Securities Industry Essentials

Federal Home Loan Mortgage Corporation (FHLMC)

"Freddie Mac" is a wholly owned subsidiary of the Federal Home Loan Bank System, which serves as a secondary mortgage market for savings and loan associations, who are members of the FHLBB; also referred to as The Mortgage Corporation.

Benefits of owning preferred stock

- Dividend preference - Priority at dissolution

Why would you include preferred stock in a client's portfolio?

- Fixed dividend income - Prior claim ahead of common stock

Risks of common stock ownership

- Market risk - Business risk

Federal Reserve Board affects the money supply through which policy tools

- Open-market operations - Changes in the discount rate - Changes in the reserve requirements

Why would you include common stock in a client's portfolio?

- Potential for capital appreciation - Income from dividends - Hedge against inflation

FINRA's Objectives

- Promote investment banking and securities business - Provide a medium for communication amongst its members and between members, govt, and other agencies - Adopt, administer, and enforce rules

Risks of owning preferred stock

- Purchasing power - Interest rate sensitivity - Decreased/ No dividend income

Rights of Common Stockholders

- Voting for members of the board of directors - A share in the corporation's earnings - A share in the assets if the corporation is dissolved - Preemptive rights

Why would you place money market securities in a client's portfolio?

- highly liquid - very safe - a good place to invest money needed short-term

Section 529 Plans

- state provided - can be funded by after tax dollars - can pay prepaid tuition - All earnings exempt from federal taxes - If withdrawn for unqualified withdrawl, 10% penalty

Market attitude (put options)

-A put "buyer" is a BEARISH investor because he wants the market to fall. The put is exercised only if the market price falls below the stirke price. -A put "writer" is a BULLISH investor because he wants the market to rise or remain unchanged. The contract is not exercised if the market price rises above the strike price.

Short Term Municipal Securities

-money market instrument -sold by many state and local govt units -are anticipation notes (issued in anticipation of revenue from another source)-paying them back -discounted securities

Market Types

1. Capital Markets 2. Primary and Secondary Markets 3. Third Market 4. Fourth Market

Tax and Revenue Anticipation Notes (TRANs)

A combination of the characteristics of both TANs and RANS.

Official Statement

A disclosure document prepared for a new municipal issue by or for the issuer. It contains a complete description of the issue and financial details about the issuer. MSRB rules require that a copy of the official statement be given to each purchaser of a new issue, if one has been prepared.

Put Feature

A feature on a bond that allows the investor to redeem the bond at its face value before it matures.

Serial and Balloon

A type of municipal bond: A serial issue with a large amount (balloon payment) maturing on the final maturity date

Tombstone Ad

Ad run in newspapers announcing an upcoming securities offering; permissible after the registration statement is filed but not yet effective; must indicate it is not an offer for sale. Includes: Name of the issue, type of security being offered, number of shares being sold, public offering price, name of the underwriting members.

Carrying Firms

Also known as a clearing firm. Carries customer accounts and accepts funds and securities from customers. They have the capability to do trades, clear, and settle transactions, and handle all back office tasks. They must segregate customer funds and securities from the firms'.

Introducing Firms

Also known as fully disclosed. Introduces its customers to a clearing firm. Essentially the clearing firm acts as the introducing firm's back office.

Farm Credit System (FCS)

An organization that provide credit services to farmers and mortgages on farm property. Included in the system are the Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.

Contraction

Business activity begins to decline from its peak. Short term, is recession. Long term is known as depression.

Buying Calls

Call buyers are bullish on the underlying stock. By purchasing calls, an investor can profit from an increase in a stock's price while investing a relatively small amount of money.

Selling Calls

Call sellers are bearish on the underlying stock. By selling calls, an investor can profit from a decrease in the price of the stock

Notice Filing

Certain securities which are deemed to be federally covered, the states do not have jurisdiction over their registrations.

Federal National Mortgage Association (FNMA)

Commonly known as "Fannie Mae", this quasi-private corporation is the largest buyer of existing mortgages in the secondary mortgage market.

Government National Mortgage Association (GNMA)

Commonly known as "Ginnie Mae," this agency of HUD operates in the secondary mortgage market. It is involved with special government financing programs.

Common Stock

Corporation's basic ownership share; also generically called capital stock.

Federal Reserve Board (FRB), what is its main function

Determines monetary policy . The FRB determines through its actions how much money is available for businesses and consumers to spend.

Business Cycle

Expansion, Peak, Contraction, Trough

Coordination

Files with the SEC at the same time as the state. State registration and federal registration become effective at the same time.

Deflation

General decrease in prices

Inflation

General increase in prices

Fiscal Policy

Government policy that attempts to manage the economy by controlling taxing and spending.

Monetary Policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Syndicate

Groups of broker dealers or investment bankers who bring securities to the market and sell them to the public

Accredited Investor

Has a net worth of $1 million or more; or has had an annual income of $200,000 or more in each of the two most recent years ($300,000 jointly with a spouse) and who has a reasonable expectation of reaching the same income level during the current year.

Money Supply (Name and Describe the Categories)

M1- The most readily available money. Currency in circulation and demand deposits. Used for purchase of goods and services. M2- Includes some time deposits (less than 100k), fairly easy to convert into demand deposits. M3- Includes time deposits of more than 100,000 and repurchase agreements with terms longer than one day

Term Bond

Matures on a single date.

Cooling-off Period

Minimum of 20 days. The offering may not be sold during this time.

Balance of Payments Surplus

More money flows into the country, than out of. When credits exceed debits.

Balance of Payments Deficit

More money flows out of the country, than into it. When debits exceed credits.

Third Market

Nasdaq Intermarket, trading market in which exchange-listed securities are traded in the OTC market.

Describe SIPC Coverage

No more than $500,000 per separate customer, of that $500,000 total, no more than $250,000 cash. The equity in a margin account is covered, not the full market value.

Revenue Anticipation Notes (RANs)

Offered periodically to finance current operations in anticipation of future revenues from revenue producing projects or facilities.

Private Securities Offering

Private placement. Selling securities to private investors rather than the general public. Usually institutional investors, but may also be accredited investors.

Buying Puts

Put buyers are bearish on the underlying stock. By purchasing puts, an investor can profit from a decrease in a stock's price while investing a relatively small amount of money.

Selling Puts

Put sellers are bullish on the underlying stock. By selling puts, an investor can profit from an increase in the price of the stock.

Qualification

Registration cannot be accomplishes by coordination, and issuer must respond to any requirements the state may specify.

MSRB

Responsible for rule-making authority for all state and municipal securities. this entity does not enforce any of the rules it makes.

What is an SRO, list them.

Self Regulated Organization 1. FINRA (Financial Industry Regulatory Authority) 2. CBOE (Chicago Board Options Exchange) 3. MSRB (Municipal Securities Rulemaking Board)

Lagging Indicators

The economic indicators that change after the economy has begun a new trend but serve as confirmation of the new trend. EX: corporate profits, average duration of unemployment, labors costs per unit of output, ratio of inventories to sales, commercial and industrial loans outstanding, ratio of consumer installment credit

Capital Markets

The financial markets for stocks and for intermediate- or long-term debt (one year or longer). Both public and private sectors sell securities to raise funds.

Securities Act of 1933

The first major law regarding the sale of securities. It required that companies register their securities sold to the public with the SEC and that investment bankers must provide full and accurate information related to new securities issues to potential investors.

Monetarist Theory

The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation.

Growth Industries

The industry is growing faster than the economy as a whole, computer and bioengineering are two industries in this category today.

Name some leading indicators

These are economic indicators that are spot checks of business activity, positive changes mean improvement. EX: Money supply, building permits, weekly claims for state unemployment, average work week in manufacturing, new orders for consumer goods, machine tool orders, stock prices, changes in inventories of durable goods, changes in sensitive material prices, business and consumer borrowing

Coincident Indicators

These are economic indicators that usually change at the same time as changes in overall business activity. EX: number of hours of work, employment levels, personal income, industrial production, manufacturing and trade sales, GDP.

Describe FDIC Coverage

Up to $250,000 for each deposit ownership category in each insured bank.

Fourth Market

Where big institutional investors (pension funds, insurance companies, mutual funds, etc.) trade directly through electronic communications networks (ECNs)

Treasury Receipts

Zero coupon bond created by brokerages. B/D buy treasury securities and place them in trust at a bank and sell seperate "receipts" against the principal. *Not backed by the U.S. Government

Convertible Bond

a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock

Call Feature

a feature that allows the corporation to call in, or buy, outstanding bonds from current bondholders before the maturity date.

Registration Statement

a long, complex document that firms must file with the SEC when they sell securities through a public offering. Discloses material information about the issue.

Securities Investor Protection Corporation (SIPC)

a nonprofit corporation, created by Congress and subject to SEC and congressional oversight, that insures customer accounts against the financial failure of a brokerage firm

Supply-Side Economics

a school of economics that believes tax cuts can help an economy by raising supply. The government should allow market forces to determine price.

Preliminary Prospectus

a.k.a. "red herring," a prospectus that lacks the "POP" and the effective date. Used to solicit indications of interest.

Keynesian Theory

an economic theory stating that the government can stabilize the economy- that is, can smooth business cycles- by controlling the level of aggregate demand, and that the level of aggregate demand can be controlled by means of fiscal and monetary policies

Institutional Investor

an organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities

Equipment Trust Certificates

bonds secured with factory and equipment as collateral

Mortgage Bonds

bonds secured with real estate as collateral

Options

contracts that give investors the choice to buy or sell stock and other financial assets

Prospectus

document issued to possible buyers of a stocks and bonds outlining the financial condition of the company issuing those securities

Expansion

increasing sales, manufacturing, and wages

Cyclical Industries

industries with above-average sensitivity to the state of the economy. EX: durable goods. heavy machinery, raw materials, automobiles. during recessions, the demand for these products decline.

Defensive Industries

industries with below-average sensitivity to the state of the economy. EX: nondurable goods. food, pharmaceuticals, tobacco.

Revenue Bonds

investments secured by the revenue generated by a state or municipal project.

General Obligation Bonds

investments secured by the taxing power of the jurisdiction that issues them.

Primary Markets

markets in which corporations raise capital by issuing new securities

Secondary Markets

markets in which securities and other financial assets are traded among investors after they have been issued by corporations

Primary Offering

new shares available in a public offering that raise new capital

Final Prospectus

part of the final registration statement prepared by a company prior to an IPO that contains all the details of the offering, including the number of shares offered and the offer price

Stagnation

periods of slow economic growth, high unemployment

Tax Anticipation Notes

raise funds to pay for expenses before actual collection of taxes

CBOE

regulates all matters related to trading standardized options and related contracts listed on that exchange

Serial Bond Issue

schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid

Established Customer

someone who: - has *held an account with the B/D for at least one year *(and has made deposit of funds or securities ) -has *made at least three penny stock purchases of different issuers on different days*

Preferred Stock

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends. No voting rights.

Current Yield

the amount of interest earned on a bond, expressed as a percentage of the bond's current market price.

Balance of Payments

the difference between the flow of money into and out of a country

Peak

the height of an economic expansion, when real GDP stops rising

Nominal Yield

the interest rate, also known as the "coupon rate" which is named on the bond certificate

yield to maturity

the rate of return a bondholder will receive if the bond is held to maturity

Yield to Call

the rate of return earned on a bond when it is called before its maturity date

Best Efforts Underwriting

the type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

Firm Commitment

type of agreement with investment bank involving the investment bank's underwritten purchase and resale of securities. They commit to purchase any unsold shares.

Debentures

unsecured bonds

Stagflation

unusual combination of both inflation and stagnation. Rise in prices and high unemployment.

Treasury STRIPS

zero-coupon bonds issued by the US government. Backed in full by the US government.