Chapter 12/13/14 Flashcards
(106 cards)
1
Q
Broker/Agent
A
Regardless of whether a client wants to buy or sell a security, a firm that acts as a broker (agent) is attempting to find the other side of the trade on behalf of its client. If a trade is executed, the broker is paid a commission.
- When acting as a broker a firm DOES NOT assume risk
2
Q
Dealers/Principals
A
When a firm buys securities for, or sells securities from, its own account, it’s acting as a dealer. When acting in a dealer capacity, a firm will adjust its prices for retail customers, in other words, the dealer will include either a markup or markdown.
- When acting as a dealer the firm DOES assume risk.
3
Q
True or false: A dealer that always stands ready to buy or sell a specific stock is also referred to as a market maker in that stock?
A
True
4
Q
Bid Price
A
The price at which the market maker is always willing to buy stock
5
Q
Ask/offer price
A
the price at which the market maker will sell the stock.
6
Q
5% markup policy
A
Since FINRA members are prohibited from selling securities excessively high or low, this policy was created. This policy says that a broker-dealer firm cannot sell a security above or below 5% of its MV.
mutual funds, variable annuities, new issues, municipal bonds, and government securities are exempt from the policy.
7
Q
Factors that determine whether a markup is excessive:
A
- Type of security involved
- The avilability of the secuity
- Price of the security
- Disclosure: Disclosing to the customer that the circumstances may warrant a higher-than-normal markup helps to make the dealer’s case.
- The pattern of the markups
- The nature of the broker-dealer’s business
8
Q
Proceeds transaction
A
When a customer directs a member firm to sell a security and use the proceeds of the sale to buy another security. For these types of transactions, the member firm must follow the 5% policy and compute the markup as if the customer had purchased the securities for cash.
9
Q
True or false: Securities that require the delivery of a prospectus or offering circular ARE NOT exempt from the provisions of the 5% policy because these primary issuances are sold at a specific public offering price.
A
False, they are exempt
10
Q
Discretion/Discretion Not Exercised
A
If a client has granted a registered representative discretion powers, a purchase of a security must be labled discretionary. If they have been given discretion powers but the client consented to the trade, it must be marker discretion not exercised. If placing a trade was the client’s idea, the order ticket is marked unsolicited. if the trade was recommended by the registered representative, the ticket should be marked solicited.
11
Q
Long sale vs short sale
A
Long sale: the customer sells stock that they currently own
Short sale: the customer sells stock they don’t currently own but instead borrows.
12
Q
Margin requirement
A
Short sales must be executed in a margin account. Brokerage firms provide short sellers with stock that has been borrowed from other margin customers. However, the other margin customers must provide permission for the firm to lend their securities to short sellers. The permission is obtained through the signing of a loan consent agreement at the time that the account is opened.
- The margin account will have a minimum required equity amount
13
Q
Covered call option vs uncovered/naked
A
covered: if the seller of a call option owns the underlying stock
uncovered: If the seller does not own the underlying stock
14
Q
What does 9x8 mean in a bid-ask quote?
A
The firm is willing to buy 900 shares and sell 800 shares.
15
Q
Inside market
A
The highest bid price and the lowest ask price
16
Q
Limit order
A
When customers want to buy or sell securities at a specific price, they enter limit orders. A limit order may be executed only at the specified price or better. A buy limit order may only be executed at the limit price or lower, while a sell limit order may only be executed at the limit price or higher. If the market price doesn’t trade at or better than the customer’s limit price, the client will not receive a trade execution.
17
Q
Day order
A
A limit order that only lasts a day
18
Q
True or false: limit orders are typically used for small orders?
A
False, limit orders are often used for large orders in thinly or infrequently traded securities in which the spread is wide
19
Q
Stop order
A
Uses a price to trigger an actual order when the specified price has been traded. Although stop orders avoid the risks of no fills and partial fills, you may end up with a lower price than you expected.
20
Q
Sell stop order
A
Placed below the current market price of the security and is used to limit a loss or protect a profit on a long stock position. It’s essentially a minimum willing to sell at.
Ex: Investor buys a stock at $25 per share and puts a sell stop at $20, so if it reaches $20 it will trigger it to sell.
Ex 2: Investor buys a stock at $25 and it rises to $50. The investor might put a sell stop order at $45 to protect their profit.
21
Q
Buy Stop Order
A
Placed above the current market price of the security and is used to limit a loss or protect a profit on a short sale.
Ex: An investor short sells a stock at $40 in hopes that it will decline value. The investor might be a buy stop order at $45 so that it can’t rise too high and thus limit their loss.
22
Q
Stop limit order
A
A conditional trade that combine the features of a stop loss with those of a limit order to mitigate risk. It includes a stop price, but once the stop price is triggered a limit order is set to where it will only execute if the price is favorable for the investor.
23
Q
Buy stop limit order
A
A buy stop-limit order is placed above the current market price of the security and is used to limit the loss (or protect a profit) on a short position. However, once activated, the buy stop-limit order becomes a buy limit order and, therefore, execution will only occur if the stock can be purchased at the limit price or lower.
24
Q
Good-‘till-cancelled orders (GTC)/open orders
A
A GTC order is one that remains in effect on a broker-dealer’s order book until it’s either executed or cancelled.
25
True or false: f no order qualifier is given, an order is assumed to be a GTC?
False, it's assumed to be a day order
26
Market order
Market orders receive priority over all other orders since they're immediately executed at the best available price when the order is entered.
27
Steps in the trading process
1. Placing the order: An order is filled (either a paper or electronic order)
2. Clearing the trade: If the order is executed, the two sides must agree on the terms.
3. Settlement: The two sides must exchange payments. Settlement is usually overseen by a 3rd party, such as the DTCC.
28
Settlement date
The date on which the transaction must be completed between the broker-dealers representing the buyer and the seller
29
Regular-way basis
The normal # of days to complete the transaction. This # depends on the types of securities involved.
Corporate bonds/munis: T + 2
Regular way transactions: T + 2
Treasuries/options: T + 1
Cash trade: Same day
30
Seller's Option
If trade settlement cannot be completed on a regular-way or for-cash basis, the seller may request a seller’s option settlement. This gives the selling firm additional time beyond the normal two business days to make good delivery.
31
True or false: Settlement date is the same as payment date?
False. Payment date is when the customer pays the broker-dealer and settlement day is when the two broker-dealers pay each other.
32
Payment dates
Corporate bonds: Settlement date + 2 business date
munis: exempt from Reg T
Treasuries: Exempt from reg T
Options: Settlement date + 2 business days
Cash: Same day
## Footnote
* Reg T determines the payment dates
33
DTCC settlement/Book-entry Settlement
the DTCC simply journals the movement of security positions and monies between each clearing firm’s account.
34
Paper Settlement
In some cases, physical securities may be delivered for settlement. the physical securities must be in proper order and have all of the necessary endorsements before being delivered to the buyer. A **good delivery** is when all the paperwork is in order.
For paper settlement, the correct security (w/ the correct CUSIP) must be delivered, the certificate must be signed, the correct # of securities must be delivered, and any restricted security must have its legend removed.
35
True or false: W/ stock transactions, the stocks must be delivered in multiples of 100 and bonds must delivered in multiples of 1,000?
True
36
How to calculate # of shares and price after a stock split?
number of shares= Shares owned * split ratio
Price = current price * inverse of split ratio
## Footnote
* For stock splits, the ex-dividend date is the business day following the payable date.
37
True or false: Stock splits and stock dividends are not taxable to the investor. The only action that must be a taken is for the investor to adjust his per share cost basis in the security?
True
38
Tender offer
A public offer which indicates a person’s or company’s (including the issuer’s) intent to buy a specific stock at a fixed price (normally above the current market price) in order to take control of the company or to gain representation on its board of directors.
39
Odd lot buyback
An odd-lot buyback occurs when a company offers to repurchase shares of its stock back from people who hold less than 100 shares. This is done sometimes since admin cost for small shareholders can be expensive.
40
Spinoff
A new and separate company that's created when a parent company distributes shares in a subsidiary or business division to the parent company shareholders. It is a type of divestiture.
41
Official Communication
Any relevant info that’s distributed by the issuer, a trustee, or a state/federal taxing authority.
42
Beneficial owners
Investors who have securities that are being held by a financial intermediary (ex: broker-dealer). These positions are typically registered in street name and each individual customer’s ownership is internally recorded on the firm’s stock record.
43
Non-objecing Beneficial Order (NOBO)
When a beneficial owner gives permission to her broker-dealer to release their name and address to the issuer. With this info, the issuer can provide NOBOs with shareholder communications, including proxies and financial filings (e.g., Forms 10-K and 10-Q).
44
Objecting Beneficial Owner (OBO)
When a client instructs their broker-dealer to keep their personal information confidential
45
True or false: A member firm is permitted to charge a customer for forwarding proxies or other financial reports from a corporation since reimbursement is typically collected from the issuer directly?
False, it's not permitted since the member firm may charge issuers for forwarding materials to the beneficial owners.
46
In the primary market, what form of settlement may be used when certificates are not ready for delivery?
In the new issue market, securities may be authorized, but not yet available and therefore unissued. In this situation, settlement is done on a when issued basis.
47
An individual has made a tender offer for a fixed # of shares of Firm A. If more shares are tendered than desired by the individual, a shareholder who has offered her shares will have what amount of them accepted?
An amount that's equal to the proportionate number of shares accepted.
48
In lieu of a customer's signature, what (if anything) may be used as proper endorsement of a certificate?
A stock or bond power.
49
If a security has been damaged in such a way that good delivery is in question, who's able to make the determination as to whether the security is acceptable?
The transfer agent
50
True or false: If a shareholder wants to exercise rights, the transfer agent of the issuer is generally contacted. For a limited period, the rights will trade in the same market as the underlying stock. Neither the OCC nor the NYSE handles the exercise of rights.
True
51
Cash account
A type of brokerage account where the investor is required to pay the full amount for the securities being purchased. Borrowing from the broker is NOT permitted. Even though Reg T requires customers to pay for their purchases within two business days of regular-way settlement, most firms require customers must pay for their trades on the settlemet date or risk exra fees.
52
Margin account
A type of brokerage account in which a broker-dealer lends money to the customer so that he’s able to purchases securities. The broker-dealer holds the securities as collateral. Reg T requires customers to deposit 50% of the trade amt and the firm can lend the other 50%. Reg T also says that customers must pay their portion 2 business days after settlement.
53
Industry rules for initial margin purchases
For an initial purchase in a long position, the customer’s minimum required deposit is the lesser of $2,000 or 100% of the purchase price.
For a short position, the customer’s minimum required deposit is $2,000. If a customer’s initial purchase or short sale exceeds $4,000, then a deposit of 50% of the security’s market value is required.
54
Marginable securities
Reg T only allows some types of securities to be purchased under margin:
* Equity and debt securities listed on NYSE or NASDAQ.
55
Which types of securities ARE NOT marginable?
1. IPOs
2. OTC
3. Mutual fund shares
56
True or false: Non-marginable securities means that these types of securities cannot be purchased in a margin account?
False, it means that any trades involving these securities must be paid for in full at the time of purchase.
57
How to open a margin account
A margin agreement must be signed which contains: a credit agreement, hypothecation agreement (mandates that securities loaned be held as collateral), and a loan consent agreement (gives the broker-dealer the right to lend long securities to short sellers).
A margin disclosure statement must also be provided. The disclosure states that a customer can lose more money than deposited, the firm can force the sale of assets int he account for a margin call, and a firm can increase maintenance requirements at any time.
58
Options accounts
A type of brokerage account. Since options can be risky, firms must have a procedure in place that requires a customer’s account to be approved for options trading. An options agreement must be signed. Within 15 calendar days after a customer's account approval, the firm must obtain a written agreement that the investor's aware of and agrees to be bound by the rules that are applicable to the trading of option contracts.
59
Non-discretionary account
A type of brokerage account where the customer decides which securities to buy and sell.
60
Discretionary account
A type of brokerage account where a customer has given trading authorization to a registered representative. This gives the RR the ability to make investment decisions w/o the customer's approval. The broker-dealer must receive written trading authorization that’s signed by the account owner
61
Limited trading authorization
Permits the authorized RR in a discretionary account to place orders for the account, but not to make withdrawals. Limited POA document must be filled out.
62
Full trading authorization
Permits the RR in a discretionary account to place buy and sell orders, as well as withdraw money and securities from the account. Full POA document must be filled out.
63
Churning
The illegal and unethical practice by a broker of excessively trading assets in a client's account in order to generate commissions. There is no set amt that is considered churning- it's a case-by-case basis.
64
Disclosing conflicts
If a member firm is selling its own stock to the public and it wants to place some of the issue in a customer’s discretionary account, the firm must obtain the customer’s written consent prior to executing the trade.
65
Fee-based vs commission-based accounts:
Fee-based accounts: a customer is charged an annual fee for investment advice, regardless of whether any transactions occur
Commission-based accounts: a customer pays a commission or other type of payment on each investment transaction.
66
Wrap-fee account
Customers are charged a single, bundled, or “wrap” fee that covers investment advice, brokerage services, administrative expenses, and other fees and expenses. The fee is generally based on a percentage of the assets under management.
67
Coverdell Educational Savings Account (ESA)
A relative make a maximum after-tax contribution of $2,000 per year to an account established for a beneficiary who is under 18. The money accumulates on a tax-deferred basis and withdrawals are tax-free if used for education. If not used for education or the beneficiary turns 30, the money is subject to ordinary income taxes plus a 10% tax penalty. To avoid the penalty, the money may also be transferred to a family member who is under the age of 30.
68
529 Plans
Funds in these programs are not taxed at the federal level if they’re used for qualified education expenses. These plans are state sponsored.
69
Individual account
Opened by and for one person. That person is the only one who may direct activity in the account unless a third party has been authorized.
70
Joint account
Have multiple owners. The owners may have different shares of the % of assets. When making decisions, both signatures are required.
71
Joint Tenancy w/ Right of Survivorship
1/2 of the most common forms of joint ownership. Created by spouses and each person fully owns the account. Therefore, if one tenant dies, the ownership of the account will pass to the remaining tenant
72
Joint Tenancy in Common
1/2 of the most common forms of joint accounts. Each owner has a percentage of ownership and, at the time of death, the deceased person’s interest passes to his estate.
73
Corporate/Institutional account
A type of brokerage account. Each firm should have a corporate resolution created by their BOD that gives at least one person authority to operate a coprorate account.
74
True or false: If a corporation intends to open a margin or options account, a copy of the corporate charter must also be obtained in addition to the corporate resolution?
True
75
Partnership account
A type of brokerage account for partnerships. Info for each general partner must be collected. The partnership agreement will specify the partners who are authorized to execute transactions on behalf of the partnership. For recordkeeping purposes, member firms are required to maintain a copy of the partnership agreement in the account file.
76
Trust Accounts
A type of brokerage account where one person (the trustee) is in charge of managing the assets for the benefit of another person (the beneficiary). The trustee has legal control of the trust assets, but must manage it in the interest of the beneficiary. Evidence of the trustee’s authority to transact business in the account and a copy of the trust agreement MUST be obtained prior to opening a trust account.
77
Revocable trust/Living trust/inter vivos trust vs irrevocable trust
Revocable: A trust that can be changed at any time. The downside of a revocable trust is that assets funded into the trust are considered the person’s personal assets for creditor and estate tax purposes.
Irrevocable: a trust that cannot be changed after the agreement has been signed. The typical revocable trust will become irrevocable when the beneficiary dies. After the beneficiary dies, the trust can be designed to break into a separate irrevocable trusts for the benefit of a surviving spouse or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries.
78
True or false: Irrevocable trusts are commonly used to remove the value of property from a person’s estate so that the property cannot be taxed when the person dies?
True
79
Custodial Accounts
Brokerage accounts created by adults in the name of a minor. lthough most states use age 18 as the age of majority, each state sets its own standard. The minor will be responsible for paying taxes on any income generated in the account. If the custodian is not the donor of the assets in the account, a custodian may receive a fee for managing the account. A custodian is permitted to authorize investment discretion to a competent third party
80
What are the two approaches for opening brokerage accounts for minors?
1. Uniform Gifts to Minors Act
2. Uniform Tranfers to Minors Act
Both of these allow an unlimited gift to a minor. An adult custodian is appointed for the minor and there may be only one custodian per account. Taxes may be due from the donor if certain dollar thresholds are exceeded (currently $17,000 per year).
81
IRA
Funded by the individual. Any person of any age may contribute to an IRA. Under certain circumstances, IRA contributions are tax-deductible; however, in all cases, the income earned by the money invested in an IRA accumulates on a tax-deferred basis until it’s withdrawn. A person may maintain an IRA at either a bank or brokerage firm. The custodian is in charge of investing the IRA's contributions. Money contributed to an IRA MAY NOT be used to purchase life insurance or collectibles such as art, antiques, stamps, etc.
82
Maximum contributions to an IRA
The maximum amount that an individual may contribute to an IRA on an annual basis is $6,500 or 100% of earned income—whichever is less. Contributions in excess of this amount are subject to a 6% tax penalty for over-funding. Individuals who are age 50 and older are allowed to make an additional $1,000 catch-up contribution, which increases their annual contribution to $7,500. CONTRIBUTIONS MUST BE MADE IN CASH.
83
True or false: W/ married couples, both spouses may contribute the $6,500 to the same IRA account?
False, they can contribute $6,500 to separate IRA accounts. If one spouse works and one does not, the employed spouse can contribute the $13,000 into the two separate accounts.
84
True or false: A person can transfer funds from an IRA to another w/o incurring taxes on the transfer?
True, people may also roll over funds from other qualified retirement plans into an IRA w/o incurring a tax.
85
True or false: A single person who is not covered by an employer-sponsored retirement plan may not always deduct an IRA contribution of up to $6,500 annually from his taxable income?
False
86
What happens to early withdrawals from IRAs?
An investor who withdraws money from an IRA before reaching the age of 59 1/2 will be required to pay a 10% tax penalty on the amount withdrawn, in addition to being liable for ordinary income taxes on the withdrawal. The individual willnot be subject to a tax penalty if:
* the account owner becomes disabled.
* the account owner dies and the money is being transfered to a beneficicary
* The money is used for medical expenses
* The money is used by a qualified first time home buyer ($10,000 limit)
* The money is used for the birth or adoption of a child ($5,000 limit
* The withdrawals are set up as a series of payments of the remainder of the account owner's life expectancy.
## Footnote
* Although investors who fall under these exceptions and those who are 59 1/2 or older will avoid a tax penalty, they will still be required to pay ordinary income taxes on the amounts withdrawn.
87
Required minimum distributions
Investors who wait too long to begin taking withdrawals from their traditional IRAs may also incur a 25% tax penalty. The IRS will levy this penalty if the investor doesn’t start taking withdrawals by April 1 following the year in which the person reaches the age of 73.
88
Roth IRA
Not tax-deductibe. Since investors contribute to Roth IRAs with after-tax dollars, they may withdraw contributions at any time without being required to pay taxes. The accumulated earnings in a Roth IRA may also be withdrawn tax-free, provided the account has been in existence for at least five years and one of the following conditions is satisfied:
1. The account owner is 59.5
2. The account owner has died or is disabled.
3.The money is used for medical expenses
4.The money is used by a qualified first time home buyer ($10,000 limit)
5.The money is used for the birth or adoption of a child ($5,000 limit).
6. The money is used to pay for qualified higher education expenses.
If these conditions are not met, then the account owner will be subject to ordinary income taxes plus a 10% tax penalty on the earnings generated by the contributions made to the account.
89
Contribution limits on a Roth IRA
The same as a normal IRA
90
True or false: Ultimately, a person may lose the ability to contribute to a Roth IRA if his adjusted gross income exceeds a specific amount which is determined by the IRS. However, there’s no income limit that precludes a person from converting her traditional IRA into a Roth IRA?
True
91
True or false: Both IRA and Roth IRAs have a catch up provision that allow people who are 50 or older to contribute an extra $1,000 to their plans?
True
92
Main differences between IRAs and Roth IRAs
Contributions to IRAs may be tax deductible (can reduce taxable income). The Roth IRA is NEVER tax deductible.
Traditional IRAs grow tax deferred and the withdrawals are taxable as ordinary income. Roth IRAs also grows tax deferred but qualified withdrawals are tax-free. Typically to be qualified, the roth IRA has been opened for at least 5 years and the individual is 59.5.
W/ IRAs, you must begin withdrawing at 72. W/ Roth IRAs there is no age limit to begin withdrawing.
93
Employee Retirement Income Security Act (ERISA)
The purpose of ERISA is to prevent the misuse and mismanagement of pension plan funds, especially by the managers of these plans. This Act sets standards for all people who interacts w/ pension plans. Qualified retirement plans meet both ERISA and IRS requirements and receive favorable tax treatment:
* The plan must cover all employees who are > 21 and have worked @ the firm for at >= year.
* all participants must be either fully vested after five years or 20% vested after three years with full vesting after seven years of service
* The investment of plan assets, as well as other plan activities, is governed by strict fiduciary guidelines.
These plans provide employers a tax break for the contributions that they make on behalf of their employees. Additionally, qualified plans allow employees to defer a portion of their salaries into the plan which reduces their immediate income-tax liability by reducing the employee’s reportable taxable income.
94
Defined Benefit Plan
1/2 tpyes of qualified retirement plans. Gives employees a guaranteed payout and puts the risk on the employer to save and invest properly to meet the plan’s liabilities.
95
Defined contribution plan
1/2 types of qualified retirement plans. The contribution is fixed, but there’s no guaranteed benefit at retirement. The amount employees receive in retirement is dependent on how well they save and invest on their own behalf during their working years.
96
Taxation of retirement plans
There are 3 phases for tax purposes: contribution, growth of investment, and distribution. Since a person’s contribution is made pre-tax, the funds are removed directly from the client’s gross income and will not count as part of their taxable income.
97
Profit-sharing plans
Funded by employers and allow for discretionary annual contributions from company profits. The BOD decides on the contribution. Each employee gets an amount equal to a % of their salary. The employer contributions are tax-deductible and the earnings grow on a tax-deferred basis; however, the maximum annual contribution amount is determined by the IRS
98
401k Plans
Retirement plans for employees. Both employers and employees can contribute to the plan. In most plans, the employees decide how to allocate their contributions from a list of investment options that are selected by their employer. Employers that maintain 401(k) plans are required to implement a dual eligibility requirement under which employees are eligible to participate if they complete either:
1. Work for one year and 1,000 hours
2. Work for three consecutive years and at least 500 hours
The contributions are made pre-tax (deductible) and the earnings grow on a tax-deferred basis; however, the maximum annual contribution amount is determined by the IRS
99
Roth 401k plans
Basically the same as a regular 401k except for taxes. W/ Roth 401k plans, contributions are after-tax. Qualified withdrawals from Roth 401(k) plans are excluded from federal tax. This means that employees are not required to pay taxes on capital gains, bond interest, or dividends.
100
403(b) Plans/tax-deferred annuities/tax-sheltered annuities
tax-deferred retirement plans that are available to employees of public school systems as well as employees of tax-exempt, non-profit organizations. Contributions can be deducted from taxable income. Growth in portfolio earnings happen on a tax-deferred basis. maximum annual contribution amount to a 403(b) plan is determined by the IRS. Employers may also make matching contributions for their employees. Investments in a 403(b) plan are typically limited to mutual funds, fixed annuities, and variable annuities. An important note is that investors are not permitted to buy limited partnerships in a 403(b) plan.
101
# ```
```
An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA w/o tax consequences if it is done within?
60 days
102
True or false: The customer's original purchase price can be found on a sell order ticket?
False. The sell order ticket includes discretionary/nondiscretionary, location of securities, and solicited/unsolicited.
103
Syndicate desk
Assists in the pricing of the offering, helps to build the book of orders, markets (distributes) the issue, and allocates the stock to investors.
104
The beneficial owner of stock held in street name is the?
Customer
105
A primary offering of securities is being made for a company listed on the NYSE. Prospectuses must be delivered:
Only on purchases made at the POP
106
