Equity Securities
Stock: Equity Securities are called stocks. Stock represents ownership in a company.
Classes of Stock include: Authorized, Issued, Outstanding, and Treasury stocks.
Authorized Stock is created and authorized for sale by the corporate charter (AKA the Articles of Incorporation). The Corporate Charter specifies the number of shares that the company is authorized to issue. To issue more shares than were originally authorized by the business founders when the charter was written, the charter must be amended by stockholder vote.
Issued Stock is simply authorized stock that has been sold to investors. Authorized but unissued stock does NOT carry the rights and privileges of issued shares and is not included when determining a company’s total capitalization. Authorized but unissued stock may be thought of as blank checks in your checkbook.
Outstanding Stock includes all shares currently held by investors.
Treasury Stock is stock a corporation has issued and subsequently reacquired. The company can hold this stock indefinitely, or can re-issue the stock to investors, or the company can retire those shares of stock. Treasury stock does NOT contain the same rights as Outstanding Stock shares.
Market-Cap - A corporation’s current market value (capitalization) is determined by multiplying the number of Outstanding Shares by the current market value of a share. Large-cap stocks that have a long history of paying dividends are often called blue-chip stocks.
Penny Stocks - A penny stock is unlisted on any US stock exchange, trades at less than $5/share, and is considered HIGH RISK. Given the speculative nature of penny stocks, the SEC requires that clients be given a copy of a Risk Disclosure Document BEFORE the client’s initial purchase of any penny stock. If an account holds any penny stocks, the Investment Bank that holds that account must provide the client with a monthly account statement. For each penny stock, this statement must include the market value and quantity of shares owned, as well as the issuer’s name for each security.
When BD contacts a prospective client regarding the purchase of a penny stock, this is a solicitation to buy. The BD rep must first establish the suitability of the penny stock, on the basis of information provided by the prospect regarding their financial situation and objectives. The client must sign and date this Suitability Statement BEFORE any penny stock trades may be initiated or placed. The BD rep must disclose the name of the penny stock, the number of shares to be purchased, a current price quote, and the amount of commission that the firm and the representative will receive. Established clients are exempt from repeated suitability statements, but every penny stock trade must be accompanied by the required BD rep disclosure statement. Established Clients are those that have maintained an account for longer than 1 year, OR have settled 3 penny stock purchases from different issuers on different days.
Penny Stock rules only apply to solicited transactions! Unsolicited transactions, those not recommended nor suggested by the BD representative, are exempt from the penny stock rules on suitability AND disclosure.
Dividends are a percentage of a company’s profits, distributed to its shareholders, and paid in one of three ways: cash, stock, or product.
Dividend Declaration Date - The date on which the company’s Board of Directors voted to approve the dividend disbursement. The approval includes the payment date and the dividend record date.
Ex-dividend date - The Ex-date is declared to be one business day BEFORE the Record date. (Most trades settle in 2 business days.) To receive the dividend a client must purchase (or already own) the stock two business days before the record date to qualify (or the day prior to the ex-date). If the stock is purchased ON or AFTER the ex-date, the new owner is not entitled to receive the previous dividend disbursement.
Dividend Record Date - The recorded (settled) shareholders, on the dividend record date, receive the dividend distribution.
Dividend Payable Date - On this date, the disbursing agent sends dividend checks to all recorded shareholders qualified for this distribution. Shareholders are taxed for the tax year the dividend is actually paid.
DERP - The order of Dividend Dates is Declaration, Ex-date, Record, and Payable. The company’s Board of Directors votes to approve the Declaration date, Record date, and Payable date. FINRA (or the listed exchange) set the Ex-Dividend Date.
Benefits of Equity Ownership: Voting Rights, opportunity for capital appreciation and current income, and limited liability.
Voting - stockholders are entitled to vote for the company’s corporate directors. Common stockholders may be asked to vote on important issues. Votes may either be calculated as Statutory Votes or Cumulative Votes. Cumulative voting benefits the smaller investor, and Statutory voting favors the larger shareholder.
Statutory voting allows one vote per share owned for each item on a ballot. Each issue is then settled by a simple majority.
Cumulative voting allows shareholders to allocate their total votes[ (# of shares) X (# of balloted questions)] in any manner they choose.
Benefits of Common stock ownership again: Potential for Capital Gains appreciation, income from dividends, and a hedge against inflation.
Preemptive Rights - Common stockholders have the preemptive right to maintain their proportionate share of ownership in the company. -If the company wants to issue additional shares of stock, existing shareholders must be given the opportunity to purchase those shares in an amount that would maintain their proportionate ownership in the company.
Risks of Common Stock ownership: Value Risk is the risk that the price per share of stock will decline in the future. Dividend Risk is the risk that any dividend is non-guaranteed profits, subject to approval by the Board of Directors for disbursement to shareholders. Risk of loss in any bankruptcy, as a company’s debt holders and preferred stockholders have priority and are considered senior securities to common stock.
Preferred Stock - an equity security that has a fixed rate of return paid out by annual dividend, similar to debt (bonds). Risks of preferred stock ownership include purchasing power risk (due to the relationship of inflation to the fixed rate of dividend return), Interest Rate Sensitivity risk because when interest rates rise, the value of the preferred shares declines. There is still dividend risk as dividends must be approved by the Board of Directors and paid from company profits. Preferred stockholders are made whole before common stockholders, but after creditors have been satisfied of their debts or bonds.
Preferred Stock is either Straight or Cumulative. Cumulative preferred stock accrues payments due, in the event dividends are reduced or suspended by the BOD due to lack of suficient profits. Dividends due to cumulative preferred stock securities accumulate on the company’s books (as a current liability) until the BOD decides to pay them: the current dividend plus the total accumulated dividends (in arrears) must be paid in full to all preferred stockholders BEFORE any dividends may be distributed to common shareholders.
Rule 144 - Restricted Stock and Control Persons - applies to securities sold through a non-standard offering (other than registered public offering). A security purchased in a private placement (Reg A and Reg D) are restricted securities and may not be resold until they have been held, fully paid, for a minimum of 6 months. These restricted securities are sometimes called Legended shares because when issued, these shares will possess a restrictive legend on the certificate warning about the holding period restriction. Once the issuer releases the restriction the shares may trade freely. On some certificates this will be indicated by the phrase “the sale effectively registers the stock.”
Control Stock is owned by officers, directors, and persons who own or control 10% or more of the company’s voting stock. Husbands and Wives, and families, may be aggregated for this determination.
When a Control Person (AKA an Affiliate) wants to sell shares, that person must complete a Form 144. The form lists the # of shares the control person may sell over a 90-day period. The volume of shares is restricted to the GREATER of 1% of the outstanding shares of the company, or, the average weekly trading volume over the most recent 4 weeks.