SIE Prep

securities

the broad term for stocks, bonds, mutual funds, and many other financial instruments that an investor might purchase to meet their financial goals.

Common stock

a type of equity security that represents ownership in a corporation. It is the most basic form of ownership and typically grants shareholders voting rights on company matters, such as electing the board of directors. Common stockholders also have the potential to earn dividends, which are distributions of the company's profits, and benefit from capital appreciation if the stock price increases.

Preferred stock

a type of equity security that represents ownership in a corporation, but it has features of both stocks and bonds. It typically does not offer voting rights, but it does offer a fixed dividend payment, which is paid out before dividends to common stockholders.

Dividends

distributions of a company's profits to shareholders, typically paid out in cash or additional shares of stock. They are often issued on a regular schedule (typically quarterly). Dividends vary depending on profits and are never guaranteed.

Capital Appreciation

an increase in the value of an investment over time, such as when a stock's price rises. It is one of the primary ways investors can profit from owning stocks or other assets.

Capital

money used to grow a business. The most common sources of capital are investors and banks.

Capitalization

the size of a company as measured by market value. This value may be found by multiplying the number of shares in the market (called outstanding shares) times the price per share. The largest companies, often with market capitalization over $10 billion, are called large-cap. (Yes, that's billion, with a "B".) You may see other terms for smaller companies like mid-cap, small-cap, and even micro-cap.

Principal

also called the face amount. It is the amount that was borrowed (what the issuer sold the bond for) and represents the amount that must be paid off at the end of the term.

Maturity

the date when the principal must be paid off.

Interest

the amount of money the borrower pays the investor. It represents the cost of borrowing the money.

Federal Government

(nicknamed govies) and its agencies sell debt to fund operations of the government.

Municipalities

(nicknamed munis) are governments below the federal government, like states, counties, and cities. Like the federal government, these governments issue debt to raise capital for operations and to build big projects, like bridges and dams.

Corporations

also sell bonds and other types of debt securities to raise capital for growth and expansion.

Long-term debt

matures in ten years or more,

medium term debt

matures in five-to-ten years,

short-term debt

matures in under five years.

money market securities

which always mature in one year or less.

Diversification

a way to reduce the ups and downs of investing (called volatility) by owning several different securities. This reduces the risk of one or two securities dropping in value. Diversifying investments is one of the best ways to reduce risk in a portfolio.

Investment Company Act of 1940 defines

what an investment company is under US law and classifies them into three broad categories: face amount certificates, unit investment trusts, and management companies. The investment management company is further divided into two broad categories: open-end and closed-end management company.

Mutual funds

a type of open-end investment company that pools money from multiple investors to purchase a diversified portfolio of securities. They offer investors professional management, diversification, and liquidity.

Liquidity

an investment is easy to buy and sell, so investors can sell (liquidate) their mutual funds quickly and easily.

Equity Funds

funds invest primarily in stocks, aiming for capital appreciation (growth, meaning an increase in value). They can be further categorized based on market capitalization (large-cap, mid-cap, small-cap), investment style (aggressive, passive, etc.), or have an industry focus (like technology, healthcare, or energy).

capital appreciation

growth, meaning an increase in value

Bond Funds

funds invest primarily in bonds, seeking income and stability. They can be classified based on maturity (short-term, intermediate-term, or long-term), credit quality (investment-grade (safer) or high-yield (less safe), or type of issuer (government, corporate, or municipal).

Money Market Funds

funds invest in short-term, low-risk debt securities, aiming to preserve safety liquidity. They are often used as a safe place to save cash.

Hybrid Funds

These funds combine stocks and bonds in varying proportions, offering a balance of growth and income potential.

Derivative

financial contracts whose value is "derived" from the performance of an underlying asset, like a stock, bond, commodity, or currency. The type you will need to know about is called an option.

option

a contract between two parties where one party (the buyer) pays for the right to buy or sell a stock at a preset price (called the strike price) before a certain date (called expiration). The contract specifies the right.

call

A contract that grants the buyer the right to buy the stock

put

contract gives the buyer the right to sell the stock

exercise

person pays money (called a premium) to gain the right

hedging

protecting against losses for an investor's existing investment

speculation

taking on higher risk in hopes of big gains

generate income

from premiums the second party collects.

Options can be used for:

• hedging (protecting against losses for an investor's existing investment),

• speculation (taking on higher risk in hopes of big gains), or

• generate income from premiums the second party collects.

primary market

where corporations sell their stocks and bonds to the public to raise money (capital). In the same way, governments sell bonds to the public to raise capital.

issuer

The term for the company or government selling a security

Securities Act of 1933

sets most of the rules for primary markets. This act requires full and fair disclosure, so that all investors have complete and accurate information when a new issue is sold to the public. The act requires that a new issue, unless it is exempt from the act, be registered with the Securities Exchange Commission (more about them in a bit) before sale.

prospectus

investors in a corporate issue must receive this detailed disclosure document before the sale

issuer

the corporation or government that is selling the security in the primary market to raise capital.

broker dealer

a firm that buys and sells securities for itself and for its customers as its primary business.

underwriter

the name for a broker dealer that assists an issuer in selling a new security to investors.

syndicate

a group of underwriters that form a joint venture to sell a new issue.

Investors

the persons that actually buy the security and provide capital to issuers selling the securities.

There are three broad categories of investors:

• Retail investors are those who buy and sell securities for their own accounts. These are often smaller investors who have less knowledge of the market and are provided more protection by regulators than more knowledgeable investors.

• Institutional investors are larger investors, like pension plans, mutual funds, and insurance companies. Because these investors are often more knowledgeable they are freer to engage in investments with more risk and complexity.

• Accredited investors are institutional investors and certain retail investors that are considered more knowledgeable about securities. These investors may freely invest in smaller offerings called private placements.

• The Securities and Exchange Commission (aka SEC) is the primary securities regulator in the United States. Most new issues must be registered with the SEC before the issue may be sold to the public.

Retail investors

those who buy and sell securities for their own accounts. These are often smaller investors who have less knowledge of the market and are provided more protection by regulators than more knowledgeable investors.

Institutional investors

larger investors, like pension plans, mutual funds, and insurance companies. Because these investors are often more knowledgeable they are freer to engage in investments with more risk and complexity.

Accredited investors

institutional investors and certain retail investors that are considered more knowledgeable about securities. These investors may freely invest in smaller offerings called private placements.

Securities and Exchange Commission (aka SEC)

the primary securities regulator in the United States. Most new issues must be registered with the SEC before the issue may be sold to the public.

secondary markets

where securities owned by investors are bought and sold (traded).

Investors

All the same people investing in the primary market are involved in the secondary market.

Broker-Dealers (BDs)

These firms are in the business of providing services to investors, helping investors buy and sell the investments they need to achieve their financial goals.

Registered Representatives

These are the employees of BDs that provide service and advice to investors.

Trading Venues

The exchanges and the OTC market are the places where investors come together to buy and sell securities. There will be more detail about them in this unit.

Regulators

work to keep the markets fair and efficient for all investors.

Investment Advisors

professionals that provide investment advice for a fee to investors, but are not involved in the trading of securities. They are always required to put the best interests of their clients before their own.

fiduciary duty

required to put the best interests of their clients before their own

Trustees, custodians, and guardians

manage investments on behalf of others. They are also fiduciaries.

Transfer agents

firms hired by issuers to maintain a record of investors who own the issuer's securities.

Depositories and clearing corporations

companies provide the services needed to settle trades.

designated market maker

All this trading happens with the help of a

listed

A stock that trades on an exchange

New York Stock Exchange

best known of the exchanges

market makers

maintain an inventory of securities, buying and selling them to other market makers and broker-dealers (for their customers).

third market

There is no rule that prevents stocks that are traded on an exchange from also being traded in the OTC market. This activity (listed stocks trading OTC) is said to occur in the

fourth market

There is also an active market for trading that is used by large institutions that trade directly with each other. This is also a virtual market called an ECN, for electronic communications networks. This trading venue is called the

Securities and Exchange Commission (SEC)

the primary regulator watching over the U.S. financial markets. Established by the Securities and Exchange Act of 1934, its primary goal is to keep things fair for investors. Think of the SEC as the referee in a game, making sure everyone plays by the rules. They have the power to create and enforce regulations that govern how investments like stocks, bonds, and mutual funds are bought and sold.

Internal Revenue Service (IRS)

enforces tax law at the federal level.

Financial Crimes Enforcement Network (FinCEN)

protects the financial system by collecting and analyzing financial information to detect criminal activity.

Office of the Comptroller of the Currency

regulates banks and supervises the Federal Deposit Insurance Corporation (FDIC).

Administrator. Blue-sky laws

refer to securities laws of the individual states.

Self-Regulating Organizations (SROs)

non-government membership organizations that enforce industry regulations and standards. They work alongside government regulators to maintain market integrity and protect investors. SROs create and enforce rules for their members, conduct investigations, and impose disciplinary actions for violations

The most prominent SROs in the securities industry are:

• Financial Industry Regulatory Authority (FINRA): The primary SRO overseeing broker-dealers and their registered representatives in the U.S. FINRA is also responsible for administering licensing exams for the securities industry. Like the SIE, Series 6, and Series 7.

• Municipal Securities Rulemaking Board (MSRB): Regulates the underwriting and trading of municipal securities.

• Chicago Board Options Exchange (CBOE): An exchange and SRO that regulates options trading.

• Securities Investor Protection Corporation (SIPC): SIPC protects investors if a broker-dealer firm fails. SIPC is a not-for-profit, membership corporation.

Financial Industry Regulatory Authority (FINRA)

The primary SRO overseeing broker-dealers and their registered representatives in the U.S. FINRA is also responsible for administering licensing exams for the securities industry. Like the SIE, Series 6, and Series 7.

Municipal Securities Rulemaking Board (MSRB)

regulates the underwriting and trading of municipal securities.

Chicago Board Options Exchange (CBOE)

An exchange and SRO that regulates options trading.

Securities Investor Protection Corporation (SIPC)

protects investors if a broker-dealer firm fails. SIPC is a not-for-profit, membership corporation.

Securities Act of 1933

created to protect investors buying securities in the United States. It's like a safety net for anyone buying new stocks or bonds. The law has two main goals: to make sure investors have access to accurate and complete information about the securities being offered, and to prevent fraud and deception in the market.

material

Another term for important information

Here is a brief list of some of the other federal laws and regulations you should get to know.

• Investment Company Act of 1940 Governs the regulation of packaged products such as mutual funds, closed-end funds, and unit investment trusts

• Investment Advisers Act of 1940 Governs the regulation of firms that earn fees for providing investment advice

• Securities Investor Protection Act of 1970 (SIPA) Covers the protection thresholds for customers in the event of a BD's bankruptcy

• Insider Trading and Securities Fraud Enforcement Act of 1988 Defines penalties for the misuse of material, nonpublic information by both firms and individuals

• The USA PATRIOT Act of 2001 (Partially based on the Bank Secrecy Act of 1970) Covers anti-money laundering (AML) policies and procedures that must be followed by financial firms

Equities (Stocks)

Represent ownership in a corporation.

Debt Securities (Bonds)

Represent loans to companies or governments.

Exchanges

Centralized marketplaces for trading securities.

Over-the-Counter (OTC) Market

Decentralized, electronic marketplace for trading securities.

Here is a list of some (not all) of the things that are securities that appear on the SIE exam and will be covered in this course:

• Stocks and other equity securities

• Bonds and other debt securities

• Mutual funds

• Limited partnerships

• Options

• Municipal backed securities

It might be helpful to recognize a few things that are not securities that may appear on the exam:

• Commodities (oil, orange juice, pork bellies, etc.)

• Precious metals (gold, silver, etc.)

• Currency (actual money, both U.S. dollars and a foreign currency)

• Futures (derivatives of commodities, precious metals, and currency)

• A personal residence

Stocks represent

equity, which means that the investor holding the security has an ownership interest in something (usually a corporation).

Bonds represent

debt. They are like an IOU that an investor holds. The investor is owed something (usually money), and the person that owes (debtor) will have to pay according to the terms of the IOU.

blue-chip stocks

stocks of large-cap companies that have a long history of steady dividend payments

The customer must sign and date this suitability statement before any initial penny stock trades (buying and selling) may be placed. In addition, the BD must disclose

• the name of the penny stock,

• the number of shares to be purchased,

• a current quotation (the current price), and

• the amount of commission that the firm and the representative will receive.

Declaration date

When a company's board approves a dividend payment, it is recognized as the date the dividend was declared. At this time, the board would also designate the payable date and the dividend record date.

Ex-dividend date

Based on the dividend record date, the Financial Industry Regulatory Authority (FINRA) (or the exchange if the stock is listed on an exchange) declares an

Record date

The stockholders of record (those who own the stock) as of the end of this day receive the dividend distribution.

Payable date

the dividend disbursing agent sends dividend checks to all stockholders whose names appear in the records as owners as of the record date. Investors are taxed for the tax year the dividend is paid

DERP

Declaration, Ex-dividend, Record, and Payable (ex-date and the record date are normally the same date.)

Statutory voting

allows a stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the BOD. A board candidate needs a simple majority to be elected.

Cumulative voting

Cumulative voting allows stockholders to allocate their total votes in any manner they choose.

dividend preference

When the BOD declares dividends, owners of preferred shares must be paid before any common shareholders are paid.

priority at dissolution over common stock

If a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders on the assets remaining after creditors (debtholders) have been paid.