Chapter 1

Question 1

What is a Broker?

Answer 1

Any person that engages in business of agency transactions in securities for the account of others.

Question 2

What is a Broker-Dealer?

Question 3

What is a Dealer?

Answer 3

Any person that engages in the business of buying and selling securities for its own account.

Question 4

Does a Broker make commission or have a fee?

Answer 4

Commision

Question 5

What does a Broker do?

Answer 5

Matches up buyer and sellers.

Question 6

Research

Answer 6

An analyst in a firm’s research department study both markets and individual issuers in order to issue recommendations. They recommend to buy, sell or hold.

Question 6

What should you compare a Dealer to?

Answer 6

A car dealership! They can mark up and down as they please.

Question 6

Work directly with the issuers to arrange and structure their securities offerings.

Answer 6

Investment Banking

Question 6

What is a Market Maker?

Answer 6

Required to make regular bids and offers and meet specific capital requirements.

Question 7

When does a Market Maker happen?

Answer 7

When a broker-dealer chooses to display quotes into a trading system to indicate its readiness to buy and/or sell securities.

Question 8

If no size is indicated, a Market Maker must be prepared to buy or sell _______ unit of trading.

Answer 8

The minimum

Question 9

Type of Investors

Answer 9

Retail, Accredited and Institutional

Question 10

Retail Investor

Answer 10

Investors who directly buy stocks or bonds from broker dealers.

Regular individuals who have limited assets and income (IRAs, custodial accounts that are for children).

Question 11

Accredited Investors

Answer 11

By the nature of their income or assets, are viewed as more sophisticated and/or able to assume greater risk.

Question 12

Examples of Accredited Investors

Answer 12

Financial Institutions (banks)

Directors, executive officers, general partners of the issuer

Individuals who have Series 7, Series 65 or Series 82 that’s in good standing.

Individuals who met either one of the two criteria

1. Have a net worth of at least $1,000,000 (excluding their primary residence)

or

2. Have a gross annual income of at least $200,000 (or $300,000 combined with a spouse) for each of the past two years, with the anticipation that this level of income will continue.

Question 13

Institutional Investors

Answer 13

Large entities that pool their money to purchase securities.

Question 14

Examples of Institutional Investors

Answer 14

Banks, Insurance Companies, Pension Plans, Endowments and Hedge Funds

Needs to be at least $50 million in total assets (individual or an entity)

Question 15

Qualified Institutional Buyers (QIBS)

Answer 15

1. Insurance companies, Registered investment companies, Registered investment advisors, Corporations, Partners, Business Trusts, Certain non-profit organizations, Small Business development companies, Private and public pension plans, Certain bank trust funds
2. Buyer must be purchasing for its own account or for the account of another QIB.
3. The buyer must own and invest at least $100 million of securities of issuers that are not affiliated with the buyer.

Question 16

Can an individual be considered a QIB?

Answer 16

NEVER! Even if they meet the standards.

Question 17

What is the Primary Market?

Answer 17

When most or all of the proceeds received will go to the issuer since it marks the beginning of the shares’ existence.

Question 18

What is the Secondary Market?

Answer 18

After the primary distribution of the issuer’s shares, the investors that purchased the shares from the issuer will inevitably want to sell them.

Question 19

Examples of Physical Trading Cards

Answer 19

New York Stock Exchange

Over the Counter (OTC) Marketplace

Question 20

What is a Physical Trade?

Answer 20

Face to face on a physical floor

Question 21

What is an Electronic Platform?

Answer 21

You can buy/sell online

Question 22

What is a Third Market?

Answer 22

Exchange-listed securities being traded over-the-counter or away from traditional exchanges. Brings together investors and accommodates after-hours trading.

Question 23

What is a Fourth Market?

Answer 23

Direct institution to institution trading and doesn't involve the public markets or exchange.

Question 23

What firms are involved in the clearing process?

Answer 23

Clearing and Introducing Firms

Question 24

Clearing Firm

Answer 24

One step below the DTCC AKA full service firm Perform order execution, clearing and settlement functions. Interface with the DTCC directly for their own transactions and other broker-dealers that choose to clear through them

Question 25

Introducing Firms

Answer 25

Neither process customer transactions or operate their own clearing operations. They contract with clearing firms to perform these services.

Question 26

What does DTCC stand for?

Answer 26

Depository Trust and Clearing Corporation

Question 27

What does the DTCC do?

Answer 27

Automate and centralize the clearing and settlement of trades among its (owners) members. Most major financial institutions in the US are members.

Question 28

What is the goal of the DTCC?

Answer 28

Eliminate physical securities in order to increase the speed and reduce the cost of clearing and settling trades.

Question 29

Fully Disclosed Accounts

Answer 29

Information about each client of the individual customers of the introducing firm will be transmitted to the clearing firm and the clients' assets are held at the clearing firm.

Question 30

What is the clearing firm responsible for?

Answer 30

All paperwork associated with the accounts, as in delivery of confirmations and statements.

Question 31

Omnibus Accounts

Answer 31

The clearing firm doesn't keep each customer's information. The record keeping responsibilities belong to the introducing firm.

Question 32

Hedge Funds

Answer 32

Private, actively managed investment fund that uses sophisticated strategies in an attempt to generate returns that are higher than traditional stock/bond investments.

Question 33

Examples of Hedge Funds

Answer 33

Concentrated speculative investments on a given company or industry Arbitrage (relational trade between two investments) Short Selling (speculating on the downward movement of a company's stock) Currency or commodities trades Margin (the use of leverage)

Question 34

Prime Brokerage Accounts

Answer 34

A bundled package of services that's offered to hedge funds, institutions, and high net worth individual clients. Client chooses one firm as its prime broker to consolidate the bookkeeping process.

Question 35

Entities that keep markets running smoothly

Answer 35

Custodians, Registrars, Transfer Agents, and Securities Trustees

Question 36

Custodian

Answer 36

Hold assets in physical form

Question 37

Registrar

Answer 37

Function is to maintain the ownership register of the issuer of each issue of its securities. Records the name, address and tax ID or social of each individual owner. Ensures the corporation doesn't issue more shares than the number of authorized shares.

Question 38

What is the Transfer Agent responsible for?

Answer 38

1. Issuance and cancelation of certificates to reflect changes in ownership 2. Maintaining a list of current shareholders who are eligible to receive additional shares after a stock split 3. Acting as the company's paying agent for interest payments on bonds and for cash or stock dividends on equities 4. Acting as proxy agent (sending voting materials) and mailing agent 5. Handling lost, destroyed, or stolen certificates

Question 39

Securities Trustee

Answer 39

Assigned to hold security interests that are created on trust for the benefit of various creditors. May represent investors in the event of default and/or bankruptcy.