SIE Flashcards
SEC (Securities and Exchange Commission)
an agency of the US gov that is responsible for protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation
Self-regulatory organizations (SROs)
entities created to regulate industry segments within an organization itself and without reliance on an actual governmental authority such as fed or state Govs
purpose: to self govern more efficiently in a narrow field –> more specialized rules and regulation
most famous SRO = FINRA (financial industry regulatory authority), trading of securities on this platform
FINRA
SRO accountable to the SEC, develops and implements rules and regulations specifically for brokerage firms and their employees involved with securities tradingg and investments
CBOE (Chicago Board Options Exchange)
largest options in the US and responsible for the S&P 500, S&P 100, Dow Jones, Nasdaq and others
NASSA (North American Securities Administrators Association)
STATE REGULATORS: devoted to investor protection, creates “model” securities laws that broadly reach many potential securities regulation issues. NASSA drafts these model acts many states use as the foundation for the laws actually enacted by the state
provides the basis for FINRA licenses 63, 65, and 66
SIPC (Securities Investor Protection Corporation)
FDIC and SIPC protect the interests of investors and bank customers. SIPC protects clients of brokers and dealers in case of financial failure of the broker. fully funded by member broker dealers
What happens in the event of a broker-dealer failure?
The SIPC organizes cash and the securities to be distributed to the clients of the failed member firm
What happens, in the case of a broker-dealer failure, there are no cash or securities?
The SIPC covers up to $500,000 of the equity balance of the customer which includes $250,000 in cash
FDIC (Federal Deposit Insurance Corporation)
protects the interests of investors and bank customers; different from the SIPC in that it helps with traditional bank deposits; in the event of a bank failure
FDIC insures a bank account of up to $250,000 and has a line of credit with the US treasury of $100 billion
Institutional investors
investors that are backed by an immense amount of capital (who are they backed by?: large financial institutions such as commercial banks, investment banks, insurance companies, pension funds, and hedge funds)
investors who invest on behalf of other people
are core drivers of the price of securities in capital markets
Retail investors
A retail investor is an individual or non-professional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s. Retail investors are investing for themselves, often in brokerage or retirement accounts
have no effect on the price of securities in capital markets
Accredited investors
investors with sufficient net worth, annual income, and/or expertise and experience investing such that the accredited investor does not require the same level of protection afforded to retail investors by securities-related laws
allowed to purchase and sell unregistered securities referred to as private equity
Broker-dealers
when affecting securities transactions on behalf of others, they are a broker; when affecting securities transactions for their own accounts, a broker-dealer is acting in a principal capacity, they are a dealer
Introducing brokers
futures market equivalent of a registered rep in the equities market = equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets
Clearing brokers
work for a clearing firm that ensure proper settlement of transactions so that investors are ensured that their transaction is completed properly, both in a timely manner and efficiently
prime brokers
provide many different services to select clients who need more specialized, higher level services
often used by hedge funds that require sophisticated services to ensure that their funds operate properly
Who is exempt from registering as an investment adviser?
- Certain domestic banks
- Advisers whose business relates solely to obligations of the US gov’t such as treasury bonds
- lawyers and accountants whose advice is related to their profession
- broker dealer firms who do not receive any special compensation for their investment advice
Municipal advisors
entities that specialize in the intricacies of financing operations of local gov’t (I.e., municipalities through bond offerings)
work with local gov’t officials to help raise funds for critical local functions such as schools, infrastructure, hospitals, parks and rec
Securities
A security is a fungible, negotiable financial instrument that represents some type of financial value, usually in the form of a stock, bond, or option
What are the most common types of underwriting arrangements when a company wants to grow their business?
best efforts underwriting: investment bank is only required to place as much of the issuance as is possible given market conditions. if the underwriter is unable to sell all of the shares for the issuer, then the underwriter is not legally responsible for purchasing any remaining shares itself. NOT ideal for the issuer but it does protect the investment bank from having to make a purchase of the shares
firm commitment underwriting: investment bank is required to purchase the entire issuance of the offering if any shares remain after being offered to the public. IDEAL for the issuer who is guaranteed that all of its shares will be sold
Hedging
process where traders take positions to reduce the risk of other positions
Transfer agents
typically a commercial bank that is a client of the corporation and that maintains records of all equity and bond holders
Depository trust and clearing corporations (DTCC)
settles most securities transactions; in charge of transferring funds from the buying brokers account to the account of the broker who made the sale
Options Clearing Corporation (OCC)
guarantees that contracts on each side of an options contract are fulfilled, which primarily means that the seller or writer of a contract received a premium, and that the buyer of the contract received the underlying security from the seller of the option exercised
Primary market
Securities are created on the primary market. Debt and equity are sold, issues, and traded in capital markets.
corporations and governments use capital markets to borrow money, raise capital, and finance everything from operations, to forming new companies, to mortgages and loans.
associated with long term sources of capital as opposed to money markets
secondary market
where previously issued stocks, bonds, and other financial instruments are available to buy and sell. AKA auction market
Auction market
first bid has priority
high bid and low offer have the floor
a new auction begins when all bids at a certain price are exhausted
there are no secret transactions
bids and offers must be audible
third and fourth markets
third market: deal in pink sheets, they exist to provide another avenue of trading in financial markets. actually traded in the OTC market and where unlisted securities trade - traded through telephone and computer market AKA penny stocks
fourth market: traded “offline” so as to not disrupt the price of the security
monetary policy
how money supply can be utilized to maximize economic growth. administered by the Federal Reserve
fiscal policy
primarily concerned with government taxation and expenditures. increased taxation will lead to less economic growth because there will be less capital to invest in economic growth
open market activities
initiated by the Federal Reserve to affect the money supply and economic growth. ex: FR buys and sells treasury securities from and to primary dealers.
the the FR wants to increase the money supply, it will buy treasury securities on the open market, transfers money from the balance sheet of the federal reserve to the market economy in exchange for holding the securities on the balance sheet
4 main interest rates:
federal funds rate: rate the largest banks charge each other for overnight loans of $1 million or more. most volatile
prime rate: rate that banks charge low-risk customers (corporations) with excellent credit. rate fluctuates based on money supply
discount rate: interest rate that the FRB charges to FR banks when the bank is issuing short-term loans –> when the FRB lowers the discount rate, it costs bank less to borrow money from the FR and other banks so banks can charge a lower interest rate to customers
broker loan rate: rate that banks charge brokers and dealers when lending money for a customer’s margin accounts AKA loan rate or the money rate
4 primary statements companies provide on an annual and quarterly basis are:
income statement, a balance sheet, a cash flow statement and a statement of retained earnings
income statement:
shows the revenues and expenses of the company over a period of time and calculates net profit or net income number. reported using the accrual method
cash flow statement
reported with the income statement and represents cash flows from investing, operating, and financing activities
inflation
decreases the purchasing power of currency by lowering the value of the future cash flows of a bond. to lower this demand, investors typically require a higher bond yield or more attractive interest rates to justify the purchase
an invested yield curve
signifies a future recession since bonds with longer maturity dates have a lower yield rate
yield curve flattens to indicate a recession and typically has an upward slope
gross domestic product
consumer consumption, investment, governmental expenditures, and net exports and imports
gross national product
basically the same as GDP plus or minus economic output that occurs outside of a nation’s border, income earned from foreign investments, and income earned by foreign residents inside the US
exchange rates
affect the securities market in one of two ways: directly by impacting the value of securities for foreign companies and indirectly when affecting the cost for domestic businesses to conduct business overseas
spot exchange rate
current price level in the market to directly exchange one currency for another, for delivery on the earliest possible value date. spot rate is set by the forex market
Keynesian economic theory
continued demand is what supports the economy. increased or steady demand for certain products or services naturally leads to more businesses being created. result = more jobs, rising wages, an increase in loans.
fed gov’t must sustain the economy by spending tax money on projects that stimulate certain sectors or the economy as a whole
monetarist economic theory
inflation and deflation are the direct result of the available money supply. if there’s not enough money in circulation, prices fall. when there’s too much money in circulation, prices rise. fed gov’t must regulate the money supply and stay out of the gov’t.
dilutive secondary offering
reduce the value of the share price because additional new shares are now available in the market but the company’s value has not changed aka follow-on offerings
nondilutive secondary offerings
do not reduce the value of the share price because no new shares are issued
underwriting commitment AKA firm commitment
guarantees the purchase of all of the securities being offered in a sale
what is included in the offering document?
basic info about location, type of business, contact information, and any type of jurisdictional information
must disclose offering price, number of shares being issues, the form of securities being offered, how escrow is handled, and how the proceeds will be sued
must also include management’s experience, all risks involved, and type of industry
securities act of 1933
requires the registration of securities before they are sold to the public, and it was the first major fed legislation to regulate the offer and sale of securities. ensures public will receive all necessary financial information in the offering prospectus of securities being sold
prospectus
similar to offering document, but issued with mutual funds, stocks, and bonds. provided by brokerages, underwriters, and investment bankers
how long is the waiting or quiet period once a corp files a registration statement?
20 days
blue sky laws
state-specific securities laws that need to be followed by investors and firms operating in that state
what is the main benefit of allowing for the shelf registration of securities?
there is better flexibility when issuing debt and equity
key business cycles
expansion: strong economic indicators and moves to the peak
peak: high point of the expansion phase
contraction: is usually a recession or a depression
trough: when downtrends begin to level off allowing for the cycle to begin again
ADR (American depository receipts)
securities that allow US citizens to purchase shares of foreign companies in the US market without having to make the purchase on the foreign stock exchange
do not have call risk meaning the company cannot redeem those shares, do have currency and political risk
Treasury bills
primary instrument used by the Federal Open Makret Committee (FOMC) to regulate the money supply.
TIPS (treasury inflation protected securities)
have their principal amount adjusted for inflation as calculated by the consumer price index
these bonds compensate investors for the inflation that erodes the value of their investment. (TIPS typically have a lower yield than comparable treasury bonds or notes since they’re compensated by the inflation adjustments)
securitization
financial institutions will sell pools of mortgages to other financial institutions with expertise in packaging the loans as a single security
corporate bonds
taxable securities
they have a set maturity
typically have a set par (100) value of $1000
trade on major exchanges
bond indenture (formal agreement between the bond issuer and the investor)
form of the bond
total dollar amount of the particular bond issuance
property pledged behind the bond
any protective covenants - acts that must be or cannot be performed by the issuer (working capital requirements, debt-equity ratio requirements, and restrictions on dividend payments)
redemption rights and call privileges
callable bond or redeemable bond
can be redeemed by the bond issuer before its stated maturity (corp. has right to call the bond away from the investor). investors are compensated for this risk with higher interest rates on a comparable bond and a premium is paid to the investor when the call option is exercised
when is a bond called?
when interest rates decline and a company can find less expensive financing
when there is a rising interest rate environment. when the investor realizes they can receive a higher interest rate for investing the same principal
convertible bonds
enable the bondholder to convert the bond into stock from the same company - have variable interest rates
conversion ratio
determines the number of shares an investor receives upon the conversion of each bond
tells the investor how many shares they’ll receive from converting each bond they own
arbitrage
when investors try to take advantage of pricing discrepancies between convertible bonds and the underlying stock
discount rates
interest rate charged to commercial banks (MS, JP Morgan, etc.) on loans they receive from the lending facility federal banks
bond
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.
Bonds are units of corporate debt issued by companies and securitized as tradeable assets
general obligation bonds
bonds backed by the full faith and credit of the municipality and are paid with general revenue and borrowings
dutch auction
where the price is lowered until it matches a bid.
municipal bonds and treasury bonds are sold through dutch auction
variable rate demand note (VRDN)
debt instrument that represents borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate, such as the prime rate
interest rate on VRDN is adjusted daily, weekly, or monthly to reflect the current interest rate environment
money market funds
NOT insured by the FDIC. SEC mandates that the prospectus states that the federal gov’t doesn’t guarantee the money, and there’s no guarantee that the funds will maintain a net asset value of a dollar.
average maturity must be short-term, no longer than 90 days
coupon rate
The coupon rate is the annual income an investor can expect to receive while holding a particular bond
how often treasury bonds pay interest?
semi-annual basis
option
serve as a unique tool to help reduce the risk of the investment, options can provide the investor the choice to buy or sell, can help inverstors increase their returns
American options: exercised or closed at any time prior to the date of expiration
European options: stipulate shorter duration of time in which the option can be exercised
call option
the obligation to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.
put option
gives the holder the right to sell the underlying asset at a specified price on or before expiration
strike price
the price at which the option can be exercised by the investo, exercise date (or expiration date) is the time by which the option can be exercised
Options contracts are derivatives that give the holders the right, but not the obligation, to buy or sell some underlying security at some point in the future at a pre-specified price. This price is known as the option’s strike price (or exercise price).
option premium
Premiums for options are the cost to buy an option. Options give the holder (owner) the right but not the obligation to buy or sell the underlying financial instrument at a specified strike price. The premium for a bond reflects changes in interest rates or risk profile since the issuance date.
open interest
primarily used to evaluate the amount of liquidity in an options market to assure there is active trading
options trading
position limit is the maximum number of contracts an investor can hold on an underlying security
CBOE usually establishes these limits based on the amount of liquidity in a stock and the number of shares outstanding
when a bond makes an interest payment or a stock pays a dividend
it will affect the price of the asset and the value of the option.
in the case of stocks, the stock price will fall by the amount of the dividend. the vaslue of the option will increase as the option holder may receive the dividend or interest payment depending on the date the option expires and if it is exercised
in the money call option
if the current price of the underlying asset is higher than the agreed upon price (or strike price) call would have intrinsic value
difference between statutory voting and cumulative voting
statutory: allows the shareholder to vote one time per share for each seat on the BOD
cumulative: allows the shareholder to pool votes together and then allocate them as desired. ex: shareholder has a total of 20 votes for the 10 shares that are held. shareholder can cast 20 votes for one candidate, 15 for one and 5 for another, or any other allocation
common stockholders
paid last in a liquidation, bondholders, general creditors, and preferred shareholders are paid first
dividends
share of the corporations profits
ex: a company could pay a dividend of $.25 per share. companies may choose not to pay dividends and instead reinvest profits for greater growth
pre=emptive rights
provides investors with a contractual right to acquire new shares proportionate to their current shares
defensive stocks
resistant to changes in economic cycles
systemic risk
reflects the fact that the performanmce of an individual security will be impacted by the performance of the overall market
preferred stock
issued by corporations, features characteristics of both stocks and bonds
holders of preferred stock typically do not have voting rights
nominal value
Nominal value of a security, often referred to as face or par value, is its redemption price and is normally stated on the front of that security. With respect to bonds and stocks, it is the stated value of an issued security, as opposed to its market value
warrant
entitles the holder to buy the issuer’s stock at a specified price for a period of time
long term instrument, 5 years or moreand the exercise price ofthe warrant is ussually higher than the stock price at the time of the issue
warrant becomes exercisable only if the stock appreciates over the long term above the exercise price. warrants are attached to bonds or preferred stock allowing the issuer to pay a lower interest rate or dividend
how do most equity trades settle?
regular way, t + 2
what happens on the morning of the ex-dividend date?
the price of the stock drops by the amount of the dividend and certain types of orders will be automatically reduced by dividend price
stock split
an adjustment in an issuer’s outstanding share count, after a stock split, each investor’s ownership position remains unchanged, but the number of shares and the stock price are adjusted
how often is interest paid
every 6 months
bond
security issued by a corporation or governmental entity to raise capital, representing a loan to a borrower in return for payment of interest and principal (return of their money) to the lender
coupon
periodic bond interest paid
par value
amount of money bond will receive at maturity
always assume a par value of $1000
bond quotation
states the price the bond is trading
ex: if bond is quoted ABOVE par, it is trading at a premium. if a bond is quoted BELOW then it is trading at a discount
ex: bond is quoted at 95, it is trading at 95% of par or $950
