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SIE-Chapter 2-Equiti


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