Systematic Risk
Risk that affect entire markets or the economy as a whole
nonsystematic risk
Affects a particular company or sector of the economy
Market Risk
Exposure to the uncertain future market value of a portfolio based on changes in investor sentiment. Also known as systematic risk and is usually managed with a short-term focus
Capital risk (principal risk)
Risk that the investor will lose all invested capital
Business/Credit Risk
An issuer may not be able to meet interest or principal payments on fixed income securities. This can be due to competitive pressures, market share, and management. Usually managed with long-term focus
Interest Rate Risk
Suffering a loss due to a change in the interest rate. longer maturities are at greater risk than short term
Reinvestment risk
Risk that, upon maturity, if interest rates have fallen, the income produced by the available bond yield will be less. Typically long-term bonds
Inflation Risk (Purchasing Power Risk)
Purchasing power shrinks because of inflation of money. Most bond may be negatively impacted over time
What two types of risk is fixed income securities associated with?
Inflation and Interest rate risk
Liquidity Risk
Ability to buy or sell quickly at a fair price
Prepayment Risk
If interest rates fall, the maturity of the CMO will shorten because homeowners will be more likely to refinance at a lower rate. Inversely as well.
Social/Political Risk
The risk of a government becoming unstable or an unfavorable government action occurring that affects the value of securities.
Aggressive Indicator
Seeking long term appreciation of principal without the fear of it fluctuating in the short term. Typically, these are referred to as emerging growth.
Diversificiation
Reduce risk in the overall protfolio by spreading the risk over a greater number of securities so they will not move in tandem.
Purpose of diversification
Avoid excessively weighting a portfolio in any one asset class. Must diversify in two levels: Among asset classes and within asset classes.
Asset Allocation
Reduce risk by allocating investments over 3 asset classes: stocks, bonds, cash. All 3 move up and down differently, which allows the reduction of risk and the portfolio will be more consistent
Rebalancing
Periodically revising your portfolio's asset allocation to make sure it still supports your investment plan.
What can be used to hedge stock positions?
Equity options
Limit Order
Order to buy at or below a specified price, or to sell a stock at or above a specified price
Sell Stops
Entered at or below support for a stock. "To catch a falling star
Buy stop
Placed above the market, executed at or above the stop price.
What is the most bullish of orders? How about the most bearish?
1. Buy stops
2. Sell stops
Sell Limit
At or above the stated price; used to take short positions or close out long positions, at or above the limit price
Buy limit
At or below the stated price; used to take long positions or close out short positions, at or below the limit price
Discretionary Trade
The registered rep chooses one or more of the following:
Asset, Action, Amount
Interpositioning
The placing of a third party between a broker-dealer and its customer when filling a trade. This practice is prohibited unless it results in a better execution for the customer
naked vs covered options
Investor does not own the underlying stock.
Covered means that the underlying shares are owned by the investor
Types of orders for Bullish
Buy stock, stop, calls
Sell puts
Types of orders for Bearish
Sell stock short, stop, calls
buy puts
What type of gain is a realized gain?
Capital gain
Total Return
any gain or loss from the sale of securities that have appreciated or depreciated in value, PLUS dividends paid on stock holdings and interest paid on bonds
Return on Investment (ROI) Formula
(Net profit / investment)X 100
Cost Basis of a security
Original price paid for the security, plus any sales charges or commissions
Securities sold for more than their cost basis results in what type of gain
Net capital gain
If the securities are mutual fund shares, which specific identification will an investor choose?
Weighted average method by calculating an average cost per share
Standard that is used to analyze performance for portfolios?
Benchmark
Members cannot effect a delivery vs payment or receipt vs payment transaction in a depository eligible security unless what?
the transaction is settled by book-entry using the facilities of a securities depository.
Stock Splits are defined as...
stock distributions of more than 25% of the outstanding stock and are shown as an accounting adjustment to the par value of the outstanding shares. Stock splits are voted on by the shareholders
Merger
Combination of two or more companies into a single firm. Stock of both companies is surrendered and new stock is issued. Must be approved by shareholders and they may received stock, cash or both
Acquisition
One corp. purchases the stock of another crop and becomes the new owner.
For corporate actions such as, dividends, stock split, or rights, how many days prior must the SEC & FINRA be notified?
10 days prior
FINRA Rule 2251
Processing & forwarding of proxy and the issuer-related materials.
FINRA Rule 5240
B/d's may not harass or intimidate another member firm or associated person
FINRA Rule 5290
Prohibited from splitting orders into multiple smaller orders for the purpose of maximizing monetary or in-kind payments
Market Rumors
Spreading false or misleading information about a company to impact the price of a security
Front Running
Broker buys a stock for its own account in front of a large trade
Marking the Close
Attempting to influence the closing price of a security by executing purchase or sales at or near the close of trading hours
Marking the Open
Entering a trade when the market opens to influence the price of a security
Pump and Dump
Artificially increasing or "pumping up" the price of a stock, by making positive statements that are false and misleading
Free Riding
Customer buys shares and then sells them before paying for the original purchase
Painting the Tape
Traders buy/sell a security among themselves to create a high level of activity that doesn't exist to influence the stock price
Excessive Trading
Excessive buying/selling of securities in a customer's account to influence the price or generate commission
Bear Raiding
Attempt to push down the price of a security by heavy selling or short selling
Cornering the Market
Investor purchases a large enough number of shares to be able to control the supply of stock and the price
FINRA Rule 5230
Prohibits payments made in connection with published information meant to influence prices
Securities Exchange Act of 1934 regarding an Insider and when must they notify the SEC
Director, officer, or owner of 10% or more of stock of a corporation.
They must notify the SEC within 10 days of becoming an insider and required to report changes in their positions within 2 days of change