UNIT 1 (FINAL)

Primary Offering

$- Issuer Receives the money Issuers sell to investors in order to raise capital Issuer sells to investor When choosing to issue additional bonds to the general public in order to raise more capital, a corporate issuer is engaging in -A primary corporate offering is one in which the proceeds raised go to the issuing corporation. Primary offerings of bonds may be made by an issuer to the general public as an initial public offering (IPO) or, as is the case here, in an additional public offering (APO). Both are primary offerings. The prospectus requirement in an IPO of a security that is not listed in the National Market System is 90 days.

Secondary Offering

$- Selling shareholder receives the money Traded Investors sell securities to other investors -Trades between shareholders

Issuers Exempt from Securities Act of 1933 (Paper Act) and purpose

*Registration of IPOs: "Paper Act" -Issuing securities Issuing the securities -Corporations -U.S Governments -Municipalities -Banks/Charities -Money Market (short-term funds) -RULE 147 unless in own state -Regulation A -Regulation D 506(b) 506(c)

Additional Public Offering (APO)

- These are primary offerings (proceeds go to issuer) - They come after an IPO - There may be multiple APOs over time - $ goes to issuer -Used to raise capital like IPO Already publicly traded Rule 5130 does not apply: Ownership from 10% owners, members, officers, BDs, director general partner, portfolio managers, member firms and employees (ONLY IPOs)

Syndictae

-A group of broker-dealers, investment bankers, and other underwriters formed to assist an issuer in offering its securities

Day Orders

-Any order entered with no other qualifier is a day order -Any unexpected portion at end of day will be canceled -Any unexecuted portion is canceled at end of day

firm commitment underwriting

-BD buys securities from issuer -Syndicate purchased shares from issuer -Buy all securities from issuer (whole sale price)

Institutional Investors

-Banks, other broker dealers, nonretail

Investor

-Buys and sells securities for own purpose -Retail and day traders -Accredited and institutional -Investment advisors and fiduciaries

Exempt Securities/Transactions/Issues

-Commercial paper: Unsecured debt instrument issued by banks and corporations. Short-term and priced at a discount and matures 270 days or less (Most are 90 days) -Bankers acceptance: Short-term money market instrument used to fund international trade (Importer/Exporter) of goods, banks promise to pay face amount at maturity less than 3 months or 270 days -T-bills: Issued at discount -Registration Statement S-1: It is basically a registration statement for a company that is usually filed in connection with an initial public offering. -All Have 270 days or less to register before reaching maturity

Broker Dealer

-Effects securities transactions for customers and own account -Aids introducing firms to clearing firms -Clearing firms making transactions -Assisting and facilitating customers -Charge a commission the customer's firm is acting as an agent (broker), a go-between that sources the shares from a dealer.

Limit Orders

-Executed at a specified price or better Buy limit order: Limit price or lower -Wanting to purchase for less Sell limit order: Limit price or higher -Wanting to purchase for more NOT GUARNTEED TO FILL

"Trigger"

-First trade at or through stop price -Once triggered it becomes a market order

Accredited Investor

-Institutional -Income/net worth of $1 million -Make $200.000 for past 2 years and the following year -Married Couples: Combined Spousal -Income/Net worth of $1 million -Make $200.000-$30,000 for past 2 years and the following year -Hedge Funds/LPs/Private Placements *They understand the risks

Accelerated Depletion

-Lose volume more quickly

Buy Stop Limit/Sell Stop Limit

-More specific -Limit order -Once "TRIGGERED" at MP- "Buy Limit" to open a long position at the price lower than the current price. "Sell Limit" to open a short position at the price higher than the current price.

Intangibile Drilling Costs

-No gas or oil produced

Unlisted Securtiy

-Not listed on exchanges -Private Placements (Dark pools, accredited/Institutional investors)

Buy stop/Sell Stop

-Once "TRIGGERED" at MP -Market order- Executed immediately Buy 1,000 shares of XYZ at 32 -Purchased at 32 or better (lower) "Buy stop" to open a long position at the price higher than the current price. Sell 1,000 shares of XYZ at 32 -Sold at 32 or better (higher) "Sell stop" to open a short position at the price lower than the current price.

Permitted during cooling off period

-Preliminary prospectus -Red-Herring -Tombstone advertisement You can make indications of interest

Regulation A Tier 1 Small-Medium Sized Offerings

-Small-Medium sized offering Max of $20 million -No more than $6 million can be sold on behalf of existing shareholder Exempt registration w/ SEC

Listed Security

-Stock, bond, or another security that satisfies a certain minimum of requirements and traded on NYSE or other regional/national securities exchanges PUBLIC

Stocks Liability

-Stocks have limited liability because you are only liable for what you invest in

4th Market

-Trading activity that occurs through electronic communication networks (ECN) -Sometimes called "dark pools" of liquidity or just dark pools -Private placements with bigger investors (Accredited/Institutional) -Not openly available to the public A market for institutional investors in which large blocks of stock, both listed and unlisted, trade-in transactions unassisted by broker-dealers

Exempt from Registration

-U.S. Government -Rule 144 (Restricted/Control Stock) -Regulation A (Tier 1/2) -Rule 506 (b) and Rule 506 (c) "Private Placement" -Municipalities -Banks and common carriers -Charities and religious institutions -Rule 147 (Unless in own state) Fixed annuities: Not a security

Private Placement

-Unlimited capital can be raised -Not publicly traded (Secondary Market) -Not registered with SEC -Accredited/Institutional (Banks, Hedge Funds, Insurance) -Letter/Legend Stock (Restricted stock) -Unlimited capital gain can be raised -Lettered and Legend stock Private and not through public offerings and only sold in primary -Not sold on secondary market -Need to be accredited or institutional

Over the Counter (OTC)

-Unlisted stocks and most bonds (Corporate, Municipal, Government) -Not a physical location -Dealers buy and sell a security from inventory to provide liquidity -Negotiated market -Trade unlisted securities *In order to be listed need to meet certain requirements 3rd Market When a security does not trade on an exchange, it solely trades in the over-the-counter (OTC) markets.

Regulation D 506(b)

-Up to 35 non accredited investors (Regular Folk) -No general solicitations or advertising Exempt Registration -Understand Risk

Underwriting Phases

1. Registration Statement Filed -20 CALENDAR days (re-filed if mistake set from initial date and does not reset) COOLING OFF PERIOD 2. Cooling off period: Minimum 20 days (re-set from error date if something is wrong) "Deficiency letter" Allowed: -Preliminary Prospectus (Red herring) -Can publish tombstone advertising: No final date or price -Can gather indications of interest Not Allowed: -No binding indications of interest -No advertising -Offer securities for sales -Distribute final prospectus -Take orders -Accept post-dated checks 3. Effective date when AUTHORIZED/ALLOWED SEC NEVER "approves" new securities -Final/Full/Statutory document -Begins trading in the secondary market

Round Lot

100 shares Ex: Size 2 = 200 shares Size 3= 300 shares Less than 100 shares: "Odd lot" (< 100)

Treasury Stock

A corporation's own stock that it has reacquired "Buy Back" -Buying shares back -Not owning Issued-Treasury= Outstanding

Market Maker

A dealer who stands ready to buy or sell a specific security or securities at all times -A dealer willing to accept the risk of holding a particular security in its own account to facilitate trading in that security Having been told that a firm incorporates proprietary trading in its business model buying and selling securities into and out of its own inventory you would know that it is If the BD maintains an inventory, the firm is transacting as a principal (also called a market maker).

Registration Statement (S-1)

A filing with the SEC disclosing all the necessary information about a securities offering under the 1933 Securities Act; It is basically a registration statement for a company that is usually filed in connection with an initial public offering.

limited liability

A form of business ownership in which the owners are liable only up to the amount of their individual investments. -An investor's right to limited potential losses to no more than the amount invested. -Equity shareholders, such as corporate stockholders and limited partners, have limited liability (Stocks)

Listed vs unlisted

A listed company is a stock exchange-listed company wherein the shares are openly tradable. An unlisted company is a company that is not listed on the stock market.

Growth Stock

A stock from a company which has a consistent record of relatively rapid growth and earnings in all economic conditions. A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends

Agent Broker Commission Investment advisors receive

Agent + Broker receive Commission IA's get money from fees

Regulation D 506(c)

All purchasers MUST accredited investors Private Placement

preemtive rights

Allow shareholders to maintain their proportionate interest in the ownership of the corporation by purchasing newly issued shares before new stock is offered to public -1 right per share -Characteristic of common stock only -Preemptive rights obligate the stockholder to maintain his percentage of ownership when additional shares are issued

Regulation S-P

An SEC regulation covering privacy rules promulgated under the Gramm-Leach-Bliley Act. A broker-dealer must provide customers with a notice of its privacy policies and practices and must not disclose nonpublic personal information about a consumer to nonaffiliated third parties unless it provides certain information to the consumer and the consumer has not opted out of the disclosure. Rigorous standards to protect privacy are also required under the regulation.

liability

An amount owed by a business -A legal obligation to pay a debt. Current liabilities are debt within 12 months -Long-term liabilities are debts payable over a period of more than 12 months

All or None (AON)

An order must be executed in its Entirety but NOT IMMEDIATELY (not accepted on NYSE floor) -Must be executed in entirety or not at all -Does not need to be filled immediately Ex: If nothing done, order to buy 300 remains as GTC All 300 shares and if nothing is done do not want -NOT IMMEDIATE

Best Efforts Underwriting

Attempting to make best effort -Syndicate agrees to do its "best" to sell the shares -BD sells what they can -Give the rest back to the issuer

Exchnages

Auction market: Execute orders NYSE -Physical places -Exchange Listed Securities -Listed on exchange (NYSE) -Auction market (No negotiations) *BD on both sides representing customer

Carrying Firm

Big BDs -They help execute the trades, buys, etc. Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing or fully disclosed firms. Carrying firms can do trade executions, clear and settle transactions, and handle all back-office tasks, such as sending trade confirmations and statements. While they can take custody of customer funds and securities, they may not commingle them with those belonging to the firm. Abiding by the rule is known as segregating customer funds and securities. A broker-dealer that executes trades and settles transactions for another broker-dealer is called

Buying on Margin

Borrowing to purchase securities is typically known as buying on margin. (Exchange-traded funds) Closed-end

Exercise

Buyer/Seller -Each represented by a BD *Random or FIFO: First in First *Any fair method -OCC assigns exercise notices to short BDs on a random basis or FIFO

Act of 1934

Created the SEC: Used to protect investors -Secondary Market transactions -Exchange-listed securities - "People Act" Auction market: Execute orders NYSE -Physical places -Exchange Listed Securities -Listed on exchange (NYSE) -Auction market (No negotiated pricing)

Trustees

Directing investments with trusts -Fiduciary who oversees trust, pension TRUSTEE: An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as

Corporate Bond Interest vs Muni Bond Interest Equivalent Yield -Which is better? Depends on tax bracket

Example: Investor is 20% tax bracket Corporate bond yielding 8% Municipal bond yielding: 5% tax free Corporate x (100% - tax bracket) = Tax free Municipal Equivalent 8% x (100% - 20%) = 6.4% So, Corporate bond is better at 8% Municipal bonds offer yields that are usually lower, but the interest should be tax-free. So which should you buy?

Fill or Kill (FOK)

Execute ENTIRE order IMMEDIATELY or cancel entire order If nothing is done, the order is canceled Ex: Want 300 shares if 300 not available kill it! Executed immediately or cancel

Immediate or Cancel (IOC)

Execute any portion available IMMEDIATELY Cancel any balance remaining Ex: Want 300 shares got 200 and cant get 100 cancel the 100 -If 200 shares are executed, balance to buy 100 is canceled -Partial execution and remaining canceled

Market Orders

Executed immediately at the best available price -Price not guaranteed -BEST AVAILABLE Buy Market Order: Buy 1,000 shares XYZ at MKT -Executed immediately to buy at the best available market price Sell Market Order: Sell 1,000 shares XYZ at MKT -Executed immediately to sell at the best available market price *Take precedence over limit orders

Volume limits under rule 144

Greater of 1% of total shares outstanding or the 4 week average trading volume (Most recent weeks) -If there is a week 5, drop the 1st week Ex: Shares outstanding x 1% 10,000,000 shares outstanding x 1% = 100,000 or Average: Total/Number of recent 4 weeks $440,000/4 weeks: $110,000 4 week Average is greater

Syndicate

Group of BDs, investment bankers, and underwriters formed to assist an issuer in offerings of securities

Fiduciaries

Higher than all other responsibilities -Disclose all earnings -Manages assets (financial) for another person and has legal and moral obligation to perform duties in the best interest of beneficiary Act in a prudent manner to be careful: Suitable for goals and objectives

Retail Investors

Individual investors who buy and sell securities for their own personal accounts, and not for another company or organization. -Not savy -Average investor

Rule 147

Intrastate Rule: "Intrastate Offering" "I-47": 80% of customers do not have to be "in-state" -Purchasing securities within the own state *NOT EXEMPT FROM REGISTRATION unless registered in own state Example: Live in South Dakota but want to register in Maine you must register -80% income from own state -80% of assets in the state -80% offering proceeds Securities may not be resold to non-residents for 6 months after initial purchase

Introducing Firm/Fully Disclosed Firm

Introduces customers to a clearing firm. The clearing firm holds the funds and securities of the introducing firm's customers and performs related functions. typically smaller regional BDs Basically, the clearing firm acts as the introducing firm's back office. They can receive customer checks, but they must be out to the clearing firm. less risky because they are not holding customer funds and securities INTRODUCED TO CARRYING FIRM -No back office functions -Need to "Fully disclose"

Short

Investor borrows and sell to open (bearish)

Long

Investor owns and buys to own (bullish)

Foreign Stock

Issued by company located in country outside of US A foreign stock is the equity of a company that is headquartered outside of the United States. A foreign company can either trade on an international stock exchange, or it can issue shares in the United States either via a traditional initial public offering (IPO) or an American Depository Receipt (ADR) program

Selling Group

Large group of BDs with no financial commitment

Ask

Lowest price anyone is willing to accept to sell the securities ask price represents the lowest price a seller is willing to accept -What you pay as retail customer *Always higher than bid price BD sells Client buys Quotes are: Bid (-) ask format Investors pay the current ask price when purchasing and receive the current bid price when selling. $10.25

Offering Price of $22 per share (How are the fees orderly distributed?)

Managers fee = $0.25 (Smallest) Underwriting Fee = $0.50 Concession Fee = $1.25 (Arbitrary Fees) Issuer Fee = $20.00 (Biggest Fee) 10% of the price the issuer gets

3rd Market

Market makes in the OTC market may deal in exchange-listed securities (OTC trading of LISTED securities) -This trading activity is called the third market -Exchange listed stock -Sell out of own inventory (3 COMBO OF 1(Exchanges/Listed) and 2(OTC/Unlisted)

Regulation A Tier 2 Small-Medium Sized Offerings

Medium-Large Size offering Max of $75 million If exceeds maximum of $75 million it must be registered -No more than $22.5 million can be sold on behalf of existing shareholders Exempt registration w/ SEC

Transfer Agent

Mutual funds w/ record keeping and ownership -Securities placed with the right person -Maintaining records of ownership The transfer agent for a corporation is responsible for each of the following except -canceling old and issuing new certificates. -maintaining records of ownership. -ensuring that its securities are issued in the correct owner's name. -acting as an intermediary between the buy and sell sides of a transaction. The transfer agent (often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates. Acting as an intermediary in a trade is the function of the clearing corporation.

designated market maker (DMM)

NYSE members who act as dealers in particular stocks. Formerly known as "specialists" -Representing a specific company (Designated Market Maker) = "Specialist"

NSCC (National Securities Clearing Corporation)

National Securities Clearing Corporation (NSCC) is a subsidiary of Depository Trust & Clearing Corporation (DTCC) that provides centralized clearing, risk management, information, and settlement services to the financial industry.

Derivative Product

New product that results from modifying an existing product, and which has different properties than those of the product it is derived from. Value dependent on another underlying asset

Dealer

Other Terms: -Principal -Market Maker (OWN INVENTORY) "Think Car Dealer" - Own inventory -Buys into inventory, sells from inventory (maintains inventory) -Profits on difference between the buy and sell price (spread, mark-up, mark-down) -Significant Capital Risk

Broker

Other Terms: -Agent -Agency Buys and sells on behalf of the customer (no inventory) *CHARGES COMMISION -Little capital at risk *On behalf of customer

Outstanding Stock

Remaining stock *never exceed the number of shares authorized. Issued-Treasury= Outstanding

Cash Settlement

Same settlement day -Settlement occurs on the same day as the trade is executed -Stocks or bonds sold must be available on the spot for delivery

Stock vs. Bond

Stock: partial capital raised by a corporation available for investments -Ownership Bond: loan given to an investor by a corporation -Loan

Settlement for options and treasuries/Govies

T+1 -Mutual funds "settle" the next time the NAV is calculated -(T-bills, T-notes, T-bonds) -Options

Regular Way Settlement

T+2 -Corporate (stocks and bonds) -Municipality debt -FNMA, FHLMC, GNMA -When the customer must pay an issuer receives The BD representing the seller receives the cash due to the seller, and the BD representing the buyer receives the securities due to the buyer For corporate securities, regular way settlement is the trade date (Friday, April 2) plus two business days; therefore, the trade will settle on Tuesday, April 6.

Spread

The difference between the bid and ask price $10.25-$10.00 = $.25 The spread is computed as the difference between the lowest ask and the highest bid.

Initial Public Offering (IPO)

The first time a company issues stock that may be bought by the general public -First time brought to the general public -Used to raise capital Rule 5130 DOES APPLY: Ownership from 10% owners, members, officers, BDs, director general partner, portfolio managers, member firms and employees (ONLY IPOs)

Bid

The highest price a buyer is willing to pay to purchase the securities -Lower than ask price -Auction: Highest bidder at auction BBB (Broker Buys Bid) BDs pay bid price from customer ask Quotes are: Bid (-) ask format Investors pay the current ask price when purchasing and receive the current bid price when selling. $10.00

Money Market

The short-term (1 year or less) debt security market. Examples include commercial paper, banker's acceptance, T-bills. (Exempt Securities/Transactions/Issues)

Treasury Securities

Treasury Security: Taxed at federal level/Not taxed at State level -Frequency of Interest: Semiannual -Entered in book entry form -Backed by U.S. government (Safe place) T-bills (Zero-coupon) short-term/Money market/Less than one year -Issued at a discount T-Notes: 2-10 years (intermediate term), Fixed rate of return & Priced at par T-Bond Greater than 10 years (long-term) Fixed rate of return/Priced at par TIPS: Keep pace with inflation (5, 10, 30) -Adjusted par value STRIPS: Zero-coupon (No interest) Receive full amount at maturity Treasury Security: Taxed at federal level/Not taxed at State level -Frequency of Interest: Semiannual -Entered in book entry form

Custodians

UGMA/UTMA 1 Adult and 1 child Bank holding securities -Managing a minors account

Investment Advisor (IAs)

Vanguard -Profit off of Transactional fees they receive a commission based on the products that they sell (Transactional) and the investments they recommend (Advice) IA only get paid for advice

Good 'Til Cancelled (GTC)

When your order is valid until you cancel it GTC orders stay on the books until filled or canceled October/April

Agent

a person who acts or does business for another Ex: A customer placed an order to purchase 100 shares of Sierra Verde Corp. common stock. The broker-dealer sourced the shares from another broker-dealer that maintains an inventory in the stock. The customer's firm acted as In this example, the customer's firm acted as an agent (broker), a go-between that sources the shares from a dealer.

Tax deductible

a qualified expense that may reduce the amount of income subject to taxation an item or expense that can reduce the taxes a person owes in a given year. A deductible item is subtracted from the total taxable income which can substantially reduce taxes owed by an individual or corporation.

Commodity

a raw material or primary agricultural product that can be bought and sold, such as copper or coffee. a substance or product that can be traded, bought, or sold: The country's most valuable commodities include tin and diamonds.

Street Name and Settlement Details

an arrangement under which a broker is the registered owner of a security -Under BDs name but still maintain ownership of security -Electronic -Endorsed and signed by all owners/Exactly as name appears

Shelf Offering

an issuer who is already a publicly traded company can register new securities without selling the entire issue at once covered under the Securities Act of 1933 supplemental prospectus required -Allowing issuers to register a new security without selling the entire issue at once. The issuer can sell limited portions of the issue over 2 2-year period. A shelf offering occurs when the shares may be held and sold later DEF, Inc., registered to sell 1 million shares of DEF common stock. They plan to sell 500,000 shares immediately and sell the remainder of the offering within the next two years. This is called

Effective Date

date established by SEC as to when the underwriters may sell new securities to investors, a.k.a. "release date." When the Securities and Exchange Commission (SEC) clears securities for sale to the investing public, this is The effective date is when the SEC clears an issue to be sold to the public; the registration becomes effective.

After-Tax

dollars are money on which an employee has already paid. The amount that U.S. residents have left to spend or save after paying taxes is important not just to individuals but to the whole economy. after federal, state, and withholding taxes have been applied

Mid-Cap Stocks

firms that issue more than $2 billion to $10 billion of stocks

Small Cap Stocks

firms that issue more than $300 million to $2 billion of stocks

Tax-Deferred

income that is not subject to taxes immediately but that will later be subject to taxes.

A lock-up provision

means that the fund requires investors to hold their shares for a minimum length of time that the fund establishes. Therefore funds having a lock-up provision are associated with being illiquid.

Short-Selling

selling stock borrowed from a broker with the intention of buying it back later at a lower price, repaying the broker, and keeping the profit (selling securities the portfolio does not own).

Authorized Stock

the amount of stock that a corporation is authorized to sell as indicated in its charter

Issued Stock

the number of shares sold to investors; includes treasury shares