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Series 6 > Unit 1 > Flashcards

Unit 1 Flashcards

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1
Q

Security

1.1.3.6

A

Investment of money
In a common enterprise
Expectation of profit
Derived from efforts other than the investor
Any note, stock, bond, investment contract, variable annuity, profit sharing or partnership agreement, certificate of deposit, option on a security, or other instrument of investment

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2
Q

Equity

1.1.1

A

Security that represents ownership
Represented by stock
Could also be rights, warrants, and options
Used to raise Capitol
Most visible and accessible means of creating wealth
Conservative for co. , rest for investors

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3
Q

Debt obligation

1.1.1

A 
Creditor relationship
Represented by bonds and notes
Used to raise capital 
Company obliged to pay investor back
Conservative for investor, risky for co.
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4
Q

SEC

1.1.2

A

Securities and exchange commission

Created by security exchange act of 1934

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5
Q

Self Regulatory organizations

1.1.2

A

SRO
Maloney act of 1938
Municipal Securities Rulemaking Board (MSRB)
Chicago Board Options Exchange (CBOE)

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6
Q

National Association of Securities Dealers

1.1.2

A

NASD
Is an SRO
Comprised of member broker/dealers
Defunct, replaced by FINRA

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7
Q

Financial Industry Regulatory Authority

1.1.2

A 
FINRA
Registered securities association
Successor of NASD
Regulates OTC
Regulates NYSE
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8
Q

Over the counter securities

1.1.2

A

OTC
Price established by negotiation
Market makers maintain OTC inventories and sell to brokers/dealers for asked or offering price

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9
Q

Primary offering

1.1.2

A

The market for issuing new securities. … They sell their securities to the public through an Initial Public Offering (IPO).

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10
Q

Secondary market

1.1.2

A

After the initial issuance, investors can purchase from other investors in the secondary market.
Done on stock exchanges and/or OTC

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11
Q

Exchange-listed Securities

1.1.2

A

Listed on NYSE

Priced by auction on the trading floor

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12
Q

Asked or offering price

1.1.2

A

The price a seller is willing to accept for a security, also known as the offer price.

Brokers purchase at lowest price
Established by open outcry
Market makers sell

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13
Q

Bid price

1.1.2

A

The price a buyer is willing to pay for a security. Securities sell price
Market makers buy and customers sell

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14
Q

Market Maker

1.1.2

A

maintain OTC inventories and sell to brokers/dealers for asked or offering price
Buy from broker/dealers at bid price
Ensures the customer get lowest ask price if buying
Ensures the customer gets highest bid price when selling

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15
Q

Associated person or member

1.1.3.1

A

Employee, manager, director, officer, partner of broker/dealer or another entity (bank, issuer, etc,) or any person controlling, controlled by, or in common control with that member.

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16
Q

Broker

1.1.3.2

A

Acts as the customer’s agent and is merely executing the customer’s order for a fee known as a commission.

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17
Q

Customer

1.1.3.3

A

Individual, person, partnership, corporation, or legal entity that is not a broker, dealer, or municipal securities dealer
The public

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18
Q

Dealer

1.1.3.4

A

Role of a brokerage firm when it acts as a principal in a particular trade
Acts as a dealer when it buys/sells for its own account at its own risk then charges a customer a mark up or mark down
Any person engaged in the business of buying/selling securities for their own account either directly or thru a broker that is not a bank

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19
Q

Member

1.1.3.5

A

Of FINRA

Any individual, partnership, corporation, or legal entity admitted to memberships

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20
Q

Sale and offer to sell

1.1.3.7

A

Disposition of a security or interest in a security for value
Offer to sell
Offer for sale
Offer
Includes every attempt or offer to dispose or offer to buy for value

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21
Q

Prospectus

1.1.3.7

A

Notice, circular, advert, letter, comm written or by radio or tv that offers any security for sale or confirms the sale

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22
Q

Balance sheet

1.1.4

A

Disclosure of composition of total capitalization (debt and equity)
Summarizes assets, liabilities, net worth

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23
Q

Asset

1.1.4

A 
What the company owns
Cash in the bank
Accounts receivable (money owed)
Investments
Property
Inventory, etc.
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24
Q

Liabilities

1.1.4

A 
What the company owe some
Accounts payable (current bills)
Short & long term debts
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25
Net worth | 1.1.4
Shareholders equity The excess of the value of assets over the value of liabilities Computed: assets - liabilities = net worth
26
Total capitalization | 1.1.4
Net worth + long term debt
27
1.2.1 Common Stock
company's primary means of raising capital investor's share of ownership in the company's net worth entitles owner to a share of profits distributed as dividends (quarterly) equal vote on directors and other important matters Four kinds: authorized, issues, treasury an outstanding
28
1.2.1.1 Authorized Stock
Number of share authorized by state to issue, sell | Can sell more by way of a stockholder vote
29
1.2.1.2 Issued Stock
Distributed to investors Unissued shares saved for: raising new capital paying stock dividends providing stock purchase plans for employees converting convertible bonds or convertible preferred stock exercise of outstanding stock purchase warrants
30
1.2.1.3 Treasury Stock
Repurchased issued stock Can be held indefinitely, reissued or retired Reissued to fund: employee bonus plans distribute to stockholders as a stock dividend Does NOT carry voting or dividend rights.
31
1.2.1.4 Outstanding Stock
Investor owned stock | Issued but not repurposed
32
1.2.1.5.1 Market Value
Market Price Current Market Value (CMV) Price investors pay to buy the stock
33
1.2.1.5.2 Book Value
How much a common stock could expect to receive for each share if a company were liquidated The difference between historical value of a company's tangible assets and liabilities divided by the number of shares outstanding A + L / outstanding shares
34
1.2.1.5.3 Par Value
The nominal value of a bond, share of stock, or a coupon as indicated in writing on the document or specified by charter.
35
1.2.1.6.1 Voting Rights
``` Important policy at annual meeting issuance of convertible securities issuance of additional common stock substantial change in corporation's business electing board of directors stock splits ```
36
Statuary voting
Cast one vote per share owned for each item on a ballot
37
Cumulative voting
Allows stockholders to allocate their votes in any manner they chose Advantageous for small shareholders
38
Proxies
a form of absentee ballot
39
1.2.1.6.2 Preemptive Rights
When a company offers securities to it's common stockholders before general public Buy enough of the newly issues stock to maintain their proportionate ownership Often sold at a discount
40
1.2.1.6.3 Limited Liability
Stockholders cannot not lose more than they have invested | Not required to pay a company's debts
41
1.2.1.6.4 Inspection of Corporate Books
``` Stockholders have the right to: receive annual financial statements obtain lists of shareholders Stockholders DO NOT have the right to: examine detailed financial records minutes of director's meetings ```
42
1.2.1.6.5 Residual Claims to Assets
If a company is liquidated, shareholder entitled to a portion of the remaining profits after all debts and senior securities have been satisfied Common Stock = Junior Secuity
43
Junior Security
common stock
44
1.2.1.7 Bullish
Buy low, sell high Investor expects the price to increase Long is act of buying Bullish
45
1.2.1.7 Bearish
``` Sell borrowed shares, buy then buy back at a lower price Sell high buy low Short sale Borrowed shares have to be replaced Bearish Expects the stock to go down Short is act of selling ```
46
1.2.1.8.1 Growth (benefit)
``` Receive capital growth Receive income Both Increase in market price = capital appreciation Capital Gain = make money on sale Capital Loss = lose money on sale Unrealized gain = potential capital gain Capital gains are taxable only when realilzed ```
47
Capital Appreciation
increase in security market price
48
Capital Gains
Profit received from selling security | Taxable
49
1.2.1.8.2 Income (benefit)
Cash paid quarterly Taxed at 15% 70% exclusion for company
50
1.2.1.9.1 Market Risk (risk)
Chance the stock will decline in price Losses limited to total investment in stock Short sellers losses are infinite because no limit to how high a stock's price may climb before he can re-purchase stock originally sold
51
1.2.1.9.2 Business Risk (risk)
Level of risk for the specific business Related to activities of the business Based on speculative nature, management, philosophy, etc. Uncertainty of operating income
52
1.2.1.9.3 Decreased or No Income (risk)
Dividend decreases or ceases
53
1.2.1.9.4 Low Priority at Dissolution
Residual rights to corporate assets upon dissolution
54
1.2.2 Points
Stock's market price quoted in whole dollars known as points, plus fractions of a dollar expressed in cents
55
Round Lot
equal to 100 shares Cost of a round lot = Day low price x 100
56
1.2.2.1 Exchange Listed Stocks
Securities that meet listing requirements such as maintaining a certain price, maintaining a certain trading activity
57
Exchanges
Have physical location and trading floors | Auction markets
58
1.2.2.1.1 Nasdaq
National Association of Securities Dealers Automated Quotation system Computerized info system that provides price and inventory info for market makers selling OTC securities
59
1.2.2.1.2 Nasdaq Markets
Nasdaq stocks that don't meet listing requirements or chose not to trade OTC Unlisted securities
60
1.2.2.1.3 Non-Nasdaq
OTC markets not part of Nasdaq (unlisted) Traded on OTC bulletin boards (OTCBB) Pink Sheets (no longer exist) Most speculative of all equity securities
61
1.2.3 Preferred Stock
Does not offer appreciation potential Issued with a fixed rate of return Purchased for income Some have variable dividend payout = adjustable rate preferred stock Price sensitive to interest rates (like bonds) Price moves inversely with interest rates (like bonds) No preset maturity state, no scheduled redemption date, no maturity value (NOT like bonds) Two advantages: Owners must receive stated dividend Priority claim over common stockholders Good for those seeking income and safety Does NOT have voting or preemptive rights
62
Fixed Rate of Return
Key attraction for investors Par value important for Preferred Stock Par = 100: rate of return quoted in % Par not = 100: rate of return quoted in $
63
1.2.3.1.1 Straight (noncumulative) Preferred Stock
No special features | Only offers dividend payments
64
1.2.3.1.2 Cumulative Preferred Stock
Any dividends in arrears must be paid prior to paying common stock dividends Lower stated dividend rate Less dividend income compared to straight preferred Less risk, less reward Safer than straight preferred
65
1.2.3.1.3 Convertible Preferred
Owner can exchange each preferred share for shares of common stock Price is preset and noted on stock certificate Lower stated dividend rate than non-convertible Investor can convert to common stock and get capital gains Conversion increases total number of common share outstanding; decreases earnings per common share; decrease common stock market value Parity = underlying common stock has the same value as the convertible preferred
66
1.2.3.1.4 Participating Preferred
Offers owners a share of corporate profits after all dividends and interest due on other securities is paid. Percentage of participation on stock certificate Common stock dividend must be declared before the participating dividend can be paid.
67
1.2.3.1.5 Callable Preferred
Callable, redeemable Company can buy back from investors at a stated price after a specified date Allows the company to replace relatively high fixed dividend securities with a lower priced one When called, dividend and conversion rights cease on that date Usually pays a premium exceeding the stock's par value at the call. Higher stated rate of dividend payment Likely to be called when interest rates are falling
68
1.2.3.1.6 Adjustable Rate Preferred
adjustable or variable dividend rate Tied to rates of other interest rate benchmarks Adjusted as often as semi-annually
69
1.2.3.1.7 Dividends and splits
Paid on common and preferred stock Distributed from company profits Only when directors declare a dividend Sent automatically to shareholders
70
Cash Dividends
If stock certificate, get a check If held by a dealer, deposited in brokerage account Usually paid quarterly Taxed as dividend income
71
Stock Dividends
Declared by board of directors Issues shares of common stock as a dividend Market price per share declines Company's total market value remains the same
72
Stock Splits
Changes the number of outstanding shares Total value of the stock remains the same before and after split 2 for 1 or reverse split 1 for 2. Shareholder approval required
73
Money Market
The trade in short-term loans between banks and other financial institutions.
74
Settlement Dates - Regular Way
T+3 = Payment must be made on the 3rd business day after the trade.

Series 6 (2 decks)

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