Flashcards

An opening sale consists of the sale of a call or a put. To close an opening sale the investor would engage in a closing purchase.

There are many ongoing expenses related to the day-to-day running of a business, these expenses are referred to as operating expenses.

The option agreement is a form that the customer must sign and return to the broker-dealer within 15 days of being approved for options trading. If the form is not returned, the client will not be able to open any additional positions until it is returned. The options agreement requires the client to abide by options rules, including market position limits and exercise limits.

The holder of an option has the right to buy or sell a security at a predetermined price for a period of time, usually nine months.

The Options Clearing Corporation is the guarantor of all listed options. They issue standardized options contracts.

The Options Disclosure Document is a document that must be given to all options trading clients, at the opening of the account. It is written by the OCC. It includes an explanation of the risks and rewards of investing in options.

The order ticket contains the customer’s instructions regarding a securities transaction. Information that is included on an order ticket includes the customer’s name and account number, description of the security, type of order (buy, sell, short), and any price qualifications (such as stops or limits). The order ticket is also sometimes referred to as the order memorandum.

An OTC margin security is a security that does not trade on an exchange but that the Federal Reserve Board has approved for margin trading. The Fed publishes a list of marginable securities.

The OTC market is a negotiated market. Both listed and unlisted securities trade in the OTC market. Municipal and U.S. government securities also trade in the OTC market.

An options contract is out-of-the-money when it does not have intrinsic value. When an option is out-of-the-money the owner of the option cannot exercise the option. A call is out-of-the-money when the market price is below the strike price. A put is out-of-the-money when the market price is above the strike price.

Once the stock is sold and in the hands of the public, the stock is outstanding. The total of a company’s outstanding stock is equal to issued stock minus any treasury stock that is held by the company.  A company’s market capitalization is determined by taking the outstanding stock and multiplying it by the current market price.

Par value on common stock is an arbitrary dollar value assigned to each share of stock at the time of issuance. Par value also references the face value (principal) amount of a bond, usually $1,000. The par value of preferred stock is $100.

Parity is the intrinsic value of a convertible security in terms of the common stock into which it can be converted.  Parity means equal.

Participating preferred stock is preferred stock with a special feature. Issuers like to add special features so that the fixed dividend rate can be lowered. A participating preferred stockholder is entitled to its preferred dividend and also will be paid the common stock dividend, participating in the common stock dividend.

A partnership is a form of business organization. A partnership is considered a general partnership unless a certificate of limited partnership is filed with the state. Partnerships are flow-through tax entities, with the owners receiving form K-1 with their percentage of profits or losses for the year, that they then declare on their personal income tax return.

Passive income includes earnings from a limited partnership received by a limited partner, rental income when the individual does not actively participate in the management of the property, and income from any other enterprise in which the individual does not actively participate. Passive losses can only be used to offset passive income.

The payable date is the date on which the dividend is paid to the owners of the stock that appear on the records of the issuer as of the record date.

Payment for order flow occurs when a brokerage firm directs its retail orders to a wholesaler, who then executes the orders, providing money back to the brokerage firm for its retail business. Not all firms engage in this practice. The SEC notes that wholesalers typically execute trades “without providing any opportunity for other market participants to compete to provide a better price.”

With a payroll deduction plan the employee authorizes the employer to take a deduction from their paycheck and deposit it into the retirement plan. A 401(k) is an example of a payroll deduction plan. It may be a qualified or nonqualified plan.

The peak is the top phase of the business cycle. It follows the expansion and precedes the contraction.

A pension plan is a contract between an individual and an employer, labor union, a government entity, or another institution that provides for the distribution of a defined benefit at retirement.

Under securities law, a person is broadly defined. It does not include a minor, a dead person, or an incompetent person. The term person includes an individual, corporation, partnership, joint-stock company, fund, trust, government, or a political subdivision of a government.

A point is a unit that measures price fluctuations in the market. A point on a stock is $1. A point on a bond is worth $10, 1% of the par value.

The POP is the public offering price. On a new issue, the public offering price is the fixed price that the new share will be sold to the public in the initial public offering. The POP is listed in the prospectus.

An investor’s position is either the number of shares owned (a long position) or owed (a short position) by an individual. A dealer will also take positions in specific securities to maintain an inventory to facilitate trading.

A pre-emptive right is the right of the stockholder to maintain his proportionate share of the corporation by purchasing shares in a new issue in direct proportion to those already owned before the new issue is offered to the general public.  Rights are short-term options, good for 30 days.

Preferred stock is a form of equity, an ownership interest in a company. Different from common stock, preferred stock is issued with a fixed or stated dividend. Preferred stock dividends are always paid before common stocks’ dividends. Although the dividend rate is fixed, the company is under no obligation to distribute the dividend.

The preliminary prospectus is the first prospectus that is distributed during the cooling-off period and that includes the essential facts about the forthcoming offering. The preliminary prospectus does not include the underwriting spread, the final public offering price, or the date the shares will be delivered. The preliminary prospectus is often called a red herring.

When referring to the sale price of a bond, a bond that is selling at an amount above its face value is selling at a premium

The price-earnings ratio for a stock compares the current market price to the company’s earnings per share. It is a ratio that is good for comparison purposes within the same industry only. The formula for the PE ratio is the current market price of the stock divided by the issuer’s earnings per share.

A primary distribution is the sale of a new issue of securities to the general public. A prospectus is required when selling a primary distribution.

The primary market is where brand new shares of stock sold in an IPO trade. Also called an issuer market. Shares trade in the primary market only one time.

In a primary offering the issuer is selling securities to raise capital. The issuer may be selling stock or debt. A primary offering is also called an issuer transaction.

A prime brokerage account is an account set up for an institutional client in which one firm is responsible for providing custody and other services (prime broker) while a different firm is responsible for the execution of transactions (executing broker).

The prime rate is the interest rate that major banks charge their best commercial borrowers. The prime rate is an interest rate that is set by the bank, not by the Federal Reserve.

A principal is anyone who is actively engaged in the management of an investment banking or securities business. This designation includes sole proprietors, officers, directors, or partners of a company, or managers of offices of supervisory jurisdiction. The term principal also includes an investment banker who assumes risk by actually buying securities from the issuer and reselling them, it is the dealer side of broker-dealer.  The term principal can also refer to an investor’s capital. Additionally, the term principal can be used to refer to the face value (par value) of a bond.

A principal transaction is the dealer side of broker-dealer. When acting as a principal the firm is buying and selling for its own account. Also referred to as a market maker. Engaging in principal transactions involves risk for the firm. When acting as a dealer with a client the firm will charge a mark-up or mark-down.

A private placement is a type of securities transaction in which very specific rules are followed. A private placement allows for the legal sale of unregistered non-exempt securities. SEC Regulation D is the federal private placement rule. Regulation D allows for the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors. Under the Uniform Securities Act, the definition of a private placement is stricter. Under state law, a minimum of 10 offers can be made in a 12-month period of time, and no commission may be paid.

A profit-sharing plan is a type of qualified plan that an employer may offer to its employees. Contributions to a profit-sharing plan are at the discretion of the employer.

A tax is progressive when it increases as a person’s income increases. Income tax rates in the United States are progressive. The more an individual earns, the higher the income tax rate will be.

A prospectus is a legal document that must be given to every investor who purchases registered securities in a primary offering.  It describes the details of the company and the particular offering.

A proxy is a power of attorney given by a stockholder to another person authorizing the holder to vote in place of the stockholder.

A public appearance is when a registered representative engages in a seminar, webinar, interactive electronic forum, radio or television interview, or other public speaking activity.

The public offering price is the price at which open-end mutual fund shares are sold to the public. In a fund that charges a sales charge the POP is equal to the net asset value per share plus the sales charge.

Purchasing power risk is the risk that a certain amount of money will not purchase as much in the future as it does today.  Purchasing power risk is also known as inflation risk. Fixed income securities have purchasing power risk. Common stock is a hedge against inflation.

A put is an option contract that allows the owner to sell shares to the seller at the strike price when the market price is below the strike price. The buyer of the put is bearish. The buyer of the put pays a premium to the seller for the option. The put is good for up to nine months.

With a put bond, the owner of the bond has the power to deliver the bond to the issuer for par value at the owner’s discretion or within a time described in the bond indenture.

The buyer of a put has the power to sell shares at the strike price if the market price is below the strike. The put buyer is also referred to as being long the option, which simply means that they have bought the option.

The put writer receives a premium from the buyer for the obligation to buy shares at the strike price if the market price should be below the strike. The writer of an option is also referred to as being short the option, which simply means they have sold the option. The writer of a put is bullish. The writer would also be fine if the price moved sideways, staying out-of-the-money, and expiring worthless.

A qualified charitable distribution (QCD) is a distribution made out of an IRA paid directly to a 501(c)(3) organization. An individual must be age 70 1/2 or older to be eligible to make a QCD. The individual may not deduct the amount of the QCD as a charitable contribution on Schedule A. A QCD allows for the appreciation donated to be tax-free (excluded from taxable income). There is an annual limit on QCD, currently $100,000, set to be indexed beginning in 2024. For a QCD to count as an RMD it must be paid by the RMD deadline.