1.1 Equity Securities
This chapter covers what a share of stock gives its owner, how stock is first sold and then traded, how foreign companies reach US investors, and how preferred stock differs from common. It ends with the Rule 144 limits on unregistered and insider shares. These are the building blocks for suitability questions, since you cannot match a client to a security until you know who gets paid first, who gets a vote, and what can be resold.
What each topic covers
Common Stock Ownership & Rights defines common stock as an equity security and shows the two ways a holder earns a return, capital appreciation and cash dividends. It walks through the six stockholder rights, including the vote for the Board of Directors, which alone decides whether a dividend is paid. It also gives the liquidation order, from unpaid wages and taxes down to common stockholders, who are last and often receive nothing.
Primary & Secondary Markets separates negotiable securities, which trade between investors, from redeemable ones such as mutual funds and unit investment trusts, which trade with the issuer. It explains that an IPO or follow-on offering is an issuer transaction in the primary market, while a secondary-market trade pays the selling investor. Regular-way settlement is T+1, counted in business days, and a secondary offering is a different thing from the secondary market.
ADRs & Currency Exposure explains how a domestic firm with foreign branches creates receipts that trade in dollars on US markets. Most ADRs carry no voting or pre-emptive rights, and foreign tax withheld on dividends earns a US tax credit. The lesson also works through the buying and selling effects of a weak or strong domestic currency, and the extra country risk in emerging markets.
Preferred Stock & Yield treats preferred as equity that behaves like fixed income because its dividend rate is fixed. The annual dividend is par times the dividend rate, with $100 assumed only when par is not stated. Current yield is annual income divided by market price, so yield moves opposite to price, and prices fall when interest rates rise. Regular-way settlement matches common stock at T+1.
Cumulative & Callable Preferred sorts preferred features by who benefits. Cumulative and participating features favor the investor and come with lower dividend rates, higher prices and lower yields. Straight and callable features favor the issuer and reverse that pattern. Its worked example shows a cumulative holder owed 17% against 5% for a straight holder, and it explains call protection, call premium and why issuers call to refinance when rates fall.
Conversion & Parity Pricing covers convertible preferred, which can be exchanged for common stock of the same issuer. It gives the conversion ratio and conversion price formulas, both based on par, and the two parity price formulas. A profit from buying, converting and selling is arbitrage. Anti-dilution covenants adjust the terms for a stock split: the ratio goes up and the conversion price goes down.
Rule 144 Restricted & Control Stock separates restricted stock, which is unregistered and must be held 6 months, from control stock held by an affiliate. An affiliate is an officer, director or 10% shareholder, and the dribble rule limits sales to the greater of 1% of outstanding shares or the four-week trading average, four times a year. It also compares Form 144, filed on intent to sell, with Form 4, filed within two business days of an actual trade, and explains why sales to a qualified institutional buyer under Rule 144A escape these limits.