Securities Industry Essentials (SIE) - Units 1 & 2

A firm designated as self-clearing can

1. act in a back-office capacity for an introducing firm.

2. not act in a back-office capacity for an introducing firm.

3. clear and settle transactions executed by other firms.

4. only clear transactions it executed.

Act in a back-office capacity

Clear and settle transactions executed by other firms; involves receiving and delivering payment and securities to both parties of a transaction

A broker-dealer sources the shares for a customer’s order from another BD that maintains an inventory of that stock. The customer’s firm acted as

a. an underwriter

b. a market maker

c. a dealer

d. an agent

agent (aka broker)

A firm that incorporates proprietary trading in its business buying and selling securities into and out of its own inventory is a

a. market maker

b. fully disclosed broker-dealer

c. clearing agent

d. introducing firm

Market makers buy and sell from their own inventory. May be a carrying firm or a fully disclosed firm.

What does the bid represent?

a. the lowest amount a customer can sell at

b. the highest amount a customer can sell for

c. the highest amount a customer can buy for

d. the lowest amount a customer can buy for

the highest amount that a buyer is willing to pay for a stock; equals the best price someone can sell at

Which best describes how a buy stop at 39 would fill?

a. the next price above 39 after market rises to 39

b. the next available price after market falls to 39

c. the next available price after market rises to 39

d. the next price below 39 after market falls to 39

order is triggered at next available price once it touches or passes above the stated price

Buy Stop Order

a. protects a short position; once stop price is hit, order is executed to buy at next available price

b. protects a long position; once stop price is hit, order is executed to sell at next available price

c. buy order is placed at or below the stated price

d. sell order is placed at or above the stated price

once stated price is hit, order is executed to buy at next available price

Sell Stop Order

a. protects a short position; once stop price is hit, order is executed to buy at next available price

b. protects a long position; once stop price is hit, order is executed to sell at next available price

c. buy order is placed at or below the stated price

d. sell order is placed at or above the stated price

once stated price is hit, order executed to sell at next available price

Buy Limit Order

a. protects a short position; once stop price is hit, order is executed to buy at next available price

b. protects a long position; once stop price is hit, order is executed to sell at next available price

c. buy order is placed at or below the stated price

d. sell order is placed at or above the stated price

buy order is placed at or below stated price (limit orders are placed at or BETTER than stated price)

Sell Limit Order

a. protects a short position; once stop price is hit, order is executed to buy at next available price

b. protects a long position; once stop price is hit, order is executed to sell at next available price

c. buy order is placed at or below the stated price

d. sell order is placed at or above the stated price

sell order is placed at or better (in this case, above) stated price

Stop Limit Order

when triggered by the stop price, a limit order executes if the price is equal to or better than the limit placed (without the limit, it would execute at next available price (market order))

example: sell 1,000 HIJ at 41 stop, 40.75 limit
sell stop order is triggered when the price hits $41 but the investor wants at least $40.75/share; sell order will only execute if price is 40.75 or higher

An investor engages a broker-dealer firm to assist in selling a very large number of personal holdings in their company. The broker-dealer, running the sale, is acting as

a. an issuer

b. a dealer

c. an owner

d. an investment banker

an investment banker

An Introducing Broker Dealer, or fully disclosed firm, can

1. act in a back-office capacity for an introducing firm.

2. not act in a back-office capacity for an introducing firm.

3. clear and settle transactions executed by other firms.

4. can execute trades for its own customers

not act in a back-office capacity for other firms; an introducing firm can execute trades for its own customers, but settlement (clearing) is handled by a clearing firm

Institutional Investors

invest money on behalf of others; for example, mutual funds, pension, insurance companies, hedge funds, banks, endowments

Accredited Investors

defined by Rule 501 in Regulation D; these investors have high net worth ($1 million excluding primary residence), high income ($200,000 or $300,000 for joint), or have obtained certain credentials establishing them as “savvy” investors. Also, general partners and officers of a company issuing unregistered securities.

A firm charging a commission when executing a securities transaction for its customer, is acting as a

a. broker

b. dealer

c. market maker

d. principal

broker; brokers charge commissions

Intrastate Rule

must meet one of three 80% rules

• 80% of revenue from the state

• 80% of the proceeds earmarked for the state

• 80% of company assets in the state

a type of stock that has been reacquired by the corporation

treasury stock; no longer has voting rights nor receives dividends

term for shares of stock that are in the hands of investors providing voting rights and access to declared dividends

outstanding stock

this refers to shares of stock that have been authorized but not yet sold to investors

unissued stock; these do not carry voting rights nor are they eligible for dividends; they are not considered when calculating a company’s valuation

penny stock cold calling rules

name of the stock

number of shares to be sold

current quote

amount of commission to be received by firm and representative

the date which a company’s board of directors approves a dividend payment

Declaration Date

ex-dividend data (ex-date)

the same date as the record date but is set by the regulator or the exchange if it is listed; the trade date plus one business day;to receive the dividend, the stock must be purchased before this date; if purchased on or after the date, it is said they’ve purchased the stock “ex” or without the dividend

stockholders of record on this date are entitled to receive the dividend distribution

record date

on this date, the dividend disbursing agent sends checks to all stockholders whose names appear on the books as owners as of the record date; investors are taxed in the year the dividend is paid

Payable date

the order of dates involving a dividend distribution

DERP:

declaration date

ex-date

record date

payable date

preemptive rights

the right of common shareholders to maintain their proportionate share of ownership in the company; allows existing shareholders to purchase shares ahead of others if the company issues new shares

• equity with a fixed rate of return

• has an ANNUAL dividend representing the return

• holders have no voting rights, nor preemptive rights

• priority over common shareholders at dissolution of the company

Characteristics of Preferred Stocks

True or False: rate of return on preferred stocks is guaranteed

False; while there is a fixed rate of return via an annual dividend, the dividend is NOT guaranteed to be paid

Types of Preferred Stock

• Straight (non-cumulative)

• Cumulative; unpaid dividends accumulate and must be paid ahead of common shareholders

• Callable; may be called (bought back) by the company

• Convertible; may be converted by owner to common shares

• Adjustable-Rate; dividend set to a benchmark

• Participating; the board may choose to give an additional amount on top of the dividend in profitable years

allows Americans to easily invest in a foreign company without having to purchase shares from a foreign exchange or converting dollars into other currency; they do still carry currency and political risk and may be taxed by the home country; they can be traded on American markets but have no voting rights (shares are actually held by the depositary bank)

American Depositary Receipt (ADR)

stock acquired through a private placement; may not be sold until they have been held fully paid for 6 months; governed by Rule 144; once sold, they are no longer restricted in any way

restricted stock

stock owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock; when these persons wish to sell shares, they must complete Form 144 which is used to determine how many shares a control person may sell in a 90-day period

control stock

volume limitations set forth in Form 144 for control persons

The greater of:

• 1% of outstanding shares of the company

• the average weekly trading volume over the most recent four weeks

sale of shares below market price offered to existing shareholders allowing them the opportunity to maintain their proportionate percentage of company’s holdings in the event of a new offering of shares; receive 1 right per share held

rights offering (does NOT apply to stock splits which do not affect the proportion of shares)

a stockholder with rights may:

• exercise the rights to buy more shares

• sell the rights and profit from there market value

• let the rights expire and get nothing

rights are a short-term instrument; typically good for 45-90 days

warrant

a certificate granting the owner the right to purchase stock from the issuer at a specified (exercised) price (typically higher than current market value) in the future; unlike a right, it is a long-term instrument; the investor hopes that the exercise price, while higher than market at issue, will be lower than market when exercised; they are oftentimes bundled with debt securities as a sweetener

these result in the shareholder receiving additional shares of stock from the issuer that affects the cost basis of the original purchase

stock dividend; purchase of 200 shares at $50 = $10,000; cost basis = $50; 10% stock dividend results in 20 additional shares; 10,000 / 220 = $45.45 (new cost basis); relevant when it comes to taxes on the sale of the shares (dividends themselves are not taxable at the time they are received)

forward stock split

results in more shares per shareholder but at a lower price; there are NO tax consequences

reverse stock split

results in fewer shares per shareholder but at a higher price; there are NO tax consequences

merger

shareholders of both companies involved receive shares in the new company; shares from old companies are cancelled

acquisition

shareholders of the company that was acquired will receive shares of the company that did the acquiring; old shares will be cancelled

spin-off

company creates a new business from one of its divisions; shares are issued to shareholders of the original company who also retain the shares they had with the original company

buyback

when a company purchases shares back on the exchange reducing the number of outstanding shares; typically increases share price (supply and demand); because this results in cash for the shareholder, it is a taxable event

tender offer

like a buyback but outside of the secondary market; issuer goes directly to the shareholder; companies may do this particularly with debt issues to retire debt early; because this results in cash for the shareholder, it is a taxable event

one company might make a tender offer for another company’s shares (friendly or hostile takeover)

corporate actions such as dividend, split, buyback or tender offer require notification of x days

10 days before record date; if not practical in case of rights or other offerings, then by the record date or at very least by effective date.