SIE Exam Prep

Stages of the Business Cycle

Expansion (economy is growing), Peak (prices hit their highest level and economic indicators stop growing), Contraction (economic growth weakens and GDP growth falls below 2 percent), Trough (economy reaches its lowest point), Recovery (low prices help foster demand, indicators begin to rise again

How many consecutive quarters must GDP fall to constitute a recession?

2 quarters

Leading Economic Indicators

Indicate where the economy is headed in the short term (useful when trying to predict the next phase of the business cycle) (i.e. stock market returns)

Lagging Economic Indicators

Reveals trends in the economy after major economic, financial, or business events have occurred (i.e. unemployment rate)

Coincident Economic Indicators

Statistics that tell analysts how the economy is currently (i.e. GDP)

Cyclical Equities

Businesses that follow the standard business cycle (do well in a good economy, but poor in a down economy)

Defensive Equities

Businesses that make goods we use as part of our daily life and are not impacted in a material way by how the economy is doing (i.e. utilities)

Growth Equities

Industries expected to grow faster than the economy in general (i.e. technology)

Keynesian Theory

Increase in government expenditures and a decrease in taxes can prevent or repair an economic recession (govt. role is significant)

Monetarist Theory

Controlling the money supply and letting the market work itself out can curb inflation (govt. role is minimal)

Balance of Payments

The net transactions completed between one country’s government bodies, companies, and individuals, and those of outside countries.

Gross National Product (GNP)

The total value of all goods and services produced by the citizens of a country, no matter where they live.

Public Offering

Occurs when an issuer sells its securities to the general investing public (IPO)

Regulation A (Reg A)

Provides an exemption from registration for public offerings up to $20 million (Tier 1) or $50 million (Tier 2) in any 12-month period

Private Offerings

The issuer sells to a narrowly defined group of investors who meet strict wealth and sophistication requirements.

SEC Regulation D (Reg D)

Contains rules for exemptions from registration, allowing some companies to offer and sell their securities without having to register them with the SEC

Restricted Securities

Securities acquired in private, unregistered sales by an issuer or an affiliate of the issuer

Treasury Stock

Shares a company repurchases from the market

Firm Commitment Distribution

The investment bank commits to purchase all the securities in an offering from the issuer and then resell them to the public; they assume the financial responsibility for these securities; any unsold shares are paid for and held by the investment bank.

Best Efforts Distribution

The investment bank agrees only to use its best professional efforts to market and sell the issuer’s securities and any unsold shares are returned to the issuer.

All or None Distribution

If 100% of the shares don’t sell, then the entire offering is nullified and the shares are returned to the issuer.

Minimum-Maximum Distribution

A minimum percentage of shares to sell is set, and as long as that percentage is sold to the public, then the deal goes through.

Competitive Sales (Municipal Bond Offerings)

Issuers advertise their bonds are for sale by releasing a notice of sale to the public. Underwriters place bids on the bonds at a specified time on a specified date and the bidder offering the lowest interest rate wins.

Negotiated Sales (Municipal Bond Offerings)

Issuers are allowed to select the underwriter(s), with whom they directly negotiate the terms of the bonds and the terms of the sale in a “two-party” process.

Prospectus

Document filed with the SEC for public securities offerings. It discloses relevant information about the issuer and the investment, such as the company’s summary, the number and type of securities being offered, names of the underwriters, and the risks involved. Companies are required to file both a preliminary prospectus and a final prospectus, with the latter containing the offering price.

Blue Sky Laws

the unique state securities laws

Securities Act of 1933

Law requires issuers to comply with a series of rules, including disclosing all material company information, in order to protect investors from fraud. Creates the SEC

Securities Exchange Act of 1934

Regulates securities trading that takes place over the secondary market.

Investment Advisers Act of 1940

Limits the advertising investment advisers may engage in.

Investment Company Act of 1940

Regulates the organization of companies that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public.

Common Stock

voting rights, receive dividends - in the event of liquidation, common shareholders are entitled to company assets only after creditors, bondholders, and preferred shareholders have received theirs

Preferred Stock

Fixed dividends, priority repayment in the event of corporation liquidation

Warrants

Certificate that gives the holder the right to buy common shares directly from a corporation at a fixed exercise price until the warrant expires (typically several years in the future)

Repurchase Agreement (Repo)

An agreement between two parties where securities are purchased from a seller for a certain amount of time, sometimes overnight, and the seller agrees to repurchase the securities at a slightly higher price than the purchase price.

American Depository Receipts (ADRs)

Certificates that represent shares of a foreign company’s stock (priced in US dollars)

Statutory System of Voting

The stockholders votes apply to every open board position (50 shares, 6 positions, 50 votes)

Cumulative System of Voting

The stockholder could allocate their votes disproportionately among the positions (50 shares, 6 positions, 300 votes)

Market Risk

The risk that in a declining stock market, even stocks of profitable and solid corporations may or will drop in market value.

Business Risk/Sector Risk

If a particular business is suffering poor results, or the overall sector is suffering, then the market value of their stock will suffer.

T-Bills

Short-term borrowings (1 year or less), interest is paid at maturity and it is determined as the excess of the face amount over the discounted-by-interest purchase price.

Treasury Notes

Intermediate-term borrowings (2-10 years), interest is paid semi-annually and is exempt from state tax

Treasury Bonds

Long-term borrowings (up to 30 years), interest is paid semi-annually and is exempt from state tax

Ginnie Mae/Fannie Mae/ Freddie Mac

these entities facilitate the mortgage market for primarily residential housing and may issue short-term or long-term debt securities for funding purposes.

General Obligation Bonds

these bonds are not backed by collateral; rather, they are backed by the municipality’s total tax and operating revenue

Revenue Bonds

Purchasers of these bonds are repaid from the income generated by the specific project the bond was funding rather than by the issuer’s total revenue.

Special Tax Bonds

Combination of GO bonds and revenue bonds; municipalities issue these in order to fund public projects and will increase a specific tax to repay the bondholders

Taxable Bonds

Fixed-income municipal securities issued to fund projects not subsidized by the federal government because they do not provide a meaningful benefit to the general public

Money Market Securities

Short-term fixed-income debt instruments that mature in up to 270 days

Par Value

the initial loan amount of a bond (typically $100 or $1,000)

Business Settlement Days for Corporate and Municipal Bonds

3 days

Number of Days in the year for Corporate and Municipal Bonds

360 days

Number of Business Settlement Days for U.S. Government Bonds

1 day

Number of Days in the year for U.S. Government Bonds

365 days

Callable Feature

gives the issuer the right to pay off the bonds at a date earlier than the maturity date

Puttable Feature

allows a bondholder to redeem the principal amount on or after a specific date well before the maturity date

Interest Rate Risk

Risk that the value of the bond will decrease due to unexpected fluctuations in interest rates.

Credit Risk

Risk that the issuer will default on loan payments

Liquidity Risk

Risk that few buyers are available when the security needs to be sold quickly

Covered Call Writing

When an investor who owns a stock writes (sells) a call option on those shares, offering it for sale in exchange for a premium. The dollar mount of the premium received provides downside protection in the event the stock declines in value. Though, a loss would occur if the decline in value is greater than the premium received. The gain is capped at the amount by which the strike price exceeds the stock’s current market price.

Protective Put Buying

An investor who owns a stock purchases a put option on those shares, locking in a fixed strike price at which they may sell their stock in the event it declines in value. They have to pay a premium for this contractual right to fix the price at which they may sell their shares, but if the stock declines dramatically, then the premium cost will be worth it.

What does open-ended mean?

Investors can invest as much as they would like into shares of the portfolio/the fund.

NAV of Mutual Funds

Total value of the fund’s securities divided by its number of outstanding shares.

Money Market Funds

These invest in only specific high-quality, short-term debt investments issued by governments, banks, or corporations

Closed-End Funds

These issue a limited number of available fund shares; they are actively managed and often concentrate on a single sector or industry

Unit Investment Trusts (UITs)

These maintain a long-term fixed portfolio of securities in order to meet a particular investment objective. The trust sponsor will typically raise capital from investors through a one-time public offering of a fixed portfolio of securities and can buy back their units from investors at the estimated NAV; UITs are not actively managed.

Variable Life Insurance

Type of permanent life insurance policy that pays out a specified death benefit to the policyholder’s beneficiaries upon their death. The cash value of the policy is invested into a particular set of securities.

Load Funds

Mutual Funds commission fee, known as a sales charge or load. FINRA caps these loads at 8.5% of the purchase or sale.

529 College Savings Plan

account earnings grow federally tax-free; withdrawals can be made from the account tax-free, so long as they are used for qualified postsecondary educational expenses.

LGIPs

Local Government Investment Pools; established by state governments; they pool the resources of different local government entities and then invest in short-term securities

DPP

Direct Participation Programs; investors become limited partners by buying into the program and then the general partner invests the pooled money into different businesses

Tax Advantages of DPP

DPP profits are taxed only once at the investor level (pass-through model), and it means that the individual investors report the profits as income rather than the DPP entity itself.

Liquidity/Marketability of DPP

DPP ownership units are generally not listed nor traded on stock exchanges; the illiquidity makes these investments suitable only for investors who don’t need readily sellable investments.

Tenants in Common (TIC)

Fractional ownership interests in real estate, these investments are illiquid, tax-deferred securities, and are typically structured as DPPs

Hedge Fund Structure

General partners have unlimited liability while limited partners are only liable up to the amounts they invest. Hedge funds offer pass-through tax treatment, which means that profits are taxed only once at the investor level.

Hedge Fund Suitability

Generally illiquid as most will require your money remains invested for a period of time before you can make withdrawals, investors must typically be considered accredited, most require a minimum investment of $100,

Systematic Risk

Risk that applies to a market or market segment as a whole

Reinvestment Risk

Risk that the cash flows received from an investment won’t generate the same returns when reinvested. Reinvestment risk increases in environments where interest rates are declining.

Political Risk

Risk that an investment’s returns would decline due to political changes in a foreign country.

Limit Order

When an investor has a specific maximum price they’re willing to pay to buy a specific security or a specific minimum price at which they wish to sell.

Stop Order

An investor who already owns a stock may wish to put in an order to sell the stock if it declines below a stop price.

Discretionary Power

Instances in which a client wishes to give their registered representative limited power of attorney, enabling the RR to make trading decisions on behalf of the client.

Broker

Acting as an intermediary between a buying customer and a selling customer in an agency capacity.

Dealer

Selling directly to a buying customer out of the firm’s inventory in a principal capacity.

Bid Price

What an investor is willing to pay for a particular stock at a particular time

Ask Price

What an investor is willing to receive for a particular stock at a particular time.

Naked Call Writing

When an investor sells a call option without owning the underlying security, believing the price of the security will trade below the option strike price on the expiration date and thereby collecting a premium (the maximum potential gain).

Naked Put Writing

When an investor sells a put option without owning the underlying security, believing the price of the underlying security will trade above the option strike price on the expiration date and thereby collecting a premium (the maximum potential gain).

Standard Settlement Time for Stocks, Corporate Bonds, Municipal Bonds, and Mutual Funds

T+1

Standard Settlement Time for options, contracts, cash trades, and repos

T+0 (same-day)

Transfer Agent

Person who keeps the corporate record (list of owners of a corporations shares and bonds)

Record Date

Date a shareholder must be on the company’s books in order to receive a dividend. (if a shareholder owns shares on or before this date, they will receive the dividend)

Ex-dividend date

Date of disqualification for the next dividend payment; those who purchase shares on or after this date will not receive the dividend.

Rights Offerings

When a company offers its existing shareholders the right to buy additional new shares in the company, proportional to their current holdings.

Regulation T (Reg T)

Governs cash and margin accounts

Cash Account

All transactions must be paid in full with available cash or investments; no credit is permitted.

Margin Account

Investors can borrow up to 50% of the cost of securities they wish to purchase from their brokerage firm.

Defined Benefit Plan

Employer-sponsored plan that provides a specified monthly benefit or lump-sum payment to the employee upon retirement

Defined Contribution Plan

A plan that generally permits an employee to make pre-tax contributions which can be partially matched by their employer

Simplified Employee Pension Plan (SEP)

Allows employers to make discretionary contributions towards their own retirement-as well as their employees’ - and receive tax deductions for these contributions.

FINRA Rule 3310

Requires all member firms to have a written compliance program in place to detect and prevent money laundering