Financial Advisor Quick Study

Control Person

(1) A director, an officer, or another affiliate of an issuer. (2) A stockholder who owns at least 10% of any class of a corporation's outstanding securities. Related item(s): affiliate; insider. - Exchange Act = More than 10% - Investment Company Act = 25% - Advisors Act/USA = 25%

Quick Asset Ratio (Acid Test Ratio)

(Current Assets - Inventory) / Current Liabilities

Hedge Funds

**Most hedge funds are organized as limited PARTNERSHIPS *The partnership is the issuer of the ownership units. *Not investment companies under Investment Company Act of 1940 (Don't provide same level of transparency) *They may not be suitable for discretionary accounts where account holders are not familiar with the risks associated with them. *They may charge both an annual fee and a fee based on the funds' profits. *Typically have unrestricted concentration limits *Initial investment minimums are typically well over $100,000 *Details of the offering would be found in -- Private Offering Memorandum *Blank-check and blind pool securities are offerings where the issuer has NOT specified the use of the capital it is raising. (Most Likely for Hedge Funds) **Hedge funds are LESS liquid than mutual funds Characteristics: - They invest in private securities, real assets, derivatives, and structured products. - They are privately organized and generally unregistered. - They use leverage, short positions, and concentrated positions. - More active trading over short period of time

Political Contributions (Pay to Play Rule)

- $350 per official or candidate per election in which they CAN vote - $150 for other elections (CAN'T VOTE) The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections.

Dividend Growth Model (DGM) (Equity)

- Assumes the amount of annual dividend will grow at a constant rate. - Computed value will be HIGHER when dividends are expected to grow rather than stay the same - Does NOT use Preferred Stock for DGM - Computes at a HIGHER current stock price** - Dividends are going to go up Dividend / stock price- dividend growth rate for common stock Is the best to value the stock or equity.

Successor Firm

- Both federal and state - Registers by filing a new application (ADV Parts 1 and 2) SEC = Pay appropriate fees USA = NO FEES

Markets

- Broadest Market/Coverage of US stock Markets = Wilshire 5000 - Large Cap = S&P 500 (+10 Billion) - Mid Cap = S&P 400 ($2 Billion - $10 Billion) - Small Cap = Russell 2000 (300 Million - $2 Billion) - International Stocks = EAFE Price Weighted = Dow Jones

Dollar Costs Averaging

- Buying more when low and less when high - End up with lower than average cost basis than those of underlying shares. Doesn't guarantee profit. Dollar-cost averaging means investing money in equal portions, at regular intervals, such as monthly or quarterly. This strategy is most effective when prices in the market are volatile.

Federal Covered Investment Advisor (IA)

- Can hire BD to be a solicitor (Not federally covered IA CANNOT) - Separate brochures for both BD and IA - $110 Million or more under management registers with SEC. $100-$110 Million can do either (Fall below $90 Million and get kicked back to state) - File form ADV with SEC and based off of fiscal year. Effective within 45 days - No net worth/Capital requirements - Withdrawal of registration on 60th day (Use form ADV-W) - Successor firm pays fee - Recordkeeping for 5 years - $10,000 and 5 years in jail - SOL - Sooner of 3 years after sale or 1 year after discovery - Brochure 120-day annual delivery - Insolvency is NOT a cause for revocation ****Registration renewal for IAs within 90!! days of fiscal year - Register as an IAR only if a place of business in the state (No de minimis) - Employee benefit plans $5 Million - Institution - May NOT use initials RIA or IAR on business card or letterhead. Professional or educational designations are okay. - Adviser, if a partnership, must notify client of ANY change in membership of partnership within reasonable period of time - Prepayment = MORE than $1,200, 6 months or more in advance - IAR with federal covered IA, IAR notifies administrator - Contract may be oral or in writing If the adviser only manages investment companies, it is federal covered - All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles

Futures

- Contracts to buy and sell commodities or stocks for a specified price on a specified date in the future - The holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration. - Purchasing a contract for future delivery is considered taking a long position. - Futures contracts can be written on financial assets or commodities. - A short position will increase in value if the underlying commodity or asset declines in value. - Among the ways in which futures differ from options is that both parties, long and short, are obligated to execute the contract - Sell future contracts (Index future) locks in price to sell in case market falls (Bearish) - Buying a future is normally done for consumers - Most cases, futures are closed out prior to expiration - Standard Contracts*** - Trade on exchange*** - Speculators use futures contracts (Without negotiations) - Payment is guaranteed by the exchange clearing house - HIGH liquidity - Regulated - Actively traded - Range of grades and uniform amount - Standard delivery and dates regulated by exchange

IRR

- Discount rate that makes the future value of an investment equal to its present value. - Method for computing long-term returns that Takes into consideration the time value of money!!!!!!!!!!!!!!!!!!!!! **Interest in a portfolio is reinvested at the.... REQUIRED RETURN - Must be determined by a trial and error process called iteration. - Preferred method of measuring the return on a DPP - Way the YTM of a bond is computed. Yield to maturity reflects the internal rate of return on a bond - Higher IRR, more appealing it is to undertake - Not practical for common stock due to uneven cash flow and no maturity date or price - When IRR equal to the discount rate (Sometimes called required rate of return), the NPV = ZERO - IRR is expressed as a % **Least likely to use COMMON STOCK

Tenancy By The Entirety (TBE) (ONLY MARRIED)

- Each cotenant has undivided interest in account - Can be created ONLY by married persons - Consent of the other tenant IS required before the other tenant can sell or give away interest in the property - Passes to surviving spouse at death - Most commonly used for ownership of real property (Real estate) and almost never for an account at a securities firm - Considered a single owner - no separate shares - Checks or distributions must be made payable in the account name and endorsed by all parties

Dividend Discount Model (DDM) (Equity)

- Fair current market value of a stock should be equal to the present value of all future dividends **Used to determine current value of security based on expected income - Dividends are a constant - Lower valuation than the growth version Take: - Investors expected future returns (Dividends) - Discount that amount to compute PV - Divide annual dividend by expected return *May also be used to value preferred stock Dividend/stock price-dividend growth rate for fixed dividend preferred stock. Annual Income / Expected Rate (Fixed Rate) = Expected Price The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it.

Weak (EMH)

- Historical - Believes technical analyst doesn't work - this form holds that credible fundamental analysis and insider information may produce above-market returns.

Issuer

- Individual who represents the issuer in transaction is EXEMPT

Equity Index Annuity (EIA)

- Not a variable annuity (Fixed annuity) - Not a security because you CAN'T lose money on it - Participation rate (90% and market goes up 10%, you get 90% of that or 9%) - CAPS - Capped at 15%, total of $100K, participation rate at 80%, how much will you have after year 3? - Year 1 = Up 10% = $108K - Year 2 = Down -3% = $108K (If index goes down, annuitant DOES NOT lose money) Negative: - Longer surrender charge periods (As long as 15 years)

Earnings Per Share (EPS)

- Only relates to Common Stock, it assumes Preferred dividends were paid

Semi-Strong (EMH)

- Passive Management - Information based on company financials and economic factors - Believes technical and fundamental analyst will not generate positive returns - Private (Inside) information can work (Wants inside info). only through the use of insider information can an investor achieve above-market returns - The semi-strong form of the EMH states that security prices fully reflect all publicly-available information. All public info is known

Private Fund Advisor

- Private fund advisers must keep the AUM under $150 million - **A Large Adviser more than 150 AUM that qualifies as either a Venture Capital Fund Adviser or Private Fund Adviser, or dealing with institution companies can elect to be treated as an ERA. An ERA will not be required to register with the SEC but will be subject to certain reporting, recordkeeping, and other obligations, if it maintains it is principal office in state , the firm needs to still register with the state.

ESA (Coverdell)

- Provisions that allow contributions to continue past age 18 for beneficiaries with special needs - Allowing Coverdell ESA contributions, for any year, to be made up to April 15 of the following year (just like contributions to your IRA). - Contributions can be made by parents and other adults (Anyone); the total for one child is $2,000. - Contribution limit is $2,000 PER YEAR, PER CHILD until the child's 18th birthday. - Contributions are not tax deductible, but all earnings are tax-deferred .- Distributions are tax-free if they are taken before age 30 and used for eligible education expenses .- If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. Their definition of family is extremely broad and, in addition to the obvious, includes cousins, aunts and uncles, and even in-laws.- Funded with AFTER TAX contributions - Can be for high school or college costs (Primary or secondary education) The Coverdell offers greater investment flexibility. (Better than 529) Primary schools are called elementary schools, intermediate (upper primary or lower secondary) schools are called middle schools, and secondary schools are called high schools.

Broker-Dealers (BD's)

- Records must be kept for 3 years Register: - Office in state - Solicit in state (Mail) - No De minimus for BD. If they even have 1 retail client in state, must register NOT REGISTER: - No Office - Clients are Institutional/Issuers ONLY - If agent with BD, both agent and BD must register in state - Broker-dealer does NOT include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers. - Broker-dealer means any person engaged in the business of effecting transactions in securities for the account of others or for his own account **Minimum net capital requirements apply to broker-dealers Broker-dealers registered in more than one state MUST be registered with the SEC because they are dealing in interstate commerce - Once a BD is registered in more than one state, it must register with the SEC. (Registers with both state and SEC, unless stated differently)) - NSMIA states that the Administrator may not require a broker-dealer to be bonded in an amount above that set by the SEC Disqualify Registration: Being currently under suspension, revocation, or injunction by any court, regulatory authority or SRO, domestic or foreign; currently employing a person statutorily disqualified; having been convicted in the past 10 years of a felony or a securities or financially related crime; or falsifying an application for registration. *CANNOT be sued for Opportunity Costs - BD's Are NOT fiduciaries - broker-dealer's fee schedule typically is disclosed at the time an account is opened. *A broker-dealer may act as agent for both buyer and seller in a transaction.

All STATE Players

- Registration expires on December 31st

C Corp

- Separate entity from owners - Needing SIGNIFICANT capital - Officers and directors are shielded from personal liability from debts and losses - Shareholders are also shielded from corporate creditors - Earnings are subject to double taxation - Entitled to exclude 50% of dividend income received from domestic corporations - Has retained earnings

Transfer on Death (TOD)/ Payable On Death (POD)/ Totten Trust

- Simplest way to keep assets held in brokerage accounts from becoming subject to probate upon client's death and be distributed specifically as account owner wishes. - Does NOT avoid estate taxes if applicable. - Owner has right to change beneficiaries at any time and provide unequal distributions - TOD (transfer on death) provides that, upon the death of the account holder, the assets pass to the named beneficiary or beneficiaries without going through probate. - The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS Totten Trust (Poor Man's Will) - Allow transfer of bank account

Community Property With Rights of Survivorship (CPWROS)

- Used in community property states (9 states) - Allows married couples to share property, like a home, equally - Legally each one has 50% interest - When first dies, entire home is then owned by survivor - Avoids probate

Strong (EMH)

- Uses both public and private information - Maintains that there is no information, public or private, that can assist an investor in achieving consistently superior investment returns. - stock prices follow a random walk and no technical analysis (price charting) or fundamental analysis (annual report or industry publication research) is of value in obtaining superior results - Put in INDEX fund - NOTHING WORKS

Present Value

-How much do we need in the future - Expected Rate of return - Time money will invest

Cost Basis

1) Cost basis - Giving niece inheritance while still alive - Person who receives the gift assumes donors cost basis 2) Grandma has died - Niece has inherited and able to use step up cost basis

3 Ways to Register a Security

1) Filing or Notice Filing - Method by which a registered investment company and certain other federal covered securities file records with state administrators. States to collect revenue in form of filing fees (Federal covered securities are preempt but still pay a fee) *least active review *most commonly occurs with investment companies registered under the Investment Company Act of 1940. ****MUTUAL FUNDS****** 2) Coordination (Most Common) - Security is eligible for Blue-Sky registration by coordination if the issuer files for registration of that security under 1933. Coordinating federal registration with state! *Coordination is the method used for nonexempt companies that are registering with the SEC. *FED registration requirement under SEC use coordination - Effective when cleared by SEC 3) Qualification (Local) (Intrastate) - Security is eligible for Blue-Sky registration if all of the offering is sold in a SINGLE state or not eligible for another method of state registration. - 147 - Effective only when administrator says so (Cleared) - Registration effective for 1 year from effective date - Registration can be amended after effective date to increase offering size if TERMS REMAIN UNCHANGED - Use when NO federal registration required

Exempt Transactions

1) Isolated Non-issuer Transactions **2) Unsolicited Brokerage Transactions 3) Underwriting Transactions (Between issuer and broker-dealers performing in capacity of underwriter) 4) Bankruptcy, guardian, or conservative transactions (Executor, administrator, sheriff, marshal, receiver, guardian, or trustee in bankruptcy are exempt) 5) Institutional investor transactions (Banks, insurance companies, investment companies) **6) Limited offering transactions (Not more than 10 persons - offerees) (Private Placements) **7) Preorganization certificates (Less than 10 subscribers) 8) Transactions with existing security holders 9) Non-issuer transactions by pledgees The term exempt transaction includes sales by fiduciaries, private placements, and isolated nonissuer transactions. Any solicited sale to an individual client, even of a properly registered security, is not an exempt transaction.

Federal Covered Securities (Don't register under state)

1) NYSE 2) Nasdaq 3) Mutual Funds!! 4) Private placement under Reg D

Investment Counsel (May not be used unless)

1) Principal business is investment advice 2) Substantial portion of service is providing investment supervisory services

Investment Advisor EXEMPTIONS (STATE)

1) Private fund advisor is more restrictive than Federal 2) Advisor has no place of business in state and: - Only clients are institutions such as investment companies, banks and trust companies, insurance companies, broker-dealers and other investment advisers. $1 Million or larger employee benefit plans, governmental agencies or instrumentalities - Does not direct communications to more than 5 clients in the state, during the previous 12 months (de minimus)

5 Components of a typical Forward Contract

1) Quantity 2) Quality 3) Time of delivery 4) Place for delivery 5) Price to be paid at delivery

Balance Sheet (Assets, liabilities, net worth)

1) Working Capital = Current Assets - Liabilities = Owners Equity OR Assets = Liabilities + Owners Equity Increase Working Capital: - Sale of securities - Profits from the business operations - Sale of noncurrent assets (Equipment no longer in use) 2) Current Ratio = Current Assets / Current Liabilities (Memory = Short term - current) (Higher the ratio, the more liquid the company is) 3) Quick Asset Ratio (Current Assets - Inventory / Current Liabilities) (Memory = Short term - current) 4) Debt to Equity Ratio (Memory = Long Term) 5) Book Value Per Share *Assets: - Cash and Cash equivalents - Accounts Receivable - Inventory - Prepaid Expenses - Negotiable Securities *Liabilities: - Accounts PAYABLE - Accrued wages payable - Current Long term debt - Notes payable - Accrued taxes *Shareholders' equity is the corporation's net worth, sometimes called owners' equity. It is computed by subtracting the TOTAL liabilities from the TOTAL assets.

Investment Advisor EXCLUSIONS (STATE)

1. Banks 2. Lawyers, Accountants, Teachers, Engineers (LATE) 3. Broker dealers 4. Publishers of any bona fide newspaper, news magazine, newsletter, or other publication that does NOT consist of the rendering of advice on the basis of the specific investment situation of each client 5. Investment Advisor Representative

Form ADV

A = Adviser (IA) B = Bodies (People) (IAR's) 1A - Business name, form of ownership - control persons (Federal covered and State IA's) Part 1A is the form used by all applicants for registration as an investment adviser. 1B - Disclosure Reporting Pages (DRPs) - Details about disciplinary events involving the adviser or affiliates (State ONLY) If the applicant is registering on the state level, Part 1B is also required. 2A - Create narrative brochures containing information about firm (Firm Brochure) Part 2A is the brochure 2B - Brochure supplements containing information about certain supervised persons Part 2B is the brochure supplement. *ADV 2 - Deliver to a client or prospective client the current brochure and supplement before or at the time of entry into in an investment advisory contract - FEDERAL = NO time requirement to deliver (48 hour Rule) - STATE = Deliver 48 hours in advance or have 5 days to rescind without penalty *Form ADV-E is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets. UPDATING FORM: - Updated ANNUALLY - Should information change (Material Change) - Prompt notification must be given in Part 1 - File an annual updated amendment within 90 DAYS after the end of the advisor's fiscal year. (Making sure over 90 million) - If there are material changes in the brochure (ADV 2) - deliver to client annually within 120 days after the end of fiscal year - No material changes, no brochure or summary

REITS

A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its taxable income to investors. *Owner of REIT hold an undivided interest in a pool of real estate investments *Liquid because they trade on exchanges and OTC *NOT investment companies (Mutual funds) *Offer dividends and gains to investors but NOT flow through losses like LP's, NOT considered DPP

Capital Structure

A corporation's capital structure consists of its long-term debt plus shareholders' equity. Included in shareholders' equity are the equity capital (stock) and the retained earnings.

Tenants In Common (TIC)

A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate. Each party must specify a percentage of interest in the account *Most commonly used for non-spousal relatives or friends *Ownership CAN be unequal - Do NOT need to make equal investments or have equal interest in the property in account **Goes to estate - Does NOT avoid probate - Checks or distributions must be made payable in the account name and endorsed by all parties

Fundamental Analyst

A fundamental analyst IS concerned with: 1) The economic climate (Broad economic trends) 2) The inflation rate 3) How an industry is performing 4) A company's historical earnings trends (Stock market price as a multiple of the company's earnings) 5) How it is capitalized (Capitalization ratio) 6) Product lines 7) Management Efficiency (Financial statements and company management) 8) Financial statement ratios, such as the P/E ratio. 9) Measures BUSINESS or FINANCIAL risk inherent in investing in a particular security **Looks at Book Value Per Share * Some FA feel the company's sales to earnings ratio is more valuable than the PE ratio because different accounting methods can impact earnings more than sales

Trough

A trough in a business cycle occurs at the end of a contraction phase when businesses are operating at their lowest capacity levels.

Memory Tip: AI < QC < QP

AI (Accredited Investor) = $1M net worth (no home) or $200k income for 2 years QC (Qualified Client) = $1.1M under mgmt or $2.2M net worth QP (Qualified Purchaser) = $5M; 2 people min, unless $25M than 1 person as an institutional investor

Memory Tip: Agent for issuers!! DOES NOT include: AlGos & Mr Pib(Think of a programmer working late!)

Algos & Mr Pib All Gov't Securities (including Canada) Municipals Promissory Notes Investment contracts Banks

Powers Of Attorney

All POA's seize upon death

Alpha

Alpha is the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the factors that affect all risky assets is systematic risk. *If stock has Beta of 1.5 and market goes up 10%, expected return is 15% (1.5 X 10) *If ACTUAL return is less than 15%, investor was not compensated for risk taken, vice versa -- If equaled 15% you would have ZERO ALPHA (Stood in place) *Negative Alpha is NOT GOOD *Measures performance that adjust for risk, relative to known benchmark When comparing the performance of several portfolios, which would you be most likely to recommend to your clients? **The one with the HIGHEST alpha

Future Value

Amount invested today at a given rate will be worth at some point in the future. - Current amount of money (Principal Amount) - Expected Rate (Coupon Rate)(Rate of return) - How long we have to get there (Number of interest payments/Number of years invested)

NOT AN AGENT

An individual representing an issuer in the sale of that issuer's security is not defined as an agent if the security is 1) Issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state 2) Issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing 3) Any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor 4) Promissory note, draft, bill of exchange, or banker's acceptance that evidences an obligation to pay cash within nine months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization 5) Any investment contract issued in connection with an employee's stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan. It is not just any exempt security that qualifies the individual for the exemption—only the five listed here. A confusing point is that the individual is not an agent when the sales are made in any exemption transaction with no exceptions.

CY

Annual dividend or interest / CMV

12b-1 Fees

Annual fees charged by a mutual fund to pay for marketing and distribution costs - What is it called when you take a % from a mutual fund?

Investment Advisor (IA) (Business) (State)

Any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in securities or, as part of a regular business, issues analyses or reports concerning securities MUST REGISTER - Has place of business in state - Has no place but more than 5 retail clients - Agency Cross - Can't trade against recommendations - Disclose cross and be approved by customer - IA's are FIDUCIARIES, BD's are NOT - Less than $100 Million under management generally registers with STATE - Filing fee is waived for the balance of the year (No new fee required for merger of 2 BD's) - Recordkeeping for 5 years (Most recent 2 years READILY accessible - Within 24 hours) (May be kept in normal accepted manner - Microfiche, digital, etc) - Partnership agreements, Articles of incorporation, minutes, any predecessor MUST be preserved until at least 3 years AFTER termination of the enterprise - $5,000 and 3 years in jail - SOL - Sooner of 3 years after sale or 2 years after discovery - Brochure - 120-day rule except 48 hours in advance - Insolvency IS a cause for revocation - Registration renewal is December 31st - Register in the state if retail clients reside in the state, subject to 5 or fewer de minimis - Employee benefit plans $1 Million - Institution - May NOT use initials RIA or IAR on business card or letterhead. Professional or educational designations are okay. - Adviser, if a partnership, must notify client of ANY change in membership of partnership within reasonable period of time - Up to 10 offers within the state over 12 months period (Private Placement) - File form with administrator. Effective noon of 30th day. Net worth and surety bonds required. Withdrawal of registration on 30th day. (Use form ADV-W) - Registration automatically registers any adviser rep - Partner, officer, director or similar in status - No Custody = $10K (Just fee reduction) - Custody = $35K (Fee deduction + send checks, etc) - Prepayment = MORE than $500, 6 months in advance - IAR with STATE, IA notifies administrator - Contract MUST be in writing (State rule) -That act considers promoters (solicitors) to be supervised persons, whether employed by the adviser or not, and requires

Discretionary

BD - Have discretion authority prior to first trade IA - Before placing an order for an account, IA should have written discretionary authority from client. Rule permits oral discretionary authority to be used for the initial transactions in a customer's account within the first 10 business days AFTER the date of the first transaction. One way in which the use of discretionary authority differs between agents and IARs is that agents may NEVER exercise discretion without prior WRITTEN authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account.

Book Value Per Share (Fundamental Analyst)

Balance sheet used to calculate (Tangible assets - liabilities - par value of preferred) / Shares of common stock outstanding (Market Value / Book Value) (Price X # of shares) *Book value reflects the theoretical liquidating value of the company, NOT its intrinsic value (Theoretical value of a company) (Expressed on a per share basis) *Balance sheet is used to calculate book value Book Value = Shareholders Common Equity - Preferred Stock For Book Value per share (BPS) Simply divide by the number of outstanding common shares

Limited Partnership

Benefits: 1) Not held personally responsible for partnership's indebtedness 2) May receive cash distributions and capital gains

Beta

Beta and beta coefficient mean the same thing. A stock or portfolio's beta is a measure of its volatility in relation to the overall market (systematic risk). The overall market is typically based on the S&P 500. A security that has a beta of 1.00 moves in line with the market. A security or portfolio with a beta of greater than 1.00 is generally going to be more volatile than the overall market. The reverse is true when the beta is less than one. A security that does NOT move in relation to market movement would have a beta of zero. For example, a money market security or money market mutual fund would have a beta of close to zero *1.0 moves with market *Market up 5%, investment up 5% *Beta of 1.5 is 50% MORE volatile than market *Beta of 0.5 is 50% LESS volatile than market *Market risk is measured by a security's beta*Measures a security's volatility in relation to overall market

Memory Tip: Investment Adviser FED exclusions: BaD to be LATE to the PUB

Broker-Dealers (incidental service with no compensation) LATE professions Publishers of general advice US Gov't security advice only Banks and Bank Holding companies

Discounted Cash Flow (DCF)

Compares the value of the future cash flows of the project to today's dollars. (Fair value) **Adding together PV of the future coupons to the PV of maturity value = DCF - Higher the DCF, more valuable the investment Have to Know: - Principal (future cash flow) - Coupon Rate (Nominal) (Discount Rate) - # of payments (Interest) **(NEVER market price) Market Price = EQUITY securities, NOT FOR BONDS Used to assess the value of a fixed-income security by looking at the future expected free cash flow and discounting it to arrive at a present value

Memory Tip: Registration for BDs & IAs ---> CRAB

Consent to Service of Process Registration fee Application fee Bond or Surety Bond

Dollar-Weighted Returns

Considers subsequent contributions to and withdrawals from an investment. Dollar-weighted return is more commonly used for evaluating investor performance. - Focuses on return of the INVESTOR (Not investment) - Reflects IRR, Time-Weighted Does NOT

Futures 2

Consumers BUY futures to lock in price in which to buy a commodity, producers SELL futures to lock in price to sell a commodity

Price-to-Earnings (P/E Ratio)

Current Market Price of Common Share / Earnings Per Share Question: Price of stock is $29 and that is 20 times the earnings, the earnings must be $20/20 or $1.45 per share

Price-To-Book Ratio/Value

Current Market Price/Book Value per Share *Useful when evaluating companies with inconsistent or negative earnings A financial ratio used by some analysts to help determine if a company's stock is over or undervalued

SEC Exempt Securities: DUMPI CRaBS

D Reg offerings US Gov't Securities Municipal Securities Promissory notes Intrastate offerings Commercial paper Reg A Banks SBIC securities

Time-Weighted Returns

Determined without regard to any subsequent cash flows of the investor. - Measures performance of the investment over a period of time and NOT of the investor Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals.

Needs Analysis

Determining a customer's needs by acquiring information, processing and evaluating the information, then creating a plan of action to address the needs. *How much life insurance is needed Considers Inflation, future income needs of beneficiary, NOT MARKET VOLITILITY

NPV

Difference between FV and PV (Investment today from 10 years from now) - Investment is a good one if it has positive NPV (Stay away if the NPV is negative) - Generally considered more important than IRR - In an efficient market, bonds should be priced so that their NPV is ZERO - NPV is NEVER expressed as a %. Shown as $ amount - Doesn't need INFLATION RATE Net present value is a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.

Memory tip: An offer is considered to have been made in a state when: Offer = DOA

Directed to the state Originated in the state Accepted in the state

Intestate

Dying without a will

High-Water Mark

Highest value reached by the index between anniversary dates of the annuity is compared to the value at the beginning of the year. Can provide greatest gain

LLC

If a business owner's goal is ease in raising capital, the LLC is preferable because it has no restrictions on the number of nationality of investors. *Ease in raising capital *Limits Personal Liability *Flow-through of taxable earnings or losses *Owners are MEMBERS *No limit on number of members *Not subject to tax at business entity level

Memory Tip: IRR > hurdle rate = NPV > $0 = profitable investment

If the NPV found is POSITIVE (above zero), it is expected that the investment will be profitable. If the IRR exceeds the required rate of return/hurdle rate, then the project is expected to be profitable.

Annual Reset

Index-linked interest is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to your annuity each year during the term. *Generally a lower participation rate than point-to-point

Point-to-Point

Interest in computed based on the value of the index at the end of the contract compared to the beginning

Memory Tip: Investment Adviser USA exclusions: IARs aren't BAD to be a BIT LATE to the PUB

Investment Adviser Reps Brokers, Agents, & Dealers (incidental service with no compensation) Banks Investment companies Trust companies LATE professions Publishers of general advice US Gov't security advice only Banks/Bank Holding companies

Memory Tip: IA = ABC

Investment Advisor = Advice as a Business for Compensation

L.A.T.E

Lawyers, accountants, teachers, and engineers. **Must be incidental

Per Stirpes

Means "Branch" - Beneficiary's share of the inheritance is to go to an heir Means per family line ie if 5 children and 1 dies, then 4 children and the kids of the 5th would get the $

Averaging

Most common is monthly average, can be best when markets are expected to be highly volatile

Anti-Fraud

NO ONE AND NOTHING IS EXEMPT FROM ANTI-FRAUD PROVISIONS

Correlation

Negative: - Things that move the opposite direction - One of the best ways to increase diversification - (-1) = More diversified High Correlation: - .80 and up

Person

On the exam, minor children, deceased individuals, and mentally incompetent individuals are the only choices that are NOT persons under the act.

Due Date

One effect of this is that Multiple member LLCs, partnerships, and S corporations all have the same filing deadline. (March 15th) For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

Wrap Fee Brochure

Part 2A Appendix 1 of Form ADV When opening new wrap accounts, agents are required to disclose to customers that wrap fees may result in higher costs than separate charges for advice, management, and transactions if the client is not able to use all of the services included. For those clients that are able to make use of all of the services provided, the costs will generally be lower than the cost of buying them piecemeal. Future performance of managed accounts may not be stated or implied. Wrap Accounts: Two primary services that are always present are advisory services and execution of trades

General Partnership

Partnership in which partners share equally in both responsibility and liability **Consider COLLECTIVE OBJECTIVES -Unlimited liability (Loss potential) -Management responsibility - Fiduciary Responsibility - Act as an agent for the partnership in managing partnership assets. - Sell property to the limited partnership .- No conflicts of interest (Can't Borrow, Comingle, Borrow) When an investment adviser's business structure is a general partner, the brochure must be signed by a general partner; an officer's signature is not sufficient. If the firm is a corporation, then an officer's signature is acceptable

TIPS (Keeps pace with inflation)

Protects investors against purchasing power (inflation) risk. *Issued with a fixed interest rate but the principal amount is adjusted SEMIANNUALLY by an amount equal to the CPI. Does not receive until the bond matures, it is reported as income each year Benefits: 1) Semiannual adjustments to principal based on the Consumer Price Index (CPI) 2) Interest payments that keep pace with inflation *Fixed interest rate, par value changes *Principal value adjusted every 6 months (Par Value) *Pays interest every 6 months *Matures 5, 10 or 20 years *At maturity, principal will never be less than original 1,000 par *Helps with variable annuities *Exempt from state and local income taxes on the interest income generated, subject to federal taxation *Differ from all other US Treasury securities by subjecting the investor to Phantom Income

Strategic Asset Allocation

Refers to the proportion of various types of investments composing a long-term investment portfolio Depends on rebalancing Strategic asset allocation is determining the target asset allocation percentages for a portfolio and remaining there. Believes that the market is perfectly efficient because stock prices reflect all available information Practice of rebalancing client portfolios on an annual basis. The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market

Agent

Register: - Works for BD and sells or solicits SECURITIES (Including sales assistants, interns) - Works for non-exempt issuer (Corporation) - Sells and solicits securities NOT Register: - Works for BD and clerical duties only/ silent partner - Works for exempt issuer (Munis, insurance company, nonprofit) - Performance-based compensation is NEVER permitted for agents. - No record keeping requirements - Agent means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities - only individuals can be agents - Persons who represent nonexempt issuers of new securities are agents under the USA unless it is stated that the transaction is exempt. - Anyone who solicits or receives/accepts or places an order while representing a broker-dealer is an agent. When an agent transfers employment from a broker-dealer registered with the SEC to a broker-dealer registered solely in this state, - The agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator When an agent transfers employment from any broker-dealer to any other broker-dealer, the agent and both broker-dealers must notify the state securities Administrator. ***An IAR only notifies administrator if IA is covered ***An IAR and IA notify administrator when its state

Memory Tip: Registration of Securities ---> REF

Registered under the act Exempt from registration Federal Covered Security

Memory Tip: Broker-Dealer!! does NOT include: SiT ABI(Think of a dog, Abi. "Sit, Abi!")

SiT ABI Savings institutions Trust companies Agents Banks Issuers

Joint Tenants With Right of Survivorship (JTWROS)

Stipulates that a deceased tenant's interest in the account passes to surviving tenant(s). **Goes to surviving party All parties have an undivided interest in the account. *Common for married couples - No changes in any account name(s) can be made unless authorized by a QUALIFIED and REGISTERED Principal - Principal MUST be informed of essential facts in writing - Must have approval of other tenant but approval goes to Principal, Not RR. - No rules prohibiting opening account for unmarried persons. Must take all steps to understand death consequences *Mail may be directed to the joint owner agreed upon by both parties to the account -Orders may be entered by either party - Checks or distributions must be made payable in the account name and endorsed by all parties

Investor does not care if stock is overvalued or undervalued, which strategy?

Strategic

Income Statement

The income statement reflects the firm's revenues (sales), expenses, and income. Assets, such as cash, are found on the balance sheet. - Earnings over a period of time is the income statement.

Alternative Assets

This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors. *Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns. That is the prime reason for their popularity, especially with institutional investors.

ADR's

Type of equity security designed to simplify foreign investing for US investors. Created when common shares are purchased in the foreign company's home market. Holding the ADRs in a portfolio entitles the investor to dividends paid in -- U.S. dollars and the ability to trade ADRs on U.S. securities markets - T+2 - Only taxable in US for capital gains - Trading profits would be taxed as capital gains - Owner of ADR may request that the depositary bank cancel the ADR and send them the underlying foreign shares - No voting rights, just foreign trading, dividends, and no preemptive rights *Trades are executed domestically in US dollars *Foreign corporation wants to see ADR issued for common stock for easier access to US capital markets * Facilitates investing in foreign securities in domestic exchange *Designed to simplify foreign investing for US investors, helps foreign companies attract US investor base - Are US Issued Securities Suitable For: 1) Diversification** (Primary Benefit) 2) Adds exposure to foreign stock (Equity) Risks: 1) Currency Risk 2) Exchange 3) Political

Technical Analyst

Uses: - Price Forecasting - Timing Considerations: - Price, Price history, Volume (Charts) - Support - Resistance - Breakouts - Consolidation - Trend Line "The trend is your friend" - Head and Shoulders - Reversal - Looks at market Interested In: 1) Graphs 2) Trading Volume 3) Moving Averages 4) Reversals 5) New highs and lows 6) Open short positions 7) Trading volume patterns 8) Measures MARKET risk assumed when investing in particular security 9) Charts a stock's price and volume over a period of time Theories: 1) Short Interest Theory 2) Odd-Lot Theory 3) Advance/Decline Theory *Declines outnumber advances = Bear *Advances outnumber declines = Bull *Rising advance/decline line is a bullish indicator. indicates that more stocks are rising in price than falling.

Investor Sentiment (Credit Spread)

When investor sentiment is positive, the extra safety of the Treasury security is not considered as valuable, so the spread is narrow. When there is "gloom and doom" ahead, investors flock to the safety of the Treasury, causing the spread to widen. Good = Narrow (Expansion is expected) Bad = Widen (Recession is expected, wants safety)

Soft Dollar Expenses (Safe Harbor)

YES: - RESEARCH REPORTS analyzing the performance of a particular company or stock - Financial newsletters and trade journals could be eligible research if they relate with appropriate specificity - Quantitative analytical SOFTWARE - Seminars or conferences with appropriate content registration fees - The use of client's commission dollars to purchase a BD's custodial services - SERVICES FOR BENEFIT OF CLIENTS NOT PERMITTED BY SEC: - Computer Hardware** - Office Equipment - Reimbursement of Travel Expenses to Attend Seminars (Hotel/Flight)** - Rent** - Software NOT related to securities - Payment for training for this exam - Internet Service - Office Furniture - Telephone Lines

Per Captia

by or for each person. A per capita figure is calculated by dividing the total amount of something by the number of people in a place.

Forwards

- It is only in the case of forward contracts that the buyer (and seller) are both obligated to complete the contract *Generally delivered - Preferred tool by producers - NOT STANDARD** - Institution to Institution*** - Never traded on exchanges - Highly customizable contracts - Hedgers use forward contracts - Counterparty Default risk - LOW liquidity - NOT actively traded - Specific grade and customized amounts - Customized delivery and dates

Investment Advisor Representative (IAR)

- No record keeping requirements ***An IAR only notifies administrator if IA is covered ***An IAR and IA notify administrator when its state Federal: - Register with STATE administrators - Only register in state in which you maintain office** NOT REGISTER: - If you have no office in state - Don't register STATE: -Register if office in state or client with residence NOT REGISTER: - No office and MORE than 5 clients Fed IAR - Must register ONLY in states in which they maintain an office (place of business) State IAR -Must register only in states in which they maintain an office or have more than 5 clients in a state IA Vs IAR Registered investment advisers, but not their representatives, are permitted to maintain custody of client assets (if not prohibited by the Administrator). There is no minimum net worth standard for IARs like there is for IAs. Both may be granted written discretionary powers, and if so, only the IA may be required to be bonded (adequate net worth will suffice).