
 Outstanding stock: issued and owned by outside investors. Outstanding = issued - treasury
 Treasury stock: issued stock the company has repurchased from the public. The company can hold it indefinitely, reissue or retire
it. Does not carry dividend or voting rights. Treasury = Issued – outstanding
 Companies buy back shares to: (1) increase earnings/share, (2) have inventory for stock options, (3) use in M&A
 Par value: when the company sells stock above the par value (face value), it is recorded in the B.S. as capital in excess of par, also
known as paid-in surplus, capital surplus, or paid-in capital
 BV: how much the stockholder receives if the company was liquidated
 Voting:
Shareholder approval is needed for convertible bonds, additional issues, board vacancies and acceptance of a buy-out.
o Statutory voting: one vote for each item. BoD needs simple majority. Beneficial for large investors.
o Cumulative voting: you pick the weight of each item. Beneficial for small investors.
 Proxy: needs to be submitted to the SEC for review. If it could change control of the company (proxy contest), all people
involved must register with the SEC, including unsolicited advisors (excludes “solicited” advisors to stockholders like brokers).
 Non-voting common stock: Class A and B
 Preemptive rights: antidilution provision gives the right to existing shareholders to buy new stock before the public (to maintain
their proportionate ownership)
 Limited liability: stockholders don’t pay the company’s debt in bankruptcy
 Stock splits: requires shareholder vote, not a taxable event. Reduce EPS, not dilutive.
o Forward splits: just reduces the price of each share, more shares. All else equal. 2:1  x by 2, / by 1
o Reverse split: is the opposite (less shares, higher price)
 Realized stock gains and dividends are taxed. Corporations receive a 50% exclusion on dividend income from investment in
other companies.
 A long loss is limited to the price of the stock. A short loss has no limit as there is no limit how high the price of the stock can go.
 Short sale: ST capital gain!
Preferred Stock
 Equity security issued as a fixed-income security with a fixed semi-annual dividend (or as stipulated in the prospectus), not
guaranteed (need to be approved by BoD).
 Has priority claim over common and receives dividend over common.
 No votes / preemptive rights. Except: (1) failure to pay dividends for a # of periods, (2) company wants to issue a new class of
preferred stock = or senior to existing stock.
 Price changes inversely with interest rates (like bonds)
 Always assume $100 par value
 Some have variable or adjustable dividends, tied to T-bills or benchmarks. Can be adjusted semi-annually (reset date).
 Priority of dividend payment: (1) dividend in arrears to cumulative preferred, (2) stated preferred dividend, (3) excess dividend
to participating preferred, (4) common dividend
 Straight preferred (noncumulative): missed dividends are not paid out.
 Cumulative preferred: missed dividends accumulate on the company’s book until they can be paid.
 Convertible preferred: can be exchanged for common shares at preset value in certificate. Often has lower div since they can
achieve P appreciation than non-conv. Conversion decreases earnings and P of common shares.
o Par Value / Conversion P = # common shares  CV rate
o Parity = # common shares * CMV of common
 Participating preferred: if BoD decides, they can pay additional dividends from remaining profits after ALL dividends and
interests are paid. 6% preferred participating to 9%: investor gets 3% on top of the 6%.
 Callable / redeemable preferred: company can buy from investors at a stated P after a specified date (call risk after this). By
issuing a callable preferred stock, a corporation can call a high dividend payment issue and replace it with a lower one when
interest rates decline. Typically has the highest dividend to make up for stopping dividend payments.
 Preferred stock has the closest characteristics to bonds and would be most affected by a change in interest rates (more than
conv preferred).

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 Series 7 – Equities

ROI
 Cash div: taxed on year received.
 Stock div: typical of growth companies and those investing in R&D. The company issues stock to pay SH, decreasing each sh P.
Not a taxable event, just reduces cost basis by the amont of the distribution (like stock split)
 Div yield = annual dividend / current MV
Transferability of Ownership
 Round-lot: divisible by 100. Odd-lot: not divisible by 100. Except OTC securities >$175 in P (round-lot)
 Stock certificate: USIP, company name, # of shares and investor’s name.
 CUSIP: stock, bonds and munis
 Transfer and registration are 2 different steps performed by different institutions
Transfer agent: handles share ownership transfer
 Cancelling old and issuing new securities
 Maintains records of ownership
 Handling problems related to lost, stolen or destroyed certificates
Registrar: keeps track of # shares outstanding
 State entity, typically done by a bank or trust
 Must be indep from issuing company
 Ensures a company does not have more shares outstanding than it is authorized. Registrar audits transfer agent.
 Any registration/issuance of new stock / bond certificates is routed through state registrar and transfer agent
Equity Securities
 Ex-Dividend: buyer will not receive the next dividend check.
 The DDA dividend disbursing agent (div) or transfer agent (stock splits) makes the appropriate distrib to the BD. Then the BD’s
dividend department distributes to the appropriate account.
 SEC requires that the firm notifies FINRA / exchange 10 days before the dividend record date.
 Ex-date: 1 day a regular way buyer is not entitled to receive dividend. Set by the market where the security principally trades.
st

o Normal settlement (T+2): 1 business day before the record date

o Cash settlement (T): day after record date
 Buyer is entitled to dividend if he buys BEFORE ex-date. If bought ON/AFTER ex-date, received by the seller
 On the ex-date the stock P is reduced by the div amount.
 DERP: declaration, ex, record, payment. All established by BoD, except Ex-Date (FINRA/exchange)
 Special handling: stock distr or stock splits increase of >25% (5:4). Ex-date: business day following pay day.
 Due bill: buyer requests seller dividend payment
 Rights offering: allows SH to buy shares below current market price. Marketable/transferable/detachable.
 Subscription right: 30-45 days (4-6 weeks) to buy additional shares. Each share has one.
o Cum-rights formula= MP– subscription right P / (# of rights to buy 1 share) + 1
o On the morning of the ex-rights date the P decreases by the right’s value
o Ex-rights formula = MP (ex-right) – subscr right P / # of rights to buy 1 share
o Standby underwriting: when the company doesn’t sell all the rights and sells it to a bank on “firm commitment”
basis (banks buys it all and then resells)
 Warrants: Right to buy shares from issuer at a certain P (higher than MP), typically for 5 years (can be indefinite too).
Negotiable/marketable/transferable/detachable
 Street name: held in a brokerage account in the company’s name

Rights Warrants
S.T. ~4 weeks L.T. ~5 years
On issuance, exercise P On issuance, exercise P
below M.P. higher M.P.
Offered to existing S.H. Sweetener for another
with preemptive rights security

What changes # of shares outstanding?

 Treasury stock increase, stock split, stock dividend, exercise of rights/warrants, conversion of CV bonds/preferred
 NOT calls/puts

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ADRs
 Facilitates trading foreign securities in U.S. markets by U.S. investors. Can be exchanged for the actual foreign security
 Custodian bank: foreign branch of US bank issue ADRs. They are the registered owners and receive the dividends.
 Same rights than common stock, but usually no voting nor preemptive rights (sold by the bank and distribute proceeds to SH)
 Dividends are net of foreign withholding tax
 ADSs (S for Shares): ADRs sponsored by the company, get FFSS by company in English. Non-sponsored ADRs are issued by banks
without company assistance
REITs
 Subchapter M of IRC - can avoid being taxed as a Corp by: (i) 75% of investment assets in RE, (ii) having >75% gross income
from rent / mortgage int, AND (iii) distribute >90% of NII
 Benefits: (i) liquidity, (ii) hedge against other strategies, (iii) reasonable expectation of income
 Risk: (i) management, (ii) default on MREITs, (iii) dividends are taxed as ordinary income
 Not a LP / invest company
 Pass through income / not losses
Bonds
 Funded debt: Corp bonds >5 yrs maturity
 T-bills (1 year), Notes (2-10 yrs), Bonds (>10 yrs)
 Par / Face value: $1,000
 Fully registered bonds: certificate is replaced with a new one when sold
 Book-entry bond: trade confirmation only, no certificate. Most US Gov bonds.
 Fully reg and book-entry receive principal + interest by mail
Mutual Funds
 DERP (declaration, ex, record, payable) dates all set by BoD
 Ex-dividend date usually one day after record date