Flashcards
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.
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.
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.
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.
Master Limited Partnerships (MLPs) are publicly listed limited partnerships that trade on a national securities exchange, therefore they are typically more liquid than traditional limited partnerships. Most MLPs have general partners and many limited partners (the investors). The general partners manage the day-to-day operations, while the limited partners purchase shares in the MLP and provide capital in return for cash distributions from the entity’s operations. MLPs primarily focus on natural resource-related activities, including oil, gas, coal, timber, and certain ways of transporting commodities.
Monetary policy is set by the Federal Reserve. Monetary policy includes buying and selling U.S. government securities through open market operations, setting the target for the federal funds rate, setting the discount rate, and determining banks’ reserve requirements. Monetary policy is designed to control the economy through manipulation of the money supply.
Money laundering involves the conversion of illegally obtained funds into legal tender. There are three stages to money laundering: placement, layering, and integration. Broker-dealers must have Anti-Money Laundering procedures designed to detect this practice.
The money market is the market where short-term debt issues trade. Money market instruments are forms of debt that mature in one year or less and are very liquid. Treasury bills make up the bulk of trading in the money market.
In the portfolio of a money market fund are short-term debt instruments, with a maximum maturity of one year. Money market funds are conservative investments. They attempt to maintain a stable NAV of $1 per share but do not guarantee it. Money market funds are good for investors looking for safety and liquidity. They pay very little income.
Moody’s is a rating company. They rate bonds, commercial paper, preferred and common stock, and municipal short term debt. Moody’s rates consist of both uppercase and lowercase letters. Baa or higher are considered investment grade securities.
The mortality guarantee is part of a variable annuity contract under which the company agrees to continue annuity payments even if the annuitant lives longer than the mortality tables predicted.
The most common type of secured bond is a mortgage bond. A mortgage bond is a type of corporate debt that is backed by real estate collateral; land, or buildings owned by the corporation. In the event of a corporate liquidation, the land or buildings will be sold to pay off the mortgage bondholders.
Municipal bonds are debt issued by any district, authority, or government (state, county, city, township, and so on) other than the federal government. The debt is issued at face value, paying a stated interest rate semi-annually. Interest on municipal debt is federal income tax-free, but capital gains are taxable. If the investor purchases municipal debt issued in the same state that they live in then the interest is double-exempt, tax-free at both the state and federal levels.
The portfolio of a municipal bond fund consists of municipal bonds, offering the investor federally income tax free dividends.
The MSRB is the self-regulatory agency for the municipal securities industry. The MSRB has rule-making authority but does not have enforcement ability. MSRB rules are enforced by various regulatory agencies, including FINRA and the SEC.
An open end mutual fund is a type of management company that continuously offers new shares. The shares are redeemable and represent ownership in a pool of securities (the fund’s portfolio). The shares are redeemed at their next determined net asset value per share, within seven calendar days. Mutual funds must be sold with a prospectus. The prospectus will describe the costs associated with the fund and the fund’s investment objective.
When an investor sells a call and does not own the underlying security they are said to be naked. To sell a naked call exposes the investor to unlimited risk. Uncovered is used to describe selling an option on a security that the investor does not own.
NASDAQ, or the National Association of Securities Dealers Automated Quotation system, lists the bid and offering prices for the securities that are listed on the NASDAQ. Market makers enter their prices into this negotiated marketplace.
The NSCC is an organization that acts as the middleman between broker-dealers and exchanges.
A negotiable CD is sold by banks to institutional investors. They are money market instruments, with high face amounts. Negotiable CDs are backed by the FDIC, up to $250,000. They are sold at face value and pay semi-annual interest.
The over-the-counter market (OTC) is a negotiated market.
A fund’s total net asset value is calculated by subtracting fund liabilities from fund assets. The net asset value per share is the net value of the fund divided by the number of shares outstanding. NAV per share is also known as the bid price or redemption price.
Net investment income of a mutual fund is the total dividends received from common and preferred stock held in the portfolio and all interest income received from bonds and other debt instruments. To this sum, any net short-term gains from trading securities are also added. The sum of dividends, interest, and short-term gains is the gross investment income of the fund. The fund will subtract expenses for operation (adviser’s fee, custodial fee, utilities, salaries, accounting costs, etc.). The result is net investment income. Dividends are paid from the net investment income of a mutual fund.
A client’s assets minus their liabilities equals their net worth. For a business, the net worth is shareholders’ equity.
New clients must fill out a new account form. The new account form includes the name of the account owner, trading authorization, payment method, and types of securities appropriate for the customer.
A new issue is a security that is being sold to the public for the first time. A prospectus is required when selling a new issue.
A no-load fund is a mutual fund that does not impose a sales charge. In a no-load fund, the bid price is equal to the ask.
The nominal yield is the percentage return stated on the face of a bond. It is fixed from the date of issue. The nominal yield is also called the coupon rate. The nominal yield is the annual interest payment on a bond. Bonds pay interest semi-annually.
Generally, REITs are publicly traded on a financial exchange just like stocks; however, some REITs are not publicly listed. Because non-traded REITs are not traded in the secondary market, they are much more illiquid than their publicly listed counterparts. REITs that are not publicly listed are referred to as non-liquid or non-traded REITs. Non-traded REITs, although not publicly listed, must still be registered with the SEC. They also must still make regulatory filings as well, including quarterly and annual financial reports. Non-traded REITs have an expected investment life, typically 7-10 years.
Nonqualified plans do not have to follow ERISA. Deferred compensation is an example of a nonqualified plan. Nonqualified plans are discriminatory.
Nonsystematic risks are risks related to the actual investment itself. Also called unsystematic risk, it can be reduced through diversification. Business risk, credit risk, legislative risk, and regulatory risk are all types of nonsystematic risk.
A normal yield curve is an upward sloping curve. Normally, short-term debt pays the lowest yield, mid-term a bit higher and long-term pays the highest yield. Normal yield curves are also called positive yield curves.
A note is a short-term debt instrument, maturing in five years or less.
The NYSE is the New York Stock Exchange. The NYSE has a physical trading floor. Historically trading was conducted by the specialists at auction. Today the NYSE is a hybrid marketplace, with trading occurring both electronically and on the floor. The NYSE is the largest stock exchange in the United States.
An odd lot involves the trading of fewer than 100 shares or five bonds. Odd lot traders are small investors.
Under the Uniform Securities Act an offer includes any attempt to solicit a purchase or sale of a security for value.
The offering price of an open-end mutual fund share is net asset value per share plus the sales charge. The offering price is also known as the ask price. When it is a no-load fund the nav per share is equal to the offering price.
Every broker-dealer must have at minimum one OSJ. The OSJ is where the principal works. The OSJ is responsible for the supervision of the activities of the associated persons at the branch offices of the member firm.
An omnibus account is an account opened for an investment adviser or a broker-dealer for the benefit of their customers. The carrying firm does not know the individual customers’ names or holdings.
An open-end investment company is a mutual fund company that is managed according to a specific investment objective and continuously offers new redeemable shares in the primary market.
The Federal Reserve engages in open market operations, the buying and selling of U.S. government securities, to control the money supply. When buying securities, they are injecting cash into the economy, to fight a recession. When selling securities, they are pulling cash out of the economy, in an attempt to control inflation.
An opening purchase consists of the purchase of a call or a put. To close an opening purchase the investor would engage in a closing sale.