Chapter 12/13/14 Flashcards
Broker/Agent
Regardless of whether a client wants to buy or sell a security, a firm that acts as a broker (agent) is attempting to find the other side of the trade on behalf of its client. If a trade is executed, the broker is paid a commission.
- When acting as a broker a firm DOES NOT assume risk
Dealers/Principals
When a firm buys securities for, or sells securities from, its own account, it’s acting as a dealer. When acting in a dealer capacity, a firm will adjust its prices for retail customers, in other words, the dealer will include either a markup or markdown.
- When acting as a dealer the firm DOES assume risk.
True or false: A dealer that always stands ready to buy or sell a specific stock is also referred to as a market maker in that stock?
True
Bid Price
The price at which the market maker is always willing to buy stock
Ask/offer price
the price at which the market maker will sell the stock.
5% markup policy
Since FINRA members are prohibited from selling securities excessively high or low, this policy was created. This policy says that a broker-dealer firm cannot sell a security above or below 5% of its MV.
mutual funds, variable annuities, new issues, municipal bonds, and government securities are exempt from the policy.
Factors that determine whether a markup is excessive:
- Type of security involved
- The avilability of the secuity
- Price of the security
- Disclosure: Disclosing to the customer that the circumstances may warrant a higher-than-normal markup helps to make the dealer’s case.
- The pattern of the markups
- The nature of the broker-dealer’s business
Proceeds transaction
When a customer directs a member firm to sell a security and use the proceeds of the sale to buy another security. For these types of transactions, the member firm must follow the 5% policy and compute the markup as if the customer had purchased the securities for cash.
True or false: Securities that require the delivery of a prospectus or offering circular ARE NOT exempt from the provisions of the 5% policy because these primary issuances are sold at a specific public offering price.
False, they are exempt
Discretion/Discretion Not Exercised
If a client has granted a registered representative discretion powers, a purchase of a security must be labled discretionary. If they have been given discretion powers but the client consented to the trade, it must be marker discretion not exercised. If placing a trade was the client’s idea, the order ticket is marked unsolicited. if the trade was recommended by the registered representative, the ticket should be marked solicited.
Long sale vs short sale
Long sale: the customer sells stock that they currently own
Short sale: the customer sells stock they don’t currently own but instead borrows.
Margin requirement
Short sales must be executed in a margin account. Brokerage firms provide short sellers with stock that has been borrowed from other margin customers. However, the other margin customers must provide permission for the firm to lend their securities to short sellers. The permission is obtained through the signing of a loan consent agreement at the time that the account is opened.
- The margin account will have a minimum required equity amount
Covered call option vs uncovered/naked
covered: if the seller of a call option owns the underlying stock
uncovered: If the seller does not own the underlying stock
What does 9x8 mean in a bid-ask quote?
The firm is willing to buy 900 shares and sell 800 shares.
Inside market
The highest bid price and the lowest ask price
Limit order
When customers want to buy or sell securities at a specific price, they enter limit orders. A limit order may be executed only at the specified price or better. A buy limit order may only be executed at the limit price or lower, while a sell limit order may only be executed at the limit price or higher. If the market price doesn’t trade at or better than the customer’s limit price, the client will not receive a trade execution.
Day order
A limit order that only lasts a day
True or false: limit orders are typically used for small orders?
False, limit orders are often used for large orders in thinly or infrequently traded securities in which the spread is wide
Stop order
Uses a price to trigger an actual order when the specified price has been traded. Although stop orders avoid the risks of no fills and partial fills, you may end up with a lower price than you expected.
Sell stop order
Placed below the current market price of the security and is used to limit a loss or protect a profit on a long stock position. It’s essentially a minimum willing to sell at.
Ex: Investor buys a stock at $25 per share and puts a sell stop at $20, so if it reaches $20 it will trigger it to sell.
Ex 2: Investor buys a stock at $25 and it rises to $50. The investor might put a sell stop order at $45 to protect their profit.
Buy Stop Order
Placed above the current market price of the security and is used to limit a loss or protect a profit on a short sale.
Ex: An investor short sells a stock at $40 in hopes that it will decline value. The investor might be a buy stop order at $45 so that it can’t rise too high and thus limit their loss.
Stop limit order
A conditional trade that combine the features of a stop loss with those of a limit order to mitigate risk. It includes a stop price, but once the stop price is triggered a limit order is set to where it will only execute if the price is favorable for the investor.
Buy stop limit order
A buy stop-limit order is placed above the current market price of the security and is used to limit the loss (or protect a profit) on a short position. However, once activated, the buy stop-limit order becomes a buy limit order and, therefore, execution will only occur if the stock can be purchased at the limit price or lower.
Good-‘till-cancelled orders (GTC)/open orders
A GTC order is one that remains in effect on a broker-dealer’s order book until it’s either executed or cancelled.
True or false: f no order qualifier is given, an order is assumed to be a GTC?
False, it’s assumed to be a day order
Market order
Market orders receive priority over all other orders since they’re immediately executed at the best available price when the order is entered.
Steps in the trading process
- Placing the order: An order is filled (either a paper or electronic order)
- Clearing the trade: If the order is executed, the two sides must agree on the terms.
- Settlement: The two sides must exchange payments. Settlement is usually overseen by a 3rd party, such as the DTCC.
Settlement date
The date on which the transaction must be completed between the broker-dealers representing the buyer and the seller
Regular-way basis
The normal # of days to complete the transaction. This # depends on the types of securities involved.
Corporate bonds/munis: T + 2
Regular way transactions: T + 2
Treasuries/options: T + 1
Cash trade: Same day
Seller’s Option
If trade settlement cannot be completed on a regular-way or for-cash basis, the seller may request a seller’s option settlement. This gives the selling firm additional time beyond the normal two business days to make good delivery.
True or false: Settlement date is the same as payment date?
False. Payment date is when the customer pays the broker-dealer and settlement day is when the two broker-dealers pay each other.
Payment dates
Corporate bonds: Settlement date + 2 business date
munis: exempt from Reg T
Treasuries: Exempt from reg T
Options: Settlement date + 2 business days
Cash: Same day
- Reg T determines the payment dates
DTCC settlement/Book-entry Settlement
the DTCC simply journals the movement of security positions and monies between each clearing firm’s account.
Paper Settlement
In some cases, physical securities may be delivered for settlement. the physical securities must be in proper order and have all of the necessary endorsements before being delivered to the buyer. A good delivery is when all the paperwork is in order.
For paper settlement, the correct security (w/ the correct CUSIP) must be delivered, the certificate must be signed, the correct # of securities must be delivered, and any restricted security must have its legend removed.
True or false: W/ stock transactions, the stocks must be delivered in multiples of 100 and bonds must delivered in multiples of 1,000?
True
How to calculate # of shares and price after a stock split?
number of shares= Shares owned * split ratio
Price = current price * inverse of split ratio
- For stock splits, the ex-dividend date is the business day following the payable date.
True or false: Stock splits and stock dividends are not taxable to the investor. The only action that must be a taken is for the investor to adjust his per share cost basis in the security?
True
Tender offer
A public offer which indicates a person’s or company’s (including the issuer’s) intent to buy a specific stock at a fixed price (normally above the current market price) in order to take control of the company or to gain representation on its board of directors.
Odd lot buyback
An odd-lot buyback occurs when a company offers to repurchase shares of its stock back from people who hold less than 100 shares. This is done sometimes since admin cost for small shareholders can be expensive.
Spinoff
A new and separate company that’s created when a parent company distributes shares in a subsidiary or business division to the parent company shareholders. It is a type of divestiture.
Official Communication
Any relevant info that’s distributed by the issuer, a trustee, or a state/federal taxing authority.
Beneficial owners
Investors who have securities that are being held by a financial intermediary (ex: broker-dealer). These positions are typically registered in street name and each individual customer’s ownership is internally recorded on the firm’s stock record.