SIE Key Concepts:

Authorized Stock

The approved number of shares a corporation can sell when it decided to offer stock to the public

Issued Stock

The shares of authorized stock that have been sold to the public

Treasury Stock

Treasury stock is authorized stock that was previously sold to the public but was repurchased by the issuer. Because it is no longer outstanding, the company's share count will fall, and the shares no longer receive dividends or have voting rights. Treasury shares may be held by the company, reissued to the public, or cancelled.

Statutory Voting

Statutory voting allows a shareholder to vote once per share for each seat on the board of directors. For example, if an investor owns 100 shares of common stock and there are three board seats to be filled, they can cast up to 100 votes for each of the three seats.

Cumulative Voting

Cumulative voting allows the shareholder to pool their votes together and allocate them as desired. For example, the shareholder can aggregate all of their votes - 300 total (100 votes x 3 shares) and allocate them however they choose (e.g., they could cast all 300 votes for one candidate or cast 200 for one candidate and the remaining for another)

Warrant As Equity Securities

Warrants are considered equity securities (not debt securities) because if the warrant is exercised, the investor will receive shares in the underlying company. Importantly, warrants do not make interest payments to investors.

Forward Stock Split

Increases the number of shares a shareholder owns while proportionally reducing the share price, keeping the total investment value unchanged. Companies use forward stock splits to make their stock appear more affordable and attractive to potential investors.

Reverse Stock Split

Reduces the number of shares a shareholder owns while proportionally increasing the share price, leaving the total value of the investment unchanged. Companies typically use reverse stock splits to raise their stock price and improve the stocks perceived stability and/or being delisted from an exchange.

Blue Chip

Stocks of a well-established, stable companies with a long history of steady earnings and dividends are known as blue chip stocks. Blue chip stocks typically trade on major exchanges such as the NYSE or Nasdaq.

Wilshire 5000

The Wilshire 5000 is an index which measures the value of U.S companies with actively traded stock

Russell Top 50

The Russel Top 50 is an index that tracks the largest 50 stocks in the Russell 3000 Universe of U.S-based equities.

Beta

A common measure of a stock's volatility relative to the broader market. This number compares the movements of an individual security against those of a benchmark index, which is assigned a beta of 1.

• For example, a stock with a beta value of 1.2 has historically moved 120% for every 100% change move in a benchmark index such as the S&P 500. In other words, it is more volatile than the broader market index.

• Higher Beta comes with higher risk but the potential for higher returns. Lower beta, and the reduced risk that comes with it, means reduced potential for short-term returns since the stock price is unlikely to increase very much in that time frame.

Cumulative Preferred Stock

Cumulative preferred stock allows investors to receive dividends in arrears. This means that ig a dividend is skipped for cumulative preffered shareholders, they must receive both current and skipped dividend payments before any additional dividend payment can be made to common shareholders. This is a benefit for the investor as it entitles them to receive missed dividend payments.

Transfer Agent vs. Custodian

A transfer agent of an issuer is responsible for issuing and cancelling certificates and processing investor mailings (e.g, proxies). A custodian, on the other hand, is responsible for holding investor assets or securities for protection. A custodian may also maintain certain investor records.

Cash Dividend Taxation

Cash dividends on stock received by an investor are taxable as ordinary income and do not increase the investor's cost basis.

Stock Dividend Taxation

Stock dividends are not taxed when received by a shareholder. However, the basis of the investor's position is adjusted downward to reflect the new number of shares.

• Example: Assume an investor holds 100 shares of stock valued at $50 per share and receives a 10% stock dividend. The $5,000 value ($50 × 100 shares) of the total position does not change, so the investor now has 110 shares with an adjusted cost basis of $45.45 (calculated as $5,000 total value / 110 shares).

Basis Points

Basis points (bps) are a unit of measurement used to discuss changes in interest rates. Each basis point equals hundredth of a percentage point and there for 100 bps is the equivalent of 1.00%

Serial Bonds

In a serial bond issue, the outstanding bonds mature at different intervals with a portion of the issue maturing each year.

• Example: a 20-year bond with a 10-year call protection period could be called any time after year 10 through maturity.

Credit Ratings

Bond rating services publish credit ratings to inform investors of a bond's credit quality. A bond's credit rating may change periodically while it is outstanding. Credit ratings are typically a significant factor in the liquidity of bonds (even more so than the coupon or maturity).

Adjusting Premium Bonds by Amortization

Bonds purchased at a premium ( > $1,000 par) must be amortized over the life of the bond. Amortization means that the cost basis will be adjusted downwards each year so that at maturity an investor's cost basis is $1,000 par. What will amortization affect? Amortization affects a bonds cost basis (downwards) and should the investor sell the bond prior to maturity the profit or loss on the transaction. Amortization does not affect sale proceeds (what a purchaser is willing to pay).

• Example: When an investor purchases a bond at a premium, the cost basis will be adjusted downward towards par on a straight line basis. This is referred to as amortization. For example, a 10-year bond bought at 110 would be adjusted by one point per year, calculated as: 10 point premium/10 years to maturity = 1 point per year.

Dated Date

The dated date is the date when interest begins to accrue on fixed income securities. THe dated date is only relevant for new issuances and once regular semi-annual coupon payments begin, it is no longer relevant.

Refunding

The process of calling a bond when interest rates have fallen and issuing a new bond with a lower coupon is called refunding.

Zero-Coupon Bonds

Bonds that pay no periodic interest; instead, they are purchased at a deep discount and mature at full face value, with the difference representing the investor's return. Because they are typically long-term investments, they're often used for future financial goals like retirement or education.

EMMA Website

The Electronic Municipal Market Access (EMMA) website provides updated information about the issuer, the municipal bond, and its credit rating.

Bond Quotations

Bonds are quoted as a percentage of par. It is more important to note that bond quotes can also include fractions, such as 1/8ths (Corporate and Municipal bonds) or 1/32nds (Government bonds) of a point. These fractions are used to represent smaller price increments.

• Example: If a bond is quoted at 98 1/8, you would convert it into a price by the following method.

  • First, convert from fraction to decimal

  • 1/8 = 0.125

  • Next, add the decimal to the whole number:

  • 98 + 0.125 = 98.125

  • Last, multiply by 10.

  • 98.125 × 10 = 981.25

• Use this same format for bonds quoted in 32nds.

Unsecured Corporate Debt

Unsecured corporate debt is not backed by collateral or a specific asset of a corporation. Instead, it is backed by the good faith and credit quality of a company. It is also referred to as debenture bond.

Convertible Bond Pricing

The value of a convertible bond is based on the value of the underlying common stock since the investor can exchange the bond for the shares. The parity price is the value at which the investor is mathematically indifferent between owning the bond or converting into the underlying shares.

Non-Marketable US Government Securities

The US government issues both marketable and non-marketable debt securities. Marketable debt securities can be freely traded by investors and include US Treasury securities, such as Treasury bills, Treasury notes, and Treasury bonds. Non-marketable securities, for example US savings bonds, cannot be resold by investors and therefore have no secondary market.

Series I Bond

A Series I Bond is a non-marketable US Treasury savings bond. It pays a combination of fixed and variable interest (linked to the rate of inflation).

New Treasury Securities

Are sold through a public auction process conducted by the Federal Reserve Board. A noncompetitive tender will ensure an individual's order is filled.

Industrial Development Revenue Bonds

Industrial development revenue bonds are a type of taxable municipal security that is issued by a municipality on behalf of a corporation. Specifically, the municipality will issue debt to build a facility on behalf of a corporation and then lease that facility back to the corporation. Because the bonds are backed by lease payments made by the corporation, the debt's credit quality is tied to the corporation since the debt is the corporation’s responsibility.

Official Statement

The official statement is the primary disclosure document used in a municipal security offering. It includes all relevant information for investors, such as the risks of the bonds.

Securitization

Securitization is the process of pooling individual mortgages together to create mortgage-backed securities.

Commercial Paper

Commercial paper is an unsecured promissory note, issued by corporations at a discount. It typically has a maximum maturity of 270 days.

Banker's Acceptances

A banker's acceptance is a short-term, negotiable money market instrument that is used to finance and facilitate international trade. It has a maturity of 180 days or less and is issued by a borrower and guaranteed by a commercial bank.

Eurodollar Deposits

Eurodollars are U.S Dollars held in a depository (bank) abroad. For example, a Swiss bank account denominated in U.S dollars would hold Eurodollar deposits. These are used by foreign corporations (or individuals) who have US currency abroad.

Certificates of Deposit (CD)

Most CDs are offered to individuals are non-negotiable, which means they cannot be traded in the secondary market, but instead only redeemed with the issuing bank. Negotiable CDs can be traded on the secondary market and have a minimum face value of $100,000.

Eurodollar Bonds

Eurodollar bonds are bonds issued outside the United States but denominated in U.S dollars. Par is $1,000 USD; coupon payments are made in USD. These are issued and trade outside the U.S and are not registered with the SEC. Issuers use Eurodollar bonds to make their securities more marketable (e.g, the issuer's home currency is unstable)

Collateralized Mortgage Obligation (CMO)

CMOs are mortgage-backed securities that have been structured by broker-dealers and divided into distinct pieces called tranches. Each tranche has unique characteristics as they relate to credit quality, expected maturity, and exposure to prepayments.

Calculating POP (public offering price)

When provided with a mutual fund's NAV and sales charge percentage, the POP can be calculated as NAV / (100% - sales charge %).

• Example: If a mutual fund has a NAV of $10 and has a 4% sales charge, the POP = $10 / (100% - 4% sales charge), or $10.42.

Mutual Fund Stability

When deciding on a mutual fund investment, the investor's investment objectives are the primary consideration. Fees are of secondary importance. Note that the size of the fund is typically the least important factor.

Breakpoint

Offer mutual fund investors discounts off the sales charge based on the dollar amount invested

Breakpoint Sale

A breakpoint sale is a violation where a registered rep suggests that an investor purchases a mutual fund just below the point at which they would receive a discounted sales charge. For example, if there is a breakpoint at $250,000, suggesting the customer only invest $249,000 is a violation.

Letter of Intent (LOI)

A letter of intent allows an investor to commit to purchasing a specified amount of mutual fund shares over 13 months so they can immediately receive the reduced sales charge associated with that larger, promised investment. It lets investors reach a breakpoint without investing the full amount upfront.

Rights of Accumulation

Allows investors to qualify for reduced sales charge on future mutual fund purchases by adding their new investment to the amount they already have in the fund. These discounts apply ONLY to subsequent purchases, not the original investment.

Money Market Fund

Money market funds are mutual funds consisting of money market securities, which are debt securities with maturities of one year or less. Because of the nature of the securities they invest in, money market funds are extremely safe and highly liquid. These funds generally attempt to maintain a stable NAV of $1.00 per share, though the price can fluctuate above or below that amount. Investments in a money market fund are least exposed to currency risk as the investments are held in US dollars. They would be subject to inflationary risk.

Average Cost Basis

Average cost basis s a method used to determine the cost of shares redeemed from a mutual fund or sold from another investment. It is calculated by dividing the total cost of all shares purchased by the total number of shares owned. This is important for tax purposes. When shares are redeemed (or sold depending on the security), investors would need to determine whether they were sold for a profit or for a loss. The difference between the selling price and the average cost basis is the capital gain or loss.

Mutual Fund Dividends

Mutual fund cash dividends are taxable for investors regardless of whether they are taken in cash or reinvested back into the fund

Mutual Fund Board of Directors

At least 40% of a mutual fund's board of directors must be independent, meaning they do not have significant business relationships with the fund.

Impact of Dividends on NAV

The NAV of a mutual fund share will decrease by the amount of the dividend on the ex-date. This is because the fund is paying out cash so the fund's assets will fall.

ETF Versus Mutual Fund Expenses

Because mutual funds are actively managed, they typically have higher fees for investors than ETFs.

Depletion

Depletion is a tax deduction that compensates a limited partnership as they use up a natural resource such as oil or gas. Because real estate is not a natural resource it cannot be depleted.

Passive Gains and Losses

Direct participation programs (DPPs) pass through gains and losses to investors, which means there is no corporate taxation, instead only the investors in the program pay tax. If there is a passive loss, it can be used to offset passive gains.

Partnership Agreement

A partnership agreement is established by an agreement between two or more individuals or entities. The partnership agreement binds the parties and details which partners can transact for the account. All partners must be given a copy of the partnership agreement and the dissolution date is typically established in the agreement.

Interest in a Limited Partnership

An interest in a limited partnership is an equity security as it indicates the partner owns a piece of the real estate.

S-Corp vs C-Corp

An S corporation is a type of DPP (Direct Partnership Program). Shareholders receive a pass-through of income and losses, and the S-Corp entity is not taxed. A C corporation is a taxable entity, and shareholders receive dividends that were taxed at the entity level and will be taxed again at the shareholder level. Double taxation applies to dividends from C-Corps.

Hedge Fund Managers

Hedge fund managers receive management and performance fees. These fees are typically higher than fees charged for other fund investments.

Fund of Hedge Funds

An investment in a “fund of hedge funds”offers the liquidity of a mutual fund, but with risk more associated with a hedge fund.

Prime Brokerage Accounts

Prime brokerage is a suite of bundled services offered to hedge funds and other large institutional investors by banks and wealth management firms

Spot Price

The spot price is another term that can be used to describe the current market price of a stock. For example, if a call option is purchased with a strike price of $50, while the current spot price is $40, the call option is out of the money.

Call Option

An options contract gives the purchaser the right to buy a stock at a fixed price and obligates the seller to sell the stock at a fixed price if the contract is exercised.

Put Option

An options contract that gives the purchaser the right to sell a stock at a fixed price and obligates the seller to buy the stock at a fixed price if the contract is exercised.

Premium

The cost of an options contract, which is paid by the buyer, who is purchasing the right to do something, and received by the seller, who is taking on the obligation to do something.

Uncovered Call (naked call)

The riskiest options position, where an investor sells a call option without owning the underlying stock and therefore, if the contract is exercised, must purchase the shares in the market, regardless of how high the price has gone up, and then sell them at a fixed strike price.

Risk of Uncovered Call (naked call)

When an investor sells and uncovered call, they are writing a call option without owning the underlying stock. This position has unlimited risk because no matter how high the price of the stock increases, the writer is obligated to purchase the shares in the marker and sell the stock at the strike price. Because of this risk profile, uncovered calls are typically inappropriate for retail investors.

Protecting a Short Put

If an investor sells (shorts) a put option, they have an obligation to purchase the stock at the strike price regardless of how far the price has fallen if the option is exercised against them. If the investor wants to hedge against some of the downside risk, they can buy a put option with a lower strike price to lock in a sale of the share price for the shares.

Foreign Currency Options

Foreign currency options allow investors to speculate on how foreign currencies will perform compared to the US dollar. Because of that an investor cannot buy or sell US dollar options.

Option Contract Adjustment

Options contracts are adjusted for stock dividends as well as for stock splits. For a stock dividend, the number of shares the contract represents will increase, while the strike price will decrease proportionately. The total value of the contract does not change. The same is true for a forward stock split.

• Example: An ABC 60 call is subject to a 6% stock dividend. The total value of the contract is $60 strike price x 100 shares per contract = $6,000. After the stock dividend, the investor will now have 106 shares (6% more). To find the new strike price: $6,000 total value divided by 106 shares = $56.60.

Option Class

Option class refers to all call and put options for a single underlying stock, regardless of their strike prices or expiration dates. For example, an ABC March 80 call and an ABC March 80 are of the same class.

Time Value

The time value of an option is the portion of an option's premium that reflects the time remaining until expiration. an option's total premium minus its intrinsic value equals its time value. ( Premium - Intrinsic = Time Value). At expiration, time value = 0.

Instituional Threshold

Under FINRA rules, an individual with at least $50 million is considered an institutional investor

Fund Investing

If the manager of a fund believes there might be a short-term drop in the market, they could keep excess cash in cash and equivalents and then buy the dip

Dividends and Current Yield

If a company's dividend is reduced, but the stock price stays the same, then the current yield will fall

Offering Memorandum

An offering memorandum is provided to investors for disclosure like a prospectus, except it is used for offerings that are exempt from SEC registration like private placements. Audited financial statements are not required in an offering memorandum.

Form 144

Under rule 144, an insider is required to file a form 144 with the SEC prior to selling control stock into the open market. Note that if the aggregate dollar amount of the sales will not exceed $50,000 over the next three months, then form 144 is not required to be filed.

Restricted Stock

Stock that has never been SEC-registered. Investors can receive the restricted stock through private placements, employee stock benefit plans, compensation for professional services, or in exchange for providing seed money or start-up capital to the company.

Control Stock

Shares held by an affiliate (Officer, Member of the board of directors, individual owning more than 10% of voting shares) of the issuing company.

Regulation S

Reg S is an exempt transaction which allows an issue to raise money outside the U.S. and avoid SEC registration.

Regulation A

Reg A is an exempt transaction which allows an issuer to raise a maximum of $75 million publicly in a 12-month period without having to go through full SEC registration process.

Oversubscribed Tender Offers

If a tender offer is oversubscribed, the shares are accepted proportionally from those shareholders who tendered.

• Example: If an investor seeks to purchase 10 million shares in a tender offer, but shareholders collectively tender 100 million shares, only 10% of each shareholder's shares will be accepted. Therefore, if a shareholder tendered 1,000 shares, only 200 of their shares (10%) will be accepted.

Shelf Registration

A shelf registration allows an issuer to preregister securities today and sell them later when market conditions are favorable. A shelf is good for up to three years and can be used for both debt and equity follow-on offerings, but never for an IPO.

Best Efforts

A best-efforts underwriting is a type of underwriting where the underwriters act as agents and have no financial responsibility for any unsold securities

Regulation M

Reg M is an SEC rule that aims to prevent any marker manipulation of IPOS and follow-on offerings by broker dealers

Stabilization

Stabilization allows an underwriter to bid on securities in the open market to prevent the price from declining below the IPO. The underwriters can stabilize at or below the POP (Public Offering Price.) For example, if XYZ stock went public at $30 per share, the underwriters could stabilize at or below $30.

Offering Circular

A shorter disclosure document that is distributed to potential investors in certain types of offerings. it highlights the key points of the offering and is often used as a marketing tool.

FINRA's corporate Financing Rules

FINRA rules 5110, 2310 and 5121 - generally compel firms that participate in public offerings of securities to fulfill three requirements.:

• 1) Firms must file documents and other information in connection with public offerings. These documents include registration statements or offering circulars and their exhibits and amendments.

• 2) Firms may not make unfair terms and arrangements

• 3) Firms have specific requirements on offerings in which there is a specified conflict of interest

Marking the open or close

Marking the open or marking the close is when a trader attempts to manipulate the opening or closing price of a security by entering a number of buy or sell orders just prior to the open or close of trading.

Third Market

Refers to over the counter trading of exchange traded securities

Fourth Market

The fourth market refers to a market where securities trade directly between institutions on a private, OTC computer network rather than large exchanges such as the NYSE or Nasdaq

Real Time Transaction Reporting System

MSRB Rule G-14 requires trades in municipal securities to be reported within 15 minutes of execution to the MSRB's Real-Time transaction reporting system. In September 2024, the SEC approved a proposed rule change to reporting “as soon as practical” but no later than one minute from the time the trade was executed. The implementation date of the rule change has not yet been announced, but will be approximately 18 months from SEC approval.

Front-Running

Firms are prohibited from placing orders when they possess material, nonpublic information about an imminent block trade. A block trade generally involves at least 10,000 shares or a large dollar amount

Elasticity

Elasticity refers to the sensitivity of supply and demand of a commodity to a change of price.

Recession

A recession is defined as a decline in gross domestic product (GDP) for two or more consecutive quarters

Depression

A depression is defined by at least six consecutive quarters of negative GDP growth or a decline of at least 10% in GDP

Stagflation

Stagflation is a period of slow economic growth accompanied by rising prices, or put differently, increased inflation combined with relatively high unemployment

Velocity of Money

Velocity of money is the rate of turnover of money, or how fast it is being spent. It is usually measured as a ratio comparing GDP to money supply. When money velocity is low, people are investing and saving instead of spending.

Impact of Inflation

Inflation described rising prices for goods and services over time. Typically, as inflation increases, interest rates will also increase. Therefore, as inflation increases, bond prices will decrease (because the inverse relationship between interest rates and bond prices).

Conversely, in a deflationary environment, interest rates are falling, and bonds will increase in value. Note that in inflationary environments, bonds with longer maturities will have a greater price decrease than those with shorter maturities.

Deflationary Environment

In a deflationary environment, outstanding issues of corporate bonds are more attractive than new issues. This is because the new issue would have a lower coupon, reflecting the decline in interest rates that accompanies deflation.

Earnings per Share (EPS)

Net Income / Shares Outstanding

P/E Ratio

Price-to-earnings ratio is calculated as a companies stock price divided by earnings per share