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SIE Exam - Free Review Session ft. Common Stock & Study Guide | Knopman Marks - YouTube
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hey everybody this is one of my SIE
equity lessons, I want you get the most
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value out of our time together so
download the slides below and take notes
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by hand as you watch me walk you through
some of the core material on the SIE Exam
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good luck in your studying and in your prep
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well let's dive in to our first lesson
which is going to cover equities. The
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goals of this lesson are to review
common stock, preferred stock, rights,
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warrants, and ADRs so we'll look at a
whole bunch of different equity
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securities and the focus is to know
their characteristics the rights the
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features and their risks you'll have to
be able to describe the dividend process
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how do equity holders generate income
calculate investors positions if their
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equities undergo a stock split or a
stock dividend and also be able to
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describe how an investor can articulate
a bearish view by entering into a short
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sale and what are the characteristics of
those we'll start at the very beginning
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what is common stock and the common
stock represents ownership or equity in
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a company if you buy shares of IBM or GE
or Facebook you become an owner of that
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company and you will generate a return
in one of two ways either through the
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company distributing its earnings to you
which is a form of a dividend or through
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capital gains which is that the value of
your ownership stake the value of your
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shares of stock go up in value you could
have capital gains you could have
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dividends hopefully maybe you even get
both now one of the things that you want
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to remember is that as an owner of
common stock you have limited liability
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to the companies or the issuers
creditors that is to say if you own
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shares of IBM GE or Facebook as I just
described and it turns out that those
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companies owe money to somebody else
those creditors cannot come after you as
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a shareholder one of the ways that this
may manifest on the exam is you could
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get a question like this what is the
most an investor can lose when buying
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common stock can you would lose and have
a return of 0% is it the amount invested
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three times the amount invested or all
of your personal assets
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risk and what I would invite you to do
here and for the rest of our program is
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when I present a question like this go
ahead and jot down what you think the
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best answer is what you'll find is that
you need to test yourself as I'm walking
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through these video lectures you're
going to be listening thinking about
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things and saying oh that makes sense
yeah Dave subscribe' describing that
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well but I know that and I want you to
use the questions as a reality check do
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you in fact know the information as well
as you think you do so you can always
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feel free to pause the lecture think
about it for a little bit make a small
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mark next one next to the answer choice
that you think is best and then you can
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resume the lecture and hear my
explanation and the answer that I've
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selected so have you had a chance to
think about what's the most an investor
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can lose when buying shares of common
stock well it is the amount invested
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your shares can go all the way down to
zero but you cannot lose more than what
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you paid at the initial purchase now
let's take a look on your next slide
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about how those returns are generated
and remember I told you you own the
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company you own a small piece of the
company and you can generate returns in
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one of two ways through either dividends
which are typically paid quarterly on
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common stock and represent a
distribution of the company's earnings
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or assets so here you can see we have a
stock chart and the company is paying
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dividends to its shareholders each
quarter if you look closely at the
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screen you can see they're paying thirty
six thirty nine forty three forty nine
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cents per share and these dividends in
amount can go up or down and they can
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move and be paid each quarter or maybe
the board could stop them but this is
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one way for investors to get a return
through their common stock holdings but
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it's not the only way remember you could
have capital gains or capital loss which
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represents the difference between what
you paid for the share and where you
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exit
so here let's assume that a client
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bought stock at 110 one way that they
would generate returns or losses would
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be if they sold at 95 so you bought at
110 if you sold at 95
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you would have a $15.00 capital loss
right the difference between what you
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paid and where you exited notice however
between that time the 110 purchase and
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the 95 exit the investor did receive a
handful of dividend payments and those
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would help offset some of the losses
that were realized through the sale at
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the lower price but maybe the investor
didn't sell at 95 and in fact waited and
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sold at 135 in this case they would
enjoy a $25 capital gain and by
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continuing to hold the stock they would
have also captured more dividends now
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what's the point I want you to take away
from this slide recognize the two
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returned streams that are available to
holders of common stock dividends or
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capital gains and appreciation should
the stock's value go up so take a look
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here at these questions an investor
holding shares of common stock can
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control the timing of what does the
investor control the timing of the
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capital gains or losses the dividend
distributions can the investor control
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both or does the investor have control
over neither capital gains nor dividends
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as I just described take a moment
jot down what you think is the best
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answer and then I'll put up the answer
on the screen here the investor controls
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when to sell and therefore the investor
decides when to realize the capital
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gains or the capital losses dividends as
we'll talk about in a little bit are
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determined and decided by the Board of
Directors and are outside the control of
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the actual individual shareholders
looking to the right-hand side of your
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screen profits earned on equity
investments are achieved through which
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of the following are
profits achieved through capital gains
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or losses dividend income both or
neither now we've already talked about
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this and how can an investor earn profit
well it's both capital gains and
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potential dividend income as a mechanism
for equity investors to generate a
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return the reason that we're doing these
questions is so that you can flesh out
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what are the characteristics of common
stock how do they work what would be
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some of the questions that you might see
on the exam to give you the opportunity
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to show the regulator's you have an
understanding of the essentials of these
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particular securities and their risks
let's take a look at common stock and
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the voting rights that shareholders have
so the question is if you own shares of
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common stock in a corporation like again
IBM what is it that you as an investor
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can vote on do you get to vote for the
board of directors the answer there is
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true as a shareholder that is one of the
things that you get to vote on do you
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get to vote on management who will serve
as CEO or CFO false you do not vote on
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management shareholders vote for the
board and the board and turn hires the
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management and the executives of the
company
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how about dividend distributions to the
individual shareholders vote on that
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that's false also we just talked about
on the prior slide investor shareholders
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do not have the ability to control the
timing or the amount of dividend
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distributions then down at the bottom
what about corporate events if a company
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was to merge make an acquisition do a
major spin off something a extraordinary
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corporate event do the shareholders vote
on that and the answer there is true so
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we're getting to again flesh out what
are the contours of owning shares of
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common stock with respect to votes in
particular where could investors find
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information
about shareholder meetings and to cast
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their votes and what document were they
used to do so right so here's the
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question investors can find information
about shareholder meetings and vote
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their shares using what document it is
important and tested that you know the
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names of some of the sort of standard
corporate documentation surrounding
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securities ownership
what do corporations send to their
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shareholders proxy statements and so you
want to be familiar with these as you
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move forward through the material now
throughout the materials you're gonna
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see slides like this that lay out a lot
of information in a graphic or in a way
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that's going to allow you to synthesize
and make a deeper connection with the
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content that I've delivered it's not my
intent to read you each of the words on
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these types of slides but instead I
invite you to flag it and come back to
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this kind of slide as you're drilling
and practicing and moving through the
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rest of the content so that you can see
distinctions that I've made here and
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help you better answer practice
questions so for example here we're
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looking at different classifications for
equity as you drill in practice you're
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gonna see questions that ask you about
income stocks or growth stocks when is
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it appropriate to think about defensive
or cyclical investments and standing
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alone you will get that one particular
data point but this is going to allow
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you to draw the comparisons so there you
can see the full spectrum so read
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through these slides as we get to them
and then make notes to yourself to come
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back to them as you progress along your
study path now as we do these what I'll
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do is often highlight a particular one
or two aspects that I want to draw your
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attention to in a chart that might add a
little value for you here for example at
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the bottom you can see I've laid out a
progression from less risky to more
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risky within this equity spectrum
however I would point out to you to
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remember for the exams purposes that all
equities are still risky and so that
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even if it is the case that we identify
something that we might think of more of
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an income stock something that we think
is pretty defensive if we
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or in the common stock point in the
capital structure if that's the
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investment we've made for the exam
remember that is still a risky
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investment now thinking about risk we
can think about it in two additional
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ways systemic or non systematic and I
want to take a moment to investigate
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each of these systemic risk or sometimes
called market risk is the risk that a
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security or an investment will be
impacted by overall market performance
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that is to say the value of your share
goes up or down not because of your
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specific company but because that the
whole market is up or the whole market
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is down good economic data is released
the whole market is up your stock is up
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that's systemic there are terrorist
attacks war droughts major economic
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factors that drag the markets down that
is going to draw your stock down even
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though it's not related to your specific
investment so how do we hedge against
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this how can we protect against this
well hedging is going to be the best
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protection here and we can try a this
risk the systemic risk that you can't
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eliminate you can protect yourself with
a hedge but you can't eliminate with non
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systemic or business or specific risk
and this is the risk that we describe
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for the specific investment that you've
chosen you chose to invest in Facebook
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you chose to invest in IBM and the
specific fortunes of that company going
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up or down or the non systemic risk that
you face if they chose to invest in
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research and development that does not
pan out if they undertake a marketing
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campaign that goes poorly if there's a
corporate scandal those types of non
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systemic risks will face that individual
stock investment how can you eliminate
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this particular risk diversification
with a broad portfolio you'd need not
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face any of that nonsense risk
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and one of the last pieces with common
stock that we need to think about is
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where it falls in the liquidation
priority so if it is the case that a
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company an issuer files for bankruptcy
and an investor holds common stock in
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that
when will the common stockholders be
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repaid would they be repaid first before
the bondholders before the preferred
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stockholders or last again take a moment
pause it if you need to and jot down
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what you think is the right answer
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did you get it common shareholders are
repaid last and what I want you to think
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about when you're answering questions on
the practice exams and the real exam is
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to always go for the best answer and
that is not always the case that it's
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going to be absolutely a hundred percent
right or that there might be nuance or
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it may be the case that two answers
could work if you make some assumptions
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but remember in these types of exams you
don't get that opportunity and so you
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have to think about what are the
regulator's asking me what can I show
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them that I know and then you choose
that deliver the best answer and find
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success on your exam what do you think
of that video was he useful do you feel
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like you understand equity is a little
bit better our training program has 17
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hours of video walking you through all
the tough concepts all the heavily
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tested ideas so you can be in the best
position to pass your exam come on over
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to our training center and see all the
resources we have we look forward to
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working with you as you pass your SIE
Exam
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