513 - Module 1 Flashcards
Accredited investor
defined in Rule 501 of Regulation D and includes the following:
A bank, insurance company, registered investment company, business development company, or small business investment company
An employee benefit plan, within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA), if a bank, insurance company, or registered investment advisor makes the investment decisions or if the plan has total assets in excess of $5 million
A charitable organization, corporation, or partnership with assets exceeding $5 million
A director, executive officer, or general partner of the company selling the securities
A business in which all the equity owners are accredited investors
A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase (does not include the value of a person’s primary residence)
A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchase a sophisticated person makes
Banker’s acceptances
Best efforts
The underwriting company for an IPO will try to sell all shares, but ultimately the company will not receive any money for unsold shares.
Broker-dealer
Securities firms act as both brokers (agents of sellers of securities who receive a commission for executing a transaction) and dealers (principals who buy and sell securities for their own accounts).
Cash
Cash equivalents and bank instruments of deposit that have a high level of liquidity.
Certificates of Deposit (CDs)
Time Deposits - Deposits made with a bank or savings and loan for a specified period, commonly one month to five years. Interest subject to ordinary income tax in the year earned. FDIC insured.
Commercial paper
Day order
Buy/sell order that is only good for the day.
Debit balance
The amount owed to the broker, includes the original amount borrowed plus any accrued interest.
Dilution
Selling of additional stock to raise capital, usually resulting in lower value of all the stock.
Eurodollar CD
Eurodollars
Firm commitment
Underwriting company for an IPO will commit to purchasing any unsold shares.
Good-till-cancelled (GTC) orders
Buy/sell order that will remain in effect until filled or cancelled.
Initial public offering (IPO)
The first offering of shares of a corporation to the public. Coordinated with investment bankers, lawyers, accountants and appraisers.
Leverage
The financial advantage of an investment that controls property of greater value than the cash invested.
Limited partnerships
Limit order
Buy/sell at a specific price (or better).
Liquidity
The ability to sell or redeem an investment quickly and at a known price without a significant loss of principal.
Maintenance margin
The amount of funds an investor must maintain for holding a leveraged investment. Usu. 35%
Margin
The amount of funds an investor must contribute for the initial purchase of leveraged investments. Usu. 50%
Margin call
A demand by the broker to add cash to the margin account, if the equity in an investor’s position drops below the maintenance margin percentage.
Marketability
The ability to sell an investment quickly in a readily identifiable market.
Market order
Buy/sell at the current price.
Money market deposit accounts (MMDA)
Bank obligations that are federally insured, considered very safe and highly liquid. Require a minimum balance and offer limited check-writing privileges.
Money market mutual funds
Invested in high quality short term investments such as T-bills, commercial paper, negotiable CDs. Rate of return is highly sensitive to changes in short term interest rates.
Negotiable CDs
Net investment income
Primary market
Facilitates the initial sale of securities issued to the public.
Private placements
An issue—most commonly bonds—to a small group of institutions or sophisticated individual investors. These avoid the SEC registration requirements of an IPO, and the company’s information is not accessible by the general public.
Public float
The number of shares available for trading by investors.
Repo rate
Repurchase agreements
Reverse repurchase agreements
Secondary market
Provides investors with a method of buying and selling securities.
-exchange market (NYSE, OTC)
-unlisted securities (OTC, Nasdaq)
-both exchange and OTC
-institutions/pensions (INSTINET)
Securities Investor Protection Corporation (SIPC)
Oversees liquidation of brokerage firms and insures investor accounts up to $500,000 in the case of brokerage firm bankruptcy.
Short selling
Borrowing stock to sell on the market, in the hopes to make a profit if the price goes down.
Stop order
Buy/sell if the price of the stock trades at or through the stop price. A buy stop would be placed higher than the current market price, a sell stop would be placed lower. If it trades through the stop price, this becomes a market order.
Stop-limit order
Same as Stop order, but when the stock trades at or through the stop price, it becomes a limit order.
US Treasury bills
Venture capital
Financing for privately held companies (e.g., start-ups) typically in the form of convertible preferred stock and is characterized by high risk with the potential for high return.
Wash sale
