Securities Industry Essentials Exam Review Guide

Investment bankers

Assist businesses that seek to raise capital through the issuance of securities.

Research department of a broker-dealer (BD)

Performs market analysis and studies both the markets and individual issuers to issue recommendations.

Trading department of a BD

Executes transactions for the accounts of customers and the firm's account.

Compliance department of a BD

Ensures information barriers are maintained between certain departments.

Information barriers

Limit the spread of non-public information within the firm.

Transfer agent

Responsible for maintaining a list of the company's current shareholders and their contact information, and also assists in the transfer of shares.

Registrar

Responsible for ensuring that a corporation doesn't issue more shares than it's authorized to issue.

Arbitrage

Buying a stock on one exchange and simultaneously selling it on another exchange.

DTC

Created to provide a book-entry system to handle the increase in volume of securities transactions.

OTC Pink Marketplace

Where the quoted price of a non-listed stock can be found.

Ask price

The price at which a BD sells a security to an investor.

Bid price

The price at which a BD buys a security from an investor.

Market maker's quote

Indicates the firm's willingness to buy 2,000 shares at 7.10 and sell 1,000 shares at 7.15 (20 x 10 represents the number of 100-share round lots).

Market maker

A member of a stock exchange (or a broker-dealer) that's responsible for providing liquidity by consistently buying and selling securities at its quoted prices.

Accredited investor

A married couple who has earned $300,000 of income in each of the last two years and reasonably expects this level to continue.

Accredited investors

Include registered investment advisers (RIAs), as well as BDs and their associated persons who are Series 7, 65, or 82 qualified.

Prime broker

Provides a centralized location for funds and securities of institutional customers.

Options Clearing Corporation (OCC)

Issues and guarantees exchange-listed options.

Uniform Securities Act (USA)

The state securities model law that's often referred to as 'Blue Sky Laws.'

FINRA members

Individuals are generally not considered FINRA members; instead, they're associate persons of member firms.

Investment Company Act of 1940

Requires mutual funds to have a significant percentage of its directors be disinterested to protect shareholders against management impropriety.

Regulatory hearing

Can result in fines and the suspension of registration, but not prison since only a court may impose a prison sentence.

SIPC

Protects the customers of a BD that becomes defunct (bankrupt).

SIPC coverage

Covers securities and cash only; commodities and futures contracts are not covered.

Client coverage example

For SIPC coverage purposes, a client with $250,000 in stocks and $50,000 in cash is fully covered.

SIPC

Securities Investor Protection Corporation, which does not cover commodity futures contracts.

FDIC

Federal Deposit Insurance Corporation, which guarantees bank savings accounts and CDs held in a bank account.

FRB

Federal Reserve Board, which buys and sells securities in the open market but does not issue securities.

Preferred Stock

A type of stock that has a fixed dividend, but the payment is not guaranteed, and does not have voting rights.

Common Stock

A type of stock that does not have a fixed dividend but does have voting rights, and its prices are more volatile than preferred stock.

Convertible Preferred Stock

The most volatile type of preferred stock, whose price fluctuates based on the value of the underlying common stock.

Restricted Stock

Unregistered stock acquired through a private placement.

Rule 144

A regulation that requires restricted stock to be held for at least six months before it may be sold.

Cumulative Preferred Shares

Shares that must receive all previously unpaid dividends before common shares receive dividends.

ADRs

American Depositary Receipts that can be listed on U.S. exchanges but are subject to exchange-rate risk.

Political Risk

The risk associated with investing in ADRs, which is higher than in domestic stocks.

Statutory Voting Method

A method where the number of votes a common stockholder has is based on the number of shares owned.

Proxy

A document that shareholders receive to submit their votes.

Rights and Warrants

Derivatives that permit holders to buy the issuing company's common stock at a predetermined price.

Call Options

Options issued by the OCC, unlike rights and warrants which are issued by the corporation.

Preemptive Rights

Rights that allow existing shareholders to maintain their percentage of ownership and control of the company.

Warrants

Instruments that, when attached to bonds, allow the issuer to pay a lower interest rate on the bonds.

Maturity Order

From longest to shortest maturity: warrants, then options, then rights.

YTM

Yield to Maturity, which for a 4% bond trading at $950 and callable at par would be greater than 4%.

Zero Coupon Bond

A bond that will have the largest price change if interest rates fluctuate.

Interest-Rate Risk

The risk that the value of bonds will change due to fluctuations in interest rates.

Call Protection

Most valuable for a bondholder if bond prices are rising due to falling interest rates.

Conversion Feature

Allows a bondholder to convert a bond with a face value of $1,000 and a market price of 125 into 40 shares of common stock at $25 each.

Convertible bond

A convertible bond is suitable for an investor who's interested in safety of principal and capital appreciation.

General obligation (GO) bonds

General obligation (GO) bonds are backed by the taxing authority of a state or local government entity (i.e., a municipality).

Revenue bonds

Revenue bonds are backed by the revenue that's generated by a specific project or facility (e.g., an airport, bridge, college, or hospital).

Municipal bond mutual fund

Regarding the tax treatment of a municipal bond mutual fund, it provides tax-free income and taxable capital gains.

Property values

An increase in property values is favorable to the credit rating of a municipal issuer.

Industrial development bond (IDB)

A corporation is the primary source that backs an industrial development bond (IDB).

Payment on IDB

The payment on an IDB is guaranteed by the signatures of the issuing authority and the corporation.

Sewer bond

A sewer bond may be paid for by an increase in property taxes.

Double-barreled bonds

These are frequently double-barreled with part of debt service covered by revenues and the remainder as a general obligation of the issuer.

Electronic Municipal Market Access (EMMA)

The Electronic Municipal Market Access (EMMA) system provides trade data and other information for municipal securities.

T-bills

T-bills trade at a discount, while T-notes, T-bonds, and TIPS can trade at a premium or discount.

Liquidity of T-bills

T-bills have more liquidity than T-notes, T-bonds, TIPS, and STRIPS.

T-bill as money market instrument

A T-bill is considered a money market instrument when it's first issued.

Treasury bonds

Treasury bonds have maturities exceeding 10 years.

Taxation of U.S. Treasury security interest

The interest received on a U. S. Treasury security is taxable at the federal level, but exempt from state and local taxes.

U.S. Treasury securities

U.S. Treasury securities are direct obligations of the U.S. government; however, they're not redeemable by the issuer (i.e., they trade in the secondary market).

Risks of U.S. Treasury securities

U.S. Treasury securities are subject to interest-rate risk, inflation risk; however, they're not subject to default risk, liquidity risk, or prepayment risk.

Agency securities

With the exception of GNMA securities, agency securities are backed by the full faith and credit of the agency that issued them.

Money-market securities

Money-market securities mature in one year or less.

Bankers' acceptance

A bankers' acceptance is a security that helps finance foreign trade.

Commercial paper

Commercial paper has a maximum maturity of 270 days.

Asset-backed securities

Asset-backed securities are secured by credit card debt, auto and home equity loans, and are subject to prepayment risk.

Trading of asset-backed securities

Asset-backed securities trade based on average life, not actual maturity.

Debentures

Debentures are unsecured corporate bonds that are not backed by specific assets.

Accrued interest calculation

For accrued interest, corporate and municipal bonds use 30 days in every month and 360 days in the year, while U.S. Treasury notes and bonds use actual days in every month and 365 days in the year.

Dividend yield

If a stock is paying a $0.50 quarterly dividend and its market price is $40, the dividend yield is 5% ($2.00 annual dividend ÷ $40).

Cost basis of mutual shares

If a customer purchased $75,000 of mutual shares, received and reinvested $3,500 in dividends and $1,000 in interest, her total cost basis would be $79,500.

Current yield of mutual fund

A mutual fund that pays a monthly dividend of 15 cents with a current market price of $36 would have a current yield equaling 5% ($.15 x 12 = $1.80, then $1.80 ÷ $36 = 5%).

Cost basis for inherited mutual fund shares

If an investor inherits mutual fund shares, the cost basis is determined as of date the decedent's death.

Ex-date for mutual fund shares

An investor who buys mutual fund shares will not receive an impending dividend distribution if she purchases on the ex-date.

Dividend receipt based on purchase date

An investor who buys shares will receive a dividend if her purchase is executed prior to the ex-date.

Ex-date for stock

For stock, the ex-date is typically the same day as the record date and is the date on which the stock's price is reduced by the amount of the dividend.

Stock Dividend

If an investor owns 1,000 shares of ABC at $40 and ABC distributes a 25% stock dividend, the investor will own 1,250 shares at $32 after the distribution.

S&P 500 Index

A broad-based index which includes large companies that are listed on U.S. exchanges.

Dow Jones Industrial Average (DJIA)

An index that's based on 30 of the leading blue-chip companies.

Yield to Maturity (YTM)

A 6% bond that's priced at par value will have a return or YTM of 6%; a 6% bond that's priced at a premium will have a return or YTM of lower than 6%, a 6% bond that's priced at a discount will have a return or YTM of higher than 6%.

Current Yield

A 5% bond that's trading at 90 has a current yield of approximately 5.6% ($50 ÷ 900).

Current Yield for Bonds

A bond paying $40 interest semi-annually and trading at par has a current yield of 8% ($80 annual interest divided by $1,000).

Yield-to-Call (YTC)

Represents a bond's yield if it's called prior to maturity.

Yield-to-Worst

For bonds, regulations require firms to disclose to investors the lower of YTM or YTC.

Custodian Bank

The custodian bank of a mutual fund holds its cash and securities, but doesn't manage the fund's portfolio.

Contingent Deferred Sales Charge (CDSC)

If a back-end load decreases based on how long an investor owns mutual fund shares, it's referred to as a contingent deferred sales charge (CDSC).

12b-1 Fee

The 12b-1 fee is used to pay for promotion and advertising, but not commissions on portfolio transactions.

Management Fee

A mutual fund's management fee is included in the operating expenses of the fund.

Breakpoint

In order to reduce the front-end load on a mutual fund, breakpoints are available based on the total amount invested in the fund (i.e., the more invested, the lower the sales charge).

Letter of Intent (LOI)

A sales charge reduction is available for an investor who signed a letter of intent (LOI), which is good for 13 months, but NOT for a married couple that invests in different mutual fund families through the same RR.

Breakpoint Sale

On a breakpoint chart, a discount is provided at $101,000. If a sale of fund shares is executed with a value of $99,000, it's considered a breakpoint sale.

Index Funds

Index funds have lower management fees since they're passively managed.

Open-End Investment Companies

Open-end investment companies (i.e., mutual funds) continuously offer new shares, must be sold with a prospectus, and remain in the primary market (i.e., their shares don't trade in the secondary market).

Net Asset Value (NAV)

Open-end investment companies determine net asset value (NAV) once per day at the 4:00 p.m. ET market close.

Redemption Value

The redemption value of open-end investment company shares is based on the NAV that's computed after the redemption order is received.

Closed-End Investment Companies

Closed-end investment companies have a one-time offering of a fixed number of shares, which then trade in the secondary market since they're not redeemable to the company.