Series 79

Trust Indenture Act of 1939

A corporation that issues more than $10 million of debt must create an indenture. The indenture is an agreement between the issuer and a trustee (usually a bank or trust company) that is responsible for acting in the best interests of bondholders.

Private Placement vs. Public Offering

Faster and less costly than a public offering.

Hart-Scott-Rodino Act

Federal antitrust law that requires certain companies or financial investors that are planning a merger or acquisition to file notice with the Federal Trade Commission and the Antitrust division of the Justice Department before the deal is completed; the merger cannot be completed until 30 days after the notice is filed

State Registration

In addition to ensuring that each registered person is qualified under FINRA rules, a firm must ensure that these individuals are also properly registered as agents in each state in which they intend to do business

Form 4

Individuals who are insiders are required to report any changes in their position no later than the second business day following the change in position.

Important Coincident Indicators

Industrial Production Index and Capacity Utilization Index

Inflation effect (Stocks)

Inflation can increase asset values, but erode cash flows, stocks do best when inflation is low.

Inflation effect (Cash)

Inflation causes rising interest rates- so savers tend to earn better return when inflation is up

Inflation effect (Bonds)

Inflation erodes the fixed interest payment of bonds, so prices drop when inflation goes up

Nasdaq-100 Index

Is a "modified capitalization-weighted" index. Most actively traded non-financial and international securities on Nasdaq based on market cap.

Regulation M-A

Purpose is to facilitate communications and disclosures made by companies that are engaged in cash and stock tender offers or mergers and acquisitions; Requires that a summary term sheet be provided to investors as part of the disclosures that are made in a tender offer or merger

M2

M1+ Money market deposit accounts + savings and relatively small time deposits + balances at money + overnight repurchase agreements at banks

M3

M2 + large time deposits + term repurchase agreements at banks and savings and loans + eurodollars

C Corporations

May have unlimited number of shareholders and are subject to regular corporate taxation. Corporate earnings suffer double taxation.

Beta

Measure of volatility or systemic risk in comparison to the market as a whole

Producer Price Index

Measure prices at the producer level and generally indexes finished goods at wholesale prices

CPI

Measures a fixed basket of goods that are bought by a typical consumer.

Prepayment rate

Measures how quickly mortgages in the pool are being paid off and how quickly prepayments of principal are being received. Usually rises when interest rates fall because homeowners refinance.

Average Life

Measures the average number of years that each dollar of principal is expected to remain outstanding.

Bond Convexity

Measures the change in the duration of a bond with change in interest rate. Second derivative measurement

Velocity of Money

Measures the number of times a dollar is spent over a given period.

Russell 2000 Index

Measures the performance of 2000 smallest publicly traded securities in the US. The largest company on the list has a market cap of about 1.5b

Bond Duration

Measures the sensitivity of a bond's price to interest rate movements. The approximate percentage the value of the bond will fall for each 1% increase in market interest rate

Discount Window

Medium for Federal Reserve Banks to to lend funds to depository institutions

Compensation Committee for Research Analysts

Member firms are required to form a compensation committee that will be responsible for reviewing and approving the compensation of the firm's research analysts.

If the Fed buys securities...

Money enters the system.

If the Fed sells securities...

Money leaves the system

Money Supply

Money supply is the entire stock of currency and other liquid instruments in a country's economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts.

Leverage

Most companies use debt to finance operations. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity. Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses

Currency and Monetary Instrument report

Must be filed when a person physically transports, sends, or receives, cash or cash equivalents in an aggregate amount exceeding $10,000 into or out of the US

Net Asset Value per share

Mutual Fund's NAV / # shares outstanding

Supermajority Approvals

Need significant majority of board of director approval for merger

Net Realizable Value

Net Accounts Receivable i.e. Accounts Receivable less Allowance for Bad Debt

Net Debt

Net Debt = (Short-Term Debt + Long-Term Debt) - Cash and Cash Equivalents

Return on Invested Capital

Net Income - Dividends / Total Capital

Return on Equity

Net Income / Average Total Equity

Net Present Value

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

Net Profit Margin

Net Profit / Revenue

Gross Profit

Net Sales - Costs of Goods Sold

Cash Flow

Net amount of cash and cash-equivalents moving into and out of a business.

Net Income

Net income (NI) is a company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses.

Organic Growth

Occurs if a company sells more of the same products and services to existing customers by expanding its product line.

Contractionary Fiscal Policy

Occurs when government spending is reduced on its own or in combination with higher taxation

Mini-Maxi

Offering is cancelled if a set minimum is not sold, but sales may continue up to a preset maximum.

All or None

Offering is cancelled if all shares are not sold

Indication of Interest (IOI)

Once potential bidders have been contacted by the seller's investment banker or have read through the CIM and expressed an interest in the target they are invited to submit a non-binding IOI

Bidding Procedure Letter

Once potential buyers have had the time to perform their due diligence, the seller and banker generate this letter which indicates a deadline for prospective bids as well as other requirements

Signing Definitive Agreement

Once the winning bid is selected and the buyer and seller agree to terms a final version of the definitive purchase agreement is drafted and executed.

Sole Propriertorship

One person owns a business and has control over all management decisions. The owner is liable for the company's debts and is entitled to all of the profits that are generated by the business.

What types of issuers can use shelf registrations?

Only WKSI and Seasoned issuers

Pay as you Go Registration

Only WKSI can use Pay as you Go Registration because only they can file S-3 Automatic Shelf registration forms. The issuer pays the filing fee at the time the prospectus supplement is filed.

Unsecured Bonds

Only backed by the full faith and credit of the company; referred to as debentures or notes.

Initiating a Stabilizing Bid

Only one participant in a distribution may enter a stablizing bid in a security and the maximum price at which the bid can be initiated is the last independent sale price or the highest bid in the market.

Federal Reserve tools

Open Market Operations, Reserve Requirements, Discount Window Lending, Moral Suasion

Operating Margin

Operating Income / Net Sales

Operating Income

Operating Income = Gross Income (Revenue -- COGS) - Operating Expenses - Depreciation & Amortization

Operating Profit

Operating Profit = Operating Revenue - COGS - Operating Expense - Depreciation - Amortization

Listed Options

Options purchased through an exchange. Trades for listed options are cleared through the options clearing corporation.

Quantitative investing

Quantitative analysis refers to economic, business or financial analysis that aims to understand or predict behavior or events through the use of mathematical measurements and calculations, statistical modeling and research. Quantitative analysts aim to represent a given reality in terms of a numerical value.

Phantom Stock

Provides cash bonuses for good employee performance. These bonuses equate to the value of a particular number of shares.

Section 4(2) Exemption of Securities Act of 1933

Provides issuers with a registration exemption if the transaction does not involve a public offering.

Schedule 13F

Quarterly filings must be filed within 45 days of the end of the quarter when institutional investment managers exercise investment discretion over at least $100 million in equity securities.

Real Estate Investment Trust

REITs raise capital and invest the proceeds in real estate related activities and mortgages.

Full Public Auction

Provides maximum exposure to a company that is seeking to put itself up for sale. Often triggered by a press release saying the company is "Looking for strategic options." Compromises confidentiality

SEC Rule 14d-9

Provision that requires a company that is subject to a tender offer to notify shareholders no later than 10 business days from the date the offer is made

What determines the filer category of a company?

Public float

SEA Rule 13e-1

Purchase of securities by the issuer during a third-party tender offer

Quantitative Obligation

Requires that a member firm and its RRs have a reasonable basis to believe that a series of recommended transactions, even if suitable for a customer, are not excessive when the customer's investment profile is taken into consideration.

Regulation D

Requires the filing of a uniform notice of sale (Form D) with the SEC no later than 15 days after the first sale of securities.

Custodian

Responsible for the possession of the securities purchased by the investment company for its portfolio. The custodian also handles most of the investment company's clerical functions. Once securities are transferred to the custodian for safekeeping, the custodian must keep the assets physically segregated at all times, restrict access to the account to officers and employees of the investment company, and allow withdrawal only according to SEC rules.

Net Profit

Revenue - COGS - Operating Expenses - (Interest + tax expense)

Revenue

Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income.

Non Negotiable Treasury Securities

Savings bonds are considered non-negotiable because they may not be sold in the secondary market; instead, they may be redeemed only by the US government

Schedule 13G

Schedule 13G is an SEC form similar to the Schedule 13D used to report a party's ownership of stock that is over 5% of the company. Schedule 13G is shorter and requires less information from the filing party. Ownership of over 5% in a publicly traded stock is considered significant ownership, and therefore must be reported to the public.

Business cycle - Contraction

Slow down in economic activity, GDP, investment spending, manufacturing and output slowdown

Contractionary Fiscal Policy Intent

Slow economic growth and can reduce a budget deficit

Spin-offs

Spin off transactions are effected by companies that are seeking to divest (dispose of) a division.

Spinning

Spinning is defined as a member firm allocating shares of a new issue to certain corporate decision makers.

Rule 104

Stabilization is defined as the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing, or otherwise maintaining the price of a security.

Systemic Risk or Market Risk

Systemic Risk or Market Risk Reflects the fact that the performance of an individual security will be impacted by the performance of the overall market and cannot be avoided through diversification

Separate Trading of Registered Interest and Principal Securities (STRIPS)

T-Notes, T-Bonds, and TIPS whose interest and principal portions have been separated or stripped. The government does not directly issue STRIPS. Structured by investment banks or brokerage firms

Yield to Call

Takes into account a bond's cash flow through its first call date.

Unearned Revenue

Temporary Difference Early years: Taxable income > book income Later years: Taxable income < book income Creates a deferred tax asset

Federal Home Loan Banks (FHLB)

The 12 Federal Home Loan Banks help provide liquidity for the savings and loan institutions that may need extra funds to meet seasonal demands for money. They issue discount notes and consolidated bonds. The securities issued by FHLBs are not backed by the US government; however, the Treasury is allowed to buy up to $4 billion of FHLB issues.

Staggered Boards

The Company creates staggered terms in its board of directors so that only a few seats come up for vote each year

Operations during a Chapter 11 bankruptcy

The DIP (usually the Company's management) operates in the capacity of a fiduciary and must act in the best interests of creditors. It must file tax returns and operating reports and make timely payments to professionals

EV/EBITDA

The EBITDA/EV ratio may be preferred over other measures of return because it is normalized for differences between companies. Using EBITDA normalizes for differences in capital structure, taxation and fixed asset accounting. Meanwhile, using enterprise value (EV) also normalizes for differences in a company's capital structure.

Yield to Maturity (bonds)

The IRR of a bond held to maturity, considering the purchase price, coupon, and face value

Establishment of Procedures

The Insider Trading and Securities Fraud Enforcement Act of 1988 required broker-dealers to establish, maintain and enforce written policies and procedures that are reasonably designed, to prevent the misuse of material, nonpublic information by the broker-dealer or any affiliated persons.

Letter of Intent

The LOI is presented to the issuer and outlines the terms of the deal including the underwriting spread, whether its firm commitment or best efforts, an overallotment option, and expense reimbursement.

Quarterly Reports on Form 10-Q

The SEC form 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. In the 10-Q, firms are required to disclose relevant information regarding their financial position. There is no filing after the fourth quarter, because that is when the 10-K is filed.

SEC Form 13F

The SEC form 13F is a filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment Managers Form. It is a quarterly filing required of institutional investment managers with over $100 million in qualifying assets. Companies required to file SEC Form 13-F may include insurance companies, banks, pension funds, investment advisers and broker-dealers. This form, which must be filed within 45 days of the end of each quarter, contains information about the investment manager and potentially a list of their recent investment holdings.

Form S-4

The SEC form S-4 is a filing with the Securities and Exchange Commission (SEC) by a publically traded company that is used to register any material information related to a merger or acquisition. In addition, the form is also submitted by companies undergoing an exchange offer.

Regulation M

The SEC restricts distribution participants (underwriters and issuers) from bidding for or making secondary market purchases of the stock that is being offered in a distribution.

Schedule 13D

The Schedule 13D is a form that must be filed with the SEC under Rule 13D. The form is required when a person or group acquires more than 5% of any class of a company's shares. This information must be disclosed within 10 days of the transaction. Rule 13D requires the owner to also disclose any other person who has voting power or the power to sell the security.

SEC

The Securities Exchange Act of 1934 authorized the creation of the Securities and Exchange Commission which is charged with enforcing the securities laws and creating rules to implement those laws

Annual and Quarterly Reports

The Securities exchange act of 1934 requires issuers whose securities are registered with the SEC to file and annual report on Form 10-K and quarterly reports on Form 10-Q.

Intermediation

The ability of financial intermediaries to attract deposits and, in turn, extend credit.

Accounts Payable Turnover

The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. APT = Total Supplier Purchases / Average AP If the turnover ratio is falling from one period to another, this is a sign that the company is taking longer to pay off its suppliers than it was before. The opposite is true when the turnover ratio is increasing, which means that the company is paying of suppliers at a faster rate.

Two Step Merger

The acquirer offers to purchase the shares of the target for cash or proposes an exchange offer. First step is to make a tender offer directly to target's shareholders; the tender offer is conditional on receiving a large percentage of shares tendered

Depreciable Base

The actual number that is depreciated.

Deductible

The amount of expenses that must be paid out of pocket before an insurer will pay any expenses

Par Value/Face Value (bonds)

The amount of money the holder will receive at maturity

Issued Shares

The amount of stock that has actually been sold

Offering Circular

The appropriate disclosure document for those using Regulation A to issue securities.

Fixed share exchange arrangement

The buyer offers a fixed ratio of its shares to be exchanged for each target share, regardless of any price fluctuations that may occur in either stock between the time the deal is signed and the eventual closing.

Reverse Triangular Merger

The buyer's subsidiary merges with and into the target company. The target assumes all of the subsidiary's assets and liabilities. This is most often used when the selling entity has significant existing contracts that would not survive an acquisition transaction.

Long Position

The buying of a security such as a stock, commodity or currency with the expectation the asset will rise in value

Cash Collection Cycle

The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.

Unsponsored ADR

The company does not pay for the cost associated with trading in the US; instead, a depository bank issues the ADR. Unsponsored ADRs trade on the OTC market.

Sponsored ADR

The company whose stock underlies the ADR pays a depository bank to issue ADR shares in the US.

Disadvantages of Public offering

The cost and length of time it takes to undertake this type of offering.

Interest Expense

The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. It represents interest payable on any type of borrowings - bonds, loans, convertible debt or lines of credit.

Cost of Capital

The cost of funds used for financing a business. Cost of capital depends on the mode of financing used - it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt.

Transfer Agent

The mutual fund contracts with a transfer agent to issue, redeem and cancel fund shares, handle the distribution of dividend and capital gains to shareholders, and send out trade confirmations. In certain instances, the custodian will act as transfer agent. The fund company usually pays the transfer agent a fee for services rendered.

Net Debt / EBITDA

The net debt to earnings before interest depreciation and amortization (EBITDA) ratio is a measurement of leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA. The net debt to EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. Debt - Cash/EBITDA

Authorized Stock/Capital Stock

The number of shares approved for sale

Significant News Exception to Quiet Periods

The occurrence of significant news or events allows the firm to publish research reports during quiet periods.

Extension Risk

The opposite of prepayment risk. Interest rates are rising and the holder of the MBS receives a smaller portion of her principal back.

Ask price

The opposite of the bid is the ask price, which is the price a seller is looking to get for his or her shares.

Gross Domestic Product

The output of goods and services produced by labor and property located in the US, without regard to the origin of the producer.

Call Protection

The period of time (typically 5-10 years) in which a bond cannot be called after the date of issuance

Conversion Parity (bond)

The point at which neither a profit or loss is made in converting the bond to common stock. Can refer to the parity price of either the stock or bond

Credit Risk or Default Risk

The possibility that a bond issuer will default on a payment or that its credit rating will be downgraded, leading to capital risk or loss of principal, or a missed interest payment

Definitive Proxy

The preliminary proxy is filed and amendments (if any) are made, the definitive proxy is sent to shareholders.

Strike Price

The price at which the call owner may buy stock from the writer.

If interest rates rise...

The price of bonds will fall since the demand for existing bonds will fall because they offer lower interest rates.

Subscription Price

The price paid for new stock in a rights offering (usually the market price)

Price Weighted Index

The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index. Ex: DJIA

Depreciation

The systematic allocation of the cost (i.e. expensing) of PP&E over its estimated useful life. Salvage value not included in the depreciable base.

Shareholder Rights Plan (Poison Pill)

The target company issues rights to existing shareholders which allows them to acquire a large number of new securities usually common or preferred shares

One Step Merger

The target company must obtain approval from its shareholders at a special meeting

Public Float

The total number of shares held by public investors both retail and institutional; ie not insiders

Gross National Product

The total value of all goods and services that are being produced by a national economy. Goods and services produced inside US borders as well as those produced overseas by US based companies

Fiscal Policy

The use of government spending and taxation to influence the economy

Retail Investor

A retail investor is an individual investors who buy and sell securities for their personal account, and not for another company or organization.

Rights Offering

A rights offering (issue) is an issue of rights to a company's existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased in generally at a discount to the current market price.

Capital Appreciation

A rise in the value of an asset based on a rise in market price. Essentially, the capital that was invested in the security has increased in value, and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis.

Subscription Agreement

A sales contract used for the sale of securities through a private placement.

Selling Syndicate vs. Selling Group

A selling syndicate imposes a financial commitment on its members while a selling group does not

Short Position

A short, or short position, is a directional trading or investment strategy where the investor sells shares of borrowed stock in the open market; hoping the price will go down in value

Special Situation

A special situation refers to particular circumstances involving a security that would compel investors to trade the security based on the special situation, rather than the underlying fundamentals of the security or some other investment rationale.

Government Investment Pool

A state or local government pool offered to public entities for the investment of public funds. These pools are important investments tools, offering safety with a competitive yield. GIP managers are vested with a public trust that the pool will maintain liquidity, diversity, and follow the investment pool's guidelines. GIPs have a history of prudent management; however, there have been several isolated instances of fund losses. Despite these failures, GIPs are required to provide regularly reporting and disclosure to its participants, fund investors.

Stock Appreciation Rights

A stock appreciation right (SAR) is a bonus given to employees that is equal to the appreciation of company stock over an established time period. Similar to employee stock options, SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees do not have to pay the exercise price but receive the sum of the increase in stock or cash.

Suspicious Activity Reports

A suspicious activity report also referred to as FinCEN Form 101, is filed by a financial institution if a transcation involves at least $5,000 and there's reason to suspect criminal activity

Syndicate Covering Transaction

A syndicate covering transaction is the placing of any bid or the effecting of any purchase on behalf of the sole distributor or the underwriting syndicate or group in an effort to reduce a short position that is created by an offering.

Arbitrage

A technique that involves profiting from price differentials in the same or similar security.

Tender Offers

A tender offer is an offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price.

Offshore transaction

A transaction in which no offer is made to a person in the U.S. and either the buyer is outside the US or the transaction is executed through a designated offshore securities market.

Triangular Mergers

A triangular merger involves three entities - a buyer (acquirer), a target (Seller), and a subsidiary entity that is owned by the buyer. The target company merges with and into the subsidiary company. The target company is eliminated with the transaction.

Chapter 7 Bankruptcy (Liquidation)

A trustee is appointed to handle the liquidation of the firm. The trustee may try to recover recent payments within the last 90 days in order to pay back creditors

Income Bonds or Adjustment Bonds

A type of debt security in which only the face value of the bond is promised to be paid to the investor. Interest is paid only if there are enough earnings to do so

Capitalization Weighted Index

A type of market index with individual components that are weighted according to their total market capitalization. The larger components carry higher percentage weightings, while the smaller components in the index have lower weights. Ex: S&P 500, NASDAQ Composite, Wilshire 5000

PIK Bonds

A type of mezzanine financing which allows the issuer to conserve cash and pay bondholders with additional principal rather than a higher cash coupon rate.

Venture Capital

A type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both). Venture capital firms or funds invest in these early-stage companies in exchange for equity-an ownership stake-in the companies they invest in.

Tender Offer

A type of public takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation) to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders directly; the directors of the company may or may not have endorsed the tender offer proposal.

EV/Sales

A valuation measure that compares the enterprise value of a company to the company's sales. EV/sales gives investors an idea of how much it costs to buy the company's sales

Price / Sales

A valuation ratio that compares a company's stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company's sales or revenues. It can be calculated either by dividing the company's market capitalization by its total sales over a 12-month period, or on a per-share basis by dividing the stock price by sales per share for a 12-month period. Like all ratios, the price-to-sales ratio is most relevant when used to compare companies in the same sector. A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation.

Confidential Information Memorandum

A very detailed document providing information regarding the business, information regard the intellectual property and trademarks, and a variety of additional content.

Amortization

Amortization is the systematic allocation of a cost of an intangible asset over a period of time.

Coupon (bonds)

Amount of interest paid on an annual basis. Generally paid SEMI-annually, so coupon amount is divided in HALF for each of the two semi annual payments

Par Value

Amount used to record the common or preferred stock accounts on the BS. Established in articles of corporation

FCF Equation

FCF is calculated as: EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure.

Gift Limit

FINRA member firms or their associated persons may not give anything of value in excess of $100 per year to employees when the gift is in relaiton to the securities business of the recipient's employer.

Complaint Quarterly Reports

FINRA members are required to provide statistical and summary information regarding customer complaints on a quarterly basis.

Joint Due Diligence

FINRA prohibits joint due diligence between research personnel and other departments such as investment banking or sales and trading, prior to the selection of underwriters for an IB transaction.

Quid Pro Quo Allocations

FINRA prohibits member firms from engaging in activities referred to as quid pro quo or kickbacks. Firms may not use their allocations of new issues as a means of obtaining compensation that is excessive in relation to the services they are providing.

Anti Money Laundering Rules

FINRA requires all member firms to create an AML compliance program that includes policies and procedures that are reasonably designed to detect money laundering and stipulate the reporting of suspicious transactions.

Two Year Window

FINRA retains jurisdiction over a registered representative for two years following any termination of registration.

Market Orders before IPO

FINRA rules prohibit a member firm from accepting a market order for a new issue prior to the commencement of trading for that stock in the secondary market.

Registration Requirements

FINRA rules require all persons who are involved in the investment banking or securities business be registered

Annual Compliance Review

All registered persons must participate in an annual compliance review which may be conducted as an individual meeting with each representative or a group meeting.

Record Keeping Requirements

All retail communications, institutional communications, research reports, and correspondence (including email and instant message) that are used by a member firm must be kept on file for a minimum of three years.

Material Adverse Effects Clauses

Allow buyers to withdraw from a deal or renegotiate the terms of a contract if something material happens

Rule 169

Allows a non-reporting issuer to continue to publish regularly released factual business information that is meant for limited use by suppliers and customers, but not investors.

Statutory Voting Rights

Allows a shareholder to apply all share's votes for each director position in an election

Cumulative Voting Rights

Allows a shareholder to pool votes and allocate as desired

Rule 168

Allows an issuer or someone acting on its behalf, to continue to publish or disseminate regularly released factual business and forward looking information at any time. Ex: Earnings Release

Rule 506

Allows an issuer to raise an unlimited amount of capital. Offering an unlimited amount of capital stipulates that the investor is sophisticated enough or that they use a purchaser representative.

Rule 103

Allows distribution participants to continue making markets on a passive basis for a Nasdaq stock that is currently the subject of an offering during the restricted period.

Employee Stock Options

Allows employees to purchase stock at a fixed price.

Callable bonds

Allows issuer to buy back bonds early

Call provision

Allows the issuer to redeem the outstanding bond before maturity.

Go Shop Provision

Allows the seller to shop the bid to find a buyer that might be willing to pay a higher price.

Green Shoe

Allows the the syndicate to acquire more shares from the issuer so that it may sell more of an issue than was originally available

Free Writing Prospectus

Also known as FWP. A free writing prospectus is any written communication that both: - Is an offer to sell or a solicitation of an offer to buy SEC-registered securities that is used after the registration statement for an offering is filed (or, in the case of a WKSI, whether or not a registration statement has been filed). - Is made by means other than: - a statutory prospectus (a final prospectus, a preliminary prospectus or certain other categories of prospectus that meet the requirements of Section 10(a) (15 U.S.C.A. § 77j(a)) of the Securities Act); - a written communication used in reliance on Rule 167 (17 C.F.R. § 230.167) and Rule 426 (17 C.F.R. § 230.426) under the Securities Act (special rules for issuers of asset-backed securities); or - a communication that is given together with or after delivery of a final prospectus (which therefore falls into the exception from the definition of prospectus in Section 2(a)(10)(a) (15 U.S.C.A. § 77b(a)(10)(a)) of the Securities Act).

American vs. European Style Options

American style options may be exercised at any time up to the business day before they expire. European style exercise may only be exercised at a specified point in time, usually on the business day before expiration.

Dilution

Dilution is a reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur when holders of stock options (such as company employees) or holders of other optionable securities exercise their options. When the number of shares outstanding increases, each existing stockholder will own a smaller, or diluted, percentage of the company, making each share less valuable. Dilution also reduces the value of existing shares by reducing the stock's earnings per share.

Fourth Market

Direct trading of large blocks of securities between institutions and/or retail investors. Trades are transacted through ECNs

Sarbanes-Oxley Act Section 403

Directors, officers, and 10%+ owners must report designated transactions by the end of the second business following the day on which the transaction was executed

Distressed Investing

Distressed debt investing combines the best of both worlds -- the cash flow of debt investments with the appreciation potential of stocks. While there is no hard and fast rule for what makes a "distressed" investment, it's generally accepted that distressed debt trades at a huge discount to par value (think $400 for a $1,000 bond, for instance) because the borrower is under financial stress and at risk of default. The risks are certainly high, but those who manage their risks well have put up incredible returns over history. Distressed debt investors typically seek to make money in one of two ways: investing in turnarounds and participating in lend-to-own situations.

Dividend Payout Ratio

Dividends / Net Income or Yearly Dividend per share / earnings per share

Adjustable-rate Preferred Stock

Dividends vary with some benchmark, typically the T-bill rate. Because adjustable-rate preferred stock always provides returns consistent with prevailing interest rates, its share price does not tend to move much

Zero Coupon Bonds

Do not pay a coupon. They are bought at a discount from par value, generally with a long term maturity of 10+ years.

Red Herring

During the cooling off period, broker-dealers are able to send a condensed form of registration to potential buyers called a preliminary prospectus or red herring.

EBIT

EBIT = Revenue - Operating Expenses EBIT = Net Income + Interest Expense + Tax Expense

Pre-tax margin

EBITDA / Net Sales

EBITDA

EBITDA = Revenue - Expenses (excluding tax, interest, depreciation and amortization).

History of EBITDA

EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector - even when it isn't warranted.

EBITDAR

EBITDAR = Revenue - Expenses(excluding tax, interest, depreciation, amortization, and restructuring or rent costs) Rent is included in the measure when evaluating the financial performance of companies, such as casinos or restaurants, that have significant rental and lease expenses derived from business operations. By excluding these expenses, it is easier to compare one company to another and get a clearer picture of their operational performance Restructuring is included in the measure when a company has gone through a restructuring plan and has incurred costs from the plan. These costs, which are included on the income statement, are usually seen as nonrecurring and are excluded to give a better idea of the company's ongoing operations.

Earnings Per Share

EPS = (Net Income - Dividends on Preferred stock) / Average Outstanding Shares Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Enterprise Value

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.

Securities Act of 1933 Section 10 Rule 424

Except as provided in paragraph (f) of this section, five copies of every form of prospectus sent or given to any person prior to the effective date of the registration statement which varies from the form or forms of prospectus

Rule 147

Exemption from the registration and prospectus requirements if securities are sold on an intrastate basis.

Limited Partnerships (LLP)

Exists when two or more partners unite to jointly conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. This term is also referred to as a "limited liability partnership" (LLP). The main advantage to this structure is that the owners are typically not liable for the debts of the company.

Stages of an Economic Cycle

Expansion, Peak, Recession, Trough

C Corporation

a legal structure that businesses can choose to organize themselves under to limit their owners' legal and financial liabilities. A C corporation is required to hold at least one meeting each year for shareholders and directors. Minutes must be maintained to display transparency in how the business operates. C corporations limit the personal liability of directors, shareholders, employees and officers. Legal obligations of the business cannot become personal debt obligations of any individual associated with the business.

Decreasing the discount rate...

causes an economic boom due to encouraged borrowing.

Increasing the discount rate...

causes an economic contraction due to tighter lending

Conversion Value

Number of shares x Conversion Price per share

Quiet period for IPOs

10 Days

Large Cap

10 billion +

Maturity of Corporate Bonds

10 years or more

Alternative Quantitative Definition of a Depression

10% decline in real GDP OR at least 6 quarters of negative GDP growth

Payment Priority

1st- Administrative Expenses (Wages, real estate maintenance, fees) 2nd- Unsecured claims 3rd- Employee back wages 4th - Claims related to employee benefit plan 5th - Any residual value that remains after all creditors' claims have been met

Mid Cap

2 billion - 10 billion

Cooling off period

20 day waiting period in which the SEC reviews the issuer's registration statement to determine if it is complete and that it contains no misleading statements.

Cash Management Bills (CMBs)

Unscheduled, short-term debt offerings that are used to smooth out Treasury cash flows. They are issued at a discount, but will mature at their face amount.

Debenture Bonds

Unsecured/no collateral; Backed only by the full faith and credit of issuing company

Securities Exempt from Registration

Us government and government agency securities - municipal securities - Non profit organization securities - Commercial Paper - Domestic bank and trust company issued securities - Small Business investment companies

SEC Rule 176

Used to determine whether the conduct of a person constitutes a reasonable investigation or whether there are reasonable grounds to believe that the liability standards set by the Act have been met.

Preliminary Proxy

Used to notify the SEC of an impending shareholder voting issue that is unexpected or unusual.

Held to Maturity Securities

Usually bonds/debt securities; based on managements internet and ability (depending on whether its callable) to hold these securities to maturity; carried on BS at Amortized Cost (not market value); Carried as LTA or CA depending on maturity date of bond; Original cost includes broker fees; unrealized gains/losses not reported; realized gains/losses go on income statement; interest revenue goes on income statement

Coincident Economic Indicators

Usually mirror the movements of the business cycle. Ex: Employees on non-agricultural payrolls; personal income less transfer payments.

Dividend Discount Model

Value of Stock = Dividend Per share / (Discount rate - dividend growth rate) Computation of today's stock price: share value equals present value of all expected future dividends + sales price

Stock Volatility

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security

Users of Free Writing Prospectuses

WKSI's have the most leeway in issuing communications. Seasoned issuers can submit a free writing prospectus after they have filed their registration statement. Unseasoned and non-reporting issuers can issue a free writing prospectus but they also need to issue a statutory prospectus.

T Bills are quotes on a...

discounted yield basis, not as a percentage of their par value. The yield represents the percentage discount from the face value of the security.

Estimate formula for YTM

((annual interest +- discount or premium) / years to maturity) / Average of current price and par value

Semi-annual payment on a bond of par value $1000 pays a 10% coupon

($1000 10% ½ = ) $50

Percentage of Sales

(% of sales)*(credit sales or total sales) = bad debt expense

Nasdaq Listing Requirements

(1) minimum bid price ($4 for initial listing, $1 ongoing), (2) min number of market makers (3) for initial listing, 2 ongoing), (3) number of shareholders, (4) financial performance metrics (revenue, net income, cash flow). 2-80

New York Stock Exchange Listing Requirements

(1) minimum number of shareholders (400 shareholders w/ typically 100 shares each), (2) minimum shares outstanding (1.1M), (3) minimum stock price ($4/share). 2-79

FINRA 2241(b)(2)

(2) A member's written policies and procedures must be reasonably designed to promote objective and reliable research that reflects the truly held opinions of research analysts and to prevent the use of research reports or research analysts to manipulate or condition the market or favor the interests of the member or a current or prospective customer or class of customers.

Current yield of a bond with a 5% coupon that is trading at 120

(5% 1000) / (120% 1000) = 4.17%

Rule-of-thumb YTM for a bond with a 5% coupon, 10 years to maturity, trading at 80

(50 + (200/10)) / 900 = 7.78%

Quick Ratio

(Cash + AR + Notes Receivable + Marketable securities)/(current liabilities)

Return on Investment

(Investment revenue - investment cost)/ investment cost

Return on Assets (ROA)

(Net Income + After tax cost of interest )/ average total assets EBIT / Average Total Assets

SEC Rule 13f-1 - Reporting by institutional investment managers of information with respect to accounts over which they exercise investment discretion

(a) (1) Every institutional investment manager which exercises investment discretion with respect to accounts holding section 13(f) securities, as defined in paragraph (c) of this section, having an aggregate fair market value on the last trading day of any month of any calendar year of at least $100,000,000 shall file a report on Form 13F (§ 249.325 of this chapter) with the Commission within 45 days after the last day of such calendar year and within 45 days after the last day of each of the first three calendar quarters of the subsequent calendar year. (2) An amendment to a Form 13F (§ 249.325 of this chapter) report, other than one reporting only holdings that were not previously reported in a public filing for the same period, must set forth the complete text of the Form 13F. Amendments must be numbered sequentially.

SEA 1934 Rule 13a-10

(a) Every issuer that changes its fiscal closing date shall file a report covering the resulting transition period between the closing date of its most recent fiscal year and the opening date of its new fiscal year; Provided, however, that an issuer shall file an annual report for any fiscal year that ended before the date on which the issuer determined to change its fiscal year end. In no event shall the transition report cover a period of 12 or more months.

SEA 1934 Rule 13a-11

(a) Except as provided in paragraph (b) of this section, every registrant subject to § 240.13a-1 shall file a current report on Form 8-K within the period specified in that form unless substantially the same information as that required by Form 8-K has been previously reported by the registrant. (b) This section shall not apply to foreign governments, foreign private issuers required to make reports on Form 6-K (17 CFR 249.306) pursuant to § 240.13a-16, issuers of American Depositary Receipts for securities of any foreign issuer, or investment companies required to file reports pursuant to § 270.30b1-1 of this chapter under the Investment Company Act of 1940, except where such an investment company is required to file

SEA 1934 Rule 13a-13

(a) Except as provided in paragraphs (b) and (c) of this section, every issuer that has securities registered pursuant to section 12 of the Act and is required to file annual reports pursuant to section 13 of the Act, and has filed or intends to file such reports on Form 10-K (§ 249.310 of this chapter), shall file a quarterly report on Form 10-Q (§ 249.308a of this chapter) within the period specified in General Instruction A.1. to that form for each of the first three quarters of each fiscal year of the issuer, commencing with the first fiscal quarter following the most recent fiscal year for which full financial statements were included in the registration statement, or, if the registration statement included financial statements for an interim period subsequent to the most recent fiscal year end meeting the requirements of Article 10 of Regulation S-X and Rule 8-03 of Regulation S-X for smaller reporting companies, for the first fiscal quarter subsequent to the quarter reported upon in the registration statement. The first quarterly report of the issuer shall be filed either within 45 days after the effective date of the registration statement or on or before the date on which such report would have been required to be filed if the issuer has been required to file reports on Form 10-Q as of its last fiscal quarter, whichever is later. (b) The provisions of this rule shall not apply to the following issuers: (1) Investment companies required to file reports pursuant to § 270.30b1-1; (2) Foreign private issuers required to file reports pursuant to § 240.13a-16; and (3) Asset-backed issuers required to file reports pursuant to § 240.13a-17. (c) Part I of the quarterly reports on Form 10-Q need not be filed by: (1) Mutual life insurance companies; or (2) Mining companies not in the production stage but engaged primarily in the exploration for the development of mineral deposits other than oil, gas or coal, if all of the following conditions are met: (i) The registrant has not been in production during the current fiscal year or the two years immediately prior thereto; except that being in production for an aggregate period of not more than eight months over the three-year period shall not be a violation of this condition. (ii) Receipts from the sale of mineral products or from the operations of mineral producing properties by the registrant and its subsidiaries combined have not exceeded $500,000 in any of the most recent six years and have not aggregated more than $1,500,000 in the most recent six fiscal years.

Proxy Rule 14a-6

(a) Preliminary proxy statement. Five preliminary copies of the proxy statement and form of proxy shall be filed with the Commission at least 10 calendar days prior to the date definitive copies of such material are first sent or given to security holders, or such shorter period prior to that date as the Commission may authorize upon a showing of good cause thereunder. A registrant, however, shall not file with the Commission a preliminary proxy statement, form of proxy or other soliciting material to be furnished to security holders concurrently therewith if the solicitation relates to an annual (or special meeting in lieu of the annual) meeting, or for an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company, if the solicitation relates to any meeting of security holders at which the only matters to be acted upon are: (1) The election of directors; (2) The election, approval or ratification of accountant(s); (3) A security holder proposal included pursuant to Rule 14a-8 (§ 240.14a-8 of this chapter); (4) A shareholder nominee for director included pursuant to § 240.14a-11, an applicable state or foreign law provision, or a registrant's governing documents as they relate to the inclusion of shareholder director nominees in the registrant's proxy materials. (5) The approval or ratification of a plan as defined in paragraph (a)(6)(ii) of Item 402 of Regulation S-K (§ 229.402(a)(6)(ii) of this chapter) or amendments to such a plan; (6) With respect to an investment company registered under the Investment Company Act of 1940 or a business development company, a proposal to continue, without change, any advisory or other contract or agreement that previously has been the subject of a proxy solicitation for which proxy material was filed with the Commission pursuant to this section; (7) With respect to an open-end investment company registered under the Investment Company Act of 1940, a proposal to increase the number of shares authorized to be issued; and/or (8) A vote to approve the compensation of executives as required pursuant to section 14A(a)(1) of the Securities Exchange Act of 1934

SEA 1934 Rule 16a-1

(a) The term beneficial owner shall have the following applications: (1) Solely for purposes of determining whether a person is a beneficial owner of more than ten percent of any class of equity securities registered pursuant to section 12 of the Act, the term "beneficial owner" shall mean any person who is deemed a beneficial owner pursuant to section 13(d) of the Act and the rules thereunder; provided, however, that the following institutions or persons shall not be deemed the beneficial owner of securities of such class held for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business (or in the case of an employee benefit plan specified in paragraph (a)(1)(vi) of this section, of securities of such class allocated to plan participants where participants have voting power) as long as such shares are acquired by such institutions or persons without the purpose or effect of changing or influencing control of the issuer or engaging in any arrangement subject to Rule 13d-3(b) (§ 240.13d-3(b)):

Average Total Equity

(previously reported total stockholders' equity + current total stockholders\' equity) / 2

NYSE Requirements

- 400 round lot shareholders - 1,100,000 outstanding shares - Total market value of all public shares of $100 million - Stock price of at least $4

Advantages of Convertible Bonds

- Allow corporations to borrow money at a lower rate because convertible feature is attractive to investors - Allows investors to participate in some capital appreciation - Investor has downside protection if stock slides

Qualifications to be an S Corp

- Be a domestic corporation - Have only allowable shareholders - May be individuals, certain trusts, and estates and - May not be partnerships, corporations or non-resident alien shareholders - Have no more than 100 shareholders - Have only one class of stock - Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

Outcome of SOX

- Companies using non-GAAP measures must also include the comparable GAAP calculations and a reconciliation of the two sets of figures. - No more personal loans to executive officers of publicly traded companies. - All insider transactions are reported.

Disadvantages of an S Corp

- Formation and ongoing expenses. To operate as an S corporation, it is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for your company, and pay the appropriate fees - stock ownership restrictions. An S corporation can have only one class of stock, although it can have both voting and non-voting shares. - Closer IRS scrutiny. Because amounts distributed to a shareholder can be dividends or salary, the IRS scrutinizes payments to make sure the characterization conforms to reality. - Less flexibility in allocating income and loss. Because of the one-class-of-stock restriction, an S corporation cannot easily allocate losses or income to specific shareholders.

Disadvantages of Convertible Bonds

- If all bonds are converted into stock then the number of shares outstanding may increase which would dilute owners and lower EPS

REIT Qualifications

- Invest at least 75 percent of its total assets in real estate - Derive at least 75 percent of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate - Pay at least 90 percent of its taxable income in the form of shareholder dividends each year - Be an entity that is taxable as a corporation - Be managed by a board of directors or trustees - Have a minimum of 100 shareholders - Have no more than 50 percent of its shares held by five or fewer individuals

Disadvantages of LLC

- Limited growth potential. You cannot issue shares of stock to attract investors. - Lack of uniformity. LLCs can be treated differently in different states. - Self-employment tax. Earnings can be subject to this kind of taxation. - Tax recognition on appreciated assets. This could happen if you convert an existing business to an LLC. One more way that extra taxation can occur.

Bonds with _______ fluctuate more than bonds with ______

- Longer maturities / shorter maturities - lower coupon rates / higher coupon rates -

Advantages of MLPs

- MLPs are known for offering slow and steady investment opportunities (though they've been subjected to a bit more volatility lately), which stems from the fact that they're often in slow-growing industries, like pipelines. This means low risk - The firm avoids double taxation because there's a pass-through: the firm passes income to the unit holder

Advantages of LLC

- Pass-through taxes. There's no need to file a corporate tax return. Owners report their share of profit and loss on their individual tax returns, meaning you avoid double taxation. - No residency requirement. Owners need not be U.S. citizens or permanent residents. - Legal protection. Owners have limited liability for business debts and obligations.

Disadvantages of MLPs

- Perhaps the biggest disadvantage to being a limited partner in an MLP is that you will have to file Form K-1. - Another tax-related negative is that you can't use a net loss to offset other income. Any net losses must be carried forward to the following year. When you eventually sell all your units, a net loss can then be used as a deduction against other income.

Benefits of S Corp

- Protected assets. An S corporation protects the personal assets of its shareholders. - Pass-through taxation. An S corporation does not pay federal taxes at the corporate level. - Tax-favorable characterization of income. S corporation shareholders can be employees of the business and draw salaries as employees. - Straightforward transfer of ownership. Interests in an S corporation can be freely transferred without triggering adverse tax consequences.

Benefits of Trusts

- Put conditions on how and when your assets are distributed after you die; - Reduce estate and gift taxes; - Distribute assets to heirs efficiently without the cost, delay and publicity of probate court. Probate can cost between 5% to 7% of your estate; - Better protect your assets from creditors and lawsuits; - Name a successor trustee, who not only manages your trust after you die, but is empowered to manage the trust assets if you become unable to do so.

Disadvantages of LPs

- Risks to the general partners: In a limited partnership, the general partners must carry the burden of all the business's debts and obligations. If the company is sued or enters into bankruptcy, all debts and liabilities are the responsibility of the general partners. - Compliance challenges: A general partnership does require less paperwork than a corporation, but because in essence you have investors (the limited partners), you must still hold annual meetings and create a detailed partnership agreement.

Tools of the Federal Reserve

- Setting reserve requirements - Setting the discount rate - Implementing open market operations - setting margin requirements - utilizing moral suasion

Mutual Funds cannot...

- Short securities - Buy securities on margin - Participate in joint investment or trading accounts - Distribute its own securities, except through a sponsor

Stock Buybacks Motives

- the best use of capital at a particular time - management may feel the market has discounted its share price too steeply - to improve its financial ratios through reductions of equity / assets - get out from under excessive dilution

Advantages of LPs

- Tax benefits: As with a general partnership, the profits and losses in a limited partnership flow through the business to the partners, all of whom are taxed on their personal income tax returns. - Liability limits: A limited partner's liability for the partnership's debt is limited to the amount of money or property that individual partner contributed to the partnership. - The general partners take charge: In a limited partnership, the general partners deal with the daily operations and responsibilities and don't need to consult the limited partners for most business decisions. - No turnover issues: Limited partners can be replaced or leave without dissolving the limited partnership. - Less paperwork: Creating a limited partnership, like a general partnership, requires less paperwork than forming a corporation - Investment opportunities: A limited partnership is a great way to offer investors the opportunity to benefit from the profits and losses of your business without getting them actually involved in the business.

Qualified Purchaser

- a person not less than $5 million in investments - a company with not less than $5 million in investments owned by close family members - a trust, not formed for the investment, with not less than $5 million in investments - an investment manager with not less than $25 million under management - a company with not less than $25 million of investments

Underwriting Syndicate

A group of broker-dealers that helps with the sale of a public offering. Assumes financial liability for the sale.

Inactive Status due to Military Duty

A registered person who voluntarily joins the military or is called into active duty is placed in a category referred to as special inactive.

Average Collection Period

Average Collection Period ACP = 365 days/ARTO. Want low ACP; this means people are paying you more quickly

Book Value

1. Book value is the value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation. 2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

If Ending Inventory is too high

1. COGS are too low (understated) 2. Net Income is too high (overstated) 3. Retained Earnings is too high (overstated)

If Ending Inventory is too low

1. Cogs are too high (overstated) 2. Net Income is too low (understated) 3. Retained Earnings is too low (understated)

How to calculate Income tax expense and DTAs/DTLs

1. Compute adjusted book income by adding back or deducting permanent differences 2. Compute taxable income by adding back or deducting temporary differences 3. Compute total Income tax expense by multiplying adjusted book income x tax rate 4. Compute current tax expense by multiplying taxable income x tax rate 5. Compute DTA or DTL by multiplying temporary difference x tax rate

How to calculate WACC?

1. First, we calculate or infer the cost of each kind of capital that the enterprise uses, namely debt and equity. Cost of Debt The cost of debt capital is equivalent to actual or imputed interest rate on the company's debt, adjusted for the tax-deductibility of interest expenses. Specifically: The after-tax cost of debt-capital = The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate in %) Cost of Equity cost of equity capital = Risk-Free Rate + (Beta times Market Risk Premium) 2. Capital structure. Next, we calculate the proportion that debt and equity capital contribute to the entire enterprise, using the market values of total debt and equity to reflect the investments on which those investors expect to earn a minimum return. 3. Weighting the components. Finally, we weight the cost of each kind of capital by the proportion that each contributes to the entire capital structure. This gives us the Weighted Average Cost of Capital (WACC), the average cost of each dollar of cash employed in the business.

New Issue Rule

A FINRA member firm is required to make a bona fide offering of new issues (only IPOs) to the public and not withold any shares for its own account, the accounts of any of its employees, or for any other industry insiders.

Benefits of Cash offers

1. Provides a known value for both buyer and seller 2. No dilution of buyer's ownership structure 3. Creates immediate tax liability for seller 4. Impractical for large deals 5. Often made at a discount to an all stock deal

Stock offers

1. Provides an unknown value to both buyer and seller 2. Dilutes buyer's ownership structure 3. Does not create immediate tax liability for seller 4. May be impossible for private buyers 5. Often made at a premium to an all cash deal

Bonds Payable

1. Represent long term liabilities (until the year the bond matures) 2. Bond indenture - contract between bondholders and issuing company (states maturity date, interest payment dates, collateral, interest rate, etc.) 3. Bonds Payable account always recored on the books at the face amount

Retirement of Securities

1. The cancellation of stocks or bonds because the issuer has bought them back. 2. The removal of an asset from securities markets because its maturity date has been reached.

Conditions required from a member firm participating in a public offering.

1. The firm is either: primarily responsible for managing the offering may not have a conflict of interest, the securities being offered have a public market, or the securities being offered are investment grade. 2. A qualified independent underwriter must be appointed to participate in the preparation of the offering documents.

Why do MLPs have a two tiered structure?

1. The way its always been 2. Allows for "double-breasted" financing; that is, the ability to raise debt at both the MLP level and the Operating Company level. Debt raised at the MLP level is then structurally subordinated to the debt at the Operating Company level. 3. Provides for a holding company structure whereby the assets and liabilities of one activity can be isolated from the assets and liabilities of another activity. In other words, the MLP can remain a pure holding entity and all the various businesses and assets can be owned below the Operating Company in multiple operating subsidiaries.

Maturity of Commerical Paper

270 days or less

Quiet period for Follow ons

3 days for lead manager; no restriction for co-manager

How long can a shelf registration be used for?

3 years

Small Cap

300mm - 2 billion

Number of Days in Inventory

365/ITO. Indicates how liquid a company's inventory is.

Micro Cap

50mm-300mm

Asset Sale

A corporation is selling specific assets rather than shares of stock. The target corporation will continue on after the sale.

Regulation S

A U.S. company may quickly issue an unlimited amount of securities outside the country without filing any documentation with the SEC. To qualify for a Regulation S transaction, the transaction must be effected offshore.

Global Depository Receipts (GDRs)

A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares but are offered for sale globally through the various bank branches.

Central Bank

A banking institution that functions primarily to control a nation's money supply

Beneficial Owner

A beneficial owner is a person who enjoys the benefits of ownership even though title to some form of property is in another name. It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company. For example, when shares of a mutual fund are held by a custodian bank or when securities are held by a broker in street name, the true owner is the beneficial owner, even though, for safety and convenience, the bank or broker holds title. Beneficial ownership may be shared among a group of individuals. If a beneficial owner controls a position of more than 5%, it must file Schedule 13D under Section 12 of the Securities Exchange Act of 1934.

Bid price

A bid price is the price a buyer is willing to pay for a security. This is one part of the bid with the other being the bid size, which details the amount of shares the investor is willing to purchase at the bid price

Bond with Warrants

A bond issued with warrants attached will trade as two separate units. After a bond is issued with warrants, the warrants are able to be detached from the bond and traded as separate units

Eurobond

A bond that is sold in one country, but denominated in the currency of another. The issuer, currency, and primary market may all be different.

Nominal Yield

A bond's nominal yield is the same as its coupon rate.

Bond Indenture

A bonds indenture consists of 2 parts - covenants and the process used to handle defaults. Covenants are agreements made by the borrow in which it pledges to protect the lender.

Written Supervisory Procedures

A book that details the firm's rules and identifies who is responsible for their enforcement within a given firm

Risk Arbitrage

A broad definition for three types of arbitrage that contain an element of risk: 1) Merger and acquisition arbitrage - The simultaneous purchase of stock in a company being acquired and the sale (or short sale) of stock in the acquiring company. 2) Liquidation arbitrage - The exploitation of a difference between a company's current value and its estimated liquidation value. 3) Pairs trading - The exploitation of a difference between two very similar companies in the same industry that have historically been highly correlated. When the two company's values diverge to a historically high level you can take an offsetting position in each (e.g. go long in one and short the other) because, as history has shown, they will inevitable come to be similarly valued.

Market Maker

A broker-dealer that is qualified and stands ready to buy or sell a minimum quantity of shares of a specific stock on a regular and continuous basis at a publicly traded quoted price.

Callable Preferred Stock

A call feature is the only feature that benefits the company and not the investor. A call feature allows the corporation to call in or redeem the preferred shares at its discretion or after some period of time has expired. Most callable preferred stock may not be called in during the first few years after their issuance. This feature, which does not allow the stock to be called in its early years, is known as call protection. Many callable preferred shares will be called at a premium price above par. For example a $100 par preferred stock may be called at $103. The main reasons a company would call in its preferred shares would be to eliminate the fixed dividend payment or to sell a new preferred stock with a lower dividend rate when interest rates decline. Preferred stock is more likely to be called by the corporation when interest rates decline.

Cash-for-stock Merger

A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company.

Futures Contract

A futures contract is an agreement to buy or sell a specific amount of a commodity or a financial instrument at a specific price on a stipulated date in the future.

Financing Cash Flow

A category in a company's cash flow statement that accounts for external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock. Cash flow from financing activities shows investors the company's financial strength. A positive number for cash flow from financing activities means more money is flowing into the company than flowing out, which increases the company's assets. Negative numbers can mean the company is servicing debt, but can also mean the company is retiring debt or making dividend payments and stock repurchases, which investors might be glad to see.

Civil Penalties

A civil penalty may be imposed of up to 3x the amount of gain made or loss avoided in the insider trading transaction

Indemnification Clause

A clause in the definitive purchase agreement that protects against a sellers material breach of contract after the deal has closed

Pension Fund

A common asset pool run by a financial intermediary on behalf of a company and its employees, to generate stable growth over the long term and provide pensions for the employees when they retire. Pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations. Pension funds are typically exempt from capital gains tax. Earnings on their investment portfolios are tax deferred or tax exempt.

Why is EBITDA not cash earnings?

A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings

REIT

A company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.

Central Registration Depository (CRD)

A computerized information system that is maintained by FINRA to provide registration information regarding broker-dealers and registered representatives.

Accumulated Depreciation

A contra-asset that is subtracted from long term assets on the BS.

Allowance for Bad Debt

A contra-asset. Subtracted from Accounts Receivable on the BS. Adjusting journal entry is : Dr: Bad Debt Expense; Cr: Allowance for Bad Debt

Forward Contract

A contract for the purchase of an individual stock, a stock portfolio or a stock index at some future date. An equity forward on an individual stock allows an investor to sell his or her stock at some future date at a guaranteed price. If that guaranteed price is below the market price, the investor will still receive the guaranteed price. If the market price is above the guaranteed price, the investor will only receive the guaranteed price and not be able to participate in any market increase above that price.

Convertible Preferred Stock

A convertible feature allows the preferred stockholder to convert or exchange their preferred shares for common shares at a fixed price known as the conversion price.

Variable Cost

A corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases

Cumulative Preferred Stock

A cumulative feature protects the investor in cases when a corporation is having financial difficulties and cannot pay the dividend. Dividends on cumulative preferred stock accumulate in arrears until the corporation is able to pay them. If the dividend on a cumulative preferred stock is missed, it is sill owed to the holder. Dividends in arrears on cumulative issues are always the first dividends to be paid. If the company wants to pay a dividend to common shareholders, it must first pay the dividends in arrears, as well as the stated preferred dividend, before common shareholders receive anything.

Merger

A deal to unite two existing companies into one new company.

Prospectus delivery requirement for Unlisted Companies

A dealer selling an IPO that will not be listed is required to continue delivering the prospectus for 90 days; 40 for a FO

Typical 363 Sale

A debtor or trustee will execute a formal asset purchase agreement (APA) with an initial proposed purchaser whose bid will set both the minimum floor of the purchase price and the proposed structure of the transaction. This initial bid is called the "stalking-horse" bid and will be subject to higher or better offers that may be received at a subsequent auction.

Deferred Tax Liability

A deferred tax liability is an account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may be realized during any given year, which makes the deferred status appropriate. Because there are differences between what a company can deduct for tax and accounting purposes, there is a difference between a company's taxable income and income before tax. A deferred tax liability records the fact the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable.

Discounted Cash Flow

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment.

Fairness Opinion

A document that is created by an outside entity and is often connected to mergers, acquisitions spinoffs, or going private transaction to determine whether the proposed transaction price is fair (within a range of potential prices)

Eurodollar

A dollar denominated deposit made outside of the United States

Quasi Endowment

A donation by an individual or institution who give the gift with the intent of having that fund serve a specific purpose. The principal is typically retained while the earnings are expended or distributed per specifications of the donor.

Trust

A fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are created by settlors who decide how to transfer parts or all of their assets to trustees. These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depends on the terms under which it was built on. In some areas, it is possible for older beneficiaries to become trustees.

SEC Form 10-KT

A filing with the Securities and Exchange Commission (SEC) that is submitted in lieu of or in addition to a standard 10-K annual report when a company changes its fiscal year-end. The report provides a comprehensive overview of the company's business activities. Companies return to filing a standard 10-K report once the transition to the new fiscal year is complete. The requirement to file a transitional 10-K report is covered by Rules 13a-10 and 15d-10 of the Securities Exchange Act of 1934.

Form S-8

A filing with the Securities and Exchange Commission (SEC) that is used by a publically traded company to register securities that will be offered to its employees via benefit or incentive plans.

Endowment

A financial asset, in the form of a donation made to a non-profit group, institution or individual consisting of investment funds or other property that may or may not have a stated purpose at the bequest of the donor. Most endowments are designed to keep the principal amount intact while using the investment income from dividends for charitable efforts.

Placement Agent

A firm, usually a broker-dealer, that agrees to find institutional investors who are willing to purchase an issuer's securities through a private placement.

Follow On Offering

A follow-on offering is an issue of stock that comes after a company has already issued an initial public offering (IPO). A follow-on offering can be diluted, meaning that the new shares lower a company's earnings per share (EPS), or undiluted, if the additional shares are preferred.

Index Investment Strategy

A form of passive investing that aims to generate the same rate of return as an underlying market index. Investors that use index investing seek to replicate the performance of a specific index - generally an equity or fixed-income index - by investing in an investment vehicle such as index funds or exchange-traded funds that closely track the performance of these indexes.

Sinking Funds

A fund established by a company into which they deposit funds each year in order to redeem their bonds. A sinking fund ensures that the debt will be retired in an orderly fashion.

Growth Funds

A growth fund is a diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. The portfolio mainly consists of companies with above-average growth that reinvest their earnings into expansion, acquisitions and/or research and development. Most growth funds offer higher potential capital appreciation but usually at above-average risk.

Limited Liability Company (LLC)

A hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner

Master Limited Partnership

A limited partnership that is traded on an exchange. MLPs combine the tax benefit of LPs with the liquidity of publicly traded securities.

Offsetting Futures contracts

A long futures position is offset (liquidated) when the investor sells the same contract, while a short futures contract is offset when the investor buys back the same contract.

Majority Owned Subsidiary

A majority owned subsidiary of a WKSI may also qualify as a WKSI in connection witht he offer and sale of its own securities.

Make Whole Provision

A make whole call provision is a type of call provision on a bond allowing the issuer to pay off remaining debt early. The issuer typically has to make a lump sum payment to the investor derived from a formula based on the net present value (NPV) of future coupon payments that will not be paid incrementally because of the call combined with the principal payment the investor would have received at maturity

Wilshire 5000

A market-capitalization-weighted index of the market value of all stocks actively traded in the United States. As of June 30, 2015 the index contained only 3,691 components.[1] The index is intended to measure the performance of most publicly traded companies headquartered in the United States, with readily available price data,

Master Limited Partnerships

A master limited partnership (MLP) is a type of business organization that exists in the form of a publicly traded limited partnership. There are two classes of partners in a master limited partnership: limited partners and general partners. Limited partners are investors that purchase units in the MLP that provide the capital for the MLP's operation and that receive periodic income distributions from the MLP's cash flow, whereas the general partners are responsible for managing the day to day operation of the MLP and that receive compensation based on the performance of the MLP's business venture.

Lagging Indictator

A measurable economic factor that changes after the economy has started to follow a particular pattern or trend, but serve as a confirmation of the new trend. Lagging indicators help confirm long-term trends and differentiate long term trends from short-term reversals that occur in any trend - Corporate Profits - Average duration of employment

Coincident Indicator

A measurable economic factor that varies directly and simultaneously with the business cycle. In other words, coincident indicators confirm where the economy is and represent the current state of the economy. - Industrial production and related capacity utilization - Employment levels (non-farm payroll)

Discount Yield

A measure of a bond's rate of return to an investor, stated as a percentage, and discount yield is used to calculate the yield on municipal notes, commercial paper and treasury bills sold at a discount. Discount yield is calculated as (par value - purchase price)[/par value] * 360/days to maturity, and the formula uses a 30-day month and 360-day year to simplify the calculation.

Total Expense Ratio

A measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. These costs consist primarily of management fees and additional expenses, such as trading fees, legal fees, auditor fees and other operational expenses. Follow us: Investopedia on FacebookTotal Fund Costs / Total Fund Assets

Duration

A measurement of how sensitive a bond's price is to small change in interest rates.

Modified pass-through certificates

A modified pass-through certificate is backed by a pool of FHA and/or VA residential mortgages. As the homeowners in the pool make their mortgage payments, a portion of those payments is passed through to investors who purchased the certificates from GNMA. The monthly payments are guaranteed.

Money Market Funds

A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. A money market fund's portfolio is comprised of short-term, or less than one year, securities representing high-quality, liquid debt and monetary instruments.

Municipal Bonds

A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools. Municipal bonds are exempt from federal taxes and from most state and local taxes, making them especially attractive to people in high income tax brackets.

Letter of Intent in M&A

A non-binding letter signifying commitment to move forward with the transaction. It normally includes anticipated pricing.

Failure to meet filing deadline results in...?

A non-timely filing. An NT filing must expand on why the deadline has not been achieved and it gives the company an additional 5 days to file.

SEC Rule 135

A notice may be required to be published concerning the transfer of assets of a company

Daily Purchase Limit

A passive market maker's daily purchase limit is limited to the greater of 30% of its ADTV in the stock or 200 shares. If a passive market makers single day net purchases end higher than the limit it must withdraw from the market for the rest of the day.

Penalty Bid

A penalty bid is an arrangement that permits a managing underwriter to reclaim a selling concession from a syndicate member when the securities that were originally sold by the syndicate member are purchased in syndicate covering transactions.

Advantages of Pension Funds

A pension fund provides a fixed, preset benefit for employees upon retirement, helping workers plan their future spending. The employer makes the most contributions and cannot retroactively decrease pension fund benefits.

Deflation

A persistent and appreciable decline in the general level of prices

Inflation

A persistent and appreciable rise in the general level of prices.

Accredited Investor

A person or entity that can deal with securities not registered with financial authorities by satisfying one of the requirements regarding income, net worth, asset size, governance status or professional experience. The term is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include natural individuals, banks, insurance companies, brokers and trusts.

Purchaser Representative

A person represents a potential purchaser of securities being distributed through a Regulation D offering

Preferred Stock

A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.

Reverse Merger

A private company buys a public shell company with the acquirer's shareholders exchanging their shares for a majority stake in the publicly traded shell corporation. This allows a private company to quickly obtain publicly listed status and forgo much of the regulatory expense incurred with an IPO.

Private Investment in Public Equity (PIPE)

A private investment firm's, a mutual fund's or another qualified investors' purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. A traditional PIPE is one in which common or preferred stock is issued at a set price to raise capital for the issuer, whereas a structured PIPE issues common or preferred shares of convertible debt. This financing technique is more efficient than secondary offerings, due to fewer regulatory issues with the SEC, and is great for small- to medium-sized public companies that may have a hard time accessing more traditional forms of equity financing.

Stagflation

A prolonged period of high rate of inflation at at the same time as a high rate of unemployment.

Prospectus

A prospectus is a formal legal document that is required by and filed with the Securities and Exchange Commission that provides details about an investment offering for sale to the public. The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction in question; the final prospectus, containing finalized background information including such details as the exact number of shares/certificates issued and the precise offering price, is printed after the deal has been made effective

Proxy Statement or FORM DEF 14A

A proxy statement is a document containing the information the Securities and Exchange Commission (SEC) requires companies to provide to shareholders so shareholders can make informed decisions about matters that will be brought up at an annual or special stockholder meeting. Issues covered in a proxy statement can include proposals for new additions to the board of directors, information on directors' salaries, information on bonus and options plans for directors, and any declarations made by the company's management. A proxy statement must be filed by a publicly traded company before shareholder meetings, and it discloses material matters of the company relevant for soliciting shareholder votes and final approval of nominated directors. Proxy statements are filed with the SEC as Form DEF 14A, or definitive proxy statement.

Proxy Statement

A proxy statement is a document that is issued when an SEC reporting company is seeking votes from its shareholders.

Public Companies

A publicly traded corporation is required to register with the SEC if it has total assets of more then $10 million that are held of record by either (i) 2000 or more persons or (ii) 500 or more persons who are not accredited investors.

Put

A put option gives the owner the right to sell the underlying security at a fixed price.

Qualified Institutional Buyers (QIBs)

A qualified institutional buyer (QIB) is a corporation that is deemed to be an accredited investor as defined in the Securities and Exchange Commission's (SEC) Rule 501 of Regulation D. A QIB owns and invests a minimum of $100 million in securities on a discretionary basis; the broker-dealer threshold is $10 million.

Block Purchase

A quantity of stock that either (i) has a purchase price of $200,000 or more or (ii) is at least 5,000 shares with a purchase price of at least $50,000 or (iii) is at least 20 round lots that total 150% or more of the trading volume for that security.

Business Cycle or Economic Cycle

A recurring pattern and fluctuation in economic activity ranging over several months to a number of years

Disinflation

A reduction in the rate of inflation

Continuing Education (Regulatory element)

All registered persons are required to participate in Regulatory element training on the second anniversary of their initial securities registration and every three years hereafter.

Securities Act of 1933 Rule 176

Accordingly, the conduct required of underwriters to meet their affirmative due diligence responsibilities and, if necessary, establish a due diligence defense depends on a variety of factors. In that regard, SEC Rule 176 sets out a number of general factors for courts to examine when determining the "reasonableness" of an investigation for purposes of Section 11.

Accelerated Filers

Accelerated filers are companies with at least $75 million in public float but less than $700 million. Although accelerated filers also have 40 days to file the10-Q, they have a little more time to file the 10-K.

Stale Financial Statements

According to Regulation S-X, financial statements in registration may become stale and unuable based on the number of days between

American Depository Receipts

ADRs facilitate the trading of foreign stocks in the United States. An ADR represents a claim to foreign securities with the actual shares being held by U.S. banks abroad.

Accounts Receivable Turnover

ARTO= Net Credit Sales/ Avg. Accounts Receivable. Avg AR = (Beg AR + ARYE)/2

Advantages of Public offering

Ability to issue to a large number of investors

Accounts Payable

Accounts payable (AP) is an accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.

Accounts Receivable

Accounts receivable (AR) refers to money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.

Accretion

Accretion is asset and earnings growth due to business expansion, and it can occur through a company's internal growth or by way of mergers and acquisitions. Accretion is also used to account for a capital gain when an investor buys a bond at a discount and holds the bond until maturity

Filing requirements for Tender Offer

Acquirer directly solicits the target's shareholders and files a Schedule TO

Filing requirements for Stock merger

Acquirer files from S4; target files proxy

Filing requirements for Cash Merger

Acquirer has no filing requirement; target files a proxy

Section 10A of the Securities Exchange Act of 1934

Addresses audit procedures and responses to audit discoveries.

Premium on Bonds

Adjunct Account; calculates the amount on top of the face value the bond was sold at

Earnings

After Tax Net Income

Preliminary Offering Circular

After filing the offering statement, but before receiving qualification by the SEC, a preliminary offering circular may be used to make a written offer of securities and it must contain basically the information contained in the final offering circular.

Secondary Securities Market

After initial issue by the company, securities are traded on official markets, including NYSE and Nasdaq

Prospectus delivery requirement for Listed Companies

Aftermarket delivery requirement applies for 25 days for IPO; none for FO

Inspection Cycles

All OSJs and supervisory branch offices must be inspected annually.

General Partnership

All of the partners have an equal voice in managing the business and are entitled to share in any profits that are generated based on a prearranged agreement.

Rule 506(c)

All purchasers must be defined as accredited investors. The issuers must verify their accredidation.

Current Reports on Form 8-K

An 8-K is a report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders or the Securities and Exchange Commission (SEC). Also known as a Form 8-K, the report notifies the public of events reported including acquisition, bankruptcy, resignation of directors or a change in the fiscal year. Businesses have four business days to file an 8-K for most specified items. One exception to this are Regulation Fair Disclosure (FD) requirements in Section 9 in the Investor Bulletin reporting requirements. Regulation FD requirements may be due earlier than four business days.

Collateralized Mortgage Obligations

An MBS that takes the principal and interest payments from underlying mortgages and separates them into various classes of bonds that are referred to as tranches.

Master Limited Partnership Structure

An MLP generally has a two-tiered structure. The MLP is the traded limited partnership whose only asset is most commonly its ownership of a wholly-owned LLC or a wholly-owned limited partnership (an LP). In either case, the lower tier entity is known as the "operating" entity. Thus, most MLPs refer to the operating limited liability company (OLLC) or the operating limited partnership (OLP), which we will refer to collectively as the "Operating Company." The Operating Company will directly or indirectly own the operating assets and other operating subsidiaries of the MLP. Moreover, in many cases, the Operating Company will incur the debt (depending on credit considerations, the credit facility may instead be at the MLP level). The ownership of the MLP is split between two primary groups - the public and the "sponsor," which for purposes of this Primer is defined as the overall organization/entity/person responsible for forming the MLP. The public will own some percentage of the MLP, which will vary at the time of the IPO based upon the optimal size of the offering and overall capital structure of the MLP. The sponsor will retain the portion of the MLP not sold to the public, as well as a 2 percent general partner interest in the MLP and a strange and magical thing referred to as "incentive distribution rights" (or IDRs). [3]

10-Q

An SEC reporting company is required to file a form 10-Q after the end of the first 3 quarters of each fiscal year.

Receivables Turnover

An accounting measure used to quantify a firm's effectiveness in extending credit and in collecting debts on that credit. The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.

Acquisition

An acquisition is a corporate action in which a company buys most, if not all, of the target company's ownership stakes to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy when it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both.

Aggressive Growth

An aggressive strategy needs more active management than a conservative "buy-and-hold" strategy, since it is likely to be much more volatile and would need more frequent adjustments to tailor it to changing market conditions. More frequent rebalancing would also be required to bring portfolio allocations back to their target levels, as the volatility of the assets that comprise an aggressive portfolio will quite often lead allocations to deviate significantly from the original or target weights.

Forward Contracts

An agreement between a buyer and seller for future delivery of a commodity

Form 5

An annual filing is required of insiders to cover certain transactions, such as gifts.

Credit Ratings

An assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money - an individual, corporation, state or provincial authority, or sovereign government.

Partnership

An association of two or more persons who have agreed to pool their resources to operate a business. Partnerships are more tax efficient since the IRS treats partnerships as an extension of the individual partners. Any profits and losses are distributed to the partners and reported on their personal tax returns.

Leading Indicator

An economic factor that changes before the economy transitions into a particular pattern or trend. A positive change in these indicators predict economic improvement while negative changes predict economic contraction. - Stock Market - New building permits - New orders for consumer goods

Economic Profit

An economic profit or loss is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs, and as a result, a person can have a significant accounting profit with little to no economic profit.

Employee stock options

An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. An employee stock option is slightly different from a regular exchange-traded option because it is not generally traded on an exchange, and there is no put component. Furthermore, employees typically must wait a specified vesting period before being allowed to exercise the option

Employee Stock Ownership Plans

An employee stock ownership plan (ESOP) is a qualified defined-contribution employee benefit (ERISA) plan designed to invest primarily in the stock of the sponsoring employer. ESOPs are "qualified" in the sense that the ESOP's sponsoring company, the selling shareholder and participants receive various tax benefits. ESOPs are often used as a corporate finance strategy and are also used to align the interests of a company's employees with those of the company's shareholders.

Engagement Letter

An engagement letter is signed by both the company that intends to issue securities and the investment banker that is hired (engaged) to market the securities to institutional investors.

Affiliate

An entity that controls, is controlled by, or is under common control of the member firm.

Extraordinary/ Nonrecurring Items

An extraordinary item consists of gains or losses included on a company's income statement from events, which are unusual and infrequent in nature. Extraordinary items are usually explained further in the notes to the financial statements, and they are the result of unforeseen and atypical events. Companies show an extraordinary item separately from their operating earnings, because it is typically recorded as a one-time charge or income, and it is not expected to recur in the future

S&P 500

An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors.

Notice of Sale

An individual who sells securities under rule 144 must notify the SEC at the same time her sell order is placed with a broker or when an order is executed directly with a market maker.

Mediation

An informal process in which the two parties to a dispute attempt to reach a mutually acceptable resolution without resorting to arbitration or litigation. A mediator must participate as a neutral person who is knowledgeable about the securities industry.

Mutual Funds

An investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.

Zero Coupon Bond

An investor purchases a zero coupon bond at a deep discount from its pay value and it doesn't pay any coupon throughout the bond

Seasoned Issuer

An issuer eligible to use Form S-3 to register primary offerings of securities on its behalf, on behalf of its majority-owned subsidiary or on behalf of its parent. Issuers of asset-backed-securities registered on Form S-3 are classified as seasoned issuers.

SEC Rule 405

An issuer that has (or whose subsidiary has) been convicted of a felony or misdemeanor specified in four enumerated provisions under Section 15 of the Exchange Act5 or an issuer that has violated (or whose subsidiary has violated) the anti-fraud provisions of the federal securities laws (or that are the subject of a judicial or administrative decree or order prohibiting certain conduct or activities involving the anti-fraud provisions of the federal securities laws)

Non-reporting issuer

An issuer that is not required to file reports under section 13 or 15(d) of the Securities Exchange Act of 1934.

Unseasoned Issuer

An issuer that is required to file reports under section 13 or 15(d) of the Securities Exchange Act of 1934, but does not meet the requirements to file on Form S-3 or Form F-3 for a primary offering of securities. Less than $75 million in public float

Well Known Seasoned Issuer (WKSI)

An issuer that meets all of the following requirements at some point during a 60-day period preceding the date the issuer satisfies its obligation to update its shelf registration statement 1. It must be eligible to register a primary offering of its securities on Form S-3 or Form F-3. 2. As of some date within 60 days of its eligibility determination date, it must have had an outstanding minimum $700 million in worldwide market value of voting and non-voting equity held by non-affiliates or have issued in the last three years at least $1 billion aggregate amount of non-convertible securities other than common equity, in primary offerings for cash, not exchange. 3. It must not be an ineligible issuer.

Roadshow

An offer (other than a statutory prospectus or portion of one filed as part of a registration statement) that contains a presentation made by one or more members of the issuer's management, which includes a discussion of the issuer, the management or the securities being offered (Rule 433, Securities Act of 1933, as amended (Securities Act)).

Section 4(5) Exemption of Securities Act of 1933

An offering by an issuer may be exempt if the offering is not greater than $5 million, no advertising is being used, and the offer is only sold to accredited investors.

Options

An option is a contract that is entered into by two parties. The buyer is long the option and the seller is short the option.

Recovering Funds - Chapter 11 Bankruptcy

An unsecured creditor is not required to file a proof of claim in order to recover funds unless the debtor does not list them in its Schedule of Liabilities

Dividend Yield

Annual Dividends per share / Price per share

Current Yield

Annual interest / Current Market Price

Auction Marketplace

Auction Marketplace Trades are directed to the exchange floor by telephone or electronically, and a broker matches interested buyers or sellers (NYSE)

Dealer

Any person engaged in the business of buying and selling securities for its own account.

Broker

Any person engaged in the business of effecting transaction in securities for the account of others

Statutory Prospectus

Any significant disclosure document which is given to investors such as a red herring or final prospectus.

Discount Rate

Applies to the interest rate on credit usually available from the Fed's discount window

SEC Rule 145

Applies to to situations in which securities are being offered as a result of business combinations, such as mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets

Customer Identification program

As part of its AML compliance procedures, member firms are required to establish written customer identification program.

Anti-Manipulation and Fraud Rules

As used in the Securities Exchange Act of 1934, the phrase "manipulative, deceptive, or other fraudulent device or contrivance" is considered to include any untrue statement of a material fact and any omission of a material fact that is necessary to make the statements not misleading. You cannot artificially raise or depress securities prices; the counterparty can sue;

Current Assets

Assets expected to be used up or converted to cash within one year or less of the BS data; Ex: Cash, Accounts Receivable, Inventory, Supplies on Hand, Prepaid rent, Marketable securities (valued at market value)

Quick Assets

Assets that can be converted to cash quickly; Cash, AR, NR, Marketable securities

Unrestricted Endowments

Assets that can be spent, saved, invested, and distributed at the discretion of the institution receiving the gift.

Aging Method

Assign probability to accounts indicating their likelihood of collection. Answer calculated is the desired credit balance in the Allowance for bad debt account. Companies on the accrual basis of accounting use the aging method of estimating bad debts to get a better matching of revenue and expenses for the period.

Firm Element

At least once per year, each firm must demonstrate to the regulators that it has analyzed and prioritized the training needs of its covered personnel and developed a written training plan.

Authorized Shares

At the time of incorporation a company is authorized to issue a certain number of shares, which may only be changed by a majority vote of the stockholders and a revision of the corporate charter.

Retained Earnings Statement

Beginning RE + Net Income - Dividends = Ending RE

Secured Bonds

Backed by the full faith and credit of the issuer and by specific assets that the company owns.

Balance Sheet

Balance Sheet Assets = Liabilities + Capital Stock + RE

Institutional Investors

Banks, insurance companies, retirement or pension funds, hedge funds and mutual funds or other organizations that pool large sums of money and invest those sums in companies

Bake-Off

Before hiring an investment bank, the company will invite competing investment banks to attend its bake off for the purpose of listening to its sales pitch.

Stockholders Equity

Common Stock + Preferred stock + APIC + RE - Treasury Stock

SEC Rule 14d-10

Best price rule: provides for equal treatment of all shareholders involved in a tender offer

Final Bid Placement

Bidders offer their final bids that are a single number (not a range) and the specifications

Examples of Leading Indicators

Bond Yields, Building Permits (new private housing), Stock Market Indices, Average of weekly unemployment insurance claims, Changes in business inventories

Income Bonds

Bonds normally issued by companies in bankruptcy; the issuer promises to repay the principal at maturity but only pay interest if it has sufficient earnings.

Taxable vs. Book Income

Book income will always be different form taxable income

Tangible Book Value

Book value after removing intangible assets

Form 14A

Both types of proxies are filed with the SEC using Form 14A

Recovering Funds - Chapter 7 Bankruptcy

Both unsecured creditors and equity holders must file a proof of claim in a timely manner in order to recover funds

Income Statement

Bottom line: Net income: Revenue - Expenses; Shows net income under the accrual basis

Filing Requirements under FINRA

Broker-dealers are generally required to file certain documents with FINRA related to securities offerings. If the securities are registered then disclosure must be filed within one day. If the securities are not registered then the disclosure must be filed in 15 days.

Information Barrier Procedures

Broker-dealers are liable for insider trading violations of the persons who are under their control and must institute procedures to detect and prevent the use of insider information.

Currency Transaction Reports

Broker-dealers are required to file Currency Transaction Reports for all cash transactions executed by a single customer during one business day that exceed $10,000

Verifying Customers Identities

Broker-dealers are required to take reasonable steps to verify customers who intend to open an account

SEC Rule 14e-5

Buyers that are engaged in a tender may not purchase additional shares in the open market once the tender has commenced

No shop agreement

By signing this document, the target firm agrees to work in good faith toward a closing

Compound Annual Growth Rate

CAGR = (Ending Value / Beginning Value) ^(1/#of years) - 1

Cash Conversion Cycle

CCC = DIO + DSO + DPO Where: DIO represents days inventory outstanding, DSO represents days sales outstanding and DPO represents days payable outstanding

Characteristics of LIFO

COGS are higher; Gross Profit lower; Lower taxes/higher cash flow; lower ending inventory; lower working capital; There is income manipulation (buying/selling) inventory on last day); Better matching of current selling prices with current costs

Characteristics of FIFO

COGS are lower; Gross Profit higher; Higher taxes/lower cash flow; Higher ending inventory; Higher working capital; No income manipulation; Worse matching of current selling prices with current costs

Inventory Turnover

COGS/Average Inventory. Avg. Inventory = (Beg Inv. + End Inv.) /2

Formula for Current Yield

CY = annual interest / market price

Capital Surplus

Capital surplus is equity which cannot otherwise be classified as capital stock or retained earnings. It's usually created from a stock issued at a premium over par value.

Cash and Cash Equivalents

Cash and cash equivalents refer to the line item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately. These include bank accounts, marketable securities, commercial paper, Treasury bills and short-term government bonds with a maturity date of three months or less. Marketable securities and money market holdings are considered cash equivalents because they are liquid and not subject to material fluctuations in value.

Investing Cash flow

Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment. Changes to property, plant and equipment (PPE), a large line item on the balance sheet, fall here. When analysts want to know how much a company is spending on PPE, they can look for the sources and uses of funds in the investing section of the cash flow statement.

Operating Cash flow

Cash flow from operating activities (CFO) is an accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service. Cash flow from operating activities does not include long-term capital or investment costs. It does include earnings before interest and taxes plus depreciation minus taxes. Cash Flow From Operating Activities = EBIT + Depreciation - Taxes

Special Proxies

Certain M+A transactions and business combinations, such as proposals for cash or spin-offs, require the filing of preliminary proxy.

Different Classes of Special Situations

Class A: Standard arbitrages, based on a reorganization, recapitalization or merger plan Class B: Cash payout, in recapitalization or mergers Class C: Cash payments on sale or liquidation Class D: Litigated matters Class E: Public utility breakups Class F: Miscellaneous special situations

Covenant

Clause in a debt contract

GARP Investing (Growth at a Reasonable Price)

Combines key theories of growth and value investing

Common Stock

Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure; in the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders are paid in full.

Types of Mergers

Conglomerate: nothing in common for united companies Horizontal: both companies are in same industry, deal is part of consolidation Market Extension: companies sell same products but compete in different markets Product Extension: add together products that go well together Vertical Merger: two companies that make parts for a finished good combine

Limited Partnership

Consists of one general partner and one limited partner. The general partner is responsible for managing the partnership's business and has unlimited liability for its debts.

Term Sheet

Contains pertinent information regarding the securities being offered.

Discount on bonds

Contra liability account; calculates the amount of discount on the bond that was sold below face value

Federal Open Market Committee (FOMC)

Controls the quantity of money in circulation through the buying and selling of Treasury securities with primary dealers such as JPM or Citi

Convertible Bond Conversion Ratio (formula)

Conversion ratio = par value / conversion price

Guaranteed bond

Corporate bond in which interest and principal are guaranteed to be paid by a firm other than the issuer. Generally the guarantor is a parent company

Mortgage Bonds

Corporate bonds backed by a mortgage on one or more assets, typically real estate holdings or other real property

Deep Value Investing Strategy

Deep value investors have a long-term focus and are not fixated on quarterly earnings. They're looking for companies with the ability to compound wealth over time.

S Corporations

Corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income

COGS

Cost of Goods available for sale - Ending Merchandise inventory = COGS

Fixed Cost

Cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.

Demand registration rights

Create an obligation for an issuer to file a registration statement that covers any potential sale under certain conditions. Allow investors to demand that a company register its shares so that the investors are able to sell them publicly

Regulation FD

Created to protect retail investors by barring issuers from selectively disclosing non-public, material information to securities professionals. If the disclosure was unintentional the issuer has 24 hours to release it to the public by filing a Form 8-k.

M1

Currency in circulation + demand deposits + other checkable deposits

Current Ratio

Current Assets/Current Liabilities; General rule of thumb is you want 2 times

Working Capital

Current assets - current liabilities; a measure of a company's liquidity.

Spot Exchange Rate

Current exchange rate

Yield Curve

Different maturities plotted against corresponding yield for each maturity

Global Depository Receipts

GDRs allow an issuer to raise capital internationally and may be offered in two or more markets

(Dividend) Record Date

Date on which a stockholder must be a registered owner of a stock to receive a declared dividend

Divided Declaration Date

Date on which the Board Of Directors declares a dividend

Days Payable Outstanding

Days payable outstanding (DPO) is a company's average payable period. Days payable outstanding tells how long it takes a company to pay its invoices from trade creditors, such as suppliers. DPO is typically looked at either quarterly or yearly. DPO = Ending accounts payable / (cost of sales) x (number of days)

Days Sales Outstanding

Days sales outstanding (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. DSO is often determined on a monthly, quarterly or annual basis and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured. (Accounts Receivable / Total Credit Sales) x Number of Days(month, quarter, year)

Dealer Market or Negotiated Market

Dealers hold inventories, or make markets in certain securities. Participants in the market are joined through electronic networks (Nasdaq)

Equipment Trust Obligation

Debt instruments that are secured by equipment or physical assets

Debt to Capital Ratio

Debt/ Shareholder's Equity + Debt

Debt / EBITDA ratio

Debt/EBITDA is a measure of a company's ability to pay off its incurred debt.

Dividend Declaration/Payment Timeline

Declaration Date>Ex-Dividend Date>(2 biz days)>Record Date>(3 wks)>Payable Date

Deferred Tax Assets

Deferred tax assets are created due to taxes paid or carried forward but not yet recognized in the income statement. Its value is calculated by taking into account financial reporting standards for book income and the jurisdictional tax authority's rules for taxable income. For example, deferred tax assets can be created due to the tax authority recognizing revenue or expenses at different times than that of an accounting standard. This asset helps in reducing the company's future tax liability. It is important to note that a deferred tax asset will only be recognized when the difference between the loss-value or depreciation of the asset is expect to offset future profit.

Insider

Defined as a director, officer or owner of more than 10% of the stock of a corporation

FINRA 2241 (a)

Defines Research analysts and research reports as well as investment banking services and investment banking department.

Subscription Rights

Determine how many shares an existing stockholder can buy and at what price in the case of a new stock issue

Lock-up Agreement

Dictates the amount of time that pre-IPO holders such as management, VC, and other insiders must wait to sell shares of their securities after an IPO begins trading in the aftermarket.

Net Margin

Earnings before Tax / Sales

Earnings Yield

Earnings yield are the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company.

Pink OTC Markets (Pink Sheets)

Electronic quotation system that displays quotes for many over-the counter securities. No listing requirements, and companies are not required to file with SEC

Operations

Ensures all the paperwork, funds, and securities transfers that are associated with a trade are handled efficiently and in accordance with industry standards.

Warrant

Entitles holder to buy stock of the issuer at a specified price for a specified period of time. Frequently attached to bonds or preferred stock as a sweetener

Nominal Yield (bonds)

Equal to coupon rate

Equity Value

Equity Value = Enterprise Value + stock options, convertible securities

Available for Sale (AFS) Securities

Equity or Debt; Contains all investments not categorized as either trying or held to maturity; If they are debt they are classified into LTA or CA based on maturity date; If equity probably not current; Carried on BS at fair value(at market value); Unrealized gains/losses reported in SE as other comprehensive income; Realized gains/losses reported on income statement.

Interest Coverage Ratio

Essentially, the interest coverage ratio measures how many times over a company could pay its current interest payment with its available earnings. In other words, it measures the margin of safety a company has for paying interest during a given period, which a company needs in order to survive future (and perhaps unforeseeable) financial hardship should it arise EBIT / Interest Expense

Stated Value

Established (stated) after charter is granted. Effectively the same as par value

Section 11 of Act of 1933

Establishes liability for registration statements that contain untrue statements of material facts that are required to make the statements not misleading.

Consumer Price Index (CPI)

Estimates the average price of consumer goods and services purchased by households

Property Plant and Equipment

Ex: Land (not depreciated), buildings, machinery, equipment, office furniture To allocate cost: Depreciation. Journal entry: Dr: Depreciation Exp Cr: Accumulated Depr. Allocation Methods: Straight line, S-Y-D, DDB, units of output Salvage Value is usually considered in the calculation The asset is physically used The asset is not part of an end product The asset can be replaced quickly in kind

Intangible Assets

Ex: Patents, copyrights, goodwill (not amortized) Term used to "Systematically allocate cost": Amortization Journal Entry: Dr: Amortization Exp Cr: Asset Account (no contra asset used) Allocation methods: normally straight line Salvage value not considered in calculation The asset is not physically used The asset is not part of an end product The asset cannot be replaced quickly in kind

Natural Resources - Depletion

Ex: Timberlands, oil fields, coal mines Term used to allocate cost: Depletion Journal Entry: Dr: Depletion Exp Cr: Accum. Depletion Allocation method: Units of output Salvage value is considered in the calculation Asset is physically used Asset is part of an end product The asset could possibly be replaced quickly

Temporary Differences

Example: Accelerated Depreciation - Will Reverse themselves in the future - A deferred tax asset or deferred tax liability is created

Permanent Differences

Example: Fines - Will never reverse themselves in the future - No deferred tax account is created - Generally result from items that are never taxable, but are included in accounting income

Examples of Lagging Indicators

Examples of Lagging Indicators Interest rates (particularly the Prime Rate), Corporate profits, Labor costs per unit of output, Commercial and industrial loans outstanding

Non-Accelerated Filers

Finally, non-accelerated filers are companies with less than $75 million of public float. These companies have 45 days from the end of the quarter to file the 10-Q.

Asset Backed Securities (ABSs)

Financial instruments which are securitized by a pool of underlying assets which are aggregated into financial instruments and sold to investors

Restricted and Watch Lists

Firms that engage in investment banking, research, or arbitrage activities must establish written procedures to address the use of material non-public information by its employees

Growth

Focus on the future potential of a company, with much less emphasis on its present price. Unlike value investors, growth investors buy companies that are trading higher than their current intrinsic worth - but this is done with the belief that the companies' intrinsic worth will grow and therefore exceed their current valuations.

Criminal Penalities

For each violation, an individual may be subject to fines of up to $5 million and or imprisonment for up to 20 years.

Form S-1

Form S-1 is an SEC filing used by companies planning on going public to register their securities with the U.S. Securities and Exchange Commission (SEC) as the "registration statement by the Securities Act of 1933". The S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering (IPO).

Form S-3

Form S-3 is the most simplified securities registration form used by the U.S. Securities and Exchange Commission. It may only be used by companies that have been required to report under the Securities Exchange Act of 1934 for a minimum of twelve months and have also timely filed all required reports (including annual forms 10-K, quarterly forms 10-Q and certain current forms 8-K) under the Securities Exchange Act of 1934 during the twelve calendar months and any portion of a month immediately before the filing of the registration statement. Also, the offering and the issuer must meet other eligibility tests prescribed by the form.

Forward P/E

Forward price to earnings (forward P/E) is a measure of the price-to-earnings (P/E) ratio using forecasted earnings for the P/E calculation.

Gun Jumping Provision

Found in the Securities Act of 1933, these provisions restrict the type of communication that may be made during the registration process for a public offering.

Free Cash Flow

Free cash flow (FCF) is a measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base

Types of Acquisitions

Friendly: Acquisitions occurs when the target firm expresses its agreement to be acquired. Hostile Acquisition: Hostile acquisitions don't have the same agreement from the target firm, and the acquiring firm must actively purchase large stakes of the target company to have a majority stake.

Real Economic Growth

GDP inflation adjusted

Examples of Coincident Indicators

GDP, Employees on non-agricultural payrolls, Personal income, Consumer spending, Inventory/sales ratio, Retail and manufacturing sales

Auctions

Generates interest from many parties and generally pushes the price of the sale up

Mortgage Backed Securities

Ginnie Mae offers US government agency-backed securities representing investments in pools of mortgages. Securities issued by Fannie Mae and Freddie Mac are not backed by the government, but by the agencies themselves, which enjoy extremely high credit ratings

Restricted Stock

Give the employees the right to receive shares as a gift or as a purchased item after particular restrictions are met such as working for a specific period of time or hitting specific performance targets.

SARs (Stock Appreciation Rights)

Gives management or employees a bonus if stock price appreciates by a specified amount. Exercised at discretion of employee once strike price is reached

Calls

Gives the owner the right to buy the underlying security at a fixed price.

Going Private Transactions

Going private is a transaction or a series of transactions that convert a publicly traded company into a private entity. Once a company goes private, its shareholders are no longer able to trade their stocks in the open market. Private equity firms will typically purchase a struggling company, make it into a private entity, reorganize its capital structure, and issue stocks once a profit can be realized.

SEA Rule 13e-3

Going private transactions by certain issuers or their affiliates.

Gross Margin

Gross profit margin = gross profit/net sales

Inorganic Growth

Growth that occurs as the result of a merger or acquisition.

Trading

Handle the execution of trades for both the firm's clients and the firm's own account.

Discount Notes

Have maturities less than 1 year

Hedge Fund

Hedge funds are alternative investments using pooled funds that may use a number of different strategies in order to earn active return, or alpha, for their investors. Legally, hedge funds are most often set up as private investment limited partnerships that are open to a limited number of accredited investors and require a large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year, a time known as the lock-up period. Withdrawals may also only happen at certain intervals such as quarterly or bi-annually.

Inflation effect (Real Estate)

Higher CF and asset values tend to result in a positive correlation between real estate and inflation

How do you know if the temporary difference will create a DTL?

Higher future taxable income T.I. < B.I. in early years

FIFO Advantages (Assuming Inflationary period)

Highest Gross profit, higher net income, higher current assets, higher working capital. More indicative of replacement costs. Better for earnings based compensation plans. Better for Debt covenant restrictions because higher current ratio. Balance sheet oriented because Ending Inventory higher

Participating Preferred Stock

Holders of participating preferred stock are entitled to receive the stated preferred rate, as well as additional common dividends. The holder of participating preferred receives the dividend payable to the common stockholders over and above the stated preferred dividend.

Neutral Fiscal Policy

Implies a balanced budget where government spending equals tax revenue

Pro-Forma Analysis

In M&A transactions that involve a strategic buyer, bankers may generate hypothetical financial statements as if the two companies were merged.

Regulation S-K

In a company's history, Regulation S-K first applies with the Form S-1 that companies use to register their securities with the U.S. Securities and Exchange Commission (SEC) as the "registration statement under the Securities Act of 1933". Thereafter, Regulation S-K applies to the ongoing reporting requirements in documents such as forms 10-K and 8-K.

Rights offering

In a rights offering, all existing common stockholders automatically receive one right for every share they own.

Tax treatment of a REIT

If 90% of the ordinary income generated from the portfolio is distributed to investors the income will only be taxes at the investor's level.

Rule 138

If a broker-dealer is a participant in the distribution provided a registration statement has been filed for a non-convertible preferred stock, the broker-dealer may publish or distribute a research report regarding the common stock and / or convertible securities of the issuer during the normal course of business and vice versa.

Parity

If a convertible bond's conversion value is equal to its market price

Firm Commitment

If a syndicate agrees to purchase an entire issue and absorb any securities that are not sold.

Form 8-K

If an even occurs that could materially affect the issuer's financial condition or share price, a report must be made to the SEC on form 8-k.

Rule 139

If an issuer is subject to the reporting requirements of the Act of 1934 and it meets other conditions (such as being a WKSI), a broker-dealer that is also a participant in the distribution may conditionally publish or distribute a research report regarding the issuer's securities.

Reference Security

If company ABC issued a convertible bond, the bond is the subject security and the stock is the reference security.

Exchange Offer

If shares are used to purchase a Company in a tender offer.

Stop Order

If the SEC becomes aware of information that leads it to believe the offering is not in compliance with the 1933 act, it may issue a stop order effectively ending all sales activity.

Deficiency Letter

If the SEC believes the registration statement to be incomplete or misleading, it sends this to the issuer.

Forced Conversion

If the call price of the bonds is less than the conversion value, the bondholder could be forced to either convert the bond immediately or accept less than its conversion value.

Intrinsic Value (Warrant)

If the stock's market price rises above the warrant's subscription price, then the warrant has intrinsic value

Stock-for-Stock Merger

If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share certificates. The desire to steer clear of the tax man explains why so many M&A deals are carried out as stock-for-stock transactions.

Best efforts

If the underwriters agree to make a bond fide effort to sell the entire issue, but are able to return any unsold securities to the issuer without penalty.

LIFO Conformity Rule

If you want to use LIFO on your tax returns you must use it on your financial statements.

P/E Ratio

In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company's earnings. This is why the P/E is sometimes referred to as the multiple because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

Creditors Committee

In order to protect the interests of unsecured lenders during the reorganization of a chapter 11 bankruptcy, a Creditors Committee is appointed by the US Trustee and ordinarily consists of the seven largest unsecured creditors

Review of Underwriting Agreements

In order to review the fairness of an underwriter's compensation, underwriting agreements must be submitted to FINRA's Corporate Financing Department.

Tipper and Tippee

In some situations, material, non public information is passed from one person (the tipper) to another person (the tippee) who has the change to trade on the information. If the tippee and the tipper knew or should have known that the information was private they have violated insider trading rules.

Asset Back Securities

In the process of securitizing the loans, the lender sells its receivables to a trust that creates a security which represents an interest in the trust that is backed by the subject receivables.

Consolidation Mergers

In this type of merger, a brand new company is formed for the purpose of buy two companies and combining them under the new entity.

PP+E Cost on the books

Includes purchase price plus all other normal costs getting the asset in place and ready to be used

Taxable Income

Income computed in accordance with Internal Revenue Code

Accounting Income

Income computed in accordance with US GAAP

Form 3

Individuals are required to report to the SEC the amount of securities they own within 10 days of becoming insiders

Treasury Inflation-Protected Securities (TIPS)

Inflation-Indexed bonds issued by the US Treasury. Principal is adjusted semi-annually based on CPI

Rule 10b5-1 Plans

Insiders are prohibited from buying or selling a security based on material nonpublic information so they are blacked out around material events such as earnings releases.

Insurance

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.

Goodwill

Intangible asset. The price paid above and beyond the cost of a business. Associated with brand recognition. Not Amortized.

Current Yield (bonds)

Interest rate stated as a percentage of the current price of the bond

IRR

Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does. NPV= ∑ {Period Cash Flow / (1+R)^T} - Initial Investment where R is the interest rate and T is the number of time periods. IRR is calculated using the NPV formula by solving for R if the NPV equals zero.

Intrinsic Value

Intrinsic value is the amount by which an option is in-the-money

Inventory

Inventory is the raw materials, work-in-process products and finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders.

Broker Dealer Departments

Investment Banking Sales Trading Operations

Value Strategy

Investor looks for stocks with strong fundamentals - including earnings, dividends, book value, and cash flow - that are selling at a bargain price, given their quality. The value investor seeks companies that seem to be incorrectly valued (undervalued) by the market and therefore have the potential to increase in share price when the market corrects its error in valuation.

Interest rate risk

Investors who purchase bonds assume the risk that the market value of their investments may decline if interest rates rise.

Refunding

Involves an issuer selling a new bond and using the proceeds to pay off a bond that is currently outstanding.

Expansionary Fiscal Policy

Involves increased spending over taxation to stimulate economic growth

Consolidated Bonds

Issued by FHLBs and have maturities that range from 1-30 years.

Outstanding Stock

Issued stock - treasury stock = outstanding stock

Sponsored ADRs

Issued with the cooperation of the foreign company and carry all the rights of the common stock

Rule 105

It is a violation for any person to first sell short the security that is the subject of an offering and then purchase the offered security from an underwriter.

Securities Act of 1933 Section 5

It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 77h of this title

Last In First Out (LIFO Method)

Items acquired Latest in the year are expensed (COGS). Items acquired earliest in the year remain in ending inventory.

First In First Out (FIFO Method)

Items acquired earliest in the year are expensed (COGS). Items acquired latest in the year remain in inventory.

Regulation A+

Jumpstart our business startups (JOBS act) expanded regulation to have tier 1 sales of up to $20 million within a 12 month period. Tier 2 - Sales of up to $50 million within a 12 month period.

Direct-Purchase Plans

Let employees purchase shares of their respective companies with their personal after-tax money

Collars

M&A transactions that involve share issuance have collars that set a lower range and upper range on the acquirer's stock price.

Distressed Debt Lend to Own situation

Let's suppose you think XYZ Corp. is a good company, but it carries way too much debt relative to its earnings power. You believe that if the company were debt free, it could be worth as much as $1 billion. Unfortunately, it carries about $2 billion in debt it cannot afford to pay. The company's debt trades for about $0.20 on the dollar, as investors are running for the exits as quickly as they can. You start buying up the debt. Within months, you acquire all of its $2 billion in debt for just $400 million. When XYZ Corp. inevitably goes into bankruptcy, you'll be first in line to collect on your debt.

Benefit of C Corporations

Limited personal liability of directors, shareholders, employees and officers. Legal obligations of the business cannot become personal debt obligations of any individual associated with the business.

Characteristics of a Depression

Long, abnormal increase in unemployment, decline in credit, less investment, bankruptcies, currency fluctuations

Long Term Debt

Long-term debt consists of loans and financial obligations lasting over one year. Long-term debt for a company would include any financing or leasing obligations that are to come due in a greater than 12-month period. Long-term debt also applies to governments: nations can also have long-term debt.

Agency Securities

Low-risk debt obligations that are issued by U.S. government-sponsored entities (GSEs) and other federally related bodies. Agency securities are issued by GSEs, including the Federal National Mortgage Association (FNMA), Federal Home Loan Bank and the Student Loan Marketing Association (SLMA). These entities were created to reduce the costs associated with borrowing for certain areas of the economy, including homeowners, students and farmers.

How do you know if the temporary difference will create a DTA?

Lower future taxable income; T.I. > B.I. in early years

LIFO Advantages

Lower taxes; better matching of latest costs against latest revenue. Provides tax savings. Income statement oriented because of better matching.

Pre-payment Risk

MBSs are subject to prepayment risk. This is the risk that is tied to homeowners paying off their mortgages early. The prepayments are passed through to the pools that hold the old mortgages. At this point the pass through investors will have to reinvest this large amount of principal at a time when interest rates have declined.

Qualifying Sources

MLPs must receive their income from sources such as exploration, mining, extraction, refining oil and gas, transportation, and the production of alternative fuels.

Regulation Basics

Major laws come in the form of Acts from the SEC Creation and enforcement of day-to-day rules are often handled by self regulatory organizations (SROs) like FINRA (Financial Industry Regulatory Authority)

Management Buyout (MBO)

Management buyouts involve the acquisition of a company by its current management team.

Parity Price of Stock (formula)

Market Value of Bond / conversion ratio

Parity Price of Stock

Market Value of bond / Conversion ratio

P/E

Market Value per share / EPS

Market Capitalization

Market capitalization is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. Price * Shares outstanding

OTC Market

Market for stocks that do not trade on a national exchanges (OTC Bulletin Board and OTC Pink)

Parity Price of Bond (formula)

Market value of stock * conversion ratio

Marketable Securities

Marketable securities are financial instruments that are very liquid and can be quickly converted into cash at a reasonable price. The liquidity of marketable securities comes from the fact that the maturities tend to be less than one year, and that the rates at which they can be bought or sold have little effect on prices. Examples of marketable securities include commercial paper, banker's acceptances, Treasury bills and other money market instruments.

Maturity of Corporate Notes

Maturity of 270 days - 10 years

Settlement of Syndicate Accounts

No later than 90 days following the syndicate settlement date, syndicate managers must provide each syndicate member with an itemized statement of expenses

Securities Act of 1933

Non-exempt securities are required to be registered witht he SEC. Attempts to prevent fraud in the sale of new issues by requiring that investors be provided with enough relevant information about the offering to make an informed decision.

Normalized Earnings

Normalized earnings are adjusted to remove the effects of seasonality, revenue and expenses that are unusual or one-time influences. Additionally, normalized earnings can be thought of as a firm's earnings that take into account seasonal or cyclical sales cycles.

Third Market

Over-the-counter, negotiated-price trading of exchange-traded securities

Limited Liability Company

Owners are not personally liable for the company's debts. IRS treats these companies like a partnership for tax purposes.

Price to Book Value Ratio

P/B = Stock Price / (Total assets - intangible assets and intangible liabilities)

Conversion Ratio

Par value of bond / Conversion price

Quiet Period

Participating broker dealers may not publish or distribute research reports or make public appearances for the subject security and the firms analysts are prohibited from making public appearances regarding the issuer.

Eurodollar bonds

Pay their principal and interest in U.S. dollars, but are issued outside of the U.S. (primarily in Europe).

Adjustable-rate preferred stock (ARPs)

Pays dividends that are determined by an underlying benchmark - usually the US treasury bill rate

Non-affiliated Directors

People who serve on the board of directors that are not otherwise connected to the corporation

Rule 144A

Permit sales of restricted securities to qualified institutional buyers without limitations regarding the amount being sold and the frequency of sales that are imposed by 144 creating a more liquid private placement market.

SEC Rule 134

Permits the publication of a simple advertisement that describes the basic features of a new issue. If the advertisement meets all of the conditions, its not considered a prospectus.

Rule 135a

Permits the use of advertising that is limited to general information about investment companies or to the nature of investment companies.

Managers Fee

Portion paid to the managing underwriter

Selling Concession

Portion that is paid to the firm that sells the shares

Leading Economic Indicators

Precede the upward and downward movements of the business cycle. Ex: Average workweek production in manufacturing; weekly claims for state unemployment insurance; new orders for consumer goods and materials, money supply

Structured Products

Prepackaged securities that are a combination of securities, such as a bond and a derivative.

Anti-Retaliation

Prevents a firm or any of its affiliates from directly or indirectly retaliating, or threatening any research analyst who publishes a research report that has a negative effect on the firm.

Rule 101

Prevents interested persons from manipulating the secondary market prior to distribution

Price / Free Cash Flow

Price to free cash flow is a valuation metric that compares a company's market price to its level of annual free cash flow. This is similar to the valuation measure of price-to-cash flow but uses the stricter measure of free cash flow, which reduces operating cash flow by capital expenditures. This is done as companies need to maintain or expand their asset bases (capital expenditure) to either continue growing or maintain the current levels of free cash flow.

Confidentiality Agreement

Prior to investing, any person that is provided with a private placement memorandum must sign a confidentiality agreement or non-disclosure agreement (NDA).

Private Equity

Private equity is capital that is not noted on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.

Disintermediation

Process by which investors withdraw funds from banks and seek higher yielding investments elsewhere.

SEC Rule 14e-3

Prohibits a person from trading while in possession of material, nonpublic information concerning a tender offer

Rule 102

Prohibits issuers and selling security holders (mainly insiders) from supporting or raising the price of a security that is being distributed. Broker-dealers may not purchase or bid for covered security or induce others to do so.

Business cycle - Recession

Prolonged period of contraction. Two or more months of consecutive GDP decline.

Stock Options

Provide employees the opportunity to buy shares at a fixed price for a set period of time.

Floating Collar Agreement

Provided the acquirer's share price remains within the collar range, the buyer and seller agree to a fixed exchange ratio.

Regulation A

Provides an issuer with an exemption from the registration requirements if it conducts a small issuance of securities and the business is organized under US law and they file 2 years of financial statements. The max amount of securities sold is 5 million in a 12 month period.

SEA Rule 14d-9

Recommendation or solicitation by the subject company and others

Schedule 14D-9

Recommendations or solicitations made by the subject company and other parties that are involved in a tender offer.

OTCBB (Over the Counter Bulletin Board)

Regulated "over-the-counter" quotation service for securities that do not trade on national markets, including ADRs and Direct Participation Programs (DPPs). Participants must remain current with SEC filings and must have a market maker

Rule 504

Regulates offerings up to $1 million within a 12 month period.

Rule 505

Regulates private offerings up to $5 million over a 12 month period. An unlimited number of accredited investors can purchase the securities and up to 35 non-accredited investors can purchase securities.

SEA Rule 14D and 14E

Regulation 14D (§§ 240.14d-1 through 240.14d-101) shall apply to any tender offer that is subject to section 14(d)(1) of the Act (15 U.S.C. 78n(d)(1)), including, but not limited to, any tender offer for securities of a class described in that section that is made by an affiliate of the issuer of such class. Regulation 14E (§§ 240.14e-1 through 240.14e-8) shall apply to any tender offer for securities (other than exempted securities) unless otherwise noted therein.

Testing the Water (regulation A)

Regulation A provides issuers the ability to test the waters for purposes of obtaining indication of interest from investors prior to filing an offering statement with the SEC.

Regulation S-X

Regulation S-X is a prescribed regulation that lays out the specific format and content of financial reports. It is cited as 17 C.F.R. Part 210; the name of the part is "Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Investment Company Act of 1940, Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975".

FINRA Rule 5122

Relates to a private placement of securities where a member firm is issuing the securities on its own behalf (aka Member private offering). The member firm must provide investors with a term sheet.

Selling, General, and Administrative Costs (SG&A)

Reported on the income statement, it is the sum of all direct and indirect selling expenses and all general and administrative expenses of a company. Direct selling expenses are expenses that can be directly linked to the sale of a specific unit such as credit, warranty and advertising expenses. Indirect selling expenses are expenses which cannot be directly linked to the sale of a specific unit, but which are proportionally allocated to all units sold during a certain period, such as telephone, interest and postal charges. General and administrative expenses include salaries of non-sales personnel, rent, heat and lights

ADRs (American Depositary Receipts)

Represent ownership in shares of non-US companies. Vehicle for trading international stocks on US markets

Lagging Economic Indicators

Represents items that change after the economy has moved through a given stage of the business cycle. Ex: Average duration of unemployment; labor cost per unit for manufactured goods; average prime rate charged by banks

Non-Systemic Risk or Specific Risk

Represents the possibility of a company making poor decisions that negatively impact the performance of its stock

Sarbanes Oxley Act

Required the SEC to implement new disclosure and corporate governance rules for publicly traded companies.

Customer specific Obligation

Requires a member firm and its RRs to have a reasonable basis to believe that a recommendation is suitable for a particular customer based on their investment profile.

Reasonable Basis Obligation

Requires a member firm and its RRs to have a reasonable basis to believe that a recommendation is suitable for at least some investors.

Section 404 of Sarbanes Oxley

Requires an SEC reporting company and its internal auditor to test the internal controls that are relevant to its financial reporting. Ie. Stress test

Sarbanes-Oxley Act Section 404

Requires each annual report of an issuer to contain an "internal control report", which shall: 1. State the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting 2. Contain an assessment, as of the end of the issuer's fiscal year, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Each issuer's auditor shall attest to, and report on, the assessment made by the management of the issuer.

Interest Rate Risk

Risk that the investments value will change as a result of changes in interest rates

Selling unregistered securities

Rule 144 permits the resale of restricted (unregistered) stock and covers the resale of control stock.

Eligible Securities

Rule 144a is primarily used to offer corporate debt and sometimes equity. No securities that are of the same class as those listed on an exchange can be offered. (have to be new securities)

SEC Rule 10b-18

Safe Harbor if: 1. Only one broker dealer can be used to place bids and asks 2. Issuers may not purchase before the first trade and within the last 30 minutes of the day. 3. Purchases occur at a price no higher than the highest independent bid from 3 dealers 4. The amount of stock purchased on a single day is limited.

Asset Turnover Ratio

Sales or Revenues / Total Assets Asset turnover ratio is the ratio of the value of a company's sales or revenues generated relative to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. Generally speaking, the higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets

Sales

Sales professionals are referred to as registered representatives. Market products to retail and institutional investors.

Depreciation in tax law

Salvage value is 0. Useful life provided by a table based on asset.

Sarbanes-Oxley Act Section 402

Section 402 of the Sarbanes-Oxley Act of 2002 was enacted to prohibit publicly traded companies from providing personal loans to directors and executive officers. Among the reasons identified were concerns over the use of company funds to provide personal financing to insiders

Collateral Trust Bonds

Secured by a financial asset owned by the corporation, such as stock or other bonds

At the Market Offerings

Securities are being sold directly into the secondary market through a designated broker-dealer at prevailing market prices.

Restricted Securities

Securities issued under Regulation D are unregistered and therefore restricted.

Capital Structure Hierarchy

Senior Secured debtholders Senior unsecured debtholders Senior subordinated debtholders Mezzanine Debtholders Preferred Stockholders Common Stockholders

Affiliated Directors

Senior executives of the corporation that also serve on the board of directors

Treasury STRIPS

Separate Trading of Registered Interest and Principal securities. Dealers are now able to purchase T-notes and T-bonds and separately resell the coupon and principal payments as zero-coupons after requesting this treatment through a federal reserve bank

Sinking Fund

Setting money aside to pay off bonds

Golden Parachute

Severance payment that is made to a senior officer of a company in the event of a takeover or change in control; payment likely to be significant

Cumulative Voting

Shareholders are able to multiply the number of shares they own by the number of directors being elected. This calculation determines the total number of votes that shareholders may cast in any manner they choose. Cumulative voting tends to favor smaller shareholders by giving them a better chance to elect their favorite director.

Statutory Voting

Shareholders vote each of their shares once for each director seat being contested. One vote, per share owned, per voting issue; therefore the more a person owns, the greater her voting power.

Treasury shares

Shares that were issued to the public and subsequently repurchased by the issuer

Treasury Stock

Shares the company has bought back in the open market

Shelf Registration

Shelf registration is a procedure, included in a regulation, that a corporation can evoke to comply with U.S. Securities and Exchange Commission (SEC) registration requirements for a new stock offering up to two years before doing the actual public offering. However, the corporation must still file the required annual and quarterly reports with the SEC. Shelf registration is formally known as SEC Rule 415.

Federal Funds

Short term loans that a banks lends using excess reserves to another bank. Considered money market instruments because the are just overnight

Short Term Debt

Short-term debt is an account shown in the current liabilities portion of a company's balance sheet. This account is made up of any debt incurred by a company that is due within one year. The debt in this liabilities account is usually made up of short-term bank loans taken out by a company, among other types.

Blue-Sky Laws

State securities laws that are established under the Uniform Securities Act (USA).

Cash Flow Statement

Statement of Cash Flows Operating Activities - Shows cash basis net income as total; Investing Activities- cash flows involving purchasing and selling of long term assets; Financing Activities - cash flows involving issuance of capital stock, cash dividends paid, long term liabilities, and stock buy backs

Expansionary Fiscal Policy Intent

Stimulate economic growth, but will typically increase the budget deficit

Term Endowments

Stipulate that only after a period of time or a certain event can the principal be expended.

ESOP (Employee Stock Ownership Plan)

Stock is set aside for employees in a trust fund, and are vested once a given employee reaches specified years of service

Control Stock

Stock that has been acquired in the open market by an affiliated person of the issuer (e.g. and officer/director)

Right of Transfer

Stockholders have the right to freely transfer their shares by selling them, giving them away, or bequeathing them to heirs.

Right of Inspection

Stockholders have the right to inspect certain books and records of the company including the stockholder's list and the minutes of stockholders' meetings

Rights to Evidence of Ownership

Stockholders have the right to receive one or more stock certificates as proof of ownership

Sum of the Parts Analysis

Sum-of-the-parts ("SOTP") or "break-up" analysis provides a range of values for a company's equity by summing the value of its individual business segments to arrive at the total enterprise value (EV). Equity value is then calculated by deducting net debt and other non-operating adjustments. Below are two situations in which a SOTP analysis would be useful: - Defending a company that is trading at a discount to the sum of its parts from a hostile takeover - Restructuring a company to unlock the value of a business segment that is not getting credit for its value through a spin-off, split-off, tracking stock, or equity (IPO) carve-out

Trust Indenture Act of 1939 (TIA)

Supplements the securities act of 1933 in the case of the distribution of debt securities. Provides for a trustee to represent bondholders in case of insolvency, with a written TRUST INDENTURE agreement between issuer and trustee on behalf of bondholders

Business cycle - Depression

Sustained, long-term downturn in economic activity in one or more economic sectors

Standby Agreements

Syndicate agrees to buy any shares that are not purchased by existing stockholders in a rights offering.

Effective Date

The date of a registration statement is generally 20 days after the filing of the last amendment. An issuer can request an accelerated effective date from the SEC.

Record Date

The date on which an investor must officially own the stock to be entitled to receive the dividend

Payment Date

The date on which the declared dividend will be paid.

Declaration Date

The date on which the dividend is authorized

Maturity Date

The date on which the issuer must pay the principal (face amount) to its bondholders

(Dividend) Payable Date

The date when a dividend payment is made, generally 3 weeks after the record date

Days Sales of Inventory

The days sales of inventory value, or DSI, is a financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are a work in progress, if applicable) into sales DSI = (Inventory / Cost of Sales) * 365

Fixed Value Agreement

The deal's total dollar valuation is guaranteed by altering the number of shares being issued to the target and is based on the performance of the buyer's stock prior to the closing.

Chapter 11 Bankruptcy (Reorganization)

The debtor typically remains in possession of its property and is considered to be the (DIP) debtor in possession once the filing is made. The company then develops a plan to restructure and pay off its debt.

Statutory Disqualification

The denial of an application for registration (U4) based solely on passed transgressions.

Additional Paid in Capital

The difference between the market price of the stock issued and the par or stated value

Stock Sale

The entire company is being sold and legally ceases to exist; therefore the buyer absorbs all of the assets and liabilities of the target firm.

Ex-dividend Date

The ex-dividend date represents the date on which a stock begins to trade without its dividend. If an individual purchases a stock for regular way settlement (T+3) on or after the ex-dividend date, he will not be entitled to the quarterly cash dividend.

FINRA Rule 3011

The firm must designate an individual, or group of individuals, as compliance officers to be responsible for monitoring and implementing the firm's AML program.

Ex-Dividend Date

The first day that a buyer will NOT receive rights to collect dividend when purchasing the stock. This date is 2 days before the record date because it takes 3 days for a transaction to settle

Part 1 of 10-Q

The first part contains relevant financial information covering the period. This includes condensed financial statements; management discussion and analysis on the financial condition of the entity; disclosures regarding market risk; and internal controls.

IPO

The first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.

Valuing Inventory

The first-in, first-out (FIFO) method says that the cost of goods sold is based on the cost of materials purchased the earliest, while the carrying cost of remaining inventory is based on the cost of materials bought the latest. The last-in, first-out (LIFO) method states that the cost of goods sold is valued using cost of materials bought latest, while the value of remaining inventory is based on materials purchased earliest. The weighted average method requires valuing both inventory and the cost of goods sold based on the average cost of all materials bought during the period.

FCF Yield

The free cash flow yield is an overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share FCF Yield = FCF per share / Mkt price of share Generally, the lower the ratio, the less attractive the investment is and vice versa. The logic behind this is that investors would like to pay as little price as possible for as many earnings as possible.

U.S. Treasury

The government department responsible for issuing all Treasury bonds, notes and bills. Among the government departments operating under the U.S. Treasury umbrella are the Internal Revenue Service (IRS), the U.S. Mint, the Bureau of the Public Debt, the Alcohol and Tobacco Tax Bureau, and the Secret Service, which is best known for its responsibility for protecting the president and vice president of the United States. Key functions of the U.S. Treasury include printing bills, postage and Federal Reserve notes, minting coins, collecting taxes, enforcing tax laws, managing all government accounts and debt issues, and overseeing U.S. banks in cooperation with the Federal Reserve. The secretary of the Treasury is responsible for international monetary and financial policy, including foreign exchange intervention.

Flipping

The initial sale of a new issue that occurs within 30 days following its offering date as an IPO. It normally creates downward pressure on price of the security in the secondary market.

Foreign Corrupt Practices Act (FCPA)

The law prohibits corrupt or improper payments to foreign government officials for the purpose of obtaining business.

Yield to Worst

The lowest potential yield that can be received on a bond without the issuer actually defaulting. The yield to worst is calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, call or sinking fund, are used by the issuer.

Downside of C corporations

The major downside of C corporations relates to the double taxation that occurs. When a C corporation generates income, it is required to file its tax return with the Internal Revenue Service (IRS). After deducting business expenses and salaries, the remaining income is subject to tax. This net income is also distributed to shareholders in the form of dividends. These dividends are income to the shareholder and are reported on the individual's tax return. Therefore, profits from a C corporation are taxed at the corporation's tax rate and individual's tax rate. Only net income retained by the C corporation temporarily avoids double taxation.

Price / Cash Flow

The price-to-cash-flow ratio is the ratio of a stock's price to its cash flow per share. The price-to-cash-flow ratio is an indicator of a stock's valuation. Although there is no single figure to indicate an optimal price-to-cash-flow ratio, a ratio in the low single digits may indicate the stock is undervalued, while a higher ratio may suggest potential overvaluation. The ratio takes into consideration a stock's operating cash flow, which adds non-cash earnings such as depreciation and amortization to net income. It is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non-cash charges.

(Price / Earnings) / Growth Ratio

The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock's value while taking the company's earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. While a low P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratio can tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. (P/E) / Annual EPS growth

Mutual Fund Sponsor

The principal underwriter of a mutual fund is called a distributor, or more commonly, the sponsor. The sponsor has a written contract with the investment company that allows it to purchase fund shares at the current net asset value and resell the shares to the public at the full public offering price, either through outside dealers or through its own sales force. The contract with the mutual fund company is subject to annual renewal, but as long as the sponsor is distributing and marketing the shares in a satisfactory manner, there is no reason why the sponsor's contract should be discontinued.

Code of Arbitration

The process used for the settlement of disputes.

Code of Procedure

The process used to discipline a person for violating FINRA rules, SEC rules, or even failing to pay dues or assessments.

Insider Trading

The purchase or sale of securities using material, non-public information about those securities in a fraudulent manner.

QIBS in 144 transactions

The purchaser must be a QIB; if the transaction requires a broker-dealer they must ensure the purchaser is a QIB.

Discount rate

The rate charged for loans made to members of the FRB

Coupon Rate

The rate of interest paid until the loan matures

WACC

The rate used to discount future unlevered free cash flows (UFCFs) and the terminal value (TV) to their present values should reflect the blended after-tax returns expected by the various providers of capital. The discount rate is a weighted-average of the returns expected by the different classes of capital providers (holders of different types of equity and debt), and must reflect the long-term targeted capital structure as opposed to the current capital structure.

Credit Risk

The recognition that an issuer may default and may not meet its obligations to pay

Securities Act of 1933 Section 7

The registration statement should contain everything that its supposed to contain according to 77a. An emerging growth company need not present more than 2 years of audited financial statements in order for the registration statement of such emerging growth company with respect to its IPO.

Convexity

The relationship between yield and price is not linear. Positive convexity describes the condition where as yields decline, prices increase at a faster rate for long-term bonds.

Restricted Period

The restricted period is either one or 5 days prior to pricing and ends when the broker-dealers participation in the deal ends.

Pre-emptive rights

The right given to common shareholders to buy newly issued shares of stock before they are sold to the public. Prevents dilution

Call Risk

The risk that a bond may be called by an issuer when interest rates are falling

Country Risk

The risk that a country could default on its financial obligations and harm the performance of all other financial obligations

Liquidity Risk

The risk that an investment may not be readily saleable or convertible to cash in the open market

Inflationary Risk or Purchasing Power Risk

The risk that an investment's returns will be adversely impacted because of inflation

Capital Risk or Principal Risk

The risk that an investor could lose all of the money that was invested

Foreign Exchange Risk

The risk that currency exchange rates can change the price of the asset

Growth at a Reasonable Price (GARP)

The strategy is a combination of both value and growth investing: it looks for companies that are somewhat undervalued and have solid sustainable growth potential.

Reinvestment risk

The risk that future coupons from a bond will not be reinvested at the prevailing interest rate from when the bond was initially purchased. Reinvestment risk is more likely when interest rates are declining and affects the yield to maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased. Zero-coupon bonds are the only fixed-income instruments to have no reinvestment risk since they have no interim coupon payments.

Political Risk

The risk that new legislation or changes in political control can have a significant influence on market performance

Section 363 Sales

The sale of an asset outside the normal course of business

Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. A private placement is different from a public issue, in which securities are made available for sale on the open market to any type of investor.Since a private placement is offered to a few select individuals, the placement does not have to be registered with the Securities and Exchange Commission (SEC).

Part 2 of 10-Q

The second part contains all other information. This includes legal proceedings; unregistered sales of equity securities; the use of proceeds from the sale of unregistered sales of equity; and defaults upon senior securities

Private Placements

The securities Act of 1933 provides an exemption from registration for securities that are sold in the transactions that are effected "by an issuer that is not involved in a public offering."

Control (Limited) Auction

The seller invites bids from a preselected list of likely buyers. Allows for some level of confidentiality for the potential seller.

Tax implication of asset sale

The selling corporation is required to pay tax on the difference between the cost basis of the assets and its sale price. The purchaser benefits by having a stepped up (higher) tax basis on the assets which may produce lower taxable gain when the assets are sold in the future.

Tax implication of stock sale

The selling shareholders pay a tax on the transaction based on the difference between their cost basis and the sale price.

Registration Statement

The set of documents, including a prospectus, which a company must file with the U.S. Securities and Exchange Commission before it proceeds with a public offering

Outstanding Shares

The shares that have been issued and are still held by the public

Teaser

The short executive summary of a private placement memorandum.

Arbitrage Investing Strategy

The simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies.

Premium (insurance)

The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time.

Straight/Noncumulative Preferred Stock

The straight preferred stock has no additional features. The holder is entitled to the stated dividend rate and nothing else. If the corporation is unable to pay the dividend, it is not owed to the investor.

Restricted Endowment

Their principal held in perpetuity, while the earnings from the earnings from the invested assets are expended per the donor's specification.

Communication with Research Department

There exists an information barrier between research and investment banking to avoid insider trading and conflicts of interest

SEA 1934 Amendment Rule 13d-1

These amendments make the short-form Schedule 13G available, in lieu of Schedule 13D, to all investors beneficially owning less than 20 percent of the outstanding class that have not acquired and do not hold the securities for the purpose of or with the effect of changing or influencing the control of the issuer of the securities. The purposes of the amendments are to improve the effectiveness of the beneficial ownership reporting scheme and to reduce the reporting obligations of passive investors.

Equipment Trust Certificates

These are bonds secured by a specific piece of equipment that is own by the company and used it its business.

Momentum Trading

These traders are looking for acceleration in a stock's price, earnings, or revenues. The traders will then often take a long or short position in the stock with the hope that its momentum will continue in either an upward or downward direction. This strategy relies more on short-term movements in price rather than fundamental particulars of companies, and is not recommended for novices.

Why can goodwill not be amortized and why can't land be depreciated?

They both have indefinite life.

Put Provision

This feature gives the bondholder the right to redeem the bond on a specified date prior to maturity. A put provision allows investors to redeem the bonds if interest rates rise.

Equity Turnover

This ratio measures a company's ability to generate sales given its investment in total equity (common shareholders and preferred stockholders). A ratio of 3 will mean that for every dollar invested in total equity, the company will generate 3 dollars in revenues. ET = Net sales/ average total equity

Securities Act Rule 144 Under the SEC

This rule governs the sales of controlled and restricted securities in the marketplace. This rule protects the interests of issuing companies, because the sales are so close to their interests. Section 5 of the Securities Act of 1933 governs all offers and sales and requires them to be registered with the SEC or to qualify for an exemption from registration requirements.

Section 333(h)(10) Election

This section refers to a part of the tax code which, if certain conditions are met, allows a stock sale to be treated as an asset sale.

Split-offs

This transaction involves the corporation being split into pieces. One shareholder will own shares solely of the orginal

High yield bonds

Those bonds rate BB and lower

Investment Grade Bonds

Those bonds rated AAA to BBB

Current Liabilities

Those debts due within one year or less of the BS date; Ex: Accounts Payable, Income taxes payable, notes payable, dividends payable, unearned revenue/deferred revenue

What is the difference between a 13G and a 13D?

To be able to file 13G instead of 13D, the party must own between 5 and 20% in the company. It must also be clearly understood that the party acquiring the stake in the company is only a passive investor and does not intend to exert control. If these criteria are not met, and if the size in the stake exceeds 20%, a 13D must be filed. Any investor with over a 20% stake must automatically file 13D, regardless of whether the intention to exert control exists. Additionally, institutional investors may be subject to stricter requirements than individual investors. Such requirements may include certification that the shares were acquired as part of normal business operations while also confirming the intent is not to exert control.

Debt to Equity Ratio

Total Liabilities / Shareholders' Equity

GNP

Total market value of goods and services produced by the residents of a country, even if they are living abroad

GDP

Total market value of goods and services produced within the borders of a country

NYSE Composite Index

Tracks the price of all stocks on the NYSE

Unsponsored ADRs

Trade only on OTC markets. Bear no responsibility to U.S. regulatory agencies

Trading Securities

Trading Securities Equity or Debt; Investments that are held for sale in the near term(90 days or less). Classified as CA on balance sheet. Carried on the BS at fair value (at market value); Unrealized gains/losses go on the IS as part of Non operating Income; realized gain/loss goes on IS; Dividend revenue goes on Income Statement.

Negotiable Treasury Securities

Treasuries are negotiable which means that investors may sell their securities to other investors after they are issued.

Treasury Notes and Bonds

Treasury bonds and Treasury notes are interest-bearing securities; each pays a fixed rate of interest semiannually and the investors receive the face value at maturity. Treasury notes have initial maturities that range from 2-10 years. Treasury bonds have maturity greater than 10 years.

Who pays more: strategic or financial buyers?

Typically strategic buyers are willing to pay more.

Treasury Bonds

US Government bonds issued with a maturity of 30 years. Pay coupon semi-annually

Treasury Notes

US Government bonds that mature in 2-10 years. Pay interest semi-annually and are quoted on the secondary market at percentage of par in 1/32s of a point

Treasury Bills

US Government bonds that mature in one year or less. Many regard T-Bills to be the least risky investment available to US Investors

Limitation on amount

Under Rule 144, there is a limitation imposed on the amount of stock that may be sold during any 90 day period. The maximum that may be sold is the greater of 1% of the total shares outstanding or the average weekly volume over the past 4 weeks.

Fingerprinting Requirements

Under SEC Rule 17f-2, fingerprints are required of any registered employees of a broker-dealer

Form U4

Under SRO rules, each individual who seeks registration with a member firm must complete form U4. This form is filed with the Central Registration Depository (CRD). U4 Form contains information about the person and answers questions

Rule 137

Under certain circumstances, a broker-dealer may distribute or publish research reports for securities that are currently in the registration process as long as the issuer is not a blank check company, a shell company, or an issuer of penny stock within the last 3 years.

Office of Supervisory Jurisdiction

Under industry rules, a member firm must appoint a princiapl to supervise the activities of any location that is defined as an Office of Supervisory Jurisdiction.

Holding period

Under rule 144, restricted stock must be held for six months and control stock can be sold at any time.

Bad Actors

Under rule 506, the SEC prohibits any offering if the issuer or any other participants (covered persons) are defined as bad actors. A bad actor has had some criminal implication or felony misdemeanor charge brought against them.

Selling Group

Underwriters that act as private placement agents

Dividend Recapitilization

When a PE firm that has already purchased a company takes on additional debt to pay itself and possibly management, a cash dividend. There is the risk that the market will not like this type of transaction since it increases debt of the company.

Debtor in Possession Financing

When a company files under chapter 11, it may find it difficult to raise new capital and a new lender may come in under the pretense it receives superpriority status as the first lender to be repaid

Dividend Recapitalization

When a company incurs a new debt in order to pay a special dividend to private investors or shareholders. This usually involves a company owned by a private investment firm, which can authorize a dividend recapitalization as an alternative to selling its equity stake in the company.

Minority Recapitilization

When a company reorganizes its debt and equity mixture with a PE investor owning less than 50% of the company. This provides liquidity to specific shareholders while preserving the capital structure

Preemptive Rights

When a corporation intends to issue additional shares of stock, a rights offering may be conducted to provide current shareholders they option to buys shares before they are offered to the public. In doing so, the current shareholders are able to maintain their proportionate interest in the company.

Form U5

When a registered representative resigns or is terminated from employment with a member firm, the firm is required to notify FINRA within 30 days by filing Form U5 with the applicable details.

Piggyback registration rights

When an issuer conducts a public offering an investor is able to register and sell the securities.

Private Equity Recapitilization

When the PE firm buy most, but not all, of the owner's interest in the company. The owner has liquidity but can still participate in the company's upside.

Oversubscribed IPO

When the demand for an IPO exceeds the shares being offered.

When are Fairness Opinions required?

When the transaction requires shareholder approval, or a proxy or tender offer filing is made with the SEC

Investment Banking

Works directly with the issuers to arrange and structure the needed financing.

SEC Rule 165

Written communications are permitted once a public announcement has been made regarding a business combination; ie press releases must be filed with the SEC

If bond purchased at a premium...

YTM < Current Yield < Nominal Yield

If bond purchased at a discount...

YTM > Current yield > Nominal Yield

Yankee Bond

Yankee bonds allow foreign entities to borrow money in the U.S. marketplace; sold in the US and registered with the SEC

Inverted Yield Curve

Yields are highest for the shortest maturity; economy looks bad

Income Strategy

aims to pick companies that provide a steady stream of income, is perhaps one of the most straightforward stock-picking strategies. When investors think of steady income they commonly think of fixed-income securities such as bonds. However, stocks can also provide a steady income by paying a solid dividend.

Federal National Mortgage Association (FNMA)

aka Fannie Mae. Raises money to buy insured Federal Housing Administration (FHA), Veterans Administration (VA), and conventional residential mortgages from lenders such as banks and savings and loan associations.

Federal Home Loan Mortgage Corporation (FHLMC)

aka Freddie Mac. The purpose is to provide liquidity to federally insured savings institutions that need extra funds to finance new housing, especially when credit is tight. Freddie Mac does this by purchasing residential mortgages from the savings institutions.

Government National Mortgage Association (GNMA)

aka Ginnie Mae. Part of the department of housing and urban development. It is a true government agency and is backed by the full faith and credit of the treasury. Ginnie Mae's purpose is to provide financing for residential housing.

Bonds with longer maturities...

have a longer duration

If bond purchased at par...

nominal yield, current yield, and yield to maturity will be the same.

Large Accelerated filers

the organization must have at least $700 million in public float. If the company meets this requirement, it has 40 days after the close of the quarter to file its 10-Q