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SIE-Chapter 2-Equiti
Equities
| Term | Definition |
|---|---|
| Common Stock Features | • Rights of stock holders ○ Right to vote for BOD ○ Right to vote by proxy ○ Right to sell or give away without permission ○ Pre-emptive right • Growth (capital gains) • Income (Dividends) • Limited liability |
| Common Stock Benefits/Risk | Benefits: • Potential income appreciation • Income (from dividends) • Hedge against inflation Risks of owning common stock • Market risk • Decreased or no income • Low priority at dissolution |
| Liquidation Priority | • Taxes and wages • Secured debt (bonds and mortgages) • Unsecured liabilities and general creditors • Subordinated debt • Preferred stockholders • Common stock holders |
| Preferred Stock Features | • Pays fixed dividends • Do not have ○ No voting rights ○ No pre-emptive rights |
| Preferred Stock Benefits and Risk | Benefits of Preferred Stock • Dividend preference • Priority at dissolution Risks • Purchasing power risk (inflation erodes dividend) • Interest rate sensitivity (interest % goes up, value goes down) |
| Preferred Stock Suitability | Why include in customers portfolio? • Fixed income • Prior claim ahead of common • Convertible preferred stock sacrifices dividends for capital gains Risks • Purchasing power •Interest rate •Business difficulties |
| Types of Preferred Stock | • Straight • Cumulative • Callable • Convertible • Adjustable rate • Participating Preferred |
| Preferred Stock - Cumulative | All dividends (those in arrears + current) must be paid before common |
| Preferred stock -- Callable | Company can call back the preferred s tock |
| Preferred Stock -- Convertible | Can be converted to common stock |
| Preferred stock -- Adjustable Rate | ○ Dividends are tied to benchmarks (variable) Test Topic: This is the least desired option for investors who want to make money off income) |
| Preferred Stock -- Participating Preferred | Can have extra dividend (after all other claims paid) |
| SEC Rule 144 | Control stock (registered) w/ affiliate -> No hold, Volume limits Restricted stock (unregistered) w/affiliate->6 month hold, Volume limits Restricted stock (unregistered) w/o affiliate->6 month hold, No volume limits Reg->Holds, Affliate->Volume limits |
| ADR Receipts | Purchase foreign stock, receipt deposited in foreign branch of US bank |
| ADR Benefits and Risk | • Benefits • Ease of use • ADR taxation ○ Taxed dividends credit is applied in US ○ Capital gains only taxed in US • Risks ○ Currency risk Political risk |
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