Chap 2 Key Concepts

Has no voting rights

does not received dividends

is purchased by the issuer to increase earnings per share

Outstanding shares

vote for dividends

Stock splits and stock dividends. Since no cash is paid out

Taxable upon sale

Represents equity ownership

Fixed dividend

Interests Rate sensitive

No voting rights

Preference over common stock in dividence in bankruptcy

American depository receipts

Are dollar denominated

Pay dividends in US dollars

Subject to foreign taxation on dividence

Subject to currency risk

lack voting at preemptive rights

A call is in the money when the market price of stock is about the strike

A put a send the money when the market price of stock is below strike price

A call is out of the money when the market price of stock is below strike price

A puts is out of the money when the market price of stock is about

Hedging is like buy insurance to protect a stock position for hedging

and investor would buy long an option contract

long stock with a long put

short stock with a long call

Selling short An option Contract

ex.

Long stock with the short call (covered call writing)

or

Short stock with a short put on (covered call writing)

Stock splits and stock dividence

100x.08=$8 per share/value

$600

A round lot of stock contains 100 shares, so Dwayne owns 200 shares of ABC Industries. A 1-point move in a stock equates to a $1.00 increase in value per share, giving Dwayne a total increase in net worth of $600 ($3 x 200).

Warrants are long term privileges to buy at a predetermined price and run at least 5 years.

Put and call options have a nine-month life.

Stock rights are issued for a short period of time (typically 30 days to 6 weeks).

Reg T

Trades like a bond

Pays a fixed dividend

Has preference over common. stock in a liquidation

no voting rights

Preferred stock represents ownership in a corporation. It has liquidation priority over common stock, pays a fixed annual dividend, and trades similarly to a bond. Unlike common stock, preferred stock does not have voting rights.

not before Monday January 13th after Jan 13

If an individual owns common stock and wishes to receive the dividend, that individual cannot sell their shares prior to the ex-date.

The ex-date is 1 business day prior to the record date, in this example Monday January 13th.

If the stock is sold on or after January 13th, the seller would still be entitled to receive the dividend.

If the stock is sold before this date, the individual that purchases the shares would be entitled to receive the dividend.

divide by five

It will decrease to $20 per share

Unlike a cash dividend or a stock dividend paid to investors, declaring a stock split DOES require shareholder approval. The reason a corporation will split its stock is to make the stock more marketable or make the price more attractive for investors trading the stock in the secondary market. The company will issue more shares based on a ratio, such as 2-for-1. This will adjust the stock’s par and market value but will not affect the total value of the stockholder’s investment. $100 / 5 = $20. The number of shares outstanding will increase 5-fold.

a preferential rate (15% in nearly all cases).

$7,520

Commissions are included in the cost of the trade. The cost basis is the amount paid for the shares (200 shares × $37.35 per share = $7,470) plus the commission ($50) for a total of $7,520. The $1 per share dividend is not included in the cost basis (unless reinvested), nor does it reduce the cost basis.

Each ADR could represent more than one shares of the underlying common stock

The British government may require tax withholding on dividends paid to ADR holders

A multinational bank has purchased blocks of XYZ Ltd. from the London Stock Exchange and holds those shares in its vaults

Dividends from ADRs are paid in U.S. dollars.

ADRs are created by major financial institutions that purchase large blocks of a foreign company’s shares on its home stock exchange and hold those shares in their vaults. The firms then issue ADRs, which are then traded on domestic stock exchanges such as the NYSE or Nasdaq. This is an easy way for a U.S. investor to buy shares of a foreign company.

An ADR can represent one share, or more than one share, of the foreign company.

Not true: Dividends from the ADRs will paid in British Pounds

Exchange offer

With an exchange offer, which is considered a type of tender offer, the corporation offers shareholders the option of trading in their common stock shares for another security, such as a bond or a preferred stock. Tender offers and exchange offers will change the number of shares that are held by the investing public and could affect the earnings and value of those holdings.

The issuing company benefits in a decreasing interest rate environment

The issuer, at its discretion, has the right to buy back the shares at a specified price, after a certain time, and cancel the stock. If the preferred stock is called, the investor is obligated to sell the stock back at the specified price (at least par value). Usually, the company will call the issue when interest rates are low, and they can reissue stocks with a lower dividend.

Foreign securities in the U.S.

American depositary receipts (shares) or ADRs are used to facilitate trading in the U.S. of foreign corporate securities since the difficulties of transferring the securities and converting the currency are eliminated. These securities are still subject to currency risk.

Outstanding

Proportional voting is another term for cumulative voting.

Statutory voting

Common stockholders have the right to vote for the

board of directors and stock splits.

They are not given the opportunity to vote on dividends, which includes cash dividends and stock dividends. Those decisions are made by the board of directors that they elect.

Selling calls and buying puts

Speculation in the options market simply involves buying or selling options based on market anticipation. Speculators are betting on the direction of a particular stock, or market as a whole. Bullish speculators will buy calls or sell puts. Bearish speculators will sell calls or buy puts.

Investors who sell on the ex-dividend date or later are entitled to receive the next dividend paymentWhile buyers must purchase prior to the ex-dividend date, any investor who sells on the ex-dividend date or later will receive the next dividend payment. This is because the settlement date of a stock trade takes place two business days following the trade date, or T+2. The settlement date is the day that money and securities change hands. Buyers take possession of the securities two days on the settlement date, and similarly sellers relinquish possession on the settlement date. Since the record date is one business day after the trade date, anyone who sells on the ex-dividend date will still be on the transfer agent’s books as being a shareholder of record on the record date. Therefore, the seller will be entitled to receive the next dividend payment. The Board of Directors establishes the declaration, record, and payable dates, but not the ex-dividend date. The ex-dividend date for mutual funds is generally one business day after the record date.

Not entitled to the dividend

For regular way settlement on a stock, the ex-dividend date is 1 business day before the record date. Since the stock was purchased on the ex-dividend date, the investor will not receive the dividend.

Participating preferred

Participating preferred is not limited to a fixed dividend

$1,940,000CORRECT!

Book value indicates a company’s worth if it were to cease operations, sell off all its tangible assets, and pay off all its outstanding debts. It is calculated by taking the value of all tangible assets (things that can be liquidated) and subtract the total of its liabilities. This represents the total value that shareholders would theoretically receive if the company were to sell everything it had and paid all its debts. Tangible assets include real estate, equipment, vehicles, office fixtures, etc. While intangible assets, such as patents, goodwill, and intellectual property are certainly valuable, they are not physical objects and can’t simply be sold at an auction. Therefore, the value of intangible assets is not included in a company’s book value. ABC’s total tangible assets total $3,380,000.

Subtract its outstanding debts, namely a loan for $1,150,000 and bills due for $290,000, and shareholders are left with a book value of $1,940,000.

2-for-1. ????

Exchange offer

With an exchange offer, which is considered a type of tender offer, the corporation offers shareholders the option of trading in their common stock shares for another security, such as a bond or a preferred stock. Tender offers and exchange offers will change the number of shares that are held by the investing public and could affect the earnings and value of those holdings.

Put option

A put option gives the buyer the right(option)to sell stock at a stated price,

while a call option gives the buyer the right(option) to buy stock at a stated price.

Rights are short-term options to buy and

warrants are long-term options to buy.

$600

A round lot of stock contains 100 shares, so Dwayne owns 200 shares of ABC Industries. A 1-point move in a stock equates to a $1.00 increase in value per share, giving Dwayne a total increase in net worth of $600 ($3 x 200).

Strike price minus premium

Breakeven is the point that the option buyer will not make any money or lose any money if the contract is exercised—this means that the market price is above or below the strike price by the exact amount of the premium paid. To calculate the breakeven for a put: Strike price minus the premium. To calculate the breakeven for a call: Strike price plus the premium.

7.5%

Dividend yield is a measure of the return on investment for a stock. When discussing a stock's dividend yield, investors compare the annual dividends to the current market price of the stock. Therefore $.25 x 3 = $.75/$10 = 7.5%.

larger, wealthier stockholders

Under statutory voting, each stockholder must keep their votes separate and use them for each individual election. Statutory voting benefits the larger, wealthier shareholder.

stock,

stock market indices

bond yields,

bond prices,

foreign currency.

not U.S. currency

Buying calls and selling puts

Speculation in the options market simply involves buying or selling options based on market anticipation. Speculators are betting on the direction of a particular stock, or market as a whole. Bullish speculators will buy calls or sell puts. Bearish speculators will sell calls or buy puts.

It will decrease to $20 per share

This will adjust the stock’s par and market value but will not affect the total value of the stockholder’s investment. $100 / 5 = $20. The number of shares outstanding will increase 5-fold.

Horizontal merger

A horizontal merger is when two companies offering similar products in the same industry combine to gain a larger share of the market.

when companies in two different industries merge, for some business benefit such as reduced costs.

when a corporation offers to purchase some of the shares currently held by investors at a premium.

which is a type of tender offer, the corporation offers shareholders the option of trading in their common stock shares for another security such as a bond or preferred stock

An option contracts expiration date is the last day the option can be exercised and if not, the option is worthless

A call contract provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock at the price

A put contract provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock at the strike price

Call Contract – Provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock, at the agreed (strike) price.

Put Contract – Provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock, at the agreed (strike) price.

Expiration Date – The last date the option can be exercised.

Most options have a 9-month life. Once this date passes, the option is worthless.

Premium – The amount an investor will pay for an option; this number is based on 100 shares of the underlying security.

An option with a premium of 2 would cost a buyer $200.

Provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock, at the agreed (strike) price

Provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock, at the agreed (strike) price.

$200

Proxies and related materiaI

all Annual reports

Information statements sent to the member by the issuer

other material sent to stockholders that are distributed to the BD by the issuer of the stock

Brokerage accounts are opened by clients who wish to buy and sell securities. If a client has purchased equity securities, their BD should forward all proxy material and all annual reports, information statements, and other material sent to stockholders that are distributed to the BD by the issuer of the stock. If the client has purchased debt securities, the BD should make reasonable efforts to forward any material from the issuer that contains material information regarding the bond, like notices concerning defaults, financial reports, information statements, and material event notices.

Corporate action

Corporate actions are actions that corporations take that have an effect on current shareholders. Most corporate actions are approved by the board of directors, and a few require a vote of the majority of shares to occur.

Unlimited potential loss and limited potential gain

This investor has written an uncovered (naked) call. The writer of any option contract is limited in their potential gain, the most they can gain is the premium received for writing the contract. When an uncovered call is written, the potential for loss is unlimited. If the call is exercised against the writer, the writer is obligated to sell shares to the holder (buyer) at the strike price. Uncovered means the writer does not own the shares and would be obligated to purchase them at the current market price. There is no limit to how high the market price could go.

The number of common shares of XYZ outstanding will decrease

This is an example of a reverse stock split. In this scenario, the number of XYZ common shares outstanding is decreased and the market price per share is increased proportionately. Because the corporation’s earnings will be spread over fewer shares, earnings per share will increase.

The yield has fallen

A stock's dividend yield is calculated as follows: annual dividends divided by current market price. If the market value rises by more than the dividend on a percentage basis, then the dividend yield falls.

Information concerning the BD compensation for the trade

Risk disclosure document

New account form

To open any account, a new account form must be completed. Penny stocks are not marginable, so there is no need for a margin agreement. Penny stocks are considered to have significantly higher risk than securities that are traded on the exchanges or NASDAQ so customers must be given a risk disclosure document that outlines the risks of investing in penny stocks. Additionally, the customer must be provided with the information concerning the broker-dealer’s compensation in connection with the trade.

Tuesday, March 9

The ex-dividend date for a stock is 1 business day before the record date. If the investor purchases the stock on or after the ex-dividend date, the investor is NOT entitled to receive the dividend.

market price of the stock would need to drop below the strike price of the option.

if the market price is higher than the exercise (strike) price.

Equity mutual funds

Shares of preferred stock

Shares of common stock

Qualified dividends are those that qualify for taxation at a preferential rate, which is 15% for nearly all investors, 20% for very high-income investors, or 0% for very low-income investors. Dividends paid from common stock, preferred stock, and dividend distributions from equity (stock) mutual funds qualify for the lower preferential tax rate.

Real Estate Investment

Trusts

authorized shares that have been sold to investors

shares approved in the articles of incorporation for the corporation to make available for sale.

not being offered for sale to the public at this time, but may be offered in the future.

To receive a fixed portion of the corporation's earnings in the form of dividends

When the market price of the stock is below $50A call option is out-of-the-money when the market price of the stock is BELOW the strike price. In this example the strike price is $50, so when the market price of the stock is below $50 the option is out-of-the-money.

Increase

The yield on common stock is computed by dividing the market price of common stock into the dividend. If the common stock price has not changed, but the dividend continues to increase, the yield will increase. For example, if the stock costs $14.90 and the dividend is $1, the yield is 6.7% ($1 divided by $14.90). If the stock stays at $14.90 and the dividend increases to $1.50, the yield is 10% ($1.50 divided by $14.90).

OTC Markets Group securities

The rule requires that a suitability analysis must be conducted on any “NEW” customer prior to recommending or selling a penny stock that obtains the customer’s financial situation and objectives along with their investment experience.

Penny stocks are common stocks that are typically priced below $5 and are not actively traded. They are not listed on an exchange or NASDAQ, these securities are OTCBB or OTC Markets Group issues.

$3,075

The maximum gain for the buyer of a put option is the strike price minus the premium paid. The holder of a put option will profit when the underlying stock falls below the strike price. The holder can purchase the stock at the lower current market price, then exercise the put option and sell the stock at the higher strike price. If the stock is worthless, then the put holder can “buy” the stock at $0, then “sell” the stock at $35 for a gain of $3,500 ($35 per share × 100 shares per contract). The buyer paid $425 for the contract ($4.25 premium per share × 100 shares), for a net profit of $3,075 ($3,500 ˗ $425). The writer of this call option has a maximum gain of $425, and the holder of a call option has unlimited maximum gain.

$7,520

Commissions are included in the cost of the trade. The cost basis is the amount paid for the shares (200 shares × $37.35 per share = $7,470) plus the commission ($50) for a total of $7,520. The $1 per share dividend is not included in the cost basis (unless reinvested), nor does it reduce the cost basis.

No immediate tax liability, but the cost basis per share will need to be adjusted

Stock dividends, like stock splits, do not increase an investor's holdings. They just redistribute holdings into more shares at a lower price per share. Morris owned 400 shares at $20/share before the ex-date, for a total value of $8,000. After the stock dividend, he owns 480 shares (20% more than 400), but the value of the shares was adjusted so that his total value remained at $8,000 (i.e., to $16.667/share). Therefore, stock dividends are not taxable. Morris will need to adjust his cost basis per share down to account for the new shares he has received.

dividend is not included in the cost basis (unless reinvested), nor does it reduce the cost basis.

The cost basis is the amount paid for the shares (200 shares × $37.35 per share = $7,470) plus the commission ($50) for a total of $7,520. The $1 per share dividend is not included in the cost basis (unless reinvested), nor does it reduce the cost basis.

Measure of the return on investment for a stock. When discussing a stock's dividend yield, investors compare the

annual dividends to the current market price of the stock. Therefore $.25 x 3 = $.75/$10 = 7.5%.

dividing the market price of common stock into the dividend. If the common stock price has not changed, but the dividend continues to increase, the yield will increase. For example, if the stock costs $14.90 and the dividend is $1, the yield is 6.7% ($1 divided by $14.90). If the stock stays at $14.90 and the dividend increases to $1.50, the yield is 10% ($1.50 divided by $14.90).

A $1,100 gain

This option has expired out of the money, as the price of the underlying stock was below the option exercise price on the expiration date. When the option expires, the writer (seller) of the option will earn the premium received, which is the maximum possible gain. The total premium was $220 per contract ($2.20 per share × 100 shares), and the investor wrote 5 contracts for a total gain of $1,100 ($220 per contract × 5 contracts).

Out-of-the-money by $4.50

An option is out-of-the-money when it is not profitable to exercise it. It would not make financial sense for the investor to sell OPQ stock at the $40 exercise price when OPQ is currently selling for $44.50. The difference between the strike price and the current market price determines how far an option is either in or out of the money. The put option is current out of the money by $4.50 ($40 strike price ˗ $44.50 current price = ˗$4.50). The premium paid is not a factor in determining how far an option is in or out of the money.

T+1

Regular way settlement for option contracts occurs one business day after the trade date or T+1. There are two ways that option transactions can settle. The investor can simply take possession of the underlying security or ask for cash settlement. With a cash settlement, the investor takes the difference between the current market value and the strike price in cash. This is the only way that index options can settle. This avoids the need to take physical delivery of the asset. Equity options can settle either way.

An option is “in-the-money” when it has intrinsic value. In-the-money has to do with the strike price as it relates to the current market value of the underlying stock. Calls are in-the-money if the market price is higher than the exercise (strike) price. Puts are in-the-money when the market price is less than the strike price. For the put to be “in-the-money”, the market price of the stock would need to drop below the strike price of the option.

Hedging is like buying insurance to protect a stock position. For hedging, an investor would buy (long) an option contract. With a long stock position, the investor is hoping the stock price will go up- if the stock price does go up the investor will let the option expire and will enjoy the gains in the stock position. The concern is that the stock price could decline, a long put can be purchased as protection. If the stock price declines below the strike price, the investor can exercise the put and sell the shares to the writer of the contract.

or short stock with long call

income strategy generate income for the investor by selling (short) an option contract

income strategy

generate income for the investor by selling (short) an option contract

A trustee is appointed to represent the bondholders and protect their interests.

D

GNMA securities are directly backed by the U.S. Government, however FNMA and FHLMC are not directly backed by the U.S. Government. FNMA and FHLMC are publicly traded companies. GNMA obligations will have lower yields than FNMA or FHLMC because GNMA are directly backed by the U.S. Government.

The investor with the short call position must accept the assignment, and must deliver 100 shares of STU by the settlement date of the tradeExcellent!Once an investor has been assigned, it may not be declined or traded to another individual, nor may they close their short position by repurchasing the call option. The customer, once exercised, must deliver the underlying security. Their loss on this trade will be partly offset by the premium received for selling the call option. They must buy the stock at the current market price, sell the stock at the strike price, for a loss of $70 per share ($35 received ˗ $105 purchase price), offset by the $5 per share premium for a net loss of $65 per share (˗$70 lost on the trade + $5 premium).