Chapter 1 Flashcards
Issuer
— a legal entity that sells securities in order to finance its operations
— includes businesses that need capital to grow and prosper,
— as well as governments that typically borrow funds as a means of paying their bills or building infrastructure
issuers include:
- the US Treasury & various US Government Agencies
- Foreign Governments
- State and Loc Governments
- Corporations
- Banks
What are the two Primary Methods that issuers use to raise capital?
- Issuing Debt Securities (bonds) — creditors will be able to collect interest
Advantages: don’t dilute the ownership of the business
Disadvantage: paying back the loan - Issuing Equity Securities (stocks) — owners of the stock will be able to collect dividends
Advantages: don’t have to pay back
Disadvantage: sold a piece of your business
Debt Securities
— both corporations and various government borrowers raise funds through the issuance of publicly traded loans — which are referred to as bonds, notes, or debt instruments.
— a bond is a security that represents the amount of indebtedness (principal) that the issuer owes to the investor
— investors who purchase bonds are considered CREDITORS of the issuer and essentially lend their funds to the issuer for a specified period (until maturity)
— the issuer is required to repay the principal balance of the bond at a future date and will typically make interest payments over the life of the loan
— if the issuer misses an interest or principal payment, it’s considered to be in default
Broker-dealer / Brokearage Firms responsibilities of employees
- Investment Banking
- Research
- Sales — typically market individual stocks or bonds but also packaged products (mutual funds) to both retail investors and institutions. These individuals are typically referred to as registered representatives (RRs) or Investment Advisor Representatives (IARs)
- Trading
- Operations
Market maker
When a broker dealer chooses to display quotes into the trading system to indicate its readiness to buy/sell securities at specific prices
Investment Advisor
— receives a fee regardless of whether it executes transactions
— charge fees for providing advice for their clients
— fees are often based on a % of AUM and are charged regardless of whether any trades occurred in their clients accounts
Types of Investors
- Retail Investors — regular individuals who have limited assets and income
- Accredited Investors —
- Institutional Investors
Accredited Investors
by the nature of their income or assets, these investors are viewed as more sophisticated and are able to assume greater risk. Example:
— Financial Institutions (banks), Large Tax Exempt Pension Plans and Private Business Development companies
— Directors, Executive Officers and General Partners of the issuer
— Individuals who meeting of the following criteria:
1 - have a net worth of at least $1M (excluding primary residence)
2 - have gross annual income of at least $200k (or $300k combined with spouse) for each of the pst two years, with the anticipation that this level of income will continue
Institutional Investors
are typically large entities that pool their money to purchase securities. These include: — Banks — Insurance Companies — Pension Plans — Endowments — Hedge Funds
The SEC refers to certain institutions as Qualified Institutional Buyers (QIBS) — however — to be considered QIBs, the buyers must satisfy the following 3-part test:
Primary Market
— works with the investment banking department of a brokerage firm
— the investment banker will assume the role of the underwriter by agreeing (for a fee) to market the shares to the ultimate investors
— as the securities are sold to investors, most or all of the proceeds received will go to the issuer
— the primary market is regulated by the SEC under the Securities Act of 1933
Secondary Market
— after the primary distribution of the issuers shares, the investors that purchased the shares from the issuer will inevitably want to sell them
— the market that brings together these buyers and sellers is referred to as the secondary market
— the funds are no longer directed to the issuer, instead, the securities and the funds pass between investors
— Securities Act of 1934
— can be listed on the NYSE, Nasdaq and OTC
Nasdaq
— one of the worlds largest stock markets
— has always been an electronic trading venue, but is still classified by the regulators as an exachabge
Listed securities
Any equity securities that meet the standards for trading on a national exchange
Third Market
—exchange listed security is traded in the over-the-counter market
Fourth Market
— refers to direct institution-to-institution trading and doesn’t involve the public markets or exchanges
— while some of this trading involves different portfolio managers contacting one another by phone, most true fourth-market trades are internal crosses set up by broker-dealers that execute trades for institutional accounts. There proprietary trading systems are established to facilitate the institution-to-institution trading are often considered a part of the 4th market
Full Service Firm
Broker dealer that
— executes orders, and
— settles and clears trades
If a client wants her shares held in a street name, whose name will appear on the stock certificate?
The broker-dealers name
Which of the following terms is associated with an entity that sells securities from its own inventory?
Market maker
Which of the following entities is responsible for the safekeeping of a customers PHYSICAL ASSETS ?
Custodian Bank
The Options Clearing Corporation is responsible for
— issuing options
— guaranteeing options
— clearing options
BUT is not responsible for settling transactions with customers
Dark Pools
A dark pool is a place for large institutional Investors and high frequency traders to trade directly with one another
— a system that provides liquidity for large institutional investors & high-frequency traders, but it doesn’t disseminate quotes
— the details of the quotes are CONCEALED from the public
— the system may be operated by broker dealers or exchanges, and it allows these investors to sell large blocks of stock anonymously
— the objective is to allow these investors to trade with the least amount of market impact and with low transaction costs
Settlement
— the simultaneous payment and delivery process between the two parties
— the buyer pays for the security and the seller is expected to deliver the security
The Depository Trust & Clearing Corporation (DTCC)
— is a securities depository and a national clearinghouse for the settlement of transactions in equities, corporate, municipal and US government bonds, mortgage backed securities, money market instruments and over the counter derivatives
— DTCCs function is to automate and centralize the clearing and settlement of trades
— most major financial institutions in the US are members of the DTCC system
— the primary goal of the system is to eliminate physical securities in order to increase the speed and reduce the cost of clearing and settling trades
Subsidies of DTCC
National Securitites Clearing Corporation (NSCC) — clears equity trades for both US and foreign issuers
Fixed Income Clearing Corporation (FICC) — Clears bond trades
