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)