SIE Prep

capital markets

where long-term securities (stocks and bonds) are traded

money markets

where short-term debt instruments (treasury bills) are bought and sold

stock market

where company shares are bought and sold

bond market

where debt securities (government and corporate bonds) are issued and traded

derivatives market

where contracts like options and futures are traded

foreign exchange market (forex)

where currencies are bought and sold

the primary market

where new stocks and bonds are sold for the first time and companies/governments raise money directly from investors

initial public offering

when a company sells stock to the public for the first time

bond issuance

when a government or corporation issues a new bond to raise funds

private placement

when securities are sold directly to institutional investors instead of the public

the secondary market

where investors buy and sell securities among themselves without involving the original issuer. it is where securities change hands between investors, making markets more liquid

issuers

the organizations that raise capital. any company, government, or entity that sells stocks or bonds to raise money

brokers

the middlemen who execute trades. they do not own the securities, but help facilitate transactions and earn a commission for their services

dealers

owners of the securities they are buying and selling. they take on risk by holding securities and profit from the price differences

investors

the buyers and sellers in the market who are looking to grow their wealth

economic indicators

data points that measure financial performance, helping determine whether an economy is expanding, contracting, or at ease

leading indicators

predict where the economy is headed

lagging indicators

confirm past trends

coincident indicators

move in real-time with economic conditions

examples of leading indicators

unemployment claims, building permits, stock market performance

examples of lagging indicators

unemployment rate, corporate profit releases, CPI

examples of coincident indicators

GDP, personal income levels, industrial production

the SEC

watchdog of the markets. responsible for regulation of the entire securities industry. specifically, enforcing laws against market manipulation and fraud

FINRA

the broker regulator. strictly responsible for broker-dealers and financial professionals. they handle licensing, trade reporting, and ensuring professional standards

the MSRB

regulator of municipal bonds, ensuring fair state and local government debt issuance practices. they provide investor protections and ensure trading transparency.

the federal reserve

the central bank of the US, responsible for managing the economy through monetary policy. wields the power to manipulate interest rates, regulate banks, and make open market trades

equities

stocks

stocks

partial ownership of a corporation. once owned, the investor becomes a shareholder

capital appreciation

if a stock price increases, the shareholder can sell for higher than what was originally paid

common stock

• shareholders can vote on corporate matters

• high volatility

• occasional dividends that have the ability to either be cut or diminished by the corporation

• last in line for liquidation in the event of bankruptcy

preferred stock

• no voting rights

• less volatility, similar to bonds

• guaranteed dividends

• second in line for liquidation in the event of bankruptcy, behind bondholders

• interest rate sensitivity

class A shares of common stock

typically offers more voting power per share to shareholders

class B shares of common stock

fewer voting rights, but may offer other incentives like lower prices

class C shares of common stock

typically do not offer voting rights but may come with higher dividend payments

shareholder rights

• voting rights

• right to transfer ownership

• right to receive dividend payments

• right to inspect corporate records

• preemptive rights: in some cases, existing shareholders can buy new shares before they are made available to the public

dividends

distributed to investors as part of their profits by way of cash payments or additional shares

declaration date for dividends

when the company announces a dividend payment

ex-dividend date

after this date, investors who buy stock will not receive the upcoming dividend

record date for dividends

the date when companies determines which shareholders receive dividends

payment date for dividends

the date where eligible shareholders are paid

stock split

when a company divides its shares into multiple shares

reverse stock split

when a company combines multiple shares into fewer shares

merger

when two companies combine

acquisitions

when a company buys another

spin-offs

when a company creates a new independent business by separating part of its operations

tender offer

when a company or investor offers to buy shares at a specific price

split ratio

current price / new price

formula for new amount of shares after a stock split

old amount of shares x split ratio

formula for new share price after a stock split

old share price / split ratio

formula for new amount of shares after a reverse stock split

old amount of shares / split ratio

formula for new share price after a reverse stock split

old share price x split ratio

growth stocks

• more volatile

• typically do not offer dividends but instead will invest in the company’s r&d

• tend to trade above intrinsic value

• most tech stocks fit in this category

value stocks

• less volatile

• will pay dividends

• tend to trade below intrinsic value

bonds

debt obligations that raise money for companies/governments and grow money for investors

government bonds

• issued by US treasury

• considered as most reliable/stable bonds

• interest earned is exempt from state/local taxes but not federal

• money raised is used to fund public projects and government operations

treasury bills

• mature in less than one year

• sold at a discounted price

• do not pay interest

treasury notes

• mature anywhere from 2-10 years

• pay interest every 6 months

treasury bonds

• mature anywhere from 10-30 years

• pay interest every 6 months

treasury inflation-protected securities

• face value adjusts for inflation to protect the investors purchasing power despite inflation (when face value adjusts the interest rate also changes though the rate itself remains constant)

corporate bonds

• issued by corporations

• more risky than government bonds

• returns are taxable at all levels of government

• used to fund expansions, operations and aquisitions

investment-grade bonds

issued by companies with strong credit ratings

high-yield (junk) bonds

higher yield because of higher probability of default and low credit ratings

convertible bonds

can be converted into a predetermined number of shares of stock if it becomes more profitable to do so - usually when the market value of those shares exceeds face value

callable bonds

• bonds can be redeemed/paid off by the company before maturity if the interest rate drops/price increases enough

• the company will then likely issue new bonds at a lower interest rate

municipal bonds

• issued by state/local governments

• used to fund public projects and municipal government operations

• less risky than corporate bonds

• returns are exempt from all tax levels

general obligation bonds (GO bonds)

backed by the full faith of the issuing government - carry low risk

revenue bonds

• repaid using revenue from a specific project

• high risk due to their dependency

• high yield

industrial development bonds (IDBs)

• a combination of GO and corporate bonds

  • the bond is issued by a municipality but all payments are made by the corporation who is being sponsored by the municipality

• higher yield because of dependency on corporation

credit ratings

• consider companies’ financial strength/stability, profitability and their ability to fulfill debt obligations

• assigned by letter grade

credit rating agencies

• moody’s

• standard & poor’s

• fitch

credit spread

• the difference between yields of corporate bonds and risk-free treasury bonds

• a larger spread = more risk in the corporate sector

yield

a measure of a bond’s return

coupon yield

the fixed annual interest rate a bond pays as a percentage of the face value

current yield

a measure of a bond’s return relative to current market prices, not original face value

yield to maturity

a measure of total return if a bond is held to maturity, this includes interest rates and any capital gains/losses if they bond was purchased at a discount or premium

options

give investors the right to buy or sell an asset at an anticipated price on or before a specific date

futures

• an agreement between two parties to buy or sell an asset at a specific price on a specific date

• no longer a right/option but an obligation by both parties

derivatives

• a financial contract who’s value depends on an underlying asset

• they do not represent ownership of an asset, they’re contracts based on what happens to the assets price

call options

the buying of an asset at a set, predicted price

put option

the selling of an asset at a set, predicted price

if bond prices fall, yield…?

rises in the market

if bond prices rise, yield…?

drops in the market

floating rate bonds

• interest rates adjust with the market by way of periodic resets in alignment with market rates + a fixed spread

• can be issued by the treasury, corporations and municipalities

duration

a measure of a bond’s price sensitivity to interest rate changes

long term bonds have a…?

higher duration - greater interest rate risk

short term bonds have a…?

lower duration - less sensitivity to interest rate changes

investors expecting interest rates to rise for the foreseeable future should…?

look to the money markets and invest in short term and/or floating rate bonds

investors expecting interest rates to fall for the foreseeable future should…?

invest in long term and/or fixed-rate bonds