65 Definitions Deux Flashcards
Common Stock
MIGHT Pay Dividends
DOES HAVE Voting Rights
DOES HAVE Preemptive Rights
Define Statutory Voting
ONE vote for EACH VACANCY per ONE share
Define Cumulative Voting
Total Number of Votes = Number of Shares X Number of Vacancies
Preemptive Rights
- Can Be Sold for Value
- the Exercise Price is BELOW CMV (Current Market Value)
- They are attached to STOCKS
- SHORT TERM
Warrants
- LONG TERM
- Attached to BONDS
- CAN be detached and sold separately
- Exercised ABOVE CMV (Current Market Value)
ADRs
American Depository Receipts (ADRs)
- Issued and held by U.S. Commercial Banks
- Represents ownership of a foreign company’s shares listed on Foreign Exchanges
- Allows investors to avoid problems associated with foreign securities such as:
Currency conversion
Certification Registration
Trade Administration
Restricted Stock
- Can NOT be transferred until certain conditions are met
- Acquired through PRIVATE offering(s)
- MANDATORY holding periods
ESOPs
Employee Stock Option Plan(s)
- Employee non-cash compensation
- Employees can purchase stock in the future ata pre-determined price
- Used as an incentive for employer’s future growth
Three Key Facts regarding FUNDAMENTAL ANALYSIS
- Economics-based
- Monetarism-Driven
- Federal Reserve Board (FRB)-driven
4 Major Issues of Fundamental Analysis
- ) Monetary policies from Federal Reserve Board
- ) FISCAL vs MONETARY policy
- ) Economic Indicators
- ) Specific Company Balance Sheet and Income Statement Analysis
P/E Ratio
- Measures HOW EXPENSIVE the stock is RELATIVE TO ITS EARNINGS
Earnings Per Share
*the higher the ratio, the more expensive it is
Price to Book Ratio
COMPARES the CMP (Current Market Price) of a stock TO ITS CALCULATED BOOK VALUE
* A low # may indicate that the stock is out of favor with investors and/or a good market value.
P/B Ratio = CMP/Book Value Per Share
***Book Value = All Company Assets - All Liabilities
TECHNICAL ANALYSIS is also known as
“QUANTITATIVE ANALYSIS”
Define “Short Interest”
Number of Outstanding shares that Investors have/are SELLING SHORT
Technical Analysis Terms
- Head and Shoulders
- Support and Resistance
- Top-Down
- Bottom-Up
- Consolidation Pattern
- 200 Day Moving Average
- Volume of Shares Traded
- VIX
Technical Analysis is useful in determining what?
PRICE and TIME
Who Utilize Technical Analysis the most?
MARKET MAKERS and TRADERS
Fundamentalists tell _______ whereas Technicicans tell ____________
- ) WHATto buy
2. ) WHEN to buy and sell
Define the DIVIDEND DISCOUNT MODEL
Determines value of stock today by determining PRESENT VALUE OF ALL FUTURE DIVIDENDS
- It uses anticipated dividends and discounts them to determine present value
Define the DIVIDEND GROWTH MODEL
Uses growth rare on Present Dividend and Projects Future Income
- If growth is expected, it usually indicates higher-quality value
Unit Investment Trusts issue what?
SBI aka SHARES OF BENEFICIAL INTEREST
Open-End Mutual Funds
- Issue REDEEMABLE shares
- Largest group in terms of Management Companies
- BOUGHT and SOLD DIRECTLY FROM MUTUAL FUND COMPANY
Closed-End Mutual Funds
- Issue NON-redeemable Shares
- Trade via EXCHANGES
- More Liquid
- Trade Like Stocks
Face Amount Certificates
- One of the THREE Types of Management Companies
- Issue DEBT CERTIFICATES
- Sold at a DISCOUNT
- RARELY Used anymore
Open-End Management Company Details
- MOST COMMON type of POOLED INVESTMENT Security
- Instant Diversification
- Continual Offering and Redemption of shares
- Shares sold at POP (Public Offering Price)
- Not allowed to sell based on dividends (can’t tell clients to buy before the Ex-Dividend date)
- Sold as common shares
- Each share allows for One voting right
- DIVIDENDS may be distributed UP TO QUARTERLY
- Investors may receive dividends in cash or otherwise choose to reinvest
- Capital Gains distributions up to ONE year
- DISTRIBUTIONS are TAXABLE in the year it was paid
- Automatically reinvested distributions increase the investor’s cost-basis
POP = ___________
NAV per share + Sales Charge
Equity Funds
- These invest in COMMON or PREFERRED stocks
- Generally considered Growth-Oriented
- May pursue variety of objectives
BLUE CHIP Companies
- Large, Mature firms with high consumer recognition and brand loyalty
- Established products and distribution channels
- Proven earnings and consistent payment history
- Stock value usually stable and more steady in declining markets
- Suits investors who want market exposure with less volatility
- Less CREDIT/volatility RISK
Example of a Money Market Fund
50% Domestic Commercial Paper 20% Foreign Commercial Paper 15% Corporate Bonds and Notes 10% Yankee Certificates of Deposit 2% U.S. Government and Agency Obligations
Example of an INCOME FUND
48% Corporate Bonds and Notes 23% Mortgage-Backed Securities 15% U.S. Government Bonds 6% Asset-Backed Securities 3% Preferred Stocks
Example of GROWTH & INCOME FUND
25% Financial Stocks 15% Consumer Staples Stocks 15% Cash and Other 10% Healthcare Stocks 10% Communications Stocks 8% Technology Stocks 7% Utility Stocks
Example of a GROWTH FUND
40% Technology Stocks 15% Healthcare Stocks 10% Financial Stocks 10% Consumer Cyclical Stocks 10% Conglomerates Stocks 10% Consumer Staples Stocks 5% Communications Stocks
Example of an AGGRESSIVE GROWTH FUND
55% Technology Stocks 10% Consumer Cyclical Stocks 10% Consumer Staples Stocks 10% Healthcare Stocks 5% Communication Stocks 5% Financials Stocks 3% Energy Stocks
Example of a SPECIALIZED FUND
25% Communications Equipment 20% Software 18% Electronics 14% Computers 11% Other 10% Communications Services 2% Cash
BLEND Funds
- NO FIXED-INCOME
- Mix of Growth and Value stocks
- Designed to appreciate in value by means of CAPITL GAINS
- GROWTH-VALUE EQUITIES
BALANCED Funds
- Combination of FIXED-INCOME instruments and EQUITIES
- Achieves Growth in both VALUE and INCOME as well as Preservation of Capital
- FIXED-INCOME DEBT AND EQUITIES
Mutual Fund Managment
- Board of Directors
- Must be elected by shareholders
- MINIMUM of 40% of board must be UNAFFILIATED with the Fund- If fund has 12b-1 fees, 51% must be outside members
Mutual Fund Expenses
- Management Fee (largest expense)
** Fee is paid to investment advisor(s0 - Expressed as % of fund’s Net Asset Value (NAV)
OTHER EXPENSES:
custodian’s fee
Transfer Agent fee
Board of Directors fee
Administration and distribution fees
12 b-1 fees
- Covers expenses associated with promotion and distribution of fund shres
- asset-based
- based on annual % of the net assets under management
- CHARGED QUARTERLY
- Annual LIIT of 0.75% of assets
- NO-LOAD max of 0.25% of net assets under management
Expense Ratio
Total Expenses / Average Net Assets
***Sales charges (loads) NOT included in the Expense Ratio)
Mutual Fund Underwriter
- “Underwriter” is a SPONSOR or DISTRIBUTOR or WHOLESALER
- Has EXCLUSIVE agreement with the Fund
- They market the fund shares to dealers who then sell to the public
Sales flow of Fund Shares
Fund (sells at NAV)
|
Underwriter (sells at discount to offering price)
|
Dealer (sells at NAV + Sales Charge)
|
Public (Buys at Public Offering Price aka POP)
Sales Charge
- Expressed as a % of POP
- Per FINRA, MAX sales charge is 8.5%
- *In Order to charge the MAX sales charge, MF must offer:
1. ) Dividend Reinvestment
2. ) Breakpoints
3. ) Rights of accumulation (family members can combine assets in order to lower the price) - ** MF may have 12 b-1 fees IN ADDITION to sales charge
The Investment Company Act of 1940 requires that MF pay redemption proceeds to investors within _____ calendar days?
7
Forward Pricing
Shareholder receives next calculated NAV
- Buy and sell orders received during the trading day are held for execution at the next pricing (EOD).
- **Mutual Funds prices fluctuate DAILY but NOT INTRADAY
Mutual Fund Quote Ex.
$81.99 - $77.89 = $4.10 $81.99 = Ask Price (POP) $77.89 = Bid Price (NAV) $4.10 = Sales Charge * Investors always redeem at NAV
Equation for NAV per share
Total Assets / Total Number of Outstanding Shares
Class A Mutual Fund Shares
Front-End Load
Expensive, Large Investment
LONG TERM
Class B Mutual Fund Shares
Back-End Load
Smaller investment
LONG TERM
***If held for YEARS, sales load goes down to ZERO which then convert to class A shares
Class C Mutual Fund Shares
Level Load
Neutral Investment amount
HIGHER Annual Expenses Than Class A shares
What is needed to achieve Sales Breakpoints of Mutual Fund shares?
LETTER OF INTENT
- CAN be backdated 90 DAYs
- ** Not binding on the investor
Exchange-Traded Funds (ETFs)
- They are investment companies whose objective is to achieve the same rate of return as a particular market index
- Bought/Sold on an exchange
- Prices fluctuate continuously throughout the day
- Offer INTRADAY liquidity (like stocks and closed-end mutual funds)
Exchange-Traded Notes
- SENIOR Unsecured Debt
- Issued by Banks and Institutions
- Sold ONLY to Accredited/Experienced Investors ($1MM Net Worth or $200k for 2 years)
Inverse ETFs are used for what?
To HEDGE a portfolio against market declines
Unit Investment Trusts (UITs)
- Can be composed of Fixed Income, Equities, etc
- Held for a FIXED PERIOD OF TIME
- Investor receives REDEEMABLE UNITS at end of term (maturity)
- Redeemable Units are sold back to the UIT company for cash
REITs
- 75% of assets in fund must be invested in real estate
- 90%+ has to be distributed to investors ANNUALLY
- Do NOT pass through losses
- NOT an investment company
- NOT a Direct Participation Program (DPP)
Call Holder
Long Calls
Pays Premium
Right to Buy
Call Writer
Short Calls
Receives Premium
Obligated to sell
Put Holder
Long Puts
Pays Premium
Right to sell
Put Writer
Short Puts
Receives Premium
Obligation to Buy
Max Gain, Max Loss, Break Even for LONG CALL
Max Gain: Infinite
Max Loss: Premium
Breakeven: Strike Price + Premium
Max Gain, Max Loss, Break Even for SHORT CALL
Max Gain: Premium
Max Loss: Infinite
Breakeven: Strike Price + Premium
Max Gain, Max Loss, Break Even for LONG PUT
Max Gain: Strike Price - Premium
Max Loss: Premium
Breakeven: Strike Price - Premium
Max Gain, Max Loss, Break Even for SHORT PUT
Max Gain: Premium
Max Loss: Strike Price - Premium
Breakeven: Strike Price - Premium
Alternative Investments (examples of)
Options Managed Futures Hedge Funds REITs Structured Products
Hedge Funds
- They are LIMITED PARTNERSHIPS
- Aggressive (options, short selling, etc.)
- Managed portfolio with FEW or NO RESTRICTIONS that address its portfolio strategy or holdings
- Only suitable for wealthy, sophisticated investors
- *MUST REGISTER W/ SEC IF $150MM+
Limited Partnerships
- A Type of DPP
- ALL PROFITS AND LOSSES FLOW DIRECTLY TO INVESTORS on a K-1
Define Net Present Value (NPV)
Present value of an investment’s future cash flows in today’s dollars
Define BETA
It Measures how closely the VOLATILITY of a stock follows the overall market.
ex. Beta of 1 = Same volatility of the market
Beta of 0.75% = 25% less volatile than market
Beta of 1.25% = 25% more “ “ “
Define ALPHA
The DIFFERENCE between BETA and ACTUAL RETURN
Capital Asset Pricing Model (CAPM)
Determines the VALUE of a security
- Looks at return the security is expected to produce given its particular risk level
Simple Trust
- ALL Income must be distributed in the year it is earned
- Principal Funds may NOT be distributed
Complex Trust
May accumulate income or distribute to the named beneficiary
72(t) distribution
Ability to withdraw from IRA early without penalty
- Distributions made in equal periodic installments for a min of 5 years or until the recipient reaches 59 1/2
RMDs
- Start at age 70 1/2
- Can be lump sum or periodic payments
- 50% penalty for not taking RMDs
ERISA eligibility requirements
21 years old
1,000 hours worked annually
1 yr of employment @ the company
ERISA section 404(c)
All plans must offer their employees AT LEAST 3 MATERIALLY DIFFERENT investment options
Defined CONTRIBUTIONS Plan
Benefits YOUNG employees with long time until retirement
Defined BENEFIT plan
Benefits OLDER employees or HIGH-INCOME earners with a SHORT time until retirement
Coverdell Education Savings Account (CESA)
- Set up for MINORS under 18
- Annual contribution limit per child ($2,000)
- Earnings are Fed income-tax-free if used for ED
- Income limitations
- MUST USE by age 30
- Funds can be applied to another child in the family for college or University IF the child is UNDER 21 years old
529 College Savings Plan
- May be set up by anyone for anyone
- NO AGE or INCOME limitations
- Funded with AFTER-TAX dollars
- Max Limits set by STATES: often as high as $350,000 or $14,000 per child per year
- Earnings are Fed Income-Taxe-Free if used for higher ED costs
UGMA
- Beneficiary has to be UNDER 18
- Up to $14,000 PER CHILD annually
- Child Receives funds at age 18
- 1 custodian per 1 minor
- No margin assets
- No short sales
- No uncovered options
- Donor pays taxes on anything over $14,000 annually
- Donor is not always the custodian
UTMA
Child Receives Funds at age 25
- 1 custodian per 1 minor
- No margin assets
- No short sales
- No uncovered options
- Donor pays taxes on anything over $14,000 annually
- Donor is not always the custodian
Joint Tenants W/ Rights of Survivorship
Bypasses Probate
EXEMPT from Estate Taxes
50%/50%
MOST COMMON
Tenants In Common
NOT required to be 50/50 (must = 100%)
CAN be more than two owners
SUBJECT to PROBATE
SUBJECT to ESTATE TAXES
TOD
BYPASSES Probate
SUBJECT to ESTATE TAXES
Capital Market Theory
Efficient Investors
Investors Borrow/Lend Money at the Risk-Free rate
TIME HORIZON EQUAL for all investors
NO INFLATION EXISTS
Investors have SAME PROBABILITY of outcome
Does NOT account for TAXES or TRANSACTION costs
NO MISPRICING within Capital Markets
Risk Free Rate of Return is equal to…
ONE year U.S. Treasury Bill yield
Capital Asset Pricing Model (CAPM)
Measures expected Risk-Adjusted Return
Factors in Beta and Risk Free Rate of Return
RR = RFRR = Beta (Market Return - RFRR)
Market Portfolio Theory
Used to determine which assets to add to an already diversified portfolio
Provides Optimal returns on a risk-adjusted basis
EFFICIENT FRONTIER: expected return at a given risk level
Factors out Portfolio Volatility (Beta)
Efficient Market Hypothesis: Weak
States “NO” to TECHNICAL ANALYSIS but allows for Fundamental Analysis to produce EXCESS RETURNS
Efficient Market Hypothesis: Semi-Strong
DISREGARDS FUNDAMENTAL ANALYSIS and all known information about a security as an indication of performance
Efficient Market Hypothesis: Strong
DISREGARDS ALL INFORMATION about a security and REJECTS BOTH TECHNICAL and FUNDAMENTAL analysis
**ALL INFO THAT EXISTS IS KNOWN BY THE MARKET ALREADY AND IS PRICED INTO THE SECURITY/MARKET
Strategic Asset Allocation
PASSIVE (think CHESS)
Needs to rebalance over time
Tactical Asset Allocation
ACTIVE (T for TRENDS)
HIGHER Transaction Costs
acTively Buying/Selling
Looks for TRENDS
ALPHA is…
the return in EXCESS of the BENCHMARK INDEX
Equilibrium Model
A positive ALPHA shows that the management is adding value
Value Stock
LESS Demand in the Marketplace due to economic and market conditions
LOW P/E and P/B
MORE sensitive to economic conditions
Growth Stocks
History of higher earnings growth and less sensitivity to economic conditions
HIGH P/E and P/B ratios
Book Value Per Share Equation
Company Assets - Liability / # of Shares Oustanding
Price to Book Ratio
Stock Price / Book Value Per Share
Net Present Value
Factors the Present Value of an Investment’s FUTURE Cash Flows expressed in TODAY’S DOLLARS
NPV is a DOLLAR value (NOT Rate of Return)
NPV of ZERO means that the Discount Rate of Return is the investment’s Internal Rate of return
MSCI
1,600 Developed-World Stocks
Russell 2000
2,000 Small-Cap Domestic stocks
Wilshire 5000
BROADEST-based index Comprised of: 1.) Domestic STOCKS 2.) REITS 3.) ADRs
DOW Jones Industrial Average
NARROWEST index
Composed of 30 Large-Cap Stock
Range
The DIFFERENCE between the HIGHEST and LOWEST numbers in set of numbers
Standard Deviation
Standard deviation is a statistical measurement in finance that, when applied to the annual rate of return of an investment, sheds light on the historical volatility of that investment. The greater the standard deviation of securities, the greater the variance between each price and the mean, which shows a larger price range. For example, a volatile stock has a high standard deviation, while the deviation of a stable blue-chip stock is usually rather low.
Qualified Estimate of the uncertainty of future returns
The MEAN of MEANS
a Measurement of Risk
Rule of 72
Allows one to determine how long it takes for an investment to double
*** 72 / Number of Years = Rate of Return
ex: $5k became $10k over 6 years….
72 / 6 = 12%
Sector Rotation
Type of TACTICAL Asset Management
Based on Market Conditions
Allocations rebalanced into favorable sectors
DCA
Dollar Cost Averaging
Investment Plan of systematic contributions of a FIXED dollar amount at regular intervals
Tax Basis
It is the ALREADY TAXED MONEY within an investment
QualifiedPlan Tax Basis is ZERO
Mutual Fund shares held for less than one year are taxed as…?
Ordinary Income
Mutual Fund shares held for One Year and One Day are taxed as….?
Long-Term Capital Gains
Investor’s Marginal Tax Rate is…?
It is the TAX RATE that is paid on the LAST DOLLAR earned (aka the “Last Dollar Tax”)
HIGHER than Investor’s typical TAX RATE
Dividends are taxed as…?
ORDINARY INCOME
AMT
Alternative Minimum Tax
Used for INDIVIDUALS or CORPORATIONS
ex: Interest earned on PRIVATE MUNI BONDS (Industrial Development Revenue Bonds) can trigger AMT
Limited Partnership cash flows…?
An LP is a CONDUIT where ALL Income and Expenses FLOW THROUGH to the Partnership
The Partnership pays NO taxes
Income from an LP is…?
PASSIVE INCOME GENERATOR (PIG)
**Passive Losses can only be offset by Passive Gains
Losses from an LP is…?
PASSIVE LOSS GENERATOR (PAL)
**Passive Losses can only be offset by Passive Gains
“Tax basis” is the same as…?
“Cost Basis”
Define ADV-E
SEC Form ADV-E includes a certification of client assets, both cash and securities, that are held by a Registered Investment Adviser. The SEC Form ADV-E is used chiefly by accountants. It contains information about the adviser and the state of the practice along with a listing of client securities and holdings.
BREAKING DOWN SEC Form ADV-E
SEC Form ADV-E is required by the SEC pursuant to the Investment Adviser’s Act of 1940. It is evaluated by an independent accountant for accuracy and compliance. The ultimate purpose of the form is to ensure proper handling of client assets.
What does a Mutual Fund Transfer Agent do?
A mutual fund transfer agent performs both the transfer agent and registrar functions. Mutual fund transfer agents maintain records of shareholder accounts; calculate and disburse dividends; and prepare and mail shareholder account statements, federal income tax information and other shareholder notices.
