Series 65
There are four basic steps involved in portfolio construction:
-Security valuation -Asset allocation -Portfolio optimization -Performance measurement
Coincident Indicators
move at the same cycle as current economic cycle we're in: -industrial production -# of employees on payroll (non-agricultural)
Schedule 13D
must be submitted to SEC within 10 days, by anyone who acquires beneficial ownership of more than 5% of any class of publicly traded securities in a public company.
Federal funds rate
overnight interest rate banks lend reserve balances to other banks
Municipal Bonds
1. are exempt from federal taxes and from most state and local taxes. 2. issued by a state, municipality or county to finance its capital expenditures (such as the construction of highways, bridges or schools).
Gross Domestic Product (GDP)
-the value of goods and services produced within a country's borders. -GDP = C + G + I + NX C = consumer spending G = government spending I = total investments (incl. businesses capital expenditures) NX = nation's total net exports (Exports - Imports)
Book value
1. the value per share if the company was liquidated. 2. The book value of a share comes from the balance sheet.
Recession
2 consecutive quarters of decline (contraction) in the GDP
Depression
6 consecutive quarters of decline (contraction) in the GDP
Statement of Retained Earnings
Bridges between two statements - provides info to the Balance Sheet from the Income Statement. 1. Retained Earnings, Beginning 2. Net Income 3. Dividends Paid to Shareholders 4. Retained Earnings, Ending
Rights Offering
allow the common stockholder (NOT Preferred Stockholders) to purchase the additional shares at a discount price for a short period of time, usually 30 days prior to the public offering.
Affiliated person
is anyone who could exercise control over the investment company, such as: the investment adviser, officers, directors, and employees. Also a company that the investment company owns at least 5% of the voting stock or vice-versa. And the person who deposits the assets of a UIT into the custodian banks.
Individual Retirement Arrangement (IRA), Traditional Deduction Limits If You Are NOT Covered by a Retirement Plan at Work (2015)
Full Deduction S / HH / QW = any amount MFJ / MFS (spouse not covered at work) = any amount MFJ (spouse is covered at work) = $183,000 or less Partial Deduction MFJ (spouse is covered at work) = >$183,000 but <$193,000 MFS (spouse is covered at work) = <$10,000 No Deduction MFJ (spouse is covered at work) = >$193,000 MFS (spouse is covered at work) = $10,000 or more
Individual Retirement Arrangement (IRA), Traditional Deduction Limits If You Are Covered by a Retirement Plan at Work (2015)
Full Deduction S / HH = $61,000 or less MFJ / QW = $98,000 or less Partial Deduction S / HH = >$61,000 but <$71,000 MFJ / QW = >$98,000 but <$118,000 MFS = <$10,000 No Deduction S / HH = $71,000 or more MFJ / QW = $118,000 or more MFS = $10,000 or more
Form 8-K
In the period between these filings, and in case of a significant event, such as a CEO departing or bankruptcy, a Form 8-K must be filed in order to provide up to date information.
Management Company (also known as mutual funds)
May be either: 1. open-end (most) 2. closed-end.
Teeter/Totter Illustration of Par
Par--------------------^NY^------------CY---YTM---YTC When interest rates rise, the price of bonds in the market falls, and vice versa.
Control stock
Restricted shares of stock held by an insider of the corporation.
Private placement stock
Restricted shares of stock that are unregistered non-exempt.
What keeps BOP from being zero?
Statistical discrepancies accounting conventions exchange rate movements
Technical Analytics
Technical analysts believe that the historical performance of stocks and markets are indications of future performance so they use charts and other tools to identify patterns that can suggest future activity by analyzing statistics generated by market activity, such as past prices and volume. Trading volume would be a tool considered by a technical analyst.
Financial account
The IMF splits what the rest of the world calls the capital account into two top-level divisions: financial account and capital account, with by far the bulk of the transactions being recorded in its financial account. Current acoount = Capital account + Financial account
Opportunity Cost
The difference in return (the cost) between one investment chosen and one that was passed up. Either a positive number or 0 (cost).
Federal Discount Rate (most important tool after reserve requirements)
The interest rate charged banks for loans received from the Federal Reserve Bank's discount window; set by the Federal Reserve Banks, rather than a market rate of interest.
Long
means the holder of the position owns the security and will profit if the price of the security goes up
Normal Yield curve
Typically when short-term interest rates are lower than long-term rates, so the yield curve slopes upwards, reflecting higher yields for longer-term investments.
Contribution Amount to Roth IRA Limited by MAGI (2015)
Up to the limit MFJ / QW = < $184,000 S / HH / MFS (did not live with spouse) = < $117,000 Reduced amount MFJ / QW = > $184,000 but < $194,000 MFS (lived with spouse) = < $10,000 S / HH / MFS (did not live with spouse) = > $117,000 but < $132,000 Zero MFJ / QW = > $194,000 MFS (lived with spouse) = > $10,000 S / HH / MFS (did not live with spouse) = > $132,000
Growth stocks
are considered to be risky since they often have little in earnings, don't pay dividends, and have high Beta factors.
Value stocks
are stocks of established companies that have low price/earnings ratios (representing a bargain price - a value) along with a history of consistent earnings and dividend payments. Most value stocks have low Beta meaning they are not as volatile as the overall market.
business risk
the risk of default.
interest rate risk
the risk that the bond's value will drop in the secondary market if interest rates in the economy go up.
Share capital
the value of the assets of a company held as shares
Lagging Indicators
typically lag is a few quarters of a year: -unemployment rate/claims -business spending -change in CPI from previous months
Leading Indicators
used to forecast the ups and downs of the business cycle in the next 3-12 months: -worker's avg work week hours -building permits -stock prices (S&P 500) -the money supply -the index of consumer expectations
Grantor Trust
investors hold proportional ownership.
Remittances
money sent by individuals working abroad to their families back home.
Balance of Trade
the export of goods and services less imports
the financial effect of making student loan payments for 20 years after graduating from college can be easily seen
the financial effect of making student loan payments for 20 years after graduating from college can be easily seen. For example, a college graduate who owes $60,000 in student loans at 3% interest will have to pay $332.76 per month for 20 years to get that paid off. If that amount was instead diverted into a Roth IRA that grows at 6% for that same time period (with no further contributions after 20 years), then the student would have almost $600,000 of tax-free money by age 65. No poll or study is necessary to see the enormous impact that student loan debt can have on a borrower's retirement preparedness. (For more, see: Student Loans: What to Do When You Can't Repay Them.)
Strike price (or exercise price)
the fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity.
Reinvestment Risk
the likelihood that interest rates will be lower than they were at the time of the bond purchase. Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk
Spot price (or market price)
the market price of the underlying security or commodity on the day an option is taken out; it may be fixed at a discount or at a premium.
Regulation T (margin requirements)
the percentage of money required to be on deposit for margin accounts (50%)
Yield to call (YTC)
1. the yield of a bond or note if you were to buy and hold the security until the call date. This yield is valid only if the security is called prior to maturity. 2. based on the coupon rate, the length of time to the call date and the market price.
Inverted "negative" Yield curve
When long-term interest rates are lower than short-term rates, so the yield curve slopes downwards, reflecting higher yields for short-term investments.
Flat Yield curve
When the spread between short-term and long-term interest rates narrows; often seen during the transition from a normal yield curve to an inverted one.
Regular-Way Settlement
allow the buyer of corporate stocks and bonds and municipal securities to make payment three days after the trade date (T+3).
Commodity
an economic good or service when the demand for it has no qualitative differentiation across a market, that formerly carried premium margins, such as generic pharmaceuticals and multivitamin supplements and as an example, a 50 mg tablet of calcium of equal value to a consumer no matter what company produces and markets it, now sold in bulk and are available at any supermarket with little brand differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently.
Regulated Investment Corporation (RIC)
held by investors who are joint owners.
purchasing power (or inflation) risk (inherent in fixed securities)
if the rate of inflation exceeds the bond's fixed nominal interest rate and it is held to maturity and redeemed at its par value.
Current account (sub account of the BOP)
includes all the transactions, and both government and private payments of: 1. goods & services (Balance of trade) 2. net investment income (from abroad) 3. net transfers -such as, workers' remittances, donations, tax payments, foreign aid and grants.
Treasury stock
stock that are sold and then bought back by the company.
Income Statement (also known as a P&L or profit and loss statement)
tells what happens over a period of time: 1. Revenue a. Sales b. Cost of Goods Sold c. Gross Profit 2. Expenses a. Rent b. Salaries and Wages c. Advertising d. Insurance e. Total Expenses 3. Net Income
Market Value per Share
the current stock price of a company.
Mutual Fund Shares Ex-dividend Date (set by the Board of Directors)
the day the mutual fund share trades which is usually the day AFTER the Record Date.
Common Stock Ex-dividend Date (set by FINRA rules)
the day the stock trades without the dividend attached which is 2 business days prior to the Record Date (set by FINRA).
Fixed-income securities
you know the exact amount of cash you'll get back if you hold the security until maturity.
HSA contribution limits (2016):
$3,350 per year/individuals $6,750 per year/family Plus $1,000 for age 55 or over
Three types of investment companies:
(1) management companies, (2) unit investment trusts, and (3) face amount certificate companies.
Accrual basis
1. Revenue (counted when earned) 2. Expenses (real time) 3. Profit (counted when earned, whether received or not) 4. Cash (real time) 5. Accounts receivable (will get later - count as asset now) 6. Deferred revenue (received but unearned)
Gross National Product (GNP)
-the value of goods and services produced by a country's citizens whether they produced these items within its borders or not. -Used by US until 1991
1. ECONOMIC FACTORS AND BUSINESS INFORMATION
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Securities Exchange Act of 1934
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Simplified Employee Pension Plan (SEP)
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a. FINANCIAL STATEMENTS
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c. CALCULATING RETURNS & RISKS
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Dividends
1. A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually and at most, quarterly. 2. May be cash (cash dividend) or in the form of stock (stock dividend) or other property. 3. Not required but are most often by companies beyond the growth phase who no longer benefit from reinvesting profits.
Cash basis
1. Revenue (counted when received, earned or unearned) 2. Expenses (real time) 3. Profit (counted when received) 4. Cash (real time)
Outstanding shares/stock
1. a company's stock currently held by all its shareholders, including share blocks held by institutional investors and Restricted shares owned by the company's officers and insiders (excluding treasury stock held by the company itself). 2. are shown on a company's balance sheet under the heading "Capital Stock." 3. used in calculating a company's market capitalization, earnings per share (EPS) and cash flow per share (CFPS)
5 Technical Risk Ratios used in MPT
1. Beta 2. Standard Deviation 3. R squared 4. Sharpe Ratio 5. Alpha
Declaration of Dividends
1. Declaration Date (determined by Board of Directors) 2. -----------------------> Ex-Div Date (set by FINRA rules) 3. Record Date (determined by Board of Directors) 4. Payable Date (determined by Board of Directors)
MyRA
1. Designed to be a starter account, places priority on the stability and preservation of money rather than on higher returns with greater risk. 2. The savings in your myRA are invested in a single retirement savings bond issued by the U.S. Department of the Treasury. The bond has a maturity date based on the value ($15,000) and age (30 years) of the account (whichever comes first). 3. Can transition to a private sector Roth IRA that has different risk-return characteristics.
Stocks
1. Equity investment securities. 2. buying and selling conducted on exchanges. 3. represent an ownership interest in a company.
Qualified payments for tax-free HSA withdrawals include:
1. Health insurance coinsurance and deductibles 2. Most medical and dental expenses 3. Vision care 4. Prescription drugs and insulin 5. Medicare premiums 6. A portion of the premiums for a tax-qualified long-term care policy
Corporate Liquidation Order of Seniority:
1. IRS 2. Secured bondholders 3. Debentures (are unsecured) 4. Preferred stock 5. Common stock
Bond ratings
1. Investment Grade: AAA, AA (high quality), A (strong), BBB (medium grade) 2. Junk Grade: BB, B (speculative), CCC, CC (highly speculative), C or D (in default).
Individual Retirement Arrangement (IRA), Traditional [There are several other types of IRAs: Roth SIMPLE and SEP IRAs.]
1. Maximum contribution of $5,500 ($6,500 if you're age 50 or older), or your taxable compensation if less with excess contributions taxed at 6% per year as long as they remain in the account. 2. Can make contributions up to age 70 1/2. 3. Contributions may be tax deductible depending on the taxpayer's income, tax filing status and coverage by an employer-sponsored retirement plan. 4. Distributions are taxed as income and any distributions before you age 59½ incur a 10% additional tax (You generally can make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them). 5. Required Minimum Distributions (RMD's) at age 70 1/2 or a 50% excise tax on the amount not distributed as required. (Depending on income, an individual may be able to fit into a lower tax bracket with tax-deductible contributions during working years and also be in a lower tax bracket during retirement).
Roth IRA
1. Maximum contribution of $5,500 ($6,500 if you're age 50 or older), or your taxable compensation if less with excess contributions taxed at 6% per year as long as they remain in the account. 2. Eligibility and permitted contribution amount depends on the individual's tax filing status and MAGI. 3. Can make contributions after you reach age 70 ½. 4. Contributions are non-deductible. 5. Distributions (qualified) are tax-free: a. at least five years after establishing Roth IRA b. to purchase a first home (limit $10,000) c. at least age 59 1/2, or disabled or deceased (in which case the beneficiary collects). 6. NO Required Minimum Distributions (RMD's) or 50% penalty at age 70 1/2 (amounts can be left in Roth IRA for as long as they live)! Named for Delaware Senator William Roth, the Taxpayer Relief Act of 1997 established the Roth IRA. In 2015, Roth IRA's accounted for roughly 9% of total IRA assets. Younger and lower-income workers may benefit the most from the Roth IRA. Even those who expect a lower tax rate in retirement can find benefit with the Roth IRA. Many investors simply prefer a tax-free income stream in retirement. The Roth IRA also allows an individual to pass on assets to heirs tax-free upon his death. Required minimum distributions are not a consideration with the Roth IRA. Those who don't need Roth IRA assets in retirement can leave the money to accrue indefinitely. As long as the individual has earned income, he can make contributions to the Roth IRA at any age.
U.S. Stock Market Crashes Since 1929
1. October 24, 1929 Also called the Great Crash or the Wall Street Crash, leading to the Great Depression. 2. Recession of 1937-38 3. May 28, 1962 The Kennedy Slide of 1962, also known as the Flash Crash of 1962 3.October 19, 1987 Black Monday 4. July 1990 Recession of 1990 5. March 10, 2000 The collapse of the Dot-com bubble. 6. September 11, 2001 7. October 9. 2002 The Stock Market Downturn of 2002 8. September 16, 2008 The Financial crisis of 2007-08 9. May 6, 2010 The Flash Crash of 2010 10. Aug 1, 2011 August 2011 Stock Market Fall
FOREX market (Foreign Exchange)
1. Over-The-Counter (OTC) exchange where currencies are traded, always in pairs. 2. is the biggest financial market in the world, with over $4 trillion worth of transactions occurring every day. Example: Euro / USD 1.48 (weak US dollar) OR Example: USD / Euro .52 (weak US dollar) Example: Euro / USD .92 (strong US dollar) OR Example: USD / Euro 1.08 (strong US dollar)
Types of Preferred Stock: Preferred stock may be issued with special features added to enhance their marketability when the stated dividend payment is less than that offered by competing issues of preferred stock in the marketplace:
1. Straight Preferred: This type of preferred stock has no other special features beyond the stated dividend payment. 2. Cumulative -has the right to receive skipped or missed dividends. 3. Participating -gives the shareholder the right to participate in earnings in excess of the stated dividend. 4. Convertible -gives the investor the privilege of exchanging their preferred stock at any time and receiving common stock. The rate of conversion (conversion ratio) is fixed at the time of issue and is stated on the preferred stock certificate.
Interested person
1. The Investment Company Act of 1940 requires that at least a majority (more than 50%) of the board be non-interested persons whose only affiliation with the fund is as a member of the board. 2. An interested person includes: All broker dealers Anyone who has been an attorney, investment adviser, affiliated person, or the principal underwriter for the investment company within the last two years The principal underwriter Employees of the investment adviser Most affiliated persons Immediate family of an affiliated person Anyone else the SEC designates
1. Investment Advisory Representative (IAR)
1. Upon passing the series 65 the agent may represent an registered investment adviser (RIA) and receive fee based compensation. The fee based compensation may be based on a percentage of the assets under management or as an hourly or flat fee for providing a personalized financial plan. There are no prerequisites for taking the series 65 exam and the candidate does not need to be sponsored by a FINRA member firm to take the test. 2. The series 66 is the uniform combined state law exam and qualifies a candidate to represent both an investment adviser and a broker dealer. After passing the series 66 an agent may receive both fee based compensation for representing an investment adviser and transition based compensation for executing customer orders. The series 66 is a combination of the series 63 exam and the series 65 exam. Candidates do not have to be sponsored by a FINRA member firm to take the series 66 exam. However, the series 7 exam is the co requisite for the series 66 exam and a candidate who has passed the series 66 exam may not conduct any business until they have passed the series 7 exam. All candidates must be sponsored to take the series 7 exam. If you have passed the series 7 exam and have not taken the series 63 exam, the series 66 may be the right exam to take. Keep in mind that while the series 66 has fewer questions than the series 65. If you have not passed the series 7 or will not be taking the series 7 exam you must take the series 65 exam.
Health Savings Account (HSA)
1. With HDHP of at least $1,300/individual $2,600/family 2. Contributions tax-free (made via payroll deduction are not subject to FICA taxes!) 3. Distributions tax-free if withdrawn to cover qualified medical expenses 4. No RMD's at age 70.5!
Callable Bond (also known as a redeemable bond)
1. a bond that can be redeemed by the issuer prior to its maturity. 2. If interest rates have declined since a company first issued the bonds, it will likely call its current bonds and reissue them at a lower rate of interest.
direct participation program (DPP)
1. a business venture designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. 2. DPPs are generally passive investments that invest in real estate or energy-related ventures usually organized as a limited partnership, a subchapter S corporation or a general partnership.
Certificate of Deposit (CD)
1. a time deposit at a commercial bank and insured by the FDIC that restricts holders from withdrawing funds on demand. 2. bears a maturity date ranging from one month to five years at a fixed interest rate and can be issued in any denomination.
Derivatives
1. a contract that derives its value from the performance of an underlying entity, such as an asset, index, or interest rate. 2. includes forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. 3. used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. 4. Most are traded over-the-counter.
Options (a derivative)
1. a financial contract between two parties whereas the buyer of the call option has the right, but not obligation (seller is obligated), to buy from seller at a a certain price (the strike price) for a certain time (the expiration date). The buyer pays a fee (called a premium) for this right. 2. An option that conveys to the owner the right to buy something at a certain price is a "call option"; an option that conveys the right of the owner to sell something at a certain price is a "put option". For clarity, the call option is more frequently discussed. 3. A European call option allows the holder to exercise the option (i.e., to buy) only on the option expiration date. An American call option allows exercise at any time during the life of the option.
Unit Investment Trust (UIT)
1. a fixed, unmanaged portfolio of stocks and bonds sold are redeemable "units" for a specific period of time. 2. provides capital appreciation and/or dividend income. 3. Each unit typically costs $1,000. 4. may be help by owners as either a regulated investment corporation (RIC) or a grantor trust.
European Union (EU)
1. a group of European countries that participates in the world economy as one economic unit and operates under one official currency, the euro. 2. The EU's goal is to create a barrier-free trade zone and to enhance economic wealth byĺcreating more efficiency within its marketplace. 3. The EU has become one of the largest producers in the world, in terms of GDP, and the euro has maintained a competitive value against the U.S. dollar. 4. EU and non-EU members must agree to many legal requirements in order to trade with the EU member states. 5. The current formalized incarnation of the European Union was created in 1993 with 12 initial members. Since then, many additional countries have since joined.
Negotiable Certificates of Deposit (NCD) (Jumbo CD)
1. a large certificate of deposit that is typically purchased by institutional/company investors. 2. Unlike a regular CD, NCDs pay periodic interest, usually twice a year and cannot be cashed in before reaching maturity, but can be easily sold in the open market before that time. 3. minimum face value of $100,000, but typically are $1 million or more.
Treasury Notes (T-notes)
1. a maturity between 1 and 10 years. 2. exempt from state and local taxes. 3. purchased at face value and pay out interest payments semi-annually. 4. bought through a bank or directly from US gov't. 5. can be sold in a large secondary market (liquidity).
Treasury Bond (T-Bond)
1. a maturity of more than 10 years. 2. exempt from state and local taxes. 3. purchased at face value and pay out interest payments semi-annually. 4. issued with a minimum denomination of $1,000 and maximum of $5 million. 5. After auction, bonds can be sold in the secondary market. 6. bonds can be bought directly from the government through TreasuryDirect at http://www.treasurydirect.gov, thereby bypassing a broker.
Working capital
1. a measurement of a company's liquidity. 2. Formula: = Current Assets - Current Liabilities
What is an Efficient Frontier?
1. a modern portfolio theory tool/graph that shows investors the best possible return they can expect from their portfolio, given the level of risk that they're willing to accept. 2. Illustration: Graph shows expected return on the vertical axis and standard deviation on the horizontal axis, with a curve upon whose line optimal portfolios are constructed to balance maximum returns with any risk taken. Portfolios behind the line are inefficient and those above the line are not possible.
Net Asset Value (NAV)
1. a mutual fund or ETF's price per share, which is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. 2. Mutual funds pay out virtually all of their income and capital gains. As a result, changes in NAV are not the best gauge of mutual fund performance, which is best measured by annual total return. 3. Because ETFs and closed-end funds trade like stocks, their shares trade at market value (supply & demand), which can be a dollar value above (premium) or below (discount) NAV.
American Depository Receipts (ADRs)
1. a negotiable receipt for a given number of shares of stock in a non-American corporation whereas dividends are sent to the registered owner. 2. All rights normally held by common shareholders, except pre-emptive rights, are given to the holder of the ADR. 3. May be traded OTC or on exchanges.
Forwards (a derivative)
1. a non-standardized contract between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. The difference between the spot and the forward price is either the premium or the discount. 2. negotiated on OTC.
Qualified tuition programs (QTPs) (also called 529 plans)
1. a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. 2. Distributions tax free unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income with some exceptions. 3. Contributions limited to the amount necessary to provide for the qualified education expenses of the beneficiary. 4. No income restrictions. 5. Does not disqualify for use also of the American opportunity credit or the lifetime learning credit. 6. You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary.
Futures (a derivative)
1. a standardized contract between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. The difference between the spot and the forward price is either the premium or the discount. 2. negotiated at a futures exchange (acts as an intermediary). 3. process of marking to market where the actual daily futures price is settled on a daily basis to mitigate risk and the possibility of default by either party.
Current Ratio
1. a tighter comparison for companies in the same industry. 2. Formula: = Current Assets / Current Liabilities
Coverdell Education Savings Account (ESA) (Education IRA is now refered to as the Coverdell ESA)
1. a trust or custodial account by a bank or an entity approved by the IRS for the purpose of making nondeductible cash contributions for the qualified education expenses of a child under the age of 18 (Designated beneficiary). 2. Qualified Education Expenses can be either: a. qualified higher education expenses (tuition, fees, books, supplies, and equipment, and expenses for room and board), or b. qualified elementary and secondary education expenses. 3. Maximum yearly contribution (not including rollovers) is $2,000. 4. Money in the account can't be invested in life insurance contracts nor be combined with other property except in a common trust fund or common investment fund. 5. Distributions are tax free for educational purposes. 6. Account balance must be distributed within 30 days after the earlier of the following events: a. beneficiary reaches age 30 (unless a special needs beneficiary). b. beneficiary's death.
Exchange Traded Funds (ETF)
1. a type of investment company organized as either an open-end mutual fund or unit investment trust that trades like a stock on a stock exchange and looks like a mutual fund. 2. tracks an underlying index and so are considered passively managed (most mutual funds are considered actively managed). 3. Since are traded on stock exchanges can be traded intraday, like traditional stocks and bonds. (Will allow an investor to hold it for a few hours while the price continues to rise and then sell it at a profit before the close of business). 4. allows investors to trade the entire market as though it were one single stock (such as short selling and trading on margin). 5. need a broker to purchase, so must pay a commission. 6. advantages of very low expenses, diversification and tax avoidance that allows in-kind redemptions for the shares of stocks that the ETFs track, (taxes deferred until the investment is sold). Also, some ETFs don't have large capital gains distributions or pay dividends (because of the particular kinds of stocks they track). 7. invest in increments of $1,000 or more.
Balance of Payments (BOP) (balance of international payments)
1. all of a country's transactions with the rest of the world (claims by non-residents on the financial assets of residents (liabilities) and claims by residents against non-residents (assets), classified in two accounts: a) Current account b) Capital account 2. note: investments are recorded in the capital account but income from investments is recorded in the current account. 3. international payments divided into a third account: c) Financial
Warrant
1. allow the holder to purchase additional stock or bonds at a predetermined price in the future. 2. Different from rights in that warrants are issued for long periods of time (several years) and with a stated exercise price above the current market price so usually, the warrant will not be exercised unless the price of the stock is greater than the exercise price of the warrant.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
1. allows employees (including self-employed individuals and employers to contribute to Traditional IRAs set up for employees. 2. Employers CANNOT impose any other conditions for participating MORE restrictive than requiring that employee has earned at least $5,000 in compensation during any 2 years before the current calendar year and expects to receive at least $5,000 during the current calendar year. 3. Employer must contribute and employee may contribute (elective salary reduction contributions only). 4. Elective salary reduction contributions cannot exceed $12,500 (2015 and 2016). 5. For employees age 50 or over, a $3,000 "catch-up" contribution is also allowed (2015 and 2016). 6. If employee participates in any other employer plan with elective salary reductions, the total amount of all salary reduction contributions is limited to $18,000 (2015 and 2016). 7. Employer is required to contribute each year either: a. 2% of employees compensation up to the annual limit of $265,000 for (2015 and 2016), or b. a matching contribution up to 3% of compensation (not limited by the annual compensation limit). 8. Employees are always 100% vested but participant loans are NOT permitted and the assets may NOT be used as collateral. 9. Required Minimum Distributions (RMD's) at age 70 1/2. 10. Distributions before age 59-1/2 are subject to a 10% additional tax. 11. Distributions within the first two years of participation, are subject to a 25% additional tax. 12. ideally suited as a start-up retirement savings plan for small business employers with 100 or fewer employees. 13. Employer cannot have any other retirement plan. 14. do not have the start-up and operating costs of a conventional retirement plan and no filing requirement for the employer. 15. established by adopting Form 5304-SIMPLE (employee picks financial institution), 5305-SIMPLE (employer picks financial institution), a SIMPLE IRA prototype or an individually designed plan document.
Simplified Employee Pension Plan (SEP) IRA
1. allows the EMPLOYER ONLY to contribute to Traditional IRAs set up for employees. 2. Contributions an employer can make to an employee's SEP-IRA cannot exceed the lesser of: 25% of the employee's compensation, or $53,000 (for 2015 and 2016). 3. Employees are always 100% vested but participant loans are NOT permitted and the assets may NOT be used as collateral. 4. Required Minimum Distributions (RMD's) at age 70 1/2. 5. Distributions before age 59-1/2 are subject to a 10% additional tax. 6. Flexible annual contributions - good plan if cash flow is an issue. 7. do not have the start-up and operating costs of a conventional retirement plan and no filing requirement for the employer. 8. established by adopting Form 5305-SIMPLE (employer picks financial institution), a SEP prototype or an individually designed plan document, If Form 5305-SEP is used, cannot have any other retirement plan (except another SEP).
Wrap accounts
1. an account in which a brokerage manages an investor's portfolio for a flat quarterly or annual fee, usually 1-3%, of your account's assets that covers all administrative, commission, and management expenses. 2. protects you from excessive trading by your broker to make more commission. 3. A traditional wrap typically requires an initial investment of at least $25,000. Mutual fund wraps have relatively smaller investment minimums of as low as $2,000. 4. are great if you don't have time to invest on your own and wish to have a money manager take care of your assets.
Form 10-K
1. an annual report required by the SEC for companies with more than $10 million in assets and equity securities held by more than 500 owners. 2. Due 90 days after year ends (may be 60 days or 75 days for some accelerated filers). 3. gives a comprehensive summary of a company's financial performance including information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.
Mortgage-backed securities (MBS)
1. an asset-backed security that is secured by a pool of mortgages issued by investment banks or, in the US government-sponsored enterprises like Fannie Mae or Freddie Mac then sold to investors. 2. may be set up where the interest and principal payments from the homebuyer "pass-through" to the MBS holder.
Rule 144
1. sets forth the holding period requirement of 6 months for a reporting issuer and 1 year for a non-reporting issuer. 2. sets forth the method of sale and volume restrictions for Control stock.
Earnings per Share (EPS)
1. an indicator of a company's profitability. 2. how much money shareholders would receive for each share owned if company distributed all net income for the period. 3. the monetary value of earnings per outstanding share of common stock for a company. 4. Formula: = Total earnings (Net income)/Number of shares outstanding 5. A company's earnings are found on the income statement.
b. BONDS
1. any securities that are founded on debt (you lend to a company or government, they pay you interest semi-annually until maturity, and then the face value. 2. are debt (whereas stocks are equity) that represent a financial interest (not ownership) in a company as a creditor. 3. traded over-the-counter (OTC). 4. In liquidation bondholders get paid first.
Brady Bonds
1. are U.S. dollar denominated bonds that were issued by mainly Latin American countries, with U.S. Government 30 year zero coupon bonds serving as collateral to ensure payment of the principal. 2. were created in March of 1989 and named for the then U.S. Treasury Secretary, Nicolas Brady.
Retained Earnings (or undistributed profits)
1. are earnings that not paid out as dividends but instead reinvested. 2. are a component of stockholder's equity.
Transaction types:
1. commercial exchanges thru buying, selling and bartering. 2. transfers -one-way flow (with nothing received in return), such as gifts (the largest type of transfer between nations is typically foreign aid).
Three main categories of financial instruments:
1. debt (i.e., bonds and mortgages and 2. stocks (i.e., equities or shares) 3. derivatives (forwards, futures, options, swaps, and variations such as collateralized debt obligations and credit default swaps.
Standard Deviation (also known as historical volatility)
1. defined as a measure of the dispersion of a set of data from its mean, but applied to the annual rate of return of an investment to measure the investment's volatility and tells us how much the return on the fund is deviating from the expected normal returns. 2. calculated as the square root of variance. 3. the higher the deviation (more spread apart) the greater the volatility.
Closed-end mutual funds
1. do not issue redeemable shares. 2. they have a fixed capital structure, so they can only issue a fixed number of shares. 3. Once these shares are sold in the primary market, they trade in the secondary market based upon supply and demand. 4. shares may trade at either a premium or a discount from NAV in the secondary market.
Yield or Current Yield (CY)
1. expressed as a %, is equal to the interest rate when purchased at par, but changes when price changes. 2. Formula: = Coupon dollar amount / Current Market Price OR = Annual dividend / Current Market Price
Duration
1. expressed as a number of years, measures interest rate risk/rate fluctuations.* 2. a complicated calculation, fortunately for investors, this is a standard data provided in bond and bond mutual fund information. *the other main risks that can affect a bond's investment value is credit risk (default).
Modern portfolio theory (MPT)
1. is a theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. 2. According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk.
Restricted stock
1. is common stock of a company that is not freely saleable (subject to Rule 144). 2. There are two categories of restricted stock: private placement and control stock.
Shareholder (owner's) equity
1. is just another name for the net worth of the company. Retained (or undistributed profits) are a component of stockholder's equity. 2. Formula: Shareholder equity = total assets - total liabilities OR Shareholders equity = share capital + retained earnings - treasury shares
What is Mean of a group of numbers?
1. is the average of a group of numbers 2. calculated by adding all the numbers up and dividing by how many numbers there are.
Treasury Bills (T-bills)
1. short-term securities that mature in 3-months, 6-months or 1-year. 2. exempt from state and local taxes. 3. purchased at less than par. 4. issued in denominations at $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million. 5. all Treasuries are considered to be risk-free (safest investments in the world).
credit default swap (CDS) (a derivative - often referred to as a credit derivative contract)
1. is the most common form of credit derivative. 2. may involve bonds or mortgage-backed securities. 3. the buyer of a CDS makes payments to the CDS's seller up until the maturity date of a contract. In return, if the debt issuer defaults then the seller will pay the buyer the security's premium as well all interest payments. However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs).
Fungibility
1. means "capable of being substituted in place of one another" the characteristic of a good or a commodity whose individual units are capable of mutual substitution. (e.g., one ounce of pure gold is equivalent to any other ounce of pure gold) 2. Other fungible commodities include sweet crude oil, company shares, bonds, precious metals, and currencies. 3. Fungibility refers only to the equivalence of each unit of a commodity with other units of the same commodity (not for another ommodity).
Beta
1. measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. 2. the tendency of a security's returns to respond to swings in the market: A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market (Many utilities stocks). A beta of greater than 1 indicates that the security's price will be more volatile than the market (most high-tech, Nasdaq-based stocks). 3. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
Sharpe Ratio
1. measures how much additional return an investment is getting for its added volatility versus a risk-free asset. 2. the higher the Sharpe Ratio the better. 2. Formula: = (Mean portfolio return − Risk-free rate)/Standard deviation
Alpha coefficient (also known as the "Jensen index")
1. measures the value added by an active manager; it is the abnormal rate of return on a security or portfolio in excess of what would be predicted by a model like the capital asset pricing model (CAPM). 2. For example, a CAPM analysis may estimate that a portfolio should earn 10% based on the portfolio's risk profile. Yet, supposing that the portfolio actually earns 15%, the portfolio's alpha would be 5, or 5% over what was predicted in the CAPM model.
Capital account (sub account of the BOP)
1. net change in ownership of national assets 2. Includes changes in direct foreign investment, portfolio investment and reserve assets. 3. A deficit in the capital account means money is flowing out of the country, and it suggests the nation is increasing its ownership of foreign assets. 4. The IMF splits what the rest of the world calls the capital account into two top-level divisions: financial account and capital account, with by far the bulk of the transactions being recorded in its financial account.
Open-end mutual funds
1. offer a continuous issue of redeemable shares. 2. shares of an open-end fund never sell for less than their net asset value. 3. New shares trade in the primary market only, so cannot be purchased on margin. However, once shares have been owned for 30 days, they can be utilized in a margin account as collateral for a loan. 4. Shares of an open-end fund are always common. 5. Under FINRA (formerly NASD) rules, the maximum sales charge is 8.5% of the ask price, although most funds charge less or have no sales charge at all (called a 'no load' fund). According to FINRA rules, if an investment company without an asset-based sales charge pays a service fee, the maximum aggregate sales charge shall not exceed 7.25% of the offering (ask) price.
U.S. Savings Bonds
1. offer a fixed rate of interest over a fixed period of time. 2. not subject to state or local income taxes. 3. cannot be cashed until at least six months after purchase but maturity varies somewhere between 15 to 30 years. 4. come in 8 values: $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. 5. purchased directly from the Dept of the Treasury but can be cashed out at most banks. 6. must be an American citizen.
Collateralized debt obligation (CDO) (a derivative)
1. pays investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. 2. interest and principal payments are divided into tranches from low risk/high rate to high risk/lower rate (If some loans default and the cash collected by the CDO is insufficient to pay all of its investors, those in the lowest, most "junior" tranches suffer losses first. The last to lose payment from default are the safest, most senior tranches). 3. Separate special purpose entities—rather than the parent investment bank—issue the CDOs and pay interest to investors.
LIBOR (London Interbank Offered Rate)
1. rate at which banks lend to other banks in the London wholesale money market and around the world. 2. Many US mortgages use 6-month LIBOR as an index 3. set by the BBA (British Banking Association) and includes representatives from 16 banks 4. Total of 35 different LIBOR rates each business day but the most commonly quoted rate is the 3-month U.S. dollar rate.
Preferred stock
1. represent partial ownership but NO voting rights. 2. pays a fixed dividend, if any at all, before any dividends are paid to common stock, that does not fluctuate. 3. takes precedence over common stock in the event of a liquidation. 4. For investors looking for income. 5. Automatically have a par value of $100.
Common stock
1. represents equity ownership in a corporation 2. provides voting rights 3. allows a share of the company's success through dividends (cash or additional shares of stock) and/or capital appreciation. 4. Are the riskiest investment investors can make or may have the highest return. 5. Has NO automatic set par value. Par value set by the board of directors.
EDGAR Electronic Data Gathering, Analysis, and Retrieval
1. system for submissions by companies and others who are required by law to file annual reports to shareholders (Form 10-K) and other forms with the SEC. 2. Required by mutual fund companies but voluntarily by other companies.
Quick Ratio
1. the "acid test" ratio for if a company may not be able to sell its inventory in 1 year. 2. Formula: = (Current Assets - Inventory) / Current Liabilities
Par (also known as face value or principal)
1. the amount of money paid back once a bond matures. 2. newly issued bonds usually sell at par, which is normally $1,000 for Corporate bonds. 3. bonds can trade at par, or at a price above the face value (at a premium) or below face value (at a discount).
Coupon or Nominal Yield
1. the interest rate on bonds, expressed as either a percentage of the par value, or a dollar amount. 2. the coupon rate is fixed for the life of the bond.
Discount rate (the missing rate)
1. the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. 2. Example: Let's say you expect $1,000 in one year. To determine the present value of this $1,000 (what it is worth to you today), you would need to discount it by a particular interest rate (discount rate of 10%). $1,000 / (1.00 + 0.10) = $909.09 if you expect to receive the $1,000 in one year. $909.09 / (1.00 + 0.10) = $826.45 if you expect to receive the $1,000 in two years.
What is Median of a group of numbers?
1. the middle number in a sorted list of numbers. 2. determined by first arranging numbers in order from lowest to highest. If there is an odd amount of numbers, the median value is the number that is in the middle. If there is an even amount of numbers in the list, the middle pair are added together and divided by two.
What is Mode of a group of numbers?
1. the number that returned or occurred most frequently. 2. A set of numbers can have more than one mode (this is known as bimodal) if there are multiple numbers that occur with equal frequency, and more times than the others in the set. 3. If no number in a set of numbers occurs more than once, that set has no mode.
Incentive stock options
1. the option to buy stock in a particular company, is a right granted by a corporation to a particular person (typically executives) to purchase treasury stock. 2. not traded on the open market.
Internal Rate of Return (IRR)
1. the percentage rate of growth a project or investment is expected to generate. 2. also called the minimum required rate of return -is the rate in which the future cash flows discounted back to their present values minus the initial cost of the investment is equal to zero. 3. If the IRR is higher than the hurdle rate it is a good investment. 4. A bond's YTM is the bond's IRR.
Bid Price
1. the price someone states is willing to pay for the bond. 2. It is quoted in relation to 100, no matter what the par value is. 3. Example: a bond with a bid of 93 is trading at 93% of its par value.
P/B ratio
1. the ratio of a company's share price to its book value. 2. Formula: = Market Value per Share / Book value 3. The book value of a share comes from the balance sheet. 4. A stock selling at a high P/B ratio, such as 3 or more, may represent a popular growth stock with minimal book value.
P/E Ratio
1. the ratio of a company's share price to its earnings per-share . 2. Formula: = Market Value per Share / Earnings per Share (EPS) 3. A company's earnings are found on the income statement. 4. Historically, the average P/E ratio in the market has been around 15-25.
Short
1. the sale of a security that is not owned by the seller, or is borrowed. 2. belief that a security's price will decline, enabling it to be "actually" bought at the lower price to make a profit. 3. the risk of loss on a short sale is theoretically infinite.
Yield to maturity (YTM)
1. the total return anticipated on a bond if the bond is held until the end of its lifetime, expressed as an annual rate. 2. a bond's IRR. 3. a complex calculation.
Net Present Value (NPV)
1. the value (dollar amount) of a future cash flow in today's dollars (compares the initial cost of a purchase to its total value of future revenue). 2. If the NPV is positive then it's a good investment. If the NPV is negative then it's not a good investment. 3. If the net present value of an investment is zero, then the discount rate being used is the investment's internal rate of return. 4. If the Discount Rate is zero, you have the highest NPV possible. So the higher the Discount Rate, the lower the NPV. The net present value of an investment is a dollar amount, not a percentage rate of return. To find the net present value, advisers net all the expected cash outflows (such as the amount of the initial investment) against all the expected cash inflows (such as the income to be generated by the investment). Next, they discount the net amount by using a required minimum rate of return as a discount rate to determine the net present value of the investment in dollars. If the net present value of the investment is positive, the investment is considered to be worthwhile.
Authorized stock
2. the maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation, also known as "authorized shares" or "authorized capital stock. 2. is listed in the capital accounts section of the balance sheet.
Yankee Bonds
a bond denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporations. These bonds must be registered under the Securities Act of 1933 with the SEC before they can be sold.
Put Bond
a bond that allows its holder to redeem the bond at specified intervals before maturity and receive the full face value so it is not at risk.
Mutual Funds
a collection of stocks and bonds which enables you (as part of a group) to pay a professional manager to select specific securities for you.
Swaps
a derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. These streams are called the swap's "legs".
What is a security?
a financial instrument that represents... 1. ownership in a publicly-traded corporation (stock) or 2. a creditor relationship with or a corporation (bond) or governmental body or 3. rights to ownership as represented by an option.
capital asset pricing model (CAPM)
a model that calculates the expected return of an asset based on its beta and expected market returns.
Balance Sheet
a snap shot at a given point in time: 1. Assets a. Cash b. Inventory c. Accounts Receivable d. Property, Plant and Equipment Total Assets: 2. Liabilities a. Accounts Payable b. Notes Payable Total Liabilities: 3. Owner's Equity a. Common Stock b. Retained Earnings Total Owner's Equity: Total Liabilities + Total Owner's Equity:
Zero-Coupon Bonds
a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value.
Systematic Risk
cannot be avoided by diversification. 3 types: 1. Market risk 2. Interest rate risk 3. Inflationary risk
Fundamental Analytics
deals with examining financial statements. Fundamental analysts use the financials statements to find Price/sales, price/book and price/earnings ratios.
Over-the-counter (OTC)
is done directly between two parties, without any supervision of an exchange.
Unsystematic Risk
is stock specific so may avoided by diversification. 4 types: 1. Business 2. Regulatory/legislative 3. Political 4. Liquidity
Redemption price (or 'bid' price)
is the investor's proportionate share' of the net asset value of a redeemable fund as of the redemption date, as next determined, which is known as 'forward pricing.' Must be paid within seven calendar days.
Form 10-Q
quarterly reports filed for each of the three quarters other than the final quarter that is included in the annual 10-K. Due 45 days after quarter ends.
Five percent ownership
refers to companies or individuals who hold at least 5% of the total value of the stock of a public company who must also file Schedule 13d with the SEC. They usually are founders of the company or large mutual fund companies, and because of how much stock they own, they usually have access to the board of directors of the company and hold significant sway over the company.
Cash Flow Statement
reports cash inflows and outflows: 1. Cash Flow From Operating Activities a. Cash Receipts b. Cash paid to suppliers c. Cash paid to employees d. Income taxes paid Net Cash Flow From Operating Activities 2. Cash Flow From Investing Activities a. Cash spent on purchase of equipment Net Cash Flow From Investing Activities 3. Cash Flow From Financing Activities a. Dividends paid to shareholders b. Cash received from issuing shares Net Cash Flow From Financing Activities 4. Net Increase in cash:
Fiscal Policy
set by Congress to control money supply thru: 1. raise/lower taxes 2. gov't spending
Monetary Policy
set by the Federal Reserve Board to control money supply thru: 1. Reserve requirements 2. Discount rate 3. Buy/sell US gov't securities (influences the Prime rate)
Secondary market
where investors purchase securities or assets from other investors, rather than from issuing companies. Example: the New York Stock Exchange, or NASDAQ.
Money market
where most liquid items trade (1 year or less)
