SIE Exam review

Blue Chip Stock

stock issued by a company that is generally nationally known with a reputation for quality management, products, and services. These companies have demonstrated the ability to pay moderate dividends consistently in good times and in bad times.

Growth Stock

stock issued by a company that is expected to have above-average increases in revenues and earnings. Have high percentage of retained earnings; this means that they pay little or no dividend resulting in a low dividend yield and increases shareholders' eq

Cyclical Stock

stock that is heavily affected by normal business and economic cycles. Rise and decline with the rise and fall in the economy.

Countercyclical

stocks that would be the opposite of cyclical stocks. These stocks move in the opposite direction of hte economy

Examples of cyclical stock

auto manufacturers
steel companies
appliance manufacturers
housing companies
paper companies
tool and die manufacturers

Examples of countercyclical stock

gold mining companies
budget retailers
temp agencies

defensive/non-cyclical stock

stocks issued by a company that is resistant to normal business cycles and to general stock market fluctuations. Investors should expect stable and consistent earnings year after year

examples of defensive/non-cyclical stock

tobacco companies
utilities
food companies
pharmaceutical companies
auto-repair companies

Special Situations

stocks that are undervalued and their price can increase suddenly and dramatically due to a number of reasons

reasons why special situations have large increases

new management
introduction of a popular new product
discovery of natural resource on corporate property

American Depository Receipts (ADRs)

receipts traded in the US for foreign stocks that are held in bearer form by an American bank in the foreign country

More on American Depository Receipts (ADRs)

Have no voting privilege
Dividends are paid in US Dollars, not in the foreign currency
Are taxed as security and gains & losses are reported on IRS Form 1099b
Are not issued as callable

Preferred stock

fixed income security because the dividend is fixed
usually does not receive preemptive rights or voting privileges
generally less volatile than common stock
generally less potential for appreciation than common stock

Cumulative (preferred stock)

all dividends must be current on preferred stock before dividends are paid to common stockholders. Favors the shareholder.

Convertible (preferred stock)

preferred stock that can be converted into common stock at the option of the stockholder. This type of preferred stock will likely fluctuate in price the most. Favors the shareholder.

Participating (preferred stock)

Dividends are fixed as to a minimum, but not a maximum amount. Shareholders have the right to participate with common stockholders in additional earnings distributions. Favors the shareholder.

Callable (preferred stock)

These stocks may be redeemed by the issuer at a set premium over the par value, after a specified date. This favors the issuer.

Real Estate Investment Trusts (REITs)

companies that manage a portfolio of real estate properties to earn profits for their shareholders. These invest in real estate such as apartment and office buildings, moving homes, nursing homes, and shopping centers which produce revenue from rental inc

REITs details

Invest in long-term mortgages
Own real property
Make short-term real estate construction and development loans
Invest in other REITs

Equity REITs

take equity positions in real estate. Shareholders receive income and capital gains when the property is sold at a profit

Mortgage REITs

Lend money to building developers and pass the interest income on to shareholders. They are generally highly leveraged.

Hybrid REITs

are a mix of Equity and Mortgage REITs

IRS rules require that REITS pay out at least

90% of their income to shareholders and must have at least 75% of its assets in real estate related activities

REITs can provide investors with

1. Income
2. Diversification
3. Growth
4. Professional Management

REITs are

NOT redeemable
NOT investment companies
NOT regulated under the Investment Company Act of 1940
NOT direct participation programs or limited partnerships

Normal Yield

Coupon or interest rate on face of the bond

Current Yield on Bonds

Annual Interest / Current Market Price

Yield to Maturity or Basis

the yield to maturity is the long-term yield on a bond that is expressed as an annual rate. It takes into account the purchase price, redemption value, coupon rate, and time to maturity.

Basis Points

equal to 1/100th of a point, or 0.01%.

If a bond has a coupon rate of 8% and a basis of 7% it is

trading at a premium

If a bond has a coupon rate of 8.5% and a basis of 9.3% it is

trading at a discount

short-term bonds react

the quickest to interest rate changes

long-term bonds react

the greatest to interest rate changes

corporate bond

an instrument of debt issued by a corporation. Bondholders are creditors of the company that issued the bonds

corporate bond details

pay interest that is stated as a percentage of par value. Interest is paid semi-annually and is fully taxable to the investor at the federal, state, and local level.

Most corporate bonds are traded in the

over-the-counter market as a dealer/principal transaction

leveraged buy-out

the takeover of a company using borrowed funds. Generally, the assets of the target company are used as security for the loans.

Spin-off

a corporate divestiture that results in the subsidiary of a company becoming an independent company operating on its own.

Holding company

a corporation which owns enough of the voting shares of another corporation that it can influence that company's policies, management, and board of directors

Trust Indenture Act of 1939

a federal act that requires that all corporate bonds and debentures be issued an indenture or deed of trust

Secured bonds

types of bonds that are more conservative investments in that they are secured by a guarantee or collateral of some sort

mortgage bond

an instrument of debt secured by a mortgage on the real property owned by the issuing corporation.

Closed-End Mortgage bond

mortgage bond in which the property used to secure the loan cannot be used as collateral to secure other future loans, unless the subsequent loans are lesser in claim

Open-end Mortgage bond

mortgage bond in which the property can be used to secure subsequent loans and all debts hold equal claims against the assets. Generally higher yield because of higher risk.

General Mortgage bond

mortgage bond that pledges all mortgageable properties of a corporation as collateral but does not name any specific lots.

Equipment Trust Certificate

an instrument of debt that is generally issued by transportation companies to purchase new equipment. These are secured by the new equipment. Not callable and are normally issued in Serial form and rarely ever default

Collateral Trust Certificate

an instrument of debt issued by a company that uses securities of other corporations that the issuer owns as collateral

guaranteed bonds

bonds guaranteed by a company other than the company that issued them

Parity bonds

bonds which are issued that have equal claim or rights as other bonds which were previously issued

Debenture

an instrument of debt backed by the "good faith and credit" of the issuing corporation only. Unsecured debts with no collateral.

Subordinated Debenture

a debenture bond which holds a lesser or "junior" claim than other debenture bonds and thus would be paid only after higher level debenture claims had been satisfield

Junk Bonds/High-Yield Bonds

bonds issued by companies without a long track record of sales and earnings, or companies that have questionable credit strength

More on junk bonds

rated BB or lower or have not been rated at all by bond rating services
Also called high-yield bonds
More volatile than investment grade bonds
Usually higher yield than investment grade bonds
sometimes used to finance corporate takeovers

Fallen Angels

bonds that were issued as investment grade bonds but have been downgraded to a Junk Bond rating.

Income or Adjustment Bonds

often issued by companies in financial difficulty trying to avoid bankruptcy. They promise to pay interest if they have sufficient earnings and the Board of Directors declares that interest will be paid

Income bonds details

principal is still due at maturity
considered to be a risky investment

Zero Coupon Bonds

sold at deep discounts and pay no interest while the bonds are outstanding. These do not pay semi-annual interest and do not have accrued interest. Issued at a discount

Treasury Bills

short-term debt obligations of the federal government
referred to as a risk-free investment
Sold at a discount at competitive bid auctions and redeemed at par on maturity
Issued with a minimum denomination of $100
Not Callable prior to maturity
Do not car

Characteristics of Treasury Notes, Bonds, TIPS

Issued in minimum denomination of $100
Fixed rate of interest paid semi-annually which is only subject to federal income tax
Regular way settlement is T+1 in the Secondary Market
Regular way settlement is T+3 in the Primary Auction Market

Treasury Notes

have maturities of 2 to 10 years and are not issued as callable

Treasury Bonds

Have maturities of 10-30 years and may be issued as callable

(TIPS) Treasury Inflation-Protected Securities

Principal is adjusted to CPI semi-Annually
Preserve an investor's capital best among all Treasury securities

Fannie Mae, Freddie Mac and Ginnie Mae

are government agencies or government sponsored corporations that provide financing for the housing market

Ginnie Mae Securities

are guaranteed by the Federal Government (GGG)

Building America Bonds (BABs)

taxable municipal bonds issued for infrastructure rebuilding.
cannot be used to refinance outstanding debt
Interest payments are fully taxable to investors

Long Call

Bullish
Unlimited profit potential
Right to buy stock
Limited loss - premium paid

Short Put

Bullish
Obligated to buy stock; if exercised
Limited profit potential - premium income
Limited loss potential

Short call

Bearish
Obligated to sell stock if exercised
Limited Profit - premium income
Loss - limited (covered)
Loss - unlimited (uncovered)

Long Put

Bearish
Right to sell stock if exercised
Limited loss - premium paid
Limited Profit Potential

Old Faithful

Call up
Put down

Short covered call

most conservative position possible

short uncovered call

most speculative option position possible
loss potential unlimited

(OCC) Options Clearing Corporation

the issuer, clearing agency and guarantor of all listed option in the US

market maker

traders on the CBOE floor who trade for their own accounts, at their own risk. Never have priority over public orders at the same price on the OBO's book

(OBO) Order book official

an employee of the exchange who handles the public limit order book.

Cease Trading

4:00 pm ET on the Third Friday of the expiration month

Excercise Cut Off Time

5:30 pm ET on the Third Friday of the expiration month

Exercise Limits

Investors are limited to the number of listed option contracts which may be exercised within any consecutive 5 business day period.

Index Options

options that mirror a specific index.
Settle in cash

Buyers of index options

will receive cash that is equal to the difference between the market price at the close of trading for the index and the exercise price on the contract

Sellers of index options

will owe cash that is equal to the difference between the market price at the close of trading for the index and the exercise price on the contract

VIX Options

options that are based on market volatility
normally have an "inverse" or opposite relationship to the market

OTC options

options traded "off" of the floor of an exchange
have a direct link between buyer and seller

Option Account Agreement

must be received by the member firm within 15 calendar days for the time the account is approved for options transactions
If the agreement is not returned within 15 days only liquidating transactions may occur

Diversified Common Stock Fund

invests in common stocks of many different companies, in many different industries and fluctuate with the changing value of the common shares in the portfolio

Specialized/Special Situation/Sector Fund

Invests primarily in stock of companies in one industry or one specific geographic area.
*These funds are subject to market risk and are considered the RISKIEST type of fund investment.

Balanced Fund

is the most conservative and least volatile type of fund especially when compared to a stock fund.

Income Fund

Objective is to maximize current income. These funds buy stocks and bonds with high yields. An equity income fund would combine income and capital appreciation.

Growth Fund

Objective is appreciation of capital, these funds do not pay dividends and have lower yields.
*Growth funds generally invest in small-cap common stocks and are therefore more volatile than other funds.

Blue Chip Fund

invests only in blue chip stock

Gold Fund

invest primarily in stocks of companies in the gold industry . Usually pay little or no dividends

International Fund

A mutual fund that can invest in companies located anywhere outside of its investors' country of residence. Also called "Overseas Funds

Bond Funds

invest in portfolios that consist of bonds. Remember that bond prices fall when interest rates rise.

Municipal Bond Fund

mutual fund that invests in municipal bonds with an objective to maximize federally tax-exempt income

Money Market Funds

invest in low risk debt securities with short-term maturities of 12 months or less.

Money Market funds provide investors

Liquidity - the investor can make deposits and withdrawals at any time without penalty.
Safety - the securities are all short-term

Hedge Funds

a form of investment vehicle established for affluent and semi-affluent investors. Not considered investment companies.

Formation of Hedge Funds

normally established in the form of a limited partnership. These funds subject investors to a larger degree of risk

Liquidity of HEdge Funds

not usually as liquid as other securities. Most allow for the sale or redemption of hedge fund shares monthly, quarterly, or annually.

Exchange Traded Funds (ETF)

funds that are similar to normal index mutual funds with a portfolio that mirrors a specific index or industry sector basket of securities

Passive ETFs

typically created to mimic the components of the index or benchmark they track so that trading is minimal and the returns match those of the tracked index

Active ETFs

intend to outperform their index by using the services of a portfolio manager. These conduct far more trading and are far more expensive and more volatile type of ETF

ETF Characteristics

trade like a stock and can be sold anytime during normal market hours
Can be purchased on margin and sold short
No sales load
Settlement is T+2 business days

(ETN) Exchange Traded Notes

ETNs are debt instruments issued by banks. The bank promises to repay the principal amount less investor fees at final maturity

ETN Characteristics

unsecured debt securities
allow the investor to participate and access markets and sectors which were previously unavailable to them or may have been unsuitable

ETNs are issued on four basic sectors

Commodities
Currencies
Emerging Markets
Strategy/Index

Classes of Shares

Funds offer three different classes of shares giving investors a choice of fee structures such as sales charges and annual expenses

Class A Shares

charge investors an upfront sales charge which cannot exceed 8.5% under FINRA rules. Offer the lowest expense charges and generally have lower fees

Class B Shares

back-end loaded funds that have a Contingent Deferred Sales Load. The sales charge is based either on a percentage of the NAV at the time of purchase or the NAV at the time of redemption, whichever is less

Class C Shares

no upfront sales load and no back-end load but these shares have the highest annual expense changes. Best choice for short-term investors.

Fund Objectives

Fund objectives must be stated in the prospectus
Management may change investment objectives with a majority of the holders vote

12b-1 fees

annual fees charged by the fund against the fund assets to cover sales and marketing expenses

Breakpoint

occurs when an investor receives a reduced sales charge based on a quantity investment

Letter of Intent (LOI)

means in which an investor can receive a reduced sale charge

LOI details

allows investor a 13 month period to reach the breakpoint amount
Investors must be advised about breakpoint discounts or the broker is in violation of FINRA Rules

Redemption Fees

fees charged on the redemption/liquidation of mutual fund shares
Must be disclosed in the fund's prospectus

Securities Acts of 1933

Requires the delivery of a prospectus
Must disclose: Minimum purchase requirements
Quantity discount amounts
Fund management fees
Fund financial statements
The Fund prospectus would not include the current NAV of the fund

Prospectus requirements apply to new issues of:

mutual funds
variable annuities
Face Amount Certificate Companies
Unit Investment Trusts
Close-End Investment Companies
Contractual Plans

Investment Company Act of 1940

investment companies must register with the SEC
annual prospectus for mutual funds
when purchasing fund shares a customer must pay within 2 business days after the purchase. After redemption of shares, customers must be paid within 7 calendar days

Managing Underwriter's Responsibilities Include:

1. Forming the Underwriting Syndicate and Selling Groups
2. Running the Books and keeping syndicate Records
3. Establishes the Underwriter's Retention
4. Allocating the issue among syndicates
5. Stabilizes the issue, if necessary

Eastern agreements

signed severally and jointly (undivided liability)

Western agreements

signed severally but NOT jointly (divided liability)

Firm Commitment

syndicate buys the entire issue and resells it to the public. This type of agreement carries the greatest risk because the underwriters could end up with all unsold shares. The firm acts as a Dealer because it takes the offering into its inventory

Stand-by Agreement

the underwriter agrees to purchase and distribute any part of an issue not purchased by stockholders who received pre-emptive rights. Used only with Rights Offering the firm acts as a Dealer.

Best Efforts Agreement

- the underwriting group acts as an Agent in trying to distribute the new issue to the public
- does not buy or take in its inventory

All or None Agreement

The issue is canceled unless it can be completely sold to be released from their commitments if a material adverse development affects the securities markets

Registration Statement

filed with SEC, contains detailed financial information about the issuer and controlling individuals

20" Day Cooling Period

minimum waiting period required by the SEC before the issue can become "Effective". Distributions of new issue shares may not begin before the "effective date

blue sky

the issue means the issue is qualified by the underwriter's counsel in each state in which it will be sold

Due Diligence Meeting

is held by the issuer and its investment banking team to review the offering, deficiency letters and the final prospectus

Red Herring or Preliminary Prospectus

- an Initial version of the Prospectus included with the registration statement
- used to Solicit Indications of Buyer Interest in the distribution
Does not include or declare a final public offering price

Pricing of a new issue

1. Comparision with similar issues on the market
2. The outlook and attractiveness of the new issue's industry classification
3. Estimate of the corporation's E.P.S. for the new year
4. Estimate of the dividends per share the new issue will probably pay

Stabilization or Pegging the Price

occurs when the managing underwriter attempts to halt the decline in the market price of a new issue by stepping away from the syndicate and becoming a buyer in the secondary market to offset the effect of an immediate and unexpected flow back of securiti

Stabilization by managing underwriter

at or below the public offering price.
After purchasing shares to stabilize, the manager may only resell the shares at the public offering price

Final Prospectus

must include the date of the prospectus, a statement as to possible stabilizing transactions, any penalty clauses, and a statement that the SEC neither approves nor disapproves of the securities.

Broker-dealers that participate in the distribution of a new issue

must wait 30 days to purchase issue on margin.

Tombstone Ads

announce the availability of a new issue for sale

Tombstones

1. are the only form of advertising permitted to announce the new issue
2. are not required to be filed with the SEC or FINRA prior to publication
3. contain the names of the issuer, managing underwriter and the amount of the issue
4. can only contain sta

Quiet Period

No member may publish Research Reports regarding a subject company for which the member acted as Manager / Co-Manager of:
1. an Initial Public Offering, for 10 calendar days after the offering
2. a Secondary Offering, for 3 calendar days after offering

Research Analysts

analysts covering emerging growth companies involved in an IPO may attend meetings with the issuer's management
Publish research reports immediately before and after the IPO "quiet period" without the research reports being considered "offers" by the SEC

Securities Exchange Act of 1934

designed to protect the public against unfair and inequitable practices in secondary market securities transactions

More on Securities Exchange Act of 1934

Establishment of the SEC
Requires all securities listed on a national exchange to be registered with the SEC
Requires disclosure of information about all listed securities
Requires stock exchanges to be registered with SEC
Requires credit regulation for s

Insider Provision

an insider is an officer, director, or principal stockholder

Insiders, with their ability to exert influence over an issuer:

may not sell shares of their company's stock short or short against the box.
Must report their holdings and any changes in their holdings to the SEC
Prohibited from doing short swings

Regulation D offering

provision under the '33 Act for exempting private companies from filing requirements under certain conditions

Rule "504" offering

cannot exceed 5,000,000

Restricted Shares

Shares that have been acquired through a private placement and are NOT Registered

Market Order

an order to buy or sell a security at the best price available when the order reaches the marketplace

Market orders entered at the opening on an exchange

always have priority over limit orders

Limit Order

an order to buy or sell a security at a specific price or better

Good for the Day Orders

the order expires on the day it was entered unless it is executed. If the order is partially executed the remainder of the order will be cancelled at the end of the day. If a day order is changed to GTC order it will lose its position in the DMM's Book

Good till cancelled (GTC)

the order remains in effect until it is executed or canceled and is also called an Open Order

GTC order details

renewed twice a year in April and October
Permitted for round and odd lots
if properly renewed, it maintains its position in the DMM's book.

Stop Order

- Memorandum order from a customer that becomes a Market order if a trade takes place at or through the price stated
- will Protect a Profit or Limit Losses on an Existing Position

A stop order can be used to protect a

long position - by using a sell stop order
short position - by using a buy stop order

Sell Limits and Buy Stops (SL/BS)

always entered above the current market price of the stock and will not be executed unless the market moves up to or above the price indicated in the order

Buy Limits and Sell Stops (BL/SS)

always entered below the current market price of the stock and will not be executed unless the market moves down to or below the price indicated in the order.

Over the Counter Market (OTC)

all securities trades that take place off the floor of an organized exchange

Market Makers

broker-dealers that maintain a firm bid and offer price in a given security by standing ready to buy or sell from their own inventory at publicly-quoted prices, sometimes this is referred to as "position trading

Firm Quote

means market makers will tradeat least 100 shares at the quoted price

Subject Quote

provides information only and is subject to change

Workout Market

a Subject Quote that provides an estimated price range within which a dealer feels they can obtain a security within a reasonable period of time when the security is not readily available
- includes Thinly Traded Secs

markup policy

- 5% Guideline in calculating markup (buy) or markdown (sell) from the client to the market maker
- factored in to NET transaction
- applies to either principal / agency
- proceeds transactions = combined profit

Regular way settlement common stock

2nd Business day (T+2)

Regular way settlement preferred stock

2nd Business day (T+2)

Regular way settlement corporate bonds

2nd Business day (T+2)

Regular way settlement municipal bonds

2nd business day (T+2)

Regular way settlement government bonds

1st business day (T+1)

Regular way settlement options

1st business day (T+1)

Regulation T settlement for most securities

4th business day (T+4)

joint tenants with rights of survivorship (JTWROS)

account where the assets of the deceased party pass to the other account owner(s). Surviving tenant must present a death certificate and an affadavit of domicile

Tenants in Common

if one of the tenants dies, his interest will pass to his estate and not to the other joint owner.

Transfer on Death (TOD)

Upon the death of an individual investor or the last surviving account owner in a joint account, the assets in the account are passed on to beneficiaries according to the written TOD agreement, thus eliminating the need for probate.

Pattern day traders

customers who execute 4 or more day trades within 5 business days, and generally do not keep positions overnight.
1. must have a minimum equity of $25000
2. are most concerned with market "timing risk"
3. buying power limit is 4 times the maintenance marg

Order tickets must indicate

1. Buy or sell
2. Number of shares
3. The security
4. Whether or not the order is for a discretionary account
5. the account number
6. the time the order was entered
7. the time that the order was executed, if available or the time the order was cancelled

Customer account statements

customers must receive statements of their accounts at least quarterly.
These must disclose: the current securities positions in the account
any and all money & debit balances
any activity such as margin interest, interest and dividend payments

annuity

A series of periodic payments made usually for retirement income

Fixed annuity

pays the same predetermined dollar amount each period

variable annuity

pays a fluctuating dollar amount each period. based off of the securities held in the Separate Account