Flashcards
An investment company is engaged primarily in the business of investing and trading in securities. There are three types of investment companies under the Investment Company Act of 1940: face-amount certificate companies, unit investment trusts, and management companies. All mutual funds are management companies. Management companies employ investment advisers (investment managers) to manage the assets in the portfolios.
The Investment Company Act of 1940 regulates investment companies. The act requires any investment company that is engaged in interstate commerce to register with the SEC.
Investment grade securities are debt instruments that are rated BBB/Baa or higher. They are often purchased by fiduciaries.
The investment objective is the goal of the client or the goal of the mutual fund portfolio. There are many different investment objectives including safety/preservation of capital, income, and growth.
A person’s income may affect how much they pay in premiums for Medicare Part B and Part D. This adjustment is commonly referred to as IRMAA – income-related monthly adjustment amounts. IRMAA is calculated based on a person’s MAGI on their tax returns two years prior. For example, in 2025 an individual with MAGI over $106,000 (over $212,000 if MFJ) will pay higher premiums for Medicare Part B and D. The income that is used for the IRMAA calculation is a person’s MAGI from their tax return two years prior, in this case 2023. Most people do not pay any premium for Medicare Part A, but even if they do, there is no income-related surcharge, so Medicare Part A premiums are not affected by income. How much IRMAA affects Part B premiums depends on the household’s income. In 2025, Medicare Part B’s premium is $185.00. IRMAA can add up to $443.90 a month to the Part B premium. In 2025, IRMAA can increase Part D’s premium by as much as $85.80.
Issued stock is the stock that has been sold to the public. The corporate charter lists authorized stock, which is the maximum number of shares that the issuer may sell.
The issuer is a corporation, municipality, or the U.S. government that offers or proposes to offer its securities for sale.
In a joint account there are two or more individuals who possess power over the account. Joint accounts must be designated as either tenants in common or joint tenants with right of survivorship.
A joint and last survivor life annuity is an annuity that pays until the last party dies. After the death of the first party, the payments will continue for the lifetime of the survivor, usually at a reduced rate.
Joint tenants in common is an ownership designation where two or more individuals hold fractional interests in an undivided asset. At the death of one of the tenants, the decedent’s interest passes to his or her heirs, not to the other tenants, going through the probate process. The asset may be owned unequally.
Joint tenants with right of survivorship is an ownership designation whereby the entire asset is owned by two or more individuals equally. At the death of one of the tenants, the decedent’s interest passes to the survivor(s), avoiding probate.
A Keogh plan is a qualified tax-deferred retirement plan for persons who are self-employed and unincorporated or who earn extra income through personal services aside from their regular employment. Keoghs are also called HR 10 plans.
FINRA rule 2090, Know Your Customer, requires firms to use reasonable diligence in regard to the opening and maintenance of every account, and to know the essential facts concerning every customer. The know your customer obligation arises at the beginning of the customer-broker relationship and does not depend on whether or not the broker has made a recommendation. Essential facts include those required to; effectively service the customer’s account, act in accordance with any special handling instructions for the account, understand the authority of each person acting on behalf of the customer, and comply with applicable laws, regulations, and rules.
A lagging economic indicator will take 3-12 months to change after the economy has entered a new phase. Lagging indicators include the duration of unemployment and corporate profits.
Last in, first out is an accounting method in which the assets sold are assigned a cost basis from the most recent purchases, generally resulting in the smallest gain, thus the smallest tax bill due.
Leading economic indicators change 3-12 months before the economic cycle changes. They predict where the economy is heading. Building permits, new orders for durable goods, and initial unemployment claims are all leading indicators.
Regardless of the type of municipal bond issued, the bond must be accompanied by a legal opinion of counsel. The opinion of counsel affirms that the issue is a municipal issue and that interest is exempt from federal taxation, among other items.
Legislative risk is the risk that tax law could change.
A letter of intent allows the investor to qualify for the reduced sales charge currently by promising to invest an amount qualifying for a breakpoint within 13 months from the date of the letter. The letter is a unilateral agreement; the client is not bound to the terms of the letter. A letter of intent may be back-dated up to 90 days, leaving 10 months going forward. Shares will be held in an escrow account to pay the additional sales charge owed if the client does not fulfill the letter of intent. Reinvested dividends and capital gains distributions do not count toward a letter of intent.
Leverage financing is the process of raising capital through the sale of bonds. Leverage is the use of borrowed funds for investment. A highly leveraged company would represent a type of financial risk to the client.
For more than 40 years, the London Interbank Offered Rate—commonly known as LIBOR—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages, and corporate debt. LIBOR was set each day by collecting estimates from up to 18 global banks on the interest rates they would charge for different loan maturities, given their outlook on local economic conditions. LIBOR was based upon estimates, not actual transactions. Over the last decade, LIBOR has been burdened by scandals and crises. LIBOR has been replaced by the Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark.
A life annuity is a type of annuity that pays the annuitant monthly, until death. A life annuity has the highest risk to the annuitant, thus it will pay the highest monthly payment. There is no beneficiary on a life annuity. Life annuities are also called life only or straight life annuities.
A limited partner, also called a subscriber, is an investor in a limited partnership. Limited partners have no say in how the partnership is managed. Limited partners have limited liability, they can lose whatever they have invested as well as any amount related to a recourse note. Limited partners receive form K-1 with their portion of profits or losses that flow through onto their individual tax returns.
A limited partnership is a form of business with one or more general partners and one or more limited partners. The general partners have unlimited liability. The limited partners have limited liability. It is a flow through tax entity that files Form 1065, as an information return only.
The limited partnership agreement spells out the responsibilities of the partners.
A limited power of attorney grants a third party limited trading authority. It allows a person other than the account owner to place trades in the account, but they cannot withdraw money or securities. Often referred to as a limited trading authorization.
Liquidation is the process of redeeming mutual fund shares. Also called redemption. Liquidation can also refer to the process of settling debts after a corporate bankruptcy.
In the event of a corporate liquidation who gets paid when is the liquidation priority. Secured creditors are paid first, then unsecured creditors (back wages, taxes, and debentures), preferred stock, common stock, and lastly foreign investors.
Liquidity refers to how easily can an asset be turned into cash.
Liquidity risk is the risk that the asset may not be easily sold. Liquidity risk is also referred to as marketability risk. Direct participation programs (DPPs) have the greatest liquidity risk since they do not trade in the secondary market.
Listed securities are those securities that meet the requirements to be listed on one of the national securities exchanges. There are many nationally registered securities exchanges in the United States. Listing requirements vary amongst the different exchanges. The three exchanges that conduct the largest volume of trades in the United States include the NASDAQ Stock Market, the NYSE, and the BATS Exchange.
Long is used to describe owning a security.
A long-term capital gain or loss occurs on securities that were held for longer than 12 months.
LEAPS are long-term options, good for two to three years.
A maintenance call will occur when the client’s equity falls below the minimum requirements. Clients can meet a maintenance call by depositing cash, fully paid securities, or selling securities out of the margin account. A maintenance call is also called a margin call.
In a margin account, FINRA sets ongoing equity requirements. For long accounts, the maintenance requirement is a minimum equity of 25% of the market value long. For a short margin account, the maintenance requirement is a minimum equity of 30% of the market value short.
Dealers make the market. Market making involves a firm buying a particular over-the-counter stock for its own account at its own risk (taking a position).
Management companies actively buy, sell and trade the securities that are held in the company’s portfolio according to a prescribed investment objective. All mutual funds are management companies. Management companies may be open end funds, closed end funds, ETFs, diversified or non-diversified.
Manager tenure is the length of time that an investment manager has been at the helm of an investment fund.
This disclosure document is designed to remind the client of the risks involved in margin accounts. It must be given to the client as part of the account opening, and again annually.
The margin agreement contains three separate agreements: the credit agreement, the hypothecation agreement, and the loan consent agreement. The margin agreement must be obtained from the client promptly after the initial transaction in the account.
A margin sale involves the purchase of a security with the use of borrowed money. The Federal Reserve Board sets the percentage of the price that the buyer must provide under Regulation T as initial equity, currently, 50% or $2,000, whichever is greater. To buy securities on margin is risky.
Federal Reserve Board Regulation T identifies which securities may be purchased on margin, these securities are called marginable securities. In general, marginable securities include listed securities as well as listed warrants.
The market maker is the dealer side of broker-dealer. The dealer takes an inventory position in a security, making the market.
A market order is an order that will be executed immediately at the best available price.
Market risk is a type of systematic risk. The markets will go up and they will go down. Market risk is the uncertainty about the loss of capital due to changes in the market price of the security. Market risk cannot be reduced with diversification. Diversifying by asset class helps to reduce market risk.
The market value is the price an investor will pay for each share of common stock at any given time. Market value is determined by the laws of supply and demand. Market value is also known as market price.
Marketability refers to the ease with which a security can be bought or sold. Also known as liquidity risk.
The markup is the amount added to the lowest current offering price when the broker-dealer is acting as a dealer and trading with a client.
The maturity date is the date on which a company is scheduled to repay the principal of a bond to the bondholder. Corporate bonds mature in up to 30 years.