FINRA SIE Sections 1 & 2 Vocabulary

Vocabulary flashcards covering key concepts, entities, options, bonds, and calculations for FINRA SIE Sections 1 & 2.

Primary Market

Market where new securities are issued and sold to investors for the first time, and the issuer receives the proceeds.

Secondary Market

Market where previously issued securities are bought and sold between investors, and the issuer generally does not receive the proceeds.

Initial Public Offering (IPO)

The first public offering of a company's stock.

Follow-on Offering

A public offering of additional shares by a company that is already publicly traded.

Private Placement

An offering of securities that is not registered for public distribution and is generally sold to a limited group of investors.

Equity Security

A security representing ownership in a company, such as common stock and preferred stock.

Debt Security

A security representing a loan from the investor to the issuer, such as corporate, Treasury, and municipal bonds.

Issuer

An entity that creates and sells securities to raise capital.

Broker

An agent acting for a customer in securities transactions.

Dealer

A principal buying or selling securities for its own account.

Market Maker

A dealer that stands ready to buy or sell a security at quoted prices, providing liquidity.

Bid

The highest price a buyer is willing to pay for a security.

Ask

The lowest price a seller is willing to accept for a security.

Spread

The difference between the bid and ask price.

Bull Market

A market characterized by generally rising prices.

Bear Market

A market characterized by generally falling prices.

Liquidity

How easily an asset can be converted into cash without significantly affecting its price.

Volatility

The degree to which the price of a security fluctuates.

Diversification

Spreading investments among different securities, asset classes, industries, or issuers to reduce unsystematic risk.

Systematic Risk

Risk affecting the overall market or economy that cannot be eliminated through diversification.

Unsystematic Risk

Risk specific to a company or industry that diversification can reduce.

Inflation

A general increase in prices that reduces the purchasing power of money.

Gross Domestic Product (GDP)

The total value of goods and services produced within a country's economy over a given period.

Federal Reserve

The central bank of the United States, which influences monetary policy and the money supply.

Monetary Policy

Federal Reserve actions that influence the economy through the money supply and interest rates.

Fiscal Policy

Government decisions involving taxation and spending.

Yield Curve

A graphical depiction showing the relationship between yields/interest rates and maturities of debt securities of similar credit quality.

Normal Yield Curve

A yield curve where longer-term securities generally have higher yields than shorter-term securities.

Inverted Yield Curve

A yield curve where short-term rates are higher than long-term rates, which can signal economic slowdown/recession.

Capital Formation

The process of raising money that can be used for investment and economic growth.

Self-Regulatory Organization (SRO)

An entity that regulates its members, such as FINRA and national securities exchanges.

Common Stock

An equity security representing an ownership interest in a corporation, generally with voting rights and potential dividends or capital appreciation.

Preferred Stock

An equity security generally providing preferential treatment over common stock for dividends and liquidation proceeds.

Cumulative Preferred Stock

Preferred stock where skipped dividends accumulate and generally must be paid before common shareholders receive dividends.

Noncumulative Preferred Stock

Preferred stock where an unpaid dividend generally does not accumulate.

Convertible Preferred Stock

Preferred stock that can be converted into common stock according to specified terms.

Stock Split

An event where the number of shares increases while the price per share decreases proportionally, keeping total market value unchanged solely by the split.

Reverse Stock Split

An event where multiple shares are consolidated into fewer shares and the price per share increases proportionally.

Stock Rights

Short-term privileges allowing existing shareholders to purchase additional shares, generally to protect against dilution.

Warrant

A security giving the holder the right to purchase company stock at a specified price for a specified period, generally longer-term than rights.

Bond

A debt security representing a loan from an investor to an issuer.

Face Value

The amount the issuer promises to repay at maturity, often $\$1,000$ for corporate bonds.

Coupon Rate

The stated annual interest rate paid on a bond's face value.

Current Yield Formula

Formula given by $\text{Current Yield} = \frac{\text{Annual Interest}}{\text{Current Market Price}}$.

Interest-Rate Risk

The risk that changes in market interest rates will cause a bond's market value to change.

Reinvestment Risk

The risk that interest or principal received must be reinvested at a lower rate.

Default Risk

The possibility that an issuer will fail to make required interest or principal payments.

Callable Bond

A bond that allows the issuer to redeem it before maturity under specified terms.

Convertible Bond

A bond that can be converted into shares of the issuer's common stock under specified terms.

Treasury Bills

Short-term U.S. government securities with maturities of one year or less.

Treasury Notes

U.S. government debt securities generally maturing in 2–10 years.

Treasury Bonds

U.S. government debt securities with maturities generally longer than 10 years.

Treasury STRIPS

Treasury securities whose principal and interest components are separated and sold as individual zero-coupon securities.

TIPS

Treasury Inflation-Protected Securities whose principal is adjusted based on inflation/deflation using the applicable inflation index.

Municipal Bonds

Debt securities issued by state and local governments and their agencies/authorities, with interest generally exempt from federal income tax.

General Obligation (GO) Bond

A municipal bond backed by the issuer's full faith and credit, generally supported by taxing power.

Revenue Bond

A municipal bond backed by revenue generated by a specific project or source, such as a toll road or airport.

Tax-Equivalent Yield Formula

Formula given by $\text{Tax-Equivalent Yield} = \frac{\text{Municipal Yield}}{1 - \text{Tax Rate}}$.

Mutual Fund

An investment company that pools money from investors to purchase a portfolio of securities.

Net Asset Value (NAV)

Formula given by $\text{NAV} = \frac{\text{Assets} - \text{Liabilities}}{\text{Shares Outstanding}}$.

Open-End Mutual Fund

A fund that continuously issues and redeems shares at its applicable NAV.

Closed-End Fund

A fund that generally issues a fixed number of shares trading in the secondary market, where market price can be above or below NAV.

Mutual Fund Load

A sales charge associated with purchasing or redeeming certain mutual fund shares.

12b-1 Fee

A mutual fund fee used for certain distribution, marketing, and shareholder-service expenses.

Exchange-Traded Fund (ETF)

A fund holding a portfolio of securities that trades throughout the day on an exchange at market prices.

Real Estate Investment Trust (REIT)

An entity that generally owns, operates, or finances income-producing real estate.

Call Option

A contract giving the holder the right, but not the obligation, to buy the underlying security at the strike price.

Put Option

A contract giving the holder the right, but not the obligation, to sell the underlying security at the strike price.

Option Writer

The person who sells/writes the option and receives the premium, assuming the obligation if exercised.

Strike Price

The predetermined price at which the underlying security can be bought or sold when an option is exercised.

Option Premium

The price paid by the option buyer to the option seller.

Annuity

An insurance product designed to provide income, often during retirement.

Fixed Annuity

An annuity where the insurer provides a specified interest rate/benefit structure according to the contract.

Variable Annuity

An annuity where returns/benefits can vary based on underlying investment options; classified as a security.

529 Plan

A tax-advantaged account designed primarily to help pay qualified education expenses.

Hedge Fund

A pooled investment vehicle typically available to qualified/accredited investors and often using complex or aggressive strategies.

Corporate Liquidation Priority

Order of priority during liquidation: secured creditors $\rightarrow$ unsecured creditors $\rightarrow$ preferred shareholders $\rightarrow$ common shareholders.

Bond Current Yield Example

For a $\\text{\$1,000}$ bond paying 6% interest trading at $\\text{\$900}$, annual interest is $\\text{\$60}$, resulting in a current yield of \frac{\\text{\60}}{\\text{\900}} = 6.67\%.

Tax-Equivalent Yield Example

For a municipal bond yielding 4% for an investor in a 25% tax bracket, the tax-equivalent yield is $\frac{4\%}{1 - 0.25} = 5.33\%$.

NAV Calculation Example

For a mutual fund with $\\text{\$10M}$ in assets, $\\text{\$500K}$ in liabilities, and 950K shares, NAV is \frac{\\text{\10M} - \\text{\500K}}{950\text{K}} = \\text{\$10.00}.