Flashcards
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 class of options includes all options of the same type (puts or calls) that cover the same underlying security. For example, all AAPL calls or all GOOG puts.
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.
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.
FINRA’s code of procedure has the penalties for violation of FINRA rules.
A coincident indicator changes along with the current phase of the business cycle. Coincident indicators include personal income and industrial production.
A collateral trust bond is a form of secured debt that is backed by stocks and/or bonds of another corporation. The collateral is held by a trustee for safekeeping.
CDOs are debt securities backed by various types of loans, such as credit card debt, auto loans, airplane leases, other equipment leases, and other fixed-income assets. CDOs are similar to CMOs, with different types of loans backing the debt. They are highly illiquid investments. These products are very complex and not suitable for average retail clients.
CMOs are debt securities backed by fixed-rate GNMA, FNMA, and other mortgages. A CMOs is a bond with a stated maturity date. Each CMO pool is divided into portions (called tranches) based on its expected maturity date. There may be short-term, intermediate, or long-term tranches. Each tranch has its own rate of interest and payment schedule. Each tranch passes through payments to investors monthly (principal and interest). Tranches are subject to pre-payment risk, which may reduce the return. They are highly illiquid investments. These products are very complex and not suitable for average retail clients.
A combination includes positions in more than one option at the same time, on the same underlying security but different strike prices, and/or expiration months.
The combination privilege allows an investor to combine purchases within a family of mutual funds towards breakpoints and/or the right of accumulation. The fund’s prospectus would describe this privilege if offered.
A combined annuity includes the features of both fixed and variable annuities.
Commercial paper is a corporate money market instrument that consists of signed promissory notes issued by the corporation to raise short-term funds. The notes are sold at a discount with full payment on demand at maturity. Commercial paper is not required to be registered with the SEC if maturing in nine months (270 days) or less.
Commingling occurs when a broker-dealer mixes firm securities with those owned by their clients. It is also considered commingling when the firm mixes a client’s fully-paid securities with their margin securities.
The broker-dealer when acting as a broker charges the client a commission. The commission is the cost charged to the client for the purchase and/or sale of securities.
Common stock is the basic stock issued by a corporation representing shares of ownership. Its dividend rights are subordinate to preferred stock, and its dividend is variable. Common stockholders are a residual claim on assets if the corporation should go broke.
A complex trust is a trust that can distribute income and/or corpus in any given year, but does not have to.
The concession is the profit on the sale of a security to the public that is paid to the selling group member. The selling group member buys the securities from the syndicate member at the public offering price minus the concession.
The conduit theory is the theory behind IRC Subchapter M. For an investment company to be “regulated” under Subchapter M, it must distribute a minimum of 90% of its net investment income to its shareholders. If it follows this 90% rule, then distributions are deemed to only pass through the company, and the distribution is not taxable to the investment company.
The confirmation is sent to the client on or before the settlement date. The confirmation includes the trade date, settlement date, type of security purchased, and any monies owed.
Constant dollars are dollars that are adjusted to show the same purchasing power from one period to another. Constant dollars are indexed for inflation.
The consumer price index is used to measure the change in the cost of a basket of goods in various cities across the U.S. over time. The CPI measures inflation at the consumer level.
Contraction is a phase of the business cycle. It follows the peak and precedes the trough. A contraction is characterized by a general economic decline.
A contributory plan is a retirement plan in which both the employer and the employee contribute.
A control person includes: a director or officer of an issuer and a shareholder who owns more than 10% of any class of a corporation’s outstanding securities, as well as their immediate family members.
Securities held by control persons are referred to as control securities.
A convertible bond may be exchanged for some other security of the issuer at the option of the holder. It is usually converted into common stock based upon a fixed conversion ratio, or conversion price.
Convertible preferred stock is preferred stock that may be converted into common stock at the option of the holder.
The cooling-off period is the time between the filing date of a registration statement and the effective date of the registration. Twenty days is the minimum cooling-off period, it is usually longer.
A corporation is a form of business organization in which the total worth of the organization is divided into shares of stock, each share representing a unit of ownership. By law, a corporation has certain rights and responsibilities. It is characterized by a continuous life span and the limited liability of the owners.
Correlation measures the extent to which two securities move in the same direction. A perfect position correlation of +1 means that the securities move identically. A perfect negative correlation of -1 means the securities move exactly opposite of each other, adding diversification to the portfolio.
Cost basis is the money in an investment in which taxes have been paid. A return of cost basis is a return of capital and is not subject to tax. Cost basis is sometimes called tax basis or just basis.
The percentage return stated on the face of a bond. It is fixed from the date of issue. Also called the nominal yield. The nominal yield is the annual interest payment on a bond. Bonds pay interest semi-annually.
A covenant is a promise in a trust indenture or other formal debt agreement that certain acts will be performed and others refrained from. Covenants are designed to protect the lender’s interest and cover such matters as working capital, debt-equity ratios, and dividend payments. Also called restrictive or protective covenants.
A Coverdell Educational Savings Account is a savings vehicle for education expenses. It may only be funded for an individual under the age of 18. It is funded with after tax dollars. There are AGI limitations on who can contribute to an ESA, as well as annual contribution limits. If the earnings are used for qualified educational expenses there is no income tax owed. Coverdell ESAs were originally called Educational IRAs. Educational savings accounts must follow the use by age 30 rule, with the exception of special needs children.
A covered call is an option contract that an investor has sold, in which they own the stock that the call is written on. The writer of a covered call has made a promise to sell shares at the strike price if the market price should exceed the strike price. Selling a covered call has limited risk.
In a short margin account the credit balance consists of the client’s short sale proceeds plus the 50% equity they must deposit to open up the trade.
Credit risk is also called financial risk. Credit risk is related to the financial health of the issuer. Credit risk is a type of nonsystematic risk.
The credit spread is the difference between the cost that two issuers must pay to issue debt of the same maturity. Commonly the credit spread compares the cost associated with issuing debt for the U.S. Government versus a U.S. corporation. The narrowing of the credit spread is positive, whereas the widening is a negative sign for the economy.
There is also an options position known as a credit spread. A credit spread involves the purchase of an option and the sale of an option (buy/sell call, or buy/sell put), on the same stock. The two options will be different in strike prices, expiration dates, or both. In a credit spread, more money is collected for the sale of the option than paid for the purchase of the option. In a credit spread, the client is hoping that the spread will narrow and the options will expire unexercised.
Cumulative preferred stock is a type of preferred stock that has a special feature. When an investor owns cumulative preferred stock, if the issuer should skip a dividend, the omitted dividend must be paid, along with the current dividend to the preferred stockholder, and then the issuer may distribute dividends to common stockholders. Cumulative preferred stock has a lower fixed dividend rate than straight preferred stock due to this special feature.
Cumulative voting is a type of shareholder voting in which the number of shares held is multiplied by the number of directors to be elected to determine the number of votes a shareholder may cast. With cumulative voting, the shareholder may allocate the votes in any way, including casting them all for one director. Cumulative voting is more beneficial for small shareholders than statutory voting.
Current assets include cash, accounts receivable, and inventory. Current assets are cash or expected to be cash in the next 12 months.
Current dollars are actual dollar amounts. Current dollars are not adjusted for inflation.
Current liabilities include accounts payable and accrued expenses. Current liabilities are monies owed in the next 12 months.
Current assets divided by current liabilities is a company’s current ratio. The current ratio is good for comparison purposes between companies of differing sizes. It is a measurement of liquidity. The higher the ratio the better.
Current yield is a stock’s annual dividends divided by its current market price. On a bond, the current yield would be the bond’s annual interest divided by the current market price.
A custodial account is used for minor children. Minor children cannot hold securities in their names.