Flashcards
A 1035 exchange is a tax-deferred exchange between similar contracts. 1035 exchanges are allowed from life insurance into life insurance, an annuity into an annuity, and life insurance into an annuity. If an investor takes cash surrender from an annuity and uses it to purchase life insurance this exchange is not allowed under section 1035, but would instead be a taxable event.
12b-1 fees are asset-based sales charges used to reimburse a fund for sales and advertising expenses. For a fund to call itself a no-load, it must have a 12b-1 fee of no more than ¼ of 1% of net assets. The maximum allowable 12b-1 fee is ¾ of 1% of net assets. 12b-1 fees are operating expenses that have the effect of lowering dividends. They are often referred to as trailer fees because they will affect the investors’ yield for as long as they own the shares.
Almost every state offers a Section 529 plan. 529 plans are also known as qualified tuition plans. They are savings accounts for education expenses. Any person may fund a 529 plan. The term 529 plan includes both prepaid tuition plans and college savings plans. A prepaid tuition plan requires the student to attend a specific school, whereas the college savings plan monies can be used anywhere. There are only a handful of states that still offer prepaid tuition plans, and the plans vary by state. 529 plans may be set up for anyone of any age. Once established for a beneficiary, the account owner can change the beneficiary but only to a family member of the original beneficiary. Earnings in a 529 plan are income tax free when the distribution is for qualified educational expenses.
The Achieving a Better Life Experience Act of 2014 allowed states to create tax-advantaged savings programs for people with disabilities (designated beneficiaries). These 529A ABLE accounts are designed to provide a way for families to save money for disability-related expenses. Distributions are tax-free if used for qualified disability-related expenses. There are annual contribution limits that vary by year and maximum account balances that vary by state. The contributions made are not federally tax deductible but may be tax deductible at the state level. Anyone of any age and income level can contribute to a 529A account.
An accredited investor is a term that is defined under Regulation D, rule 501. Accredited investors can purchase private placements. An individual can meet the definition of an accredited investor in one of two ways. First, based upon their adjusted gross income. An individual is considered an accredited investor if they have an adjusted gross income above $200,000 in the preceding two years and reasonably expected to be so this year if single, or over $300,000 if they are married filing jointly. The second way an individual can meet the definition of accredited investor is by having a net worth above $1 million, excluding the value of their primary residence. The net worth calculation would include the assets of a spouse and any minor children, but not adult children or friends.
An accounting measurement that represents an annuity contract owner’s proportionate unit of interest in the separate account during the pay-in period, before the contract has been annuitized.
The acid test ratio is also known as the quick ratio. It is the most stringent measurement of a company’s liquidity. The formula for the quick ratio (acid test) is current assets minus inventory divided by current liabilities.
An active portfolio management strategy attempts to time the market. Technical analysis is used to determine which securities to buy and sell, and when. The active style of portfolio management has higher transaction costs than a passive approach.
Both floating rate and adjustable rate preferred stock have dividends that may be adjusted, the difference is the reference benchmark. Adjustable rate preferred stocks’ most common benchmark is the rate associated with Treasury bills or the federal funds rate. The calculation of the dividend and the linked benchmark rate is set when the shares are issued. The dividend payment is based on the benchmark, plus a fixed spread, which is primarily a reflection of the issuer’s credit risk. The dividend typically has a minimum rate and a rate cap, to prevent the issuer from having to pay inordinately large dividends.
A person’s AGI comes from their income tax return. AGI is gross income minus certain adjustments to income such as deductible IRA contributions and net capital losses. AGI is the basis for determining a person’s taxes owed.
The Administrator is the person responsible for administering a state’s securities laws.
An advertisement is any material designed for use by newspapers, magazines, radio, television, telephone recordings, or any other public medium to solicit business. Advertising may not be sent to clients considering a new issue unless accompanied by a prospectus.
As defined by the Investment Company Act of l940, the term affiliated person of another person includes any person directly or indirectly controlling, controlled by, or under common control with, such other person.
Agency basis refers to a transaction in which the broker-dealer acts for the client, charging a commission on the transaction. The broker side of broker-dealer.
An agency cross transaction is a transaction in which the investment adviser represents both the party buying and the party selling the security.
Debt obligations of agencies of the Federal government are referred to as agency debt. This debt is not a direct obligation of the U.S. government. Ginnie Mae debt is the only agency issue that is backed by the federal government. Agency debt can be in the form of notes or bonds issued at face value and carry a stated interest rate payable semi-annually. Often called indirect debt.
An agent is an individual who affects securities transactions for the accounts of others. Agents most commonly represent broker-dealers. An individual representing an issuer in the sale of non-exempt securities or through non-exempt transactions would also be required to register as an agent. Most states require a series 63 license to register in that state as an agent. This individual is also referred to as a registered representative when they hold either a Series 6 or Series 7 license.
An aggressive growth portfolio is characterized by a high turnover of holdings and attempts to cash in on higher-risk rapid capital appreciation situations. Aggressive growth portfolios are unsuitable for clients looking for income since they pay low to no dividends.
An aggressive investment policy concentrates on maximizing return. Such a policy entails increased risks, such as buying on margin, using options, and buying stocks with high beta factors.
Algorithmic trading uses computer programs to determine which securities to buy and sell and when. Most high frequency trading is driven by algorithms.
All-or-none is one form of best-efforts underwriting. The underwriter agrees to sell all the shares or none of them. Commissions will not be paid unless the offering is completed.
An all-or-none order is one in which the broker must execute all of the order in one transaction or it will be allowed to expire.
Alpha is the rate of return that is more than that which is predicted by an equilibrium model, such as the capital asset pricing model. A positive alpha is desirable.
The alternative minimum tax is a tax computation system that high-income earners may be required to determine. When calculating the AMT certain items, called tax preference items, are disallowed.
American depository receipts are used to facilitate U.S. trading in foreign corporations. The ADR trades in the United States and is denominated in U.S. dollars. ADRs are used to diversify an investor’s portfolio.
Calls and puts are option contracts that may be exercised by the owner anytime the contract has intrinsic value, this is referred to as an American style option. European style options can only be exercised at expiration, if in the money.
To amortize a debt is to pay the principal down over a period of time in periodic installments.
The annuitant is the annuity contract holder.
An annuity is a contract between an insurance company and an individual (the annuitant). An annuity generally guarantees lifetime income to the person on whose life the contract is based in return for a lump sum or a periodic payment to the insurance company. Annuities offer tax-deferred earnings during the pay-in period. They may or may not be annuitized. If an annuitant dies without annuitizing their beneficiary will receive either the balance in the account or the premiums paid in, whichever is higher.
An annuity unit is the accounting measure used to determine the amount of each payment to an annuitant during the payout period.
Appreciation is the increase in the value of an asset. Appreciation is a common investment objective. Appreciation is also called growth. Realized appreciation is taxable. Unrealized appreciation is subject to market risk and is not taxable.
Arbitrage is dealing in differences. Arbitrage is legal.
The ask price is the price at which the dealer is willing to sell the stock to an investor or another dealer. The ask price of an open-end mutual fund share is what the client will pay to purchase the share.
An asset is something that is owned by either an individual or a business. Assets are found on the balance sheet. Assets include current assets, fixed assets, and intangible assets.
In an asset allocation fund the portfolio is invested a specific percentage in each of the various asset classes.
Asset class allocation involves determining certain percentages of asset classes to be held in a portfolio. Asset classes include stocks, bonds, real estate, cash, and precious metals.
The assumed interest rate is a base rate used for illustrating payments from a variable annuity, the assumed interest rate is not a guarantee. Assumed interest rates vary by insurance company. Naturally, the higher the assumption, the higher the initial benefit, and vice versa. When the actual return is equal to the AIR, the monthly payment will remain the same as the prior month.
In an auction stock exchange the securities are sold to the highest bidder. It is a two-way auction since some brokers are bidding to sell at the highest possible price while others are bidding to buy at the lowest possible price. The NYSE was historically an auction market. Today, the NYSE is a hybrid market, with some trades taking place electronically and some trades at auction.
Audited financials are financial statements that have been verified by an independent certified public accountant (CPA). Audited financials include a company’s annual report (10-K filing with the SEC).
Authorized stock is the maximum number of shares a corporation may issue under the terms of its charter. The number of shares authorized may be changed, with the approval of the stockholders.
Back-end loads are most commonly found on class B mutual fund shares. Also called a contingent deferred sales charges. If an investor redeems their shares before the period of time described in the prospectus has expired, they will have a sales charge charged on their redemption amount.
The balance of payments is a country’s record of its transactions with the rest of the world over a period of time.
A country’s balance of trade is its exports versus its imports. A county that imports more than it exports has a balance of trade deficit. A country that exports more than it imports has a balance of trade surplus.
The balance sheet is a financial statement that shows the financial health of a company or an individual at a moment in time. The balance sheet includes what is owned and what is owed.
The balance sheet equation is assets = liabilities plus shareholders’ equity. For a client, assets minus liabilities = net worth.
A balanced mutual fund is a type of mutual fund whose stated investment policy is to have at all times some portion of its investment assets in bonds and stocks, creating a balance between the two types of securities.
Banker’s acceptances are letters of credit from a bank guaranteeing payment of a debt. Generally, bankers’ acceptances are used in the import and export business. They are short-term, money market instruments.
A bond’s yield to maturity is sometimes referred to as its basis yield. Basis can also be used to reference an investment’s after-tax dollars (cost basis).
A basis point is 1/100th of yield, ten cents.
A bear market is one in which the prices of securities are falling or are expected to fall.
A benchmark portfolio is an index that is used for comparison purposes when judging a portfolio manager’s performance.
In a best-efforts underwriting the underwriter is acting as an agent for the issuer, the underwriter puts forth his or her best efforts to sell as many shares as possible. The issuer pays the underwriter a commission for those shares sold. The underwriter does not have liability for unsold shares, as in the case of a firm-commitment agreement.
Beta measures a stock or portfolio’s volatility as compared to the market as a whole. A beta of 1 means the security or portfolio moves with the market. The market in this case is the S&P 500. A beta of greater than 1 is aggressive, and less than 1 but greater than 0 is defensive. A negative beta would mean the performance is the opposite of the market.
The bid price is the price at which a dealer is willing to buy stock from an individual or another dealer. The client sells at the bid. On an open-end mutual fund share, the client redeems at the bid. The bid price of an open-end mutual fund is also called the redemption price, or net asset value per share.
The Black-Scholes is a pricing model for options.
A blend/core fund is an equity fund that has different classes of stock within its portfolio. The prospectus of the fund would fully describe the investments found in this type of fund’s portfolio, as well as the management strategies used. A blend/core fund is actively managed.
A block of stock is 10,000 shares or a value of $200,000 or more.
Blue chips are stocks of strong, well-established companies that have demonstrated their ability to pay dividends in good times and bad times. Blue chip stocks include General Motors, Johnson & Johnson, JPMorgan Chase, and 3M Company, to name a few.
Blue Sky laws are state securities laws, the Uniform Securities Act.
A board of directors consists of individuals elected by shareholders to establish corporate management policies. The board of directors will determine dividend distributions, among other duties.
Bona fide means genuine, authentic, and real.
Bonds represent the borrowing of money by a corporation or government. The bond is a legal obligation of the company or government to repay the principal at the maturity of the bond. Terms of the repayment and any interest to be paid are stated in the indenture. Bonds are issued with a par value ($1,000), representing the amount of money borrowed by the company. The issuer promises to pay a percentage of the par value as interest on the borrowed funds. The interest rate is stated on the face of the bond at issue and is called the nominal or coupon rate and is fixed.
A bond fund is a type of mutual fund whose investment policy is to provide stable income with a minimum of capital risks. Bond funds may invest in corporate, government, or municipal bonds.
A bond rating is a measurement of the quality of a bond issue as determined by independent bond rating services. AAA is of the highest quality. Both Moody’s Investor’s Service and Standard & Poor’s Corporation have such services.
Book entry securities do not have paper certificates. Most securities today are book entry, with the ownership recorded electronically.
Book value per share is the net worth of the company minus intangible assets and preferred stock divided by the number of shares of common stock outstanding in the hands of the public. Value stocks have a low price/book ratio. Value stocks’ market price trades at a low multiple of its book value per share.
A breakpoint sale involves the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions so as to share in the higher sales charges applicable. Breakpoint sales are a violation of the Rules of Fair Practice.
Breakpoints are the schedule of sales charge discounts offered by a mutual fund for a lump sum or cumulative investment. Eligibility requirements for breakpoints must be disclosed in the prospectus.
BRIC is an acronym used to refer to investments in Brazil, Russia, India, and China.
The brochure is the written disclosure document that an investment adviser must deliver to all new clients. The firm brochure is Part 2A of Form ADV.
The brochure supplement is the written disclosure document that must be given to new clients describing the investment adviser representative’s background. The brochure supplement is Part 2B of Form ADV.
The broker is the role of a brokerage firm when it acts as an agent for customers and charges the customers a commission for its services.
A broker-dealer is a person in the business of buying and selling securities, either for themselves or for their clients. Broker-dealers file Form BD to register as a firm. Broker-dealers are registered with the SEC, self-regulatory organizations (SROs), and in each state in which they do business.
A bull market is one in which prices of securities are moving higher or are expected to move higher.
The business cycle is a predictable pattern of economic activity. It consists of four phases, that always follow this order: expansion, peak, contraction, trough.
A day the New York Stock Exchange is open for business (trading).
A buy stop order is an order to buy a security at a price that is above the current market price. The order is held on the books of the specialist. Open buy stops are the best way to hedge a short position. If an order should occur at the stop price (or higher) the order will become a market order to buy at the next market price.
A call option is a contract to buy 100 shares of stock at a definite price within a specified period of time (up to 9 months). The owner of the call has the power to call away (buy) the shares at the strike price should the market price be above the strike. The seller of the call has an obligation to sell shares at the strike price.
The call price is the price paid (usually a premium over the par value of the issue) for callable preferred stock or callable bonds when they are redeemed by the issuer prior to maturity. Issuers call securities when interest rates have fallen.
Call protection is a period of time when the issuer can not call the bond, generally 5-10 years from issuance.
When a security has a call provision the issuing corporation retains the ability to recall (redeem) its issues of equity or debt. The call provision must be clearly stated on the face of the certificate at issue.
The CAPM is used to determine a security’s or a portfolio’s expected return based on the investment’s systematic risk.
A capital gain occurs when the selling price of the asset is more than its cost basis. If the asset was held for a period of longer than 12 months, it is considered a long-term gain, taxable at long-term capital gains rates. Short-term gains are those that occur when the asset was held for 12 months or less, and they are taxed as ordinary income.
A mutual fund may make a capital gain distribution to its shareholders at most one time a year. The capital gain is the result of the sale of assets held within the fund’s portfolio for a year and a day or longer. The distribution is taxable to the shareholder at long-term rates, regardless of the investor’s holding period.
A company’s capital structure is also referred to as its capitalization. It is the amount of debt and equity issued by a corporation.
A cash account is a brokerage account in which the client must pay for the securities within two business days, under regular way settlement.
Cash equivalents are securities that are the most liquid, the “safest” on the risk spectrum. Money market instruments are sometimes referred to as cash equivalents.
The Chicago Board Options Exchange (CBOE) is where listed options trade in the United States.
A cease and desist order instructs a person to abstain from an action. The Administrator can issue a cease and desist order when he knows or has a reason to believe an individual or firm is about to commit a violation of the Uniform Securities Act. It may be issued with or without a prior hearing.
There are two types of certificates of deposit. Negotiable CDs and bank CDs. Negotiable CDs are issued by commercial banks, representing bank borrowing for a short period of time. Negotiable CDs are sold by the bank to institutional clients. Negotiable CDs have high face amounts and trade in the money market. Negotiable CDs are securities. Bank CDs are sold by the bank to retail clients. With a bank CD, the client has liquidity risk for the time period in which they have committed their deposit. In exchange for this deposit, the bank will pay the client a competitive interest rate. Bank CDs are not securities.
The China Wall is the delineation that a firm must have between the trading desk and the research department. The Chinese wall is also called an information barrier.
Churning occurs when there is trading in a customer’s account that is excessive in size or frequency. The term suggests that the registered representative ignores the objectives and interests of clients and seeks only to increase commissions. Churning is often done in discretionary accounts. Churning is a violation of FINRA’s Rules of Fair Conduct.
A class A share is a front-loaded mutual fund share, with low to no 12b-1 fees. Class A shares usually have breakpoints and are often recommended to investors who are investing large lump sums of money all at once.
A class B share is back-end loaded (contingent deferred sales charge). Class B shares have the highest 12b-1 fees, paying the lowest dividends. Class B shares will convert to class A shares after being held for a period of time as described in the prospectus.
A class C share may be front-loaded or back-end loaded. It has a middle 12b-1 fee. It never converts to an A share.
A closed-end investment company is a management investment company that is operated in much the same manner as a conventional corporation. The closed-end fund will issue a fixed number of shares for sale (fixed capitalization). The shares may be of several classes. Shares are bought and sold in the secondary marketplace; the fund does not offer to redeem shares.
A closing purchase is done to close an options transaction that began with an opening sale.
A closing sale is done to close an options transaction that began with an opening purchase.
A CMO is a type of mortgage backed security.
FINRA’s code of arbitration provides a method of handling securities-related disputes or clearing controversies between members, public customers, clearing corporations, or clearing banks. Any claim, dispute, or controversy subject to arbitration is required to be submitted to arbitration. FINRA members and registered representatives must arbitrate. If the customer has signed a pre-dispute arbitration agreement as part of the account opening process, then the customer must also arbitrate. There is no appeal.