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Series 6 > Unit 1 > Flashcards

Unit 1 Flashcards

1
Q

Security

1.1.3.6

A

Investment of money
In a common enterprise
Expectation of profit
Derived from efforts other than the investor
Any note, stock, bond, investment contract, variable annuity, profit sharing or partnership agreement, certificate of deposit, option on a security, or other instrument of investment

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2
Q

Equity

1.1.1

A

Security that represents ownership
Represented by stock
Could also be rights, warrants, and options
Used to raise Capitol
Most visible and accessible means of creating wealth
Conservative for co. , rest for investors

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3
Q

Debt obligation

1.1.1

A 
Creditor relationship
Represented by bonds and notes
Used to raise capital 
Company obliged to pay investor back
Conservative for investor, risky for co.
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4
Q

SEC

1.1.2

A

Securities and exchange commission

Created by security exchange act of 1934

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5
Q

Self Regulatory organizations

1.1.2

A

SRO
Maloney act of 1938
Municipal Securities Rulemaking Board (MSRB)
Chicago Board Options Exchange (CBOE)

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6
Q

National Association of Securities Dealers

1.1.2

A

NASD
Is an SRO
Comprised of member broker/dealers
Defunct, replaced by FINRA

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7
Q

Financial Industry Regulatory Authority

1.1.2

A 
FINRA
Registered securities association
Successor of NASD
Regulates OTC
Regulates NYSE
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8
Q

Over the counter securities

1.1.2

A

OTC
Price established by negotiation
Market makers maintain OTC inventories and sell to brokers/dealers for asked or offering price

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9
Q

Primary offering

1.1.2

A

The market for issuing new securities. … They sell their securities to the public through an Initial Public Offering (IPO).

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10
Q

Secondary market

1.1.2

A

After the initial issuance, investors can purchase from other investors in the secondary market.
Done on stock exchanges and/or OTC

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11
Q

Exchange-listed Securities

1.1.2

A

Listed on NYSE

Priced by auction on the trading floor

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12
Q

Asked or offering price

1.1.2

A

The price a seller is willing to accept for a security, also known as the offer price.

Brokers purchase at lowest price
Established by open outcry
Market makers sell

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13
Q

Bid price

1.1.2

A

The price a buyer is willing to pay for a security. Securities sell price
Market makers buy and customers sell

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14
Q

Market Maker

1.1.2

A

maintain OTC inventories and sell to brokers/dealers for asked or offering price
Buy from broker/dealers at bid price
Ensures the customer get lowest ask price if buying
Ensures the customer gets highest bid price when selling

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15
Q

Associated person or member

1.1.3.1

A

Employee, manager, director, officer, partner of broker/dealer or another entity (bank, issuer, etc,) or any person controlling, controlled by, or in common control with that member.

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16
Q

Broker

1.1.3.2

A

Acts as the customer’s agent and is merely executing the customer’s order for a fee known as a commission.

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17
Q

Customer

1.1.3.3

A

Individual, person, partnership, corporation, or legal entity that is not a broker, dealer, or municipal securities dealer
The public

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18
Q

Dealer

1.1.3.4

A

Role of a brokerage firm when it acts as a principal in a particular trade
Acts as a dealer when it buys/sells for its own account at its own risk then charges a customer a mark up or mark down
Any person engaged in the business of buying/selling securities for their own account either directly or thru a broker that is not a bank

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19
Q

Member

1.1.3.5

A

Of FINRA

Any individual, partnership, corporation, or legal entity admitted to memberships

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20
Q

Sale and offer to sell

1.1.3.7

A

Disposition of a security or interest in a security for value
Offer to sell
Offer for sale
Offer
Includes every attempt or offer to dispose or offer to buy for value

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21
Q

Prospectus

1.1.3.7

A

Notice, circular, advert, letter, comm written or by radio or tv that offers any security for sale or confirms the sale

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22
Q

Balance sheet

1.1.4

A

Disclosure of composition of total capitalization (debt and equity)
Summarizes assets, liabilities, net worth

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23
Q

Asset

1.1.4

A 
What the company owns
Cash in the bank
Accounts receivable (money owed)
Investments
Property
Inventory, etc.
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24
Q

Liabilities

1.1.4

A 
What the company owe some
Accounts payable (current bills)
Short & long term debts
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25
Q

Net worth

1.1.4

A

Shareholders equity
The excess of the value of assets over the value of liabilities
Computed: assets - liabilities = net worth

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26
Q

Total capitalization

1.1.4

A

Net worth + long term debt

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27
Q

1.2.1 Common Stock

A

company’s primary means of raising capital
investor’s share of ownership in the company’s net worth
entitles owner to a share of profits distributed as dividends (quarterly)
equal vote on directors and other important matters
Four kinds: authorized, issues, treasury an outstanding

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28
Q

1.2.1.1 Authorized Stock

A

Number of share authorized by state to issue, sell

Can sell more by way of a stockholder vote

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29
Q

1.2.1.2 Issued Stock

A

Distributed to investors
Unissued shares saved for:
raising new capital
paying stock dividends
providing stock purchase plans for employees
converting convertible bonds or convertible preferred stock
exercise of outstanding stock purchase warrants

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30
Q

1.2.1.3 Treasury Stock

A

Repurchased issued stock
Can be held indefinitely, reissued or retired
Reissued to fund:
employee bonus plans
distribute to stockholders as a stock dividend
Does NOT carry voting or dividend rights.

31
Q

1.2.1.4 Outstanding Stock

A

Investor owned stock

Issued but not repurposed

32
Q

1.2.1.5.1 Market Value

A

Market Price
Current Market Value (CMV)
Price investors pay to buy the stock

33
Q

1.2.1.5.2 Book Value

A

How much a common stock could expect to receive for each share if a company were liquidated
The difference between historical value of a company’s tangible assets and liabilities divided by the number of shares outstanding
A + L / outstanding shares

34
Q

1.2.1.5.3 Par Value

A

The nominal value of a bond, share of stock, or a coupon as indicated in writing on the document or specified by charter.

35
Q

1.2.1.6.1 Voting Rights

A 
Important policy at annual meeting
     issuance of convertible securities
     issuance of additional common stock
     substantial change in corporation's business
     electing board of directors
     stock splits
36
Q

Statuary voting

A

Cast one vote per share owned for each item on a ballot

37
Q

Cumulative voting

A

Allows stockholders to allocate their votes in any manner they chose
Advantageous for small shareholders

38
Q

Proxies

A

a form of absentee ballot

39
Q

1.2.1.6.2 Preemptive Rights

A

When a company offers securities to it’s common stockholders before general public
Buy enough of the newly issues stock to maintain their proportionate ownership
Often sold at a discount

40
Q

1.2.1.6.3 Limited Liability

A

Stockholders cannot not lose more than they have invested

Not required to pay a company’s debts

41
Q

1.2.1.6.4 Inspection of Corporate Books

A 
Stockholders have the right to:
receive annual financial statements
obtain lists of shareholders
Stockholders DO NOT have the right to:
examine detailed financial records
minutes of director's meetings
42
Q

1.2.1.6.5 Residual Claims to Assets

A

If a company is liquidated, shareholder entitled to a portion of the remaining profits after all debts and senior securities have been satisfied
Common Stock = Junior Secuity

43
Q

Junior Security

A

common stock

44
Q

1.2.1.7 Bullish

A

Buy low, sell high
Investor expects the price to increase
Long is act of buying
Bullish

45
Q

1.2.1.7 Bearish

A 
Sell borrowed shares, buy then buy back at a lower price
Sell high buy low
Short sale
Borrowed shares have to be replaced
Bearish
Expects the stock to go down
Short is act of selling
46
Q

1.2.1.8.1 Growth (benefit)

A 
Receive capital growth
Receive income
Both
Increase in market price = capital appreciation
Capital Gain = make money on sale
Capital Loss = lose money on sale
Unrealized gain = potential capital gain
Capital gains are taxable only when realilzed
47
Q

Capital Appreciation

A

increase in security market price

48
Q

Capital Gains

A

Profit received from selling security

Taxable

49
Q

1.2.1.8.2 Income (benefit)

A

Cash paid quarterly
Taxed at 15%
70% exclusion for company

50
Q

1.2.1.9.1 Market Risk (risk)

A

Chance the stock will decline in price
Losses limited to total investment in stock
Short sellers losses are infinite because no limit to how high a stock’s price may climb before he can re-purchase stock originally sold

51
Q

1.2.1.9.2 Business Risk (risk)

A

Level of risk for the specific business
Related to activities of the business
Based on speculative nature, management, philosophy, etc.
Uncertainty of operating income

52
Q

1.2.1.9.3 Decreased or No Income (risk)

A

Dividend decreases or ceases

53
Q

1.2.1.9.4 Low Priority at Dissolution

A

Residual rights to corporate assets upon dissolution

54
Q

1.2.2 Points

A

Stock’s market price quoted in whole dollars known as points, plus fractions of a dollar expressed in cents

55
Q

Round Lot

A

equal to 100 shares
Cost of a round lot =
Day low price x 100

56
Q

1.2.2.1 Exchange Listed Stocks

A

Securities that meet listing requirements such as maintaining a certain price, maintaining a certain trading activity

57
Q

Exchanges

A

Have physical location and trading floors

Auction markets

58
Q

1.2.2.1.1 Nasdaq

A

National Association of Securities Dealers Automated Quotation system
Computerized info system that provides price and inventory info for market makers selling OTC securities

59
Q

1.2.2.1.2 Nasdaq Markets

A

Nasdaq stocks that don’t meet listing requirements or chose not to trade OTC
Unlisted securities

60
Q

1.2.2.1.3 Non-Nasdaq

A

OTC markets not part of Nasdaq (unlisted)
Traded on OTC bulletin boards (OTCBB)
Pink Sheets (no longer exist)
Most speculative of all equity securities

61
Q

1.2.3 Preferred Stock

A

Does not offer appreciation potential
Issued with a fixed rate of return
Purchased for income
Some have variable dividend payout = adjustable rate preferred stock
Price sensitive to interest rates (like bonds)
Price moves inversely with interest rates (like bonds)
No preset maturity state, no scheduled redemption date, no maturity value (NOT like bonds)
Two advantages:
Owners must receive stated dividend
Priority claim over common stockholders
Good for those seeking income and safety
Does NOT have voting or preemptive rights

62
Q

Fixed Rate of Return

A

Key attraction for investors
Par value important for Preferred Stock
Par = 100: rate of return quoted in %
Par not = 100: rate of return quoted in $

63
Q

1.2.3.1.1 Straight (noncumulative) Preferred Stock

A

No special features

Only offers dividend payments

64
Q

1.2.3.1.2 Cumulative Preferred Stock

A

Any dividends in arrears must be paid prior to paying common stock dividends
Lower stated dividend rate
Less dividend income compared to straight preferred
Less risk, less reward
Safer than straight preferred

65
Q

1.2.3.1.3 Convertible Preferred

A

Owner can exchange each preferred share for shares of common stock
Price is preset and noted on stock certificate
Lower stated dividend rate than non-convertible
Investor can convert to common stock and get capital gains
Conversion increases total number of common share outstanding; decreases earnings per common share; decrease common stock market value
Parity = underlying common stock has the same value as the convertible preferred

66
Q

1.2.3.1.4 Participating Preferred

A

Offers owners a share of corporate profits after all dividends and interest due on other securities is paid.
Percentage of participation on stock certificate
Common stock dividend must be declared before the participating dividend can be paid.

67
Q

1.2.3.1.5 Callable Preferred

A

Callable, redeemable
Company can buy back from investors at a stated price after a specified date
Allows the company to replace relatively high fixed dividend securities with a lower priced one
When called, dividend and conversion rights cease on that date
Usually pays a premium exceeding the stock’s par value at the call.
Higher stated rate of dividend payment
Likely to be called when interest rates are falling

68
Q

1.2.3.1.6 Adjustable Rate Preferred

A

adjustable or variable dividend rate
Tied to rates of other interest rate benchmarks
Adjusted as often as semi-annually

69
Q

1.2.3.1.7 Dividends and splits

A

Paid on common and preferred stock
Distributed from company profits
Only when directors declare a dividend
Sent automatically to shareholders

70
Q

Cash Dividends

A

If stock certificate, get a check
If held by a dealer, deposited in brokerage account
Usually paid quarterly
Taxed as dividend income

71
Q

Stock Dividends

A

Declared by board of directors
Issues shares of common stock as a dividend
Market price per share declines
Company’s total market value remains the same

72
Q

Stock Splits

A

Changes the number of outstanding shares
Total value of the stock remains the same before and after split
2 for 1 or reverse split 1 for 2.
Shareholder approval required

73
Q

Money Market

A

The trade in short-term loans between banks and other financial institutions.

74
Q

Settlement Dates - Regular Way

A

T+3 = Payment must be made on the 3rd business day after the trade.

Series 6 (2 decks)

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