Securities Industry Essentials Exam
supply side economics
-government should allow market forces to determine price of all goods
notice of filing
-states don't have jurisdiction but can charge a filing fee
class A shares
Shares of a mutual fund that charges a front-end sales charge. Sales charges are paid at the time an investor buys shares and the sales charge is taken from the total amount invested
restricted securities
Those acquired through some means other than a registered public offering such as private placement
Third Market
off-exchange market for securities listed on an organized exchange
GNP
the sum of all goods and services produced in a nation in a year, ownership based
certificates of deposit
time deposits that state the amount of the deposit, maturity, and rate of interest being paid. Generally larger than 1 million.
solicited transaction
transaction initiated by an agent or representative
class C shares
typically have one year sales charge and a shareholder services fee
Federal Reserve
-12 regional Fed reserve banks and hundreds of national and state banks that belong to the system -determines monetary policy and takes actions to implement policies including 1. acting as an agent of treasury 2. regulating US money supply 3. setting reserve requirements 4. supervising the printing of currency 5. clearing fund transfers
Things to remember about REITS
-REIT owners hold an undivided interest in a pool of real estate investments -REITs may or may not be registered with the SEC -REITS may or may not be listed on exchanges -REITs are not investment companies -REITS offer dividends and gains to investors but do not pass through losses like limited partnerships and, therefore, are not considered to be direct participation programs
fully disclosed firm
-a firm that introduces into customers to a clearing firm
Securities Investor Protection Corporation (SIPC)
-a nonprofit corporation, created by Congress and subject to SEC and congressional oversight, that insures customer accounts against the financial failure of a brokerage firm -basic coverage under is no more than 500k per separate customer
Keynesian economics
-active government involvement is vital -government affects levels of spending and saving by taxes -demand for goods drives employment and prices
Repurchase Agreement
-agreement between a buyer and a seller to conduct a transaction and then to reverse that transaction in the future.
GDP
-all goods and services produced within a nation -personal consumption, government spending, gross private investment, foreign investment and net exports
monetarist theory
-believe the money supply is the major determinant of price levels -amount of money is the system is a major influence on economic performance
Real Estate Programs
-capital growth(achieved through appreciation of property) -cash flow(collected from rents) -tax deductions(from mortgage interest expense and depreciation allowances for wearing gout the building and capital improvements -tax credits(fro government assisted housing and historic rehabilitation
Carrying Firm
-carries customer accounts and accepts funds and securities from customers -largest broker-dealers
Broker-Dealer that doesn't comply is subject to:
-censure -limits on activities -suspension -revocation of reg -fine
Transfer Agents
-ensures securities are issued in the correct owners name -cancels all old and issues new certificates -maintain records of ownership -handle problems related to lost, stolen or destroyed certificates
reorganization
-entity will likely be able to retain property and continue doing business but must submit and stick to a plan that will allow the repayment of some of all of its existing debts
why include preferred stock on a portfolio?
-fixed income from dividends -prior claim ahead of common stock -convertible preferred sacrifices income in exchange for potential appreciation
Coordination
-form of registering securities -issuer files with the state at the same time it files with the SEC
qualification
-form of registering securities at state level -issuer must respond to any requirements the state specifies -most difficult
summary prospectus requirements:
-fund's name and the class or classes of shares -exchange ticker symbol -legend must appear on the cover page that refers to the summary nature of the prospectus and the availability of the fund's full prospectus
Accredited Investor
-has a net worth of 1 million or more, not including net equity -has had an annual income of 200k or more in each of the two most recent years
Common Hedge Fund Strategies
-highly leveraged portfolios -the use of short positions -the utilization of derivative products such as options and futures -currency speculation -commodity speculation -investment in politically unstable international markets
Advantages of Limited Partnership
-investment managed by others -limited liability(can only lose the amount invested) -flow-through of income and certain expenses
liquidation
-keeping property or continuing business will not occur and all property will be taken and sold to repay all debts
Federal Reserve Bank
-mandates how much money its member banks must keep on reserve -any deposits in excess are known as federal funds
Fourth Market
-market for institutional investors in which large blocks of stock, both listed and unlisted trade in transactions unassisted by broker-dealers
Limited Partnership
-most common type of DPP, investment opportunities that permit the economic consequences of a business to flow or pass through to investors, businesses themselves are not tax-paying entities
straight (noncumulative) preferred stock
-no special features beyond the stated dividend payment
Federal Reserve affects money supply through:
-open-market operations -changes in the discount rate -changes in reserve requirements
fund company expenses
-operating expenses: salaries and administrative fees -fund portfolio management fee: paid to those hired to manage the investments in the fund portfolio -asset based fee: fee determined annually as a flat dollar amount or as a percentage of NAV during the year
ETF advantages
-pricing and ease of trading -margin -operating costs -tax efficiency
FINRA Purpose
-promote investment banking and securities business -provide medium for communication among its members -adopt, admin, and enforce rules designed to prevent fraud -promote self-discipline among members
Municipal Advisor
-provides advice with respect to municipal products or the issuance of municipal securities, including advice with respect to structure, timing, terms, and other similar matters
MSRB (MUNICIPAL SECURITIES REGULATORY BOARD)
-regulates all matters related to the underwriting and trading of state and municipal securities -depends on other SROs for enforcement ability
established customer
-someone who's held an account witht eh broker-dealer for at least one year or -has made at least three penny stock purchases
callable preferred stock
-stock that can be bought back from investors at a stated price after a speciifed date
Federal Deposit Insurance Corporation (FDIC)
-the government agency that insures customer deposits if a bank fails -accounts covered up to 250k
prime account
-type of account that allows a customer to select one member firm to provide custody and other services while other firms-called executing brokers-handle all trades placed -key advantage is that it usually provides a client with the ability to trade with multiple brokerage houses
Three Phases of Underwriting
1. prior to filing of the registration statement, no sales can be solicited and no prospectus can be circulated 2. file reg 3. cooling off period: no one can solicit sales during period but indications of interest can be solicited 4. effective date (offering period may begin): sales can now be solicited but the firm must use a final prospectus
investment company
A corporation or trust that pools investors money and then invests that money in securities on their behalf.
Farm Credit System
A federal agency of the Department of Agricultural that offers programs to help families purchase or operate family farms.
Government National Mortgage Association (GNMA)
Commonly known as "Ginnie Mae," this agency of HUD operates in the secondary mortgage market. It is involved with special government financing programs. The only agency securities backed by the full faith and credit of the federal government.
exchange traded notes
Debt instruments in which the issuer promises to pay a return based on the performance of a specific debt index.
Federal Home Loan Mortgage Corporation
Freddie Mac: public corporation created to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial institutions
naked short selling
Involves selling short without actually borrowing the shares needed to sell short. This is illegal.
inflation risk
The danger that money won't be worth as much in the future as it is today
current yield
a bond's annual coupon divided by its price
Parity
a put option is at parity when the premium equals intrinsic value
discretionary account
account set up with the preapproved authority for a registered representative to make transactions without having to ask for a specific approval is a discretionary account
cumulative
accrues payments due its shareholders in the event dividends are reduced or suspended
investment management company
actively manages a securities portfolio to achieve a stated investment objective
yield to maturity
annualized return of a bond if held at maturity
fill or kill order
applicable to limit orders, this is an instruction to fill the order immediately or kill the order completely
class B shares
back-end sales load, a contingent deferred charge. Paid at the time an investor sells shares previously purchased
term bond
bond structured so that the principal of the whole issue matures at once. Since the entire principal is repaid at one time, issuers may establish a sinking fund account to accumulate money to retire the bonds at maturity
american style options
can be exercised at any time before expiration
European-style option
can only be exercised on the expiration date
no-load shares
companies who market their shares directly to the public eliminating the need for underwriters and thus the sales charges used to compensate them
face amount certificates
contract between an investor and an issuer in which the issuer guarantees payment of a stated sum to the investor at some set date in the future
investment company
corporation or trust that pools investors money and then invests that money in securities on their behalf
nominal yield
coupon or stated yield is set at time of issue
ex-dividend rate
date one day before the record date. Stock must be purchased before this day in order to receive dividends
Statement of Additional Information (SAI)
detailed registration document for an open-end or closed-end management company providing further details than what is contained in the statutory prospectus.
dividends
distributions of a company's profits to its shareholders
payable date
dividend disbursing agent sends dividend checks to all stockholders
preemptive rights
entitle existing common stock-holders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public
stock warrant
grants owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the time the warrants are issued
annuity
insurance contract designed to provide retirement income
unit investment trust
investment company organized under a trust indenture
Real Estate Investment Trust
investments that -own commercial property -own mortgages on commercial property or -do both(hybrid REITS)
primary market
market for selling financial assets that can only be redeemed by the original holder
exchange traded funds
offshoots of mutual funds that allow investors to trade index portfolios
open-end investment companies
only issues one class of security, which is common stock. It doesn't specify the exact number of shares it intends to issue but registers an open offering with the SEC
covered option writing
options contract where the writer already owns the underlying security, ensuring the ability to perform should the owner exercise the contract
uncovered option writing
options contract where the writer doesn't own the underlying security
preliminary prospectus (red herring)
part of the registration statement prepared by a company prior to an IPO that is circulated to investors before the stock is offered
balloon bond issue
pays off major portion of bond at maturity but pays part of the principal throughout
federal national mortgage association(Fannie mae)
publicly held corporation that provides the mortgage capital.
closed-end investment company
raise capital for its portfolio by conducting a common stock offering
FINRA
regulates all matters related to investment banking, trading in the OTC market, trading in the NYSE listed securities, and the conduct of FINRA member firms and associated persons
call risk
risk that a bond might be called before maturity and an investor will be unable to reinvest the principal at a comparable rate of return
market risk
risk that affects all companies in the stock market (type of systematic risk)
nonsystematic risk
risk that can be eliminated by diversification
systematic risk
risk that cannot be eliminated through diversification
sales loads
sales charges on the front end, back end or level load
serial bond issue
schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid
redeemable securities
securities that do not trade in a secondary market
Banker's Acceptance
short-term time draft with a specified payment date drawn. Payment date is normally between 1 and 270 days.
convertible preferred stock
stock that permits the preferred stockholders to convert their shares into common stock
record date
stockholders of record as of this date receive the dividend distribution
ordinary income
the income earned from interest, wages, rents, royalties, and similar income streams
yield to call
the rate of return earned on a bond when it is called before its maturity date
interest rate risk
the risk of capital losses to which investors are exposed because of changing interest rates (type of systematic risk)
Reinvestment Risk
the risk that a fixed-income investor will not be able to reinvest interest payments or the par value at attractive interest rates. Happens when rates are falling (type of systematic risk)