Unit 15: Ethics, Recommendations and Taxation Flashcards
For preservation of capital and low risk tolerances, move toward _______ securities and away from ________ securities and equities.
Move towards government securities and away from corporate securities
Many investors, particularly those on fixed incomes, want to generate current income from their investments.
_______ bonds,
_______ bonds,
_______ and _______ securities,
_______ - oriented mutual funds,
some stocks (including utilities and REITs),
money market funds and annuities are among the investments that can contribute current income through dividend or interest payments.
Corporate bonds,
municipal bonds,
government and agency securities,
income-oriented mutual funds,
some stocks (including utilities and REITs),
money market funds and annuities are among the investments that can contribute current income through dividend or interest payments.
If current income on a monthly basis is the customer’s investment objective, then _______ _________ or _______ should be considered first. The investor’s profile and needs will determine which of the two is better.
Variable annuity or GNMA
Refers to an increase in an investment’s value over time. The can come from increases in the security’s value, the reinvestment of distributions, or both.
Growth
The most common growth-oriented investments are _______ _______ and _____ _______ ________ _______.
Common stock and common stock mutual funds.
The product is _____ if the customer can sell it quickly at a fair market price.
liquid
Stock has varying degrees of liquidity, were as _____, _____ and ______CDs generally are considered illiquid.
DPPs, annuities and bank CDs
Real estate is the classic example of an _____ investment because of the time and money it takes to convert it into cash.
Real estate
______ are highly liquid and are often used for this purpose.
Money Market Funds
to ______ is to earn much higher-than-average returns in exchange for higher-than-average risk
speculate
_____ bonds pay interest only if the corporation meets targeted earnings levels.
Income bonds
________ bonds or preferred generally pay out a lower income rate than _______ because the investors receive benefit from the conversion feature.
Convertibles (bond or preferred); nonvonvertibles
A measure of performance that adjusts for risk, relative to a known benchmark
Alpha
7 Speculative Investments
1) Speculative Stocks
2) Speculative Stock Options
3) Low-rated debt securities
4) Precious metals
5) Commodities & futures
6) Speculative LPs
7) Speculative Mutual Funds
7 Growth Investments
1) Growth & Small-Cap Stocks
2) Stock Options
3) Non-bank grade bonds
4) Growth-oriented LPs
5) Growth stock mutual funds
6) Commodities funds
7) Variable Annuities
78 Safety Investments
1) Cash
2) Money Market Funds
3) Certificates of deposit
4) U.S. Treasury Securities
5) Bank-grade corporate and muni bonds
6) Blue-chip stocks
7) Blue-chip stock & bond mutual funds
In finance, ______ is defined as the uncertainty that an investment will earn its expected rate of return.
Risk
A measure of its volatility in relation to the overall market. It measures a security’s systemic (or systematic) risk - the risk that can be associated with the market in general.
Beta
_______ Investment Strategies have growth or income as an objective, but safety of principal tends to be the top priority.
Defensive
In a Defensive Investment Strategy, invest in _________ stocks with moderate or low volatility or _____ rated bonds.
Invest in blue-chip stocks with moderate or low volatility; AAA rated bonds
_______ Investment Strategies attempt to maximize investment returns by assuming higher risk.
Aggressive
Aggressive Investment Strategies include:
1) selecting ________ volatile stocks
2) buying securities on __________
3) Using ___________ strategies
1) Selecting highly volatile stocks
2) buying securities on margin
3) Using put & call option stragegies
A_________ investment, such as the purchase of a limited partnership unit, is not considered an outside business activity.
passive
Defined as any sale of securities outside an associated person’s regular business and his employing member.
Private Securities Transaction (aka selling away)
__________ __________must be consistent with customer needs, financial capability, objectives and risk tolerance; must be in the customer’s best interest – not the registered representatives.
Investment recommendations
Excessive trading aka _______in a customer’s account to generate commissions rather than to help achieve the customer’s stated investment objectives is an abuse of fiduciary responsibility.
churning
________ churning - the specific practice of placing clients who trade infrequently in fee-based accounts.
Reverse churning
When one party sells stock to another with the understanding that the stock will be repurchased later in the day at virtually the same price. The intent of such transactions is to make it appear that far more activity in a stock exists than actually does.
Painting the Tape
is a widely used investment strategy. By mixing industries and types of securities, investors attempt to spread their risk.
Diversification
Involves periodic purchases of a fixed dollar amount in one or more common stocks or mutual funds. It doesn’t guarantee against loss, but it does help control the cost of investing.
Dollar Cost Averaging
An investor buys or sells securities in a manner that keeps the portfolio balanced between equity and debt securities.
Constant Ratio Plan
Primary goal is to buy and sell securities so that a set dollar amount remains invested at all times.
Constant Dollar Plan
refers to an increase in an investment’s value over time.
Growth
A product is________ if a customer can sell it quickly at a fair market price.
liquid
try to earn much higher-than-average returns in exchange for higher-than-average risks
Speculate
This risk is the effect of continually rising prices on investment returns.
Purchasing power risk (inflation risk)
This risk is the potential for an investor to lose some or all of his money – his invested capital – under circumstances unrelated to an issuer’s financial strength.
Capital Risk
The risk to an investor of buying or selling at the wrong time and incurring losses or lower gains.
Timing risk
This risk is the sensitivity of an investment’s value to fluctuations in interest rates.
Interest rate risk
This risk is when interest rates decline, it is difficult to invest proceeds from redemptions, calls, or investment distributions to maintain the same level of income without increasing credit or market risks.
Reinvestment risk
The risk that a bond might be called before maturity and an investor will be unable to reinvest the principal at a comparable rate of return.
Call risk
A period during which a bond cannot be called.
Call protection
The risk that investors may lose some or their principal as a result of price volatility in the overall market.
Market risk (systematic risk)
The risk/danger of losing one’s invested principal through an issuer’s failure.
Credit risk (financial risk or default risk)
The risk that a client might not be able to sell his investment quickly at a fair market price
Liquidity (marketability) risk
The risk that such legal changes might affect an investment adversely
Legislative risk (or political risk)
Defined as the uncertainty that an investment will earn its expected rate of return.
Risk
A measure of performance that adjusts for risk, relative to a known benchmark.
Alpha
A measure of a stock’s volatility in relation to the overall market.
Beta
This investment strategy may have growth or income as an objective, but safety of principal tends to be the top priority.
Defensive investment strategies
This investment strategy will attempt to maximize investment returns by assuming higher risks
Aggressive investment strategies
The balancing of different asset classes, generally stocks, bonds, and cash, within an investment portfolio.
Asset allocation
Refers to the proportion of various types of investments that should compose a long-term investment portfolio
Strategic asset allocation
Refers to short-term portfolio adjustments that adjust the portfolio mix between asset classes in consideration of current market conditions.
Example: if the stock market is expected to do well over the near term, a portfolio manager may allocate greater portions of a portfolio to stocks. If the market is expected to decline, the portfolio manager may allocate greater portions of the portfolio to bonds and cash.
Tactical asset allocation
Relies on the manager’s stock picking and market timing ability to outperform market indices
Active management
International equities and equity funds can add even more____________ to a portfolio if this is the objective, but remember that investments abroad generally carry more risk.
diversification
A___________ must review and approve all correspondence and keep a record of all securities transactions and correspondence.
principal
________ ________ must periodically review all branch office activities to detect and discipline any individuals who engage in unethical behavior.
Member firms
It is the ________ responsibility to provide full and honest disclosure to the registered representative or investment advisor.
customer’s
All ______________are required to maintain written supervisory procedures.
broker-dealers
A___________ is responsible for enforcing the rules of the broker-dealer.
principal
A ______________ may have its own house rules that can be more stringent than those of the self-regulatory organization (SRO), but these rules can never be less stringent
broker-dealer
The ________ ________ deal with ethical treatment of customers.
Conduct Rules
A registered representative offers an attorney and an accountant two tickets to a professional sporting event each time one of them refers one of their clients to him. These tickets would be considered noncash compensation, and giving them in exchange for referrals would be____________.
prohibited
These rules permit occasional noncash expenditures that exceed the $_______ limit, such as dinners, seminars, tickets to entertainment events, or reminder advertising. Vacations or season tickets are always violations.
$100
If a registered representative (RR) witnesses or believes unethical trading or business practices are occurring, a regulatory tip may be filed with_________ via the Regulatory Tip Line in Washington, DC.
FINRA
__________ ________ instruments are susceptible to reinvestment risk. When interest rates fall, mortgage holders typically refinance at lower rates. This means that they pay off their mortgages early, which causes a prepayment of principal to holders of mortgage-backed securities. The early principal payments cannot be reinvested at a comparable return.
Mortgage backed
Which instruments are not subject to reinvestment risk. Of the ones listed, the best answer to choose is typically a ______ _______ bond. Because no interest is paid on a current basis, the investor has no reinvestment risk.
zero-coupon
___________risk, or the risk of a general market decline, cannot be diversified away._____________ risk, also known as selection risk, is the risk that a single investment will not perform. Diversifying a portfolio minimizes nonsystematic risk.
Systematic;
Nonsystematic
Taxes such as sales, excise, payroll, property and gasoline, are levied equally regardless of income, thus representing a smaller portion of income for wealth tax payers than for taxpayers with lower incomes.
Regressive taxes
Taxes such as estate and income taxes, increase the tax rate as income increases. Affect people with high incomes more than people with low incomes.
Progressive taxes
Income that includes salary, bonuses, and income derived from active participation in a trade or business.
Earned (Active) Income
Income and losses that come from rental property, LPs, and enterprises in which an individual is not actively involved.
Passive Income and Losses
Includes dividends, interest, and net capital gains derived from the sale of securities.
Portfolio Income
