Regular way settlement for equities
T + 2
The first day that a buyer buys stock without a dividend
Ex-dividend date
The date on which a corporation pays a dividend to shareholders of record
Payable date
The last day a buyer can buy stock and receive the dividend
Business day before the ex-date
When issuers must notify the exchange prior to the stock’s record date
10 business days prior (the declaration date)
When the ex-dividend date happens relative to the record date for regular way trades
1 business day before record date
Security with the most junior claim in a corporate liquidation
Common stock
Fixed rate equity security that responds to market conditions like a bond
Preferred stock
Share value of a penny stock
Less than $5 per share
adjustable-rate preferred stock
A type of preferred stock where the stated dividend rate will fluctuate based on an underlying benchmark, such as the rate on T-bills. Because the dividend will adjust based on current interest rates, the share price tends to remain extremely stable.
American depositary receipts (ADRs)
Negotiable certificates that represent ownership in the shares of foreign companies and help facilitate their trading in the US.
American depositary shares (ADS)
The individual shares of foreign corporations represented by ADRs.
authorized stock
The total number of shares of common stock that a corporation is allowed to issue according to its corporate charter.
beneficial owner
The actual owner, who retains all rights of ownership, even if the account has another legal owner in name. When securities are held in street name, the broker-dealer acts as the nominal owner, with the investor still being the beneficial owner.
beta
A measure of the volatility of a stock or portfolio compared to the overall market. A security that has a beta of 1.0 will track the market, a beta of more than 1.0 indicates the price will be more volatile than the market, and a beta of between 0 and 1.0 indicates that the security will be less volatile than the market.
blue chip stock
Shares of large, stable companies that have a long history of steady earnings and dividends. Because of their size, they offer modest growth potential, but generally pay a consistent dividend. Examples include Coca-Cola, General Electric, and IBM.
business risk
The risk that one specific company’s value will lower, be it due to poor management decisions or product recalls. An investor can protect against this risk by owning a diversified portfolio.
callable preferred stock
A type of preferred stock that can be repurchased by the company at its discretion. The company is most likely to exercise this call feature when interest rates are falling in order to issue new stock with a lower dividend. Because of the call risk faced by the investor, callable preferred generally pays a higher dividend than non-callable preferred stock from the same issuer.
capital appreciation
The increase in the value of a securities position, such as one involving a stock or bond.
cash dividend
The most common type of dividend payment. Cash profits are distributed to shareholders if declared by the company’s board of directors. Cash dividends are taxable at receipt by the investor.
cash settlement
A settlement cycle where both payment and legal ownership change hands on the same day the trade is executed. Cash settlement contrasts with regular way settlement, in which there’s a delay between the trade date and settlement date.
common stock
The most widely held equity security, representing ownership stake in a company. Rights of common stockholders include the ability to vote on corporate matters, to receive dividends if declared by the company’s board, and limited liability. Investors typically purchase common stock for capital appreciation and dividends.
convertible preferred stock
A type of preferred stock where holders have the option to exchange their preferred shares for shares of the issuer’s common stock. Because of this benefit for the investor, convertible preferred pays a lower dividend than nonconvertible preferred from the same issuer.
cumulative preferred stock
A type of preferred stock that requires the company to pay any previously skipped dividend payments to these investors before any dividends can be paid to a common stockholder.
cumulative voting
A voting structure in which each shareholder can pool all of his votes together and allocate them as he chooses.
declaration date
The date on which a company’s board of directors declares 1) that a dividend will be paid, 2) when it will be paid (the payable date), and 3) the date an investor must be on the company’s books by to receive the dividend (record date). This announcement must be made at least 10 business days before the record date.
dilution
The reduction in ownership interest of a corporation due to the issuance of additional shares. Pre-emptive rights give investors the opportunity to avoid dilution and maintain their proportionate ownership if the company issues additional shares.
dividend
A distribution of a company’s profits that is paid to shareholders if declared by the board of directors. Dividends can be paid in cash, company stock, stock of a subsidiary, and company product.
dividends in arrears
Missed dividend payments.
equity security
A type of security that represents ownership. The most common examples include common stock and preferred stock.
ex-dividend date
The first day that an investor buys the stock, but will not receive the dividend because the transaction will not settle in time. Because the buyer will not be on the books and records of the company in time to receive the dividend, the seller receives it instead. For regular way transactions, the ex-date is the business day before the record date and for cash-settled transactions, the ex-date is the business day after the record date. On the morning of the ex-date, the price of the security will fall by the amount of the dividend to reflect the fact that the buyer will not receive the dividend.
ex-rights
Shares issued in a rights offering that are trading in the marketplace separate from the rights are said to be trading ex-rights.
forward stock split
A type of stock split in which investors receive additional shares with each share worth a proportionately lower price. The total value of the company remains unchanged. A company may engage in this action if it believes its share price is too high to interest potential investors.
Form 10-K
An audited financial report that must be filed with the SEC and provided to investors on an annual basis.
growth stock
Shares of companies that reinvest most of their earnings back into the business. They have a great potential for increased value, but with considerably more risk. Growth stocks typically trade at a high price-to-earnings ratio with investors seeking capital appreciation.
income stock
Shares of a company that pay steady dividends to investors. These are generally companies that operate in mature industries and have low investments in research and development. Examples include utility stocks.
issued stock
The total number of shares that have been sold to the public by the company.
long-term capital gains
The profits from the sale of securities that have been held by the investor for more than one year. These gains are taxed at a preferential rate.
market risk
The risk that the performance of an individual security will be impacted by the performance of the overall market. Market risk cannot be avoided through diversification, though it can be hedged or protected with investments in options and other derivatives.
nominal owner
The registered or legal owner of the security in name only, as another entity is the beneficial owner, retaining all rights of ownership. A broker-dealer acts as a nominal owner when securities are held in street name.
participating preferred stock
A type of preferred stock that allows holders to receive an additional dividend on top of the stated rate if some predetermined event occurs.
outstanding shares
The total number of shares that are currently in the hands of investors. This excludes treasury shares, which have been repurchased by the company.
penny stock
An unlisted stock trading for less than $5.00 per share. Penny stocks are typically extremely speculative and illiquid securities and trade in the OTC marketplace.
payable date
The date on which a company actually pays the dividend. It is announced on the declaration date and typically occurs sometime after the record date.
preferred stock
An equity security, representing ownership stake in a company. Although it is equity, it trades like a bond, meaning it is sensitive to changing interest rates due to the regular fixed dividend payments it makes. Unlike common stock, preferred stock typically does not include voting rights.
proxy statement
SEC-required disclosures that are sent to a company’s shareholders prior to a corporate vote. The proxy statement includes all the important facts upon which shareholders are to vote. If a shareholder cannot attend the meeting in person to cast her ballot, she can vote by proxy through an absentee ballot.
record date
The date by which an investor must be on the books and records of the company to receive the dividend. This date is set by the board on the declaration date and must be at least 10 business days after the declaration date.
registrar
The institution responsible for maintaining records of investors when an issuer sells securities to the public to ensure there is no unauthorized issuance.
regular way settlement
The normal settlement cycle for most securities. Regular way for equity securities, corporate bonds, municipal securities, and US agency securities is T + 2. Regular way for options and treasury securities is T + 1.
reverse stock split
A type of stock split in which each investor’s share count is reduced with each share worth a proportionately higher price. The total value of the company remains unchanged. A company may engage in this action if its stock price has fallen dramatically in order to avoid falling below the minimum price required for exchange listing.
rights
Provide shareholders with the ability to maintain their proportionate ownership in a company if the company issues additional shares. Investors are typically given a short time frame to decide whether or not they want to exercise these rights, and if they do, it is generally at a discounted price.
rights offering
When a company gives existing shareholders the right to purchase additional shares, proportionate to their current holdings, at a stated price; companies usually do this to raise equity.
settlement
The date on which payment for securities is due and legal title and ownership passes from the seller to the buyer. Most securities settle regular way, meaning in the normal course of business. Regular way for equity securities, corporate bonds, municipal securities, and US agency securities is T + 2. Regular way for options and treasury securities is T + 1.
shareholder
An investor, such as an individual or a corporation, that owns at least one share of a company’s stock. Depending on what class of equity securities the investors own, common or preferred, they will be entitled to different rights.
short sale
transaction in which an investor sells borrowed shares in the market, hoping to buy back and replace the shares at a lower price than what they were initially sold for. The difference between the initial sale price and repurchase price is the investor’s profit or loss. Short-sellers are speculating that the value of a security will fall, but if they are incorrect and the price rises, they face the potential for unlimited risk, as they will have to buy back the shares regardless of how high the price goes.
short-term capital gains
The profits from the sale of securities that have been held by the investor for one year or less. These gains are taxed as ordinary income.
statutory voting
A voting structure in which each shareholder can vote one time per share for each seat on a company’s board of directors.
stock certificate
A document that represents an investor’s ownership interest in a corporation.
stock dividend
A form of dividend payments in which the investor receives extra shares of the company’s stock in lieu of cash. Because all shareholders will receive additional shares, each investor’s proportionate stake in the company as well as total value of his position remains unchanged. Stock dividends are not taxed upon receipt; instead they are taxed only upon sale of the shares by the investor.
stock split
The artificial adjustment of a company’s outstanding share count and price per share. After a stock split, each investor’s total value and ownership position remain unchanged, but the number of shares and stock price are adjusted.
straight preferred stock
A type of preferred stock which is non-cumulative, meaning the company does not have to make up missed dividend payments to these investors prior to paying out dividends to common stockholders.
street name
A type of security registration in which the broker-dealer maintains the customer’s securities in the firm’s name. In this structure, the firm is said to be the nominal owner, while the customer is the beneficial owner, as the customer maintains rights of ownership, such as voting rights and dividends. This procedure allows for ease of transfer when securities are bought and sold.
transfer agent
The institution in charge of recording changes in ownership of securities and recording the names of registered security holders.
treasury stock
Shares of common that are issued to investors and subsequently repurchased by the company. These shares are not included when calculating a company’s current shares outstanding.
unrealized gains or losses
Sometimes referred to as paper gains, this occurs when an investor’s securities holding has increase in value, but the customer has not yet sold the shares. Unrealized gains or losses have no immediate tax impact.
volatility
The relative rate at which the price of a security moves up or down. An investment with greater volatility has greater price movement versus one with lower volatility, which stays much more stable in value. It can be measured by beta which reflects the volatility of a stock versus the market as a whole.
voting rights
The right to vote for corporate policy and elect board members. Typically, common stockholders have voting rights, while preferred shareholders do not.
warrants
Give an investor the ability to purchase the company’s stock at a specified price for a set period of time. They are typically issued by a corporation in conjunction with another security to make that instrument more attractive to investors, i.e., to sweeten the deal.
The date on which a firm’s directors issue a statement declaring a dividend is known as the ________ date.
declaration
The date on which a statement is issued by a firm’s directors declaring a dividend is known as the declaration date. The ex-dividend date is the date when the right to the dividend leaves the stock. It is the first date that the share trades without the dividend. The holder-of-record date is the date the corporation closes its stock transfer books and generates a list of shareholders who will receive the dividend. The payment date is the date on which the firm mails the dividend checks to the holders-of-record.
What type of dividends are never paid out in the form of cash?
stock dividends
Stock dividends are dividends paid in the form of additional shares of stock rather than in cash. The total number of shares is increased, so earnings, dividends, and price per share all decline. Stock dividends that are used on a regular basis will keep the stock price more or less constrained, i.e. within the optimal trading range.
What type of voting style is the most supportive of shareholder protection?
Use of cumulative voting in electing members of the board
Cumulative voting is a method of stock voting that permits shareholders to cast all votes for one candidate. This is a voting system that gives minority shareholders more power by allowing them to cast all of their board of directors votes for a single candidate as opposed to regular or statutory voting, in which shareholders must vote for a different candidate for each available seat or distribute their votes between a number of candidates.
What distinguishes bond holders from equity holders?
Bondholders are creditors of the issuer, whereas equity holders are owners of the corporation.
Under what conditions would a short sale of stock benefit the investor?
A short sale will benefit the investor if the price of the stock declines. In this situation, the investor will be able to repurchase the shares for a lower price than what they were sold for originally. That difference would be the investor’s profit.
How does a short seller actually capture profits?
Just like an investor who owns stock, a short seller will profit only when he closes out the position by buying back the short sale at a price lower than he initially sold it, keeping the difference between the original sale and the buy-back price.
What is the maximum gain of a short seller?
Short stock going to zero
In this situation, the investor would profit from the price they sold the stock originally down to zero.
What is the maximum potential loss of a short seller?
Unlimited
Because there is no limit to how high the stock can go, the investor theoretically has the potential for unlimited loss. This is because they will be forced to repurchase the shares in the market regardless of the price.
Who gets paid last in a liquidation?
Common shareholders
What is the riskiest type of securities investing?
Common Stock
Common Stock is riskiest because the shareholder is paid last in the event of a corporate liquidation.
What are the basic features of common stock?
- Represents ownership in the company
- Limited liability
- Voting rights
- Could pay a dividend, although not guaranteed
- Paid last in a bankruptcy
What does negotiability mean with respect to common stock?
The owner of common stock has the right to do whatever he wants with that security, such as give the stock away, sell it, or transfer it to another investor.
What is par value for a common equity?
Par value is an arbitrary number assiged to the value of the securities at issue, but has no real meaning or importance.
The maximum number of shares a company is allowed to issue is referred to as
Authorized stock
What is the difference between authorized and outstanding shares?
Authorized shares represents the number of shares the board has authorized to be issued but does not mean all those shares are actually trading in the market. Shares can be authorized but remain unissue.
Outstanding shares are those that have been both authorized and acutally issued to the public.
How are dividends paid?
Dividends either can be paid in cash, stock, or a mix of both. In some cases, a company can declare its products as dividends and issue it to all its shareholders.
What are the three critical dates for dividend distributions set by a company’s board of directors?
- The declaration date is when the board of directors authorizes a dividend to be paid
- The record date is the date that an investor must be on the books and records of the company in order to receive the dividend.
- The payable date is the date the dividend is actually paid out.
What is the ex-dividend date?
The ex-dividend date is the first date that when an investor buys a stock they will not receive the dividend because the transaction will not settle in time. For regular way trades, the ex-date is the business day before the record date.
What are the different settlement types for common securities?
Stocks typically settle regular way, which is two business days after the trade date. If the trade is for cash settlement then it settles on the same day.
What are the two types of voting?
- Statutory voting means you cast votes equal to the shares you own for each board seat vacancy. If you own 100 shares and there are two openings, then you may vote all your shares per vacancy and actually cast 200 votes but can only cast a maximium of 100 votes per vacancy.
- Cumulative voting is the opposite of statutory. It allows shareholders to multiply their shares by the number of vacancies and cast the total in any way they want, potentially for the same person.
The theory behind cumulative voting is it allows minor or small shareholders some voice in determining the composition of the board.
What is a stock split and how does it impact a stock’s price?
A stock split is an artificial adjustment of the stock price and number of shares. Importantly, the total value of an investor’s position does not change.
- A reverse stock split is when the number of shares goes down, but each share is worth more
- A forward stock split is simply the opposite: the number of shares is increased, but the price goes down
In a short sale, what is an investor’s potential maximum loss?
Unlimited
In a short sale, the investor sells borrowed shares in the market, hoping to repurchase them at a lower price. However, if the price of the shares increase, the investor has an obligation to repurchase them in the market regardless of how high the price goes.
If a US investor wants to buy liquid shares of a foreign company, they can purchase
American Depository Receipts (ADRs)
ADRs help to facilitate
the US trading of foreign stock
ADRs pay dividends in what currency?
US Dollars
When a foreign company declares a dividend, a bank will convert that foreign dividend payment into US dollars for the ADR holder.
Which of the following is NOT true about preferred stock?
- Dividends paid on preferred stock are legally binding
- Preferred stock typically does not have voting rights
- Preferred stock has a greater claim on assets in a bankruptcy compared to common stock
- The value of a preferred stock investment can be impacted by changing interest rates
Dividends paid on preferred stock are legally binding
Although there is an assumption that preferred shareholders will receive their dividend payment each quarter, technically all dividends are at the discretion of the company’s board of directors and are not legally guaranteed.
Which of the following statements regarding preferred stock is false?
- Holders of preferred stock have a more senior claim on assets than holders of common stock
- Preferred stock is classified as a fixed-income security
- Preferred stock shareholder typically do not have voting rights
- The firm’s board of directors must declare dividends on preferred stock for them to be paid
Preferred stock is classified as a fixed-income security
Preferred stock is an equity security as it represents ownership stake in the issuing corporation.
What type of option is issued by a corporation and gives the holder the right to acquire the firm’s common stock at a specified price within a designated time period?
warrant
How frequently are cash dividends paid on common stock?
quarterly
The date on which an investor must be listed by the company as an owner in order to receive the dividend is referred to as the
record date
The date on which a company actually distributes a cash dividend to investors is known as the
payable date
Arrange the list below in the correct chronological order for a typical dividend payment time line:
- Record Date
- Ex-Dividend Date
- Declaration Date
- Payable Date
- Declaration Date
- Ex-Dividend Date
- Record Date
- Payable Date
If a company engages in a stock split, what impact does that have on a shareholder’s total ownership position?
None
Stock splits and stock dividends have no impact on the total value of an investor’s position. Even though the number of shares the investor owns will change, the price per change will also change proportionally.
An investor who owns 1000 shares of stock at $4 per share will own how many shares at what price after a 1:10 reverse stock split
100 shares at $40 per share
