Flashcards

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 one business day, under regular way settlement (T + 1).

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.