SIE exam part 1!

Issuers

the entity that creates and sells a security to raise capital. Corporations issue stocks and bonds, governments and municipalities issue debts securities. Investment companies issue fund shares.

Investors

provide capital in hopes of receiving income, growth, safety, liquidity

Broker-dealers

A securities firm that acts as a broker or dealer. As a broker, acts as an agent and matches buyers and sellers for commission. As a dealer, firm buys and sells from its own inventory and earns mark up, markdown, or spread.

Investment advisors

Provide securities advice for pay, They focus on portfolio management over executing trades as dealers do

Investment bankers

help issuers raise capital. Advise on time of security to issue, underwriting, offering prices

Traders and market makers

traders buy and sell securities, Market makers stand ready to buy and sell by quoting prices, which adds liquidity.

Custodians

Hold customer assets for safe keeping

clearing firms

help process trades after execution by comparing trade details, moving securities and cash, and maintaining back office records

Transfer agents

maintain records for an issuer.

How money and securities move through system

1) issuer needs capital and works with investment bankers or underwriters to structure offering

2) Investors pay money to buy the securities in the primary market

3) after issuance, investors may trade the securities with other investors through broker-dealers, exchanges, or OTC market

4) clearing firms, custodians, depositories, and transfer agents help maintain accurate records

Primary market

new issues of securities are being sold. An IPO, a follow-on offering, and a new municipal bond issue are primary market events.

Secondary market

Existing securities trade among investors after the initial distribution. The issuer usually does not receive money from routine secondary market trades

Public offerings

Offering made broadly to the investing public, Generally require registration and disclosure so investors receive enough info

Private placements

offering exempt from full public registration, often sold to a limited group of investors.

Exchanges

Organized market place where securities trade under exchange rules, provide structure, price discovery, listing standards, and trading systems

OTC markets

(over the counter markets) trading occurs through broker-dealer networks rather than on national securities exchange.Generally unlisted

Auction markets

Buyers and sellers compete and prices are determined by interaction of orders

Dealer markets

dealers buy and sell securities from their own inventories, make money off the spread

market makers

dealers that quote prices at which they are willing to buy the security. Help create liquidity

listed securities

meets an exchange’s listing requirements and trades on that exchange.

Unlisted security

does not trade on national securities exchange and may trade OTC

Follow-on offering

later scale of additional securities by a company that is already public

underwriting syndicates

group of investment bankers that work together to distribute new issues

firm commitment underwriting

underwriter buys the securities from the issuer and resells them to investors

Best efforts underwriting

underwriter works as an agent and uses best efforts to sell securities but does not buy the entire issue for its own account

shelf registration

allows an eligible user to register securities and sell them later when the market conditions make more sense

prospect basics

disclosure document used in registered offerings, gives investors important information about the issuer, securities, and risks

Private offerings

raises capital without a full public offering. sold to institutions or accredited investors. May come with limits on advertising

Regulation D

Provides exemptions from SEC registration for certain private offerings. Strongly associated with private placements and accredited investors

accredited investors

better to evaluate and bear risks from private offering

equity represents

The ownership in a company that creates profit and dividends but can also bring risk

common stock

Basic ownership, voting rights, lowest priority for liquidation

preferred stock

priority for liquidity and dividends, legally equity but has fixed payments

dividends

distributions from corporation to shareholders

dividend yield

annual dividend/ current stock price

liquidation priority

who gets paid first if a company is wound down. Creditors come first over owners.

Rights

short-term privledges that let existing shareholders buy additional shares, before shares are offered more broadly. maintain percentage ownership

warrants

give the holder the right to buy shares at a specified price. compared to rights, usually have longer lives and are attached to a security that makes it more attractive

American depository receipts

US traded reciepts representing shares in a foreign country, carry currency, political, and country risks

limited liability

shareholder losses are generally limited to the amount invested

What debt represents

when an investor buys a bond, they are lending money to the issuer, who repays principle and interest according to the bond’s terms

Par value

principle amount used to calculate coupon interest and the amount is generally repaid at maturity

Coupon rate

stated annual interest on the bond (annual interest = coupon rate X par value)

maturity

date when the principle is meant to be repaid, longer maturities bring a higher interest rate risk

agency securities

issued or backed by federal agencies or government sponsored enterprises,

Coporate bonds

issued by coporations to raise capital, risk depends on issuer’s financial strength, so credit ratings and business conditions matter

municpal bonds

issued by states, cities, public authorities.

General obligation bonds

backed by taxing power, the repayment source is broad government taxing authority

revenue bonds

backed by revenue from a specific project or source. tolls, airport fees, hospitals

secured debt

backed by specific collateral

unsecured debt

debenture, backed by issuer’s general credit rather than collateral

callable bonds

gives the issuer the right to redeem the bond before maturity, usually when rates fall, can hurt investors with reinvestment risk

convertible bonds

gives the bond holder the option to convert the bond into a specified number of common shares. This adds equity upside to the debt instrument

bond ratings

about credit quality, higher rated bonds have lower credit risk and lower yeilds. lower rated must bring higher yields to attract investors

debt risks

credit risk, interest rate risk, reinvestment risk, call risk, inflation risk