Chapter 1 Terms

Question 1

Security

Answer 1

It constitutes and investment on money w/ expectations of profits. Can be ownership interest (equity) or creditor relationship (debt obligation).

Question 2

Equity Security

Answer 2

Investors purchase shares of a company to profit of company gains. Risky for investor, conservative for issuer. Issuer has no obligation to give money back.

Question 3

Debt Security

Answer 3

Investors purchase company debt by lending money to a company as a credit. Risky for issuer, conservative for investor, and the issuer is obligated to give money back.

Question 4

Securities Exchange Commission (S.E.C.)

Answer 4

Regulates securities markets in the U.S. as a whole. Created by the Securities Exchange Act of 1934. In 1938 it was given authority to establish other “self regulatory organizations” (SRO’s).

Question 5

National Association of Securities Dealers (NASD)

Answer 5

First membership to regulate organizations within assigned jurisdictions, comprised of the broker-dealer firms.

Question 6

Financial Industry Regulatory Authority (FINRA)

Answer 6

An SRO that regulates participants in the “over the counter” (OTC) markets as well as the New York Stock Exchange (NYSE). Its a successor to the NASD.

Question 7

Self Regulated Organization (SRO)

Answer 7

Non-federal agencies that enforce federal securities laws on their members and are accountable to the SEC. They work within assigned jurisdictions. Examples include the National Association of Securities Dealers (NASD), and the Financial Industry Regulatory Authority (FINRA).

Question 8

Primary market transaction/Primary Offering

Answer 8

When securities are traded between investors, through secondary market transactions. Some include stock exchanges, over the counter (OTC) market, or sometimes both.

Question 9

Exchange listed securities

Answer 9

Priced by auction on the trading floor. An example are like exchanges on the New York Stock Exchange (NYSE).

Question 10

Brokerage houses

Answer 10

Purchase securities for their customers at the lowest available/asked offering price, or sell at the highest bid.

Question 11

Over The Counter (OTC) Securities

Answer 11

Are priced by negotiation rather than auction, and have no centralized trading location. They are regulated by the Financial Industry Regulatory Authority (FINRA).

Question 12

Broker Dealers/Market Makers

Answer 12

Maintain inventory of Over The Counter (OTC) securities to sell to other broker dealers for their inventory at their bid price.

Question 13

Member

Answer 13

Any individual, partnership, corporation, or legal entity admitted to membership in the Financial Industry Regulatory Authority (FINRA).

Question 14

Associated Person (AP)

Answer 14

Any employee, manager, director, officer, or partner of a member broker-dealer or authority entity (issuer, bank), or any person controlling, controlled by, or in common control with that member.

Question 15

Broker

Answer 15

An individual/firm that charges a fee or commission for executing buy and sell orders, submitted by another individual/firm.

Question 16

Dealer

Answer 16

Any person engaged in the business of buying and selling securities for their own account, and at their own risk, either directly or through a broker, that is not a bank, then charges customers a markup or markdown.

Question 17

Customer

Answer 17

Any individual/person/partnership/corporation/legal entity that is “not” a broker dealer, or municipal securities dealer. -(The Public)

Question 18

Difference between Stocks and Bonds

Answer 18

“Stocks” represent equity or ownership in a company.

“Bonds” are a loan to a company.

Question 19

Balance Sheet

Answer 19

Disclosed composition of a company’s total capitalization of debt and equity.

Question 20

Assets

Answer 20

What a company owns, cash in the bank, accounts receivable (money owed), investments, property, inventory.
Liabilities + Networth = Assets

Question 21

Liabilities

Answer 21

What a company owes, accounts payable (current bills it must pay), short term and long term debt and other obligations.

Question 22

Net Worth (Shareholders Equity)

Answer 22

the excess value between assets and liabilities.

Assets - Liabilites = Networth

Question 23

Total Capitalization

Answer 23

Networth + Long term debt

Question 24

Common Stock

Answer 24

1 of the 2 types of stock that corporations issue. Primary means of raising capital, investors share ownership in company net worth. What ever the business owns (assets - liabilities) belongs to the business owners (its stockholders).

Question 25

Authorized Stock

Answer 25

Authorized by state for a corporation to issue or sell stock of a specific number of shares as part of its original charter. Note: if they want/need to sell more shares they much amend its charter through a stockholder vote that approves more shares.

Question 26

Issued Stock

Answer 26

Authorized, then can be issued to investors. It’s not considered in “total capitalization”. Note: it does not have rights like voting/dividends.

Question 27

Treasury Stock

Answer 27

A stock that a corporation has issued and repurchased from the public. Note: it does not have rights like voting/dividends.

Question 28

Outstanding Stock

Answer 28

Any shares that a company issued but has not repurchased. Basically an “investor owned stock”.