SIE Exam

Issuer

Organization that distributes and sells securities to investors

Long

Financial jargon for owning security

Going long

Financial jargon for purchasing ownership in security

Outstanding share

Number of shares held by company shareholders

Equity

Formal term for ownership

Security

Legal term for specific type of investment. Ex: common stock, mutual fund, ETFs, options)

2 general ways to make money on common stock

1. Capital appreciation (growth), which is realized gains

2. Cash dividend, if issuer chooses to pay them

Capital gain

Sell at higher price minus initial purchase price

Cash dividend

Profit made by the company that is distributed to shareholders (not all publicly traded companies pay dividends) Ex: Amazon

Retained Earnings

Profits retained by a company, often used to expand and reinvest business operations (not paid by investors by dividends)

Growth Companies

Their goal is to increase the size of operations and profitability (can be a startup) typically offer capital appreciation but not going to pay dividends to shareholders

Cyclical stock

Shares that tend to move with broader business cycle (more volatile) higher risk = higher reward

• generally perform well during economic expansion, when consumer and business spending increases and decline at recessions when spending slows down

Defensive (non-cyclical) stock

Tends to hold value through all business cycle phases. Typically in essential goods and services that consumers need. Ex: healthcare, food, utilities, tobacco, etc.

Pro-Rata

In proportion to shares earned. Ex: if you own 10% of outstanding shares, you get 10% of any dividend paid.

ONLY BOD can approve dividends payout

Outstanding shares

Number of shares held by company’s shareholders

Common stock pays dividends by:

1. Cash

2. Stock or,

3. Products

Cash dividend

Companies sell products and services for revenue. Revenue is the used to pay expenses. Left over is considered profit and earnings and will pay per share. Typically quarterly or annual

Stock dividend

Dividend paid in additional shares. Ex: 25% stock dividend means everyone gets 25% more shares. DOES NOT increase overall share value of position.

BOD’s directions in actions:

1. Hire/fire senior level

2. Manage senior level employee compensation

3. Creating and implementing general company policies

4. Approving dividend payout

2 structures of voting for electing BOD:

1. Statutory

2. Cumulative

Statutory

Spread votes equally across the open BOD positions. Ex: investor owns 100 shares and there are 3 open seats. That means investor

Has 300 votes and can only apply 100 to each position. BETTER FOR LARGER STOCKHOLDERS

Cumulative

Stockholders allocate total votes across open BOD positions in any way they choose. Ex: owner has 100 share and 3 open seats. Has 300 votes and can devote however they choose. BETTER FOR SMALL SHAREHOLDERS

Financial reporting

Publicly traded companies must file ongoing financial disclosures

10-K annual report

Audited financial report will be annual.

10-Q quarterly report

Unaudited financial report and will be quarterly

Security

A formal way to refer to an investment. Ex: stock, bond, mutual fund, options, ETFs

Authorized shares

Max amount of shares a company is allowed to offer to investors

Issued share

Shares sold to investors

types of shares

1. authorized

2. issued

3. Outstanding

4. Treasury

Characteristics of rights

1. Right to purchase new shares at a fixed price

2. Intrinsic value exists at issuance

3. Low time value at issuance

4. Short term (60-90 days or less)

5. Can be exercised or traded or expire

6. Stockholders receive one right every share owned

Characteristics of warrants:

1. Right to purchase new shares at fixed price

2. No intrinsic value at issuance

3. High time value at issuance

4. Long term (typically 5 years or longer)

5. Can be exercised traded or expire

Dilutive actions

Any action reducing percent ownership Ex:

• issuing new shares

• Issuing convertible securities

Preemptive right

The right to buy newly issued shares before they are offered to the public Ex: if you own 10% of outstanding shares prior to issuance, you get opportunity to buy 10% of new shares to keep same ownership percentage

Intrinsic value

They provide immediate economic benefit

Warrant

Similar to rights because they give the holder the right to purchase shares from publicly traded companies at a fixed price. IS A DILUTIVE ACTION

Convertible Bond

You can exchange or convert the interest paying bond into company common stock

Stock splits

Used by issuer that believes stock price is too high or too low. 2 types:

1. Forward split: higher number of outstanding shares

2. Reverse split: lower number of outstanding shares

Stock splits do NOT change overall value of investors position

SS factor = first ss number / second ss number

Liquidation

Sale of all company assets, including buildings, factories, investors, equipment, vehicles.

Order of payout during liquidation

1. Unpaid wages

2. Unpaid tax

3. Secured creditors

4. Unsecured creditors

5. Junior unsecured creditors

6. Preferred stockholder

7. Common stock holder

Secured creditor

Loaned money to the company and is backed with collateral. Typical a lien on asset

Lien

Right to property if loan cannot be repaid

Unsecured creditor

Lent money but do not have a lien. They are “full faith and credit”

Humor unsecured creditor

Difference is priority liquidation. Lent money without specific lien.

Senior Debt

Has priority over general and junior debt in liquidation

Preferred stockholder

If money remains, different form of ownership and priority over common stock

Common stock holder

Only if money remains. Most do not have enough to fully repay them

Liquidate

Turn asset into cash in an investment

Transfer agent

An organization hired by issuer to handle several tasks:

1. Transfer ownership from seller to buy after trade occurs

2. Maintain book of stockholder

3. Make dividends payments to stockholder

4. Distribute proxies to stockholder

5. Keep accurate count of shares outstanding

Book entry format

Database marks who owns what shares (most are held here today)

Electronic book of ownership

List all current shareholders

Negotiable

Investor can buy and sell shares with each other by agreeing on a price. Trade in secondary market between investors. Common stock and most securities are negotiable

Sweetener

Company has a hard time selling a bond, they may attach a warrant to make the bond sound more appealing.

Redeemable

Bought and sold directly with the issuer, not with other investors in the market

Agency transaction

• connects buyers and sellers

• Commission is connected

Primary Market

• sale of securities where issuer keeps proceeds

• Where initial public offerings (IPOs) occur

Secondary Market

• sale of securities where a party other than issuer keeps proceeds

• Where securities trade after their initial sales

Subdivisions of secondary market:

1. First market: listed stocks trading on exchanges

2. Second market: unlisted stocks trading OTC

3. third market: listed stocks trading OTC

4. Fourth market: institutions trading through ECNs (avoid retail “small” investors)

Dark pool investment

• fourth market

• Allow large institution investors to buy and sell large blocks of securities anonymously

• Offer limited price discovery since quotes are not publicly displayed

Private placement

Offering involves selling securities privately to wealthy individuals and institutional investors

Institutional investors

A single entity investing on behalf of a group of clients (hedge/mutual funds)

Initial public offering (IPOs)

First time an issuer makes its stock available to the general public

Listed

When a stock is capable of being traded on a stock exchange

Stock exchange

A specific place where stocks trade (NYSE OR NASDAQ)

Over the Counter (OTC) market

When a tree of securities takes place between 2 parties, but not on exchange

Market maker

Operate in third and second market. They make markets by trading securities directly with public

Spread

Difference between buy price (bid) and the sell price (ask)

Liquidity

Ability to buy and sell securities easily and quickly

Electronic Communication Network (ECNs)

Electronic bulletin boards where large institutions can post interest in buying or selling large amounts of stock. Is open 24 hours and matches buys and sellers

Settlement

When a trade is fully finalized. Buyer gets security and seller gets cash

Broker/Dealer

Financial firms that help customers buy and sell securities

Introducing brokers

Often smaller firms that focus on customer relationships and trade facilitation.

• They DO NOT maintain custody, process orders, or provide clearing services

• Hires a clearing broker to perform actions above

Clearing broker

• Broker-dealer that maintains custody, processing orders

• acts as an intermediary clearing service between investors and clearinghouse

Clearinghouse

• organization responsible for clearing trades

• Ensures buyers deliver cash

• Ensures sellers deliver securities

Depository trust and clearing corporation (DTCC)

• largest clearinghouse in financial markets

• Clears the vast majority of US trades

Settlement rules for common stock:

1. Regular way settlement: one business day after the trade (T+1)

2. Cash settlement: same day if executed by 2:30 pm ET

Declaration Date

BOD publicly declares the dividend

Record Date

The day a stockholder must be officially “on the books” as a shareholder

Ex-dividend date

Included in dividend announcements and represents a crutucak cutoff point. (the first day the stock trades without dividend)

Payable date

when the dividend payment is made to the stockholder

Financial industry regulatory authority (FINRA)

is a self regulatory organization (SRO) which means they are empowered to enforce the laws and regulations in finance

Ex-date for the stock split:

Occurs the date the stock begins trading at the post-split price

Selling Short

Allows the investor to bet against a security and profit it its market values declines:

• investors borrow the security from the brokerage firm and agree to return in the future

• investor sells borrowed security in the market right away (profit in the bear Market)

Bear Market

Declines over extended period of time

Bull Market

Increases over an extended period of time

leverage

investing with borrowed funds which amplifies gains or loss potential

short sellers:

• bearish investors

• subject to unlimited risk

• must pay dividends on share held short

American Depositary Receipts (ADRs)

Created to reduce foreign obstacles. they are created by domestic financial firms, shares are placed in a trust account and that is divided into “receipts” representing the stock. the receipts are registered with SEC and sold to American investors

• Most do not provide VOTING RIGHTS - meaning owned by the firm,

• no preemptive rights

• subject to currency exchange risk

The Securities Act of 1933

the law that requires most issuers to register their securities with SEC

Material Information

Any information that would influence an investment decision, important information about an investment

Ticker Symbol

Set of characters that represent an investment every publicly traded stock has a unique ticker symbol

Currency exchange risk

when investment exchange applies. the risk in these circumstances:

• currency exchanged out of weakness

• currency exchanged into strengthenseT

Tender Offer

used when an investor or group or organization wants to buy a significant portion of an issuers stock

• sometimes for hostile takeover (gain enough votes to influence corporation)

• Direct proposals to buy security from current investors usually at a premium to market value

• to be eligible, investor must be Long the stock (no short position)

Long

Purchase and subsequent ownership of stock

Short

sales of borrowed security

Convertible Security

a security that is convertible into common stock of the same issuer

Tender Offer Regulations

1. investors must be given at least 20 business days to decide

2. if any terms change, offer must be extended by another 10 business days

Stock Buy Back

When issuer repurchases its own stock in the open market

• often to benefit stockholders

• with fewer shares outstanding issuers can report higher earnings per share (EPS) on its financial reports even if total earnings stay the same

Blue chip companies

large successful companies that have been in business for several years