Series 7 Notes part1
Transcript of Series 7 Notes part1
CHAPTER ONE:
Number of votes= shares owned times vacancies on board
Statutory voting= must divide votes equally among candidates
Cumulative voting= divide anyway you want
Class b stock= non-voting
Company issuing new security= corporate charter + registration statement with the SEC
Shelf registration= authorized shares can remain unissued for 2 years
Preferred stock= fixed income security
Participating preferred= get fixed preferred dividend + common dividend
Cumulative preferred= missed payments must be made up
ADR (American depository receipt) = bank holds foreign securities and receipts trade in place(div. paid in U.S. dollar)
Warrant= long term call option
Standby underwriter= sells securities that were not sold through preemptive rights
Cumulative right value= (market price of stock-discount price)/(number of rights+1)
Ex- rights (without rights= (market price of stock-discount price)/(number of rights)
Stockholder cannot vote for dividends
CHAPTER TWO:
Bonds pay interest Semiannually (interest/2)
Indenture for a bond (deed of trust) = legal agreement between issuer and bond holder (includes: maturity, par, rate, collateral, callable/convertible features and trustee who delivers interest payments)
Bearer (coupon) bond= whoever holds it gets interest
Fully registered= no coupons, whoever is registered collects interest
Book entry bond= owner only receives a receipt, and automatically receives payments through database
Term bond= bonds issued at the same time with the same maturity (called randomly)(sinking fund)
Serial bonds= bonds issued at the same time with equal amounts maturing at different dates (called by longest maturity first)
Balloon bonds= more bonds mature at a later date (called by longest maturity first)
Series bond= issued in successive years with the same maturity date
Sinking fund= bank account that issuer deposits money to pay off debt (term bonds usually have mandatory)
Pre- refunded= issuer has deposited money needed to pay off the bond already in a sinking fund
Refunding= issues new bonds to repay outstanding bonds
Senior bonds= paid first
Open ended mortgage bond= can borrow money using same property as collateral
Collateral trust= backed by stocks and bonds owned by company
Guaranteed bond= backed by the assets of the issuing company as well as a second company
Unsecured bonds (debentures) = last to be paid in bankruptcy since no collateral
Unsecured bond (income bond/adjustment) = don’t pay interest until company become profitable (bankruptcies)
Equipment Trust= backed by equipment (used by transportation companies)
Zero coupon= discount bond (interest + principal not received until maturity (“trades flat”)
Bond in default= when interest payments are late
Eurodollar bonds= foreign securities which pay interest and principal in dollars
In bonds: a point= $10 and a basis point= $0.10
U.S. Bonds are quoted in 32nds (“95.8”=95 and 8/32) can be shown as 95:08 or 95-08
Nominal yield (coupon rate) = face interest rate on bond (face interest x par)
Current yield= face interest/ market price
PR^ NY! CY! YTM! YTC! (!=down ^=up)
If bond is trading at par then premium, nominal yield (coupon rate), current yield, yield to maturity and yield to call would all be equal
Junk bonds= moody Ba/ s+p BB
Corporate and muni bonds calculate interest using 30 day month 360 day year
Corp + muni bonds settle T+3 (business days)(360 day years)
U.S. bonds settle T+1 (actual days 365 day years)
First coupon if longer than 6 months= long coupon less= short
Accrued interest= add settlement date and then subtract from previous coupon date (assume 30 day months) (be careful to remember business days)
Calendar= Jan+1 Feb-2 Mar+1 Apr+0 May+1 June+0 July+1 Aug+1 Sep+0 Oct+1 Nov+0 Dec+1
Put bonds= right to sell bond back to issuer
Ex: ABC 7s015-20= 7% callable 2015 and matures 2020
ZR20= zero coupon maturing in 2020
Conversion ratio for bond= par (usually $1000)/ conversion price
Parity= stock and bond are trading equally (worth the same)
T- Bills= mature in 6 months or less (sold at discount +non callable) (not quoted in 32nds)
T- Notes= 1-10 year maturity (pay semi- annually)
T- Strips (receipts)= 10-30 year maturity (sold at a discount + don’t pay interest)
Non marketable: Series EE (DISCOUNT) +Series HH (semi annual interest)
Moral obligations= not directly backed by government
Mortgage Backed securities= Ginnie Mae ($25,000 min. + pays interest and principal monthly) + Fannie Mae ($10,000 min.)/ Freddie Mac ($25,000 min.)
CMO= Diversifies between Fannie, Freddie and Ginnie (usually AAA)
PSA (public securities association)= Publishes statistics on prepayment + extension risk
Prepayment= early payment because of refinancing (interest rate decline)
Extension risk= bonds repaid later than expected (interest rate increase)
Plain vanilla Tranche= no special features
PAC (planned amortization class) Tranche= safest because has sinking fund
TAC (Targeted amortization) Tranche= sinking fund but is also callable
Companion (Support) Tranche= Absorbs risk of extension + repayment from other tranches and there for has a higher interest rate and uncertain repayment date
IO (interest only) tranche= only pays interest never repays through principal
PO (principal only) tranche= pays principle but no interest
Z (zero coupon) tranche= longest maturity
Money Market= less than a year maturity
Capital market= Over a year
Commercial Paper= unsecured debt that is sold at discount and matures in under 270 days
Bankers Acceptance= Postdated checks used for import + export
Jumbo CD’s= minimum of $100,000 and can be traded like regular bonds (pays interest)
Fed Funds Rate= rate of loans between financial institutions (fastest to change)
Effective Fed Fund Rate= average fed fund rate of all commercial banks
Libor= Average fed fund rate of foreign banks’ lending money to each other in U.S. dollars
REPO (repurchase agreement) = overnight loan (up to 90 days) that is secured by T-bills as collateral (fed lends banks)
Reverse Repo (matched sale) = banks lend to fed and hold T- Bills as collateral
Interbank market= unregulated market for foreign currency transactions
CHAPTER THREE:
Selling group= helps syndicate sell new issues without buying the securities (no risk)
Underwriting agreement types:
1) Firm commitment= unsold securities are retained by syndicate2) Best effort= unsold securities returned to issuer----All or Non 3) Best effort= Mini- Max (minimum # issues must be sold)
Stand by rights= back up underwriter in case any left-over shares (only for stocks)
Primary Offering= authorized but previously unissued shares (within 2 years of authorization)
Secondary Offering= treasury shares or shares held by insiders)
Combined offering=primary + secondary offering
Preliminary Prospectus (red herring) = Post SEC filing but pre-issuance
Prospectus = includes relevant info + earnings of current and 3 previous years + use of money +business description + officers + potential benefits and risks (can’t be used as an advertisement)
Final Prospectus = available after securities are issued
SEC puts a disclaimer on the prospectus saying: does not guarantee+ judge+ approve + recommend anything
Effective date= first day the security trades (decided by the SEC)
Investor buys security within 90 days after effective date in an IPO
Other types of offerings=within 40 days after effective date
New offerings must be paid in full (no margin) within the first 30 days
Trust indenture act 0f 1939= newly issued corporate bonds file an indenture with the SEC
Rule 145= in the event of major change a company must file a new registration statement with the SEC
Exemptions from listing with the SEC= U.S. securities+ muni + commercial paper + non-profit +banks issues+ insurance and annuity policies+ rule 147 offerings (only within corporations own state) +reg A offering ($5million or less within 12 months) + reg D (private placement/up to 35 unaccredited investors and unlimited accredited)
Accredited investors= Financial institutions+ insiders and family or owners of more than %10+ annual income over 200,000/ (300,000 joint) +Net worth over a million+ Corporation worth over 5 million
Restricted stock= Private placement
Rule 144= Restricted stock must be held for at least 1 year
After waiting period you can sell up to %1 of outstanding shares or average weekly trading volume of the last four weeks whichever is greater
Must file a 144 w/ sec when selling and it is valid for 90 days
If selling 500 shares or less worth $10000 or less then exempt from filing a 144
Portal Market (rule 144a)= able to sell before a year to a qualified institutional buyer ($100mm+ in assets)
Blue Sky= Must be registered in the customers state
“Cooling off period”= 20 day period between registration of new issue and the approval of the SEC
Green shoe clause= Underwriters can indicate interest for up to %15 more than securities available
Rule 145= Major changes in a company must re-file with SEC
Order of allocation= Pre-sale/ syndicate/designated/member (“please give Dave money”)
Takedown= Profit for syndicate members
Reallowance= profit of non-syndicate sellers
Concession= Profit for selling group member
Managers fee= Fee received by managing under writer for a sale by anyone
Spread= Takedown+ Managers fee
Western Account Syndicate (divided) = each syndicate member sells what they are responsible for
Eastern Account (undivided) = If a firm sells all of their own they are responsible for a percentage of the unsold (percentage of their allotment in respect to total offering is reapplied to leftover shares)
Stabilization= Agreement to be a market maker
Market out clause= ability to withdraw from offering due to negative market conditions
Sticky issue= hard to sell
Hot issue= easy to sell
Debentures must be filed with the SEC
CHAPTER FOUR
Unlisted Securities= only trade on the OTC
Muni +Gov’t bonds always trade on the OTC
Within the secondary markets:
1) First market= listed securities trading on an exchange2) Second market= unlisted securities trading OTC3) Third Market= Listed security trading OTC4) Fourth market= Trading of securities between institutions without using a broker-dealer
Instinet= reporting system for the fourth market
Broker (agent)= does not use own inventory to execute trades
Dealer (principal/market maker)= uses own inventory
A firm must disclose if they are a broker or dealer for each trade (on receipt) and cannot be both for same trade
Commissions must be disclosed (markups/markdowns don’t have to be disclosed)
A specialist order of priority= 1) best price 2) which order was placed first 3) if same time and price then bigger order goes first
Stopping Stock= Specialist guaranteeing a certain price (only done with public orders)
Stops= immediately executed (becomes market order when triggered)
Limits= Specific price or better
Sop limit= when entered starts as a stop order and when triggered becomes a limit order (wont execute until at a better price than order)
Buy limit and Sell stops (bliss) are reduced on dividend days (SLoBS remain the same)
Inside the market= highest bid and lowest ask (does not include stops)
Size of the market= number of shares available “inside the market”
Specialist can only bid inside the market
Immediate or cancel order= fill as much as possible and cancel the rest
Discretionary order= order without prior verbal permission carried out by broker (need power of attorney)
If an order does not include one of the following it is discretionary: which security/ buy or sell/ quantity
Not held order= order which the rep has the ability to decide when to execute an order at a price he thinks is right (power of attorney is NOT needed) (can’t be executed by specialist)
Either Or= Execute one order and cancel the other
Market on Close= Execute as close to the market close as possible (cancelled if not executed at the close)
Market on Open= If order not executed on the opening price or better it is cancelled
Unsolicited order= customer order that rep never suggested
Tape A= NYSE listed stocks (shows all secondary market)
Tape B= Amex listed stocks (shows all secondary market)
Round lot= normal unit (100 shares)
ABC 9s15.50= 900 shares of ABC @ $15.50
.P/PR=preferred
.R/RT= Rights
.W/WT= warrant
.X=mutual fund
“SLD” on a ticker means a trade occurred out of sequence (can’t trigger stop or limit)
Super dot= System that by passes floor brokers and goes straight to specialist (used for 3 million shares or less and is only available to public customers) (Large orders CANT be broken up)
NASQAQ is divided into two parts:
NASDAQ Global Markets= Largest and mostly actively traded stocks that are OTC (majority of stocks) (can be bought on margin)
NASDAQ Capital Markets= actively traded stocks that don’t meet earning requirements of NGM
Level 1= shows inside of the market
Level 2= shows all bid and asks entered
Level 3= Allows market makers to enter their own quotes
Super Montage= System used by NASDAQ to automatically execute orders of under 1 million shares (bigger orders may be broken down)
OTCBB (OTC bulletin board)= FINRA’s quotation system for non- exchange traded securities
Pink sheet= newsletter for non- NASDAQ securities
Yellow sheet= newsletter for OTC corporate bonds
Blues list= newsletter for quotes of municipal bonds
Non-NASDAQ stocks are not marginable
Firm Quotes= entered by market makers
Backing Away= Failure to honor a firm quote
Subject (nominal) quotes= are subject to change
Workable indication= likely bid price
Firm with a recall option= used by a firm to give another broker-dealer a chance to sell the firms inventory and then both firms split commission. (Recall= time the lending firm, must give before taking back the loaned security)(firm cant change quote)
Long sale= sale of security an investor owns
Reg SHO= uptick rule on short sales
Threshold Security= FINRA determined non- liquid security. (If sold short must be delivered to buyer within 10 business days of settlement)
Tender offer= Arbitrage for Mergers and Acquisitions
Risk arbitrage= in anticipation of an acquisition or merger being short the buyer and long the one being acquired
Selling short against the box= selling short a security you already own
Securities Exchange act of 1934= created the SEC and made price manipulation illegal
Bonds are not shown on consolidated tape
CHAPTER FIVE
Progressive tax= more you make the more you are taxed
Regressive tax= flat rate
Capital gains= profit when selling a security above price you paid
Short term= Capital gains made in 1 year or less
If net capital gains loss you can deduct up to $3000 dollars per year against ordinary income and rollover the rest (no limit to how much you can roll over)
Ordinary income= Interest on bonds+ dividends
Cash dividends are taxed a maximum of %15 if stock is held for more than 60 days
In order to calculate loss/gain for taxes you must determine LIFO or FIFO and match the stocks sold with the first/last one bought
If claiming a stock as a loss cannot by back within 30 days (you can buy bonds+ preferred)
Tax (bond) swap= selling a capital loss bond and buying a new bond (higher coupon rate/shorter maturity/ better rating) while using as tax write off
If corporation buys stock (common or preferred) of another company %70 of dividends are tax free (if corp. owns over %20 then %80 tax free)
Up to $13,000 per year in gifts per person is tax free
Cost basis gets transferred if gain but if market loss then new cost basis of recipient is market price on day of transfer (for gift and inheritance)
Withdrawals on retirement plans are taxed as ordinary income
Money withdrawn from a retirement plan before age 59 and a half has a %10 tax penalty
Exempt from penalty if death or disability
Some plans allow early withdrawal in case of buying a 1st time home/ medical expenses/ college tuition
Payout must start the April that the investor has turned 70 and a half (% 50 tax penalties on what should have been withdrawn)
Qualified retirement plans= pretax dollars+ withdrawals are fully taxed at investors tax bracket
Non-Qualified retirement plans= after tax dollars + withdrawals are only taxed for money beyond contributions (capital gains) (both plans are only taxed after withdrawal)
Keogh Plan (Hr-10)= self-employed income only + may deposit $49k per year and up to %20 of gross income max.
IRA’s= for employed people+ max contribution of $5k w/ excess contribution taxed an extra %6 + joint account treated like two single accounts with a $10k max
If covered by another retirement plan deductions are only possible for those making under $56k or jointly making under $89k
Ira’s can only invest in securities and not: commodities/ life insurance/ stamp and coin collections
Educational IRA (Coverdell)= $2k per child under 18 + must be used before student turns 30
529 educational plan= by the state and similar to a Coverdell
SEP IRA= small business IRA where contributions are made by employer and employee (all contributions are vested)
Vesting= pension benefits belong to employee even if they leave the company
Fixed annuity= fixed amount of payout
Variable annuity= variable and based on underlying portfolio
ERISA= act that regulates qualified retirement plans (only private pensions)
Defined contribution= variable benefit (based on portfolio)
Defined benefit= variable contribution
401k= percentage of salary is contributed by employee and sometimes employer
Profit sharing plans= percentage of company profits are placed in tax deferred accounts for employee retirement
Deferred compensation= receives part of salary after retirement
Payroll reduction plan= part of employee salary is used to pay for mutual funds etc. that the company has the ability to acquire at a cheaper price
Rollover= transferring between retirement plans (must be done within 60 days of withdrawal) (have to wait one year to rollover again)
Trustee to trustee transfer is without withdrawal
Accretion= difference between market value and par(when buying at a discount)- difference is split over time until maturity and every year that amount of accretion is taxed as ordinary income and there is a new cost basis every time you add accretion
Amortization= difference between market value and par (when buying at a premium) - difference is split over time until maturity and every year that amount of amortization may be written as a tax write off while lowering the cost basis yearly
CHAPTER SIX
Fundamental analysis=what to buy
Technical analysis= when to buy
Market risk= systematic risk
Business risk= non systematic risk which is based on company performance
Liquidity (marketability risk)= possibility of future illiquidity
Interest rate risk= possibility that interest rates will increase causing value of bonds owned to decrease
Reinvestment risk= risk of dividends and interest received
Purchasing power risk= risk of inflation
Capital risk= risk of losing all money invested (options)
Regulatory risk= legislative risk
Assets= liabilities + equity
Current assets = assets that are convertible into cash within one year
Fixed assets= assets that are not easily convertible into cash (land + equipment)
Intangible assets= assets based on reputation of a company
Current liabilities= debt owed within the year
Long term liability= debt maturing in over a year
Working capital= current assets – current liabilities
Current ration= current assets/ current liabilities (ratio of over 2 means liquid)
Quick ratio (acid test)= quick assets( current assets- inventory)/ current liabilities (ratio over 1 means liquid)
Net worth= total assets- total liabilities
Paid in capital= amount received over par for stock issue
Retained earnings= after expenses + interest+ taxes + dividends
Inventory turnover ratio= sales/ inventory cost (low turnover ratio means inefficiency)
Read pages 173 - 177 (balance sheet + income statement + EPS ratios…) (empire training institute)
Blue chip stock= high earnings and high dividends consistently for several years
Cyclical company= performance depends on economy
Counter cyclical= companies that do well when economy is slow
Defensive= company that remains stable regardless of the economy
Utilities= are high leveraged and have good ratings (stock price is sensitive to interest rates)
PE= Market price / EPS
Growth companies have high PE’s
Fed controls monetary policy (12 regional fed banks)
Interest rate increase= decrease in money supply (tight money)
Reserve requirements= percentage of a banks money that can’t be lent out
Discount rate= rate fed charges banks for loans (lowest possible rate)
Fed funds rate= rate that banks and financial institutions charge each other (usually overnight loans)
Call loan rate= rate that banks charge brokerage firms to use for customer margin accounts
Prime rate= rate that banks charge their best customers (usually corporations)
Open market operations= most common tool that fed uses to control money supply (controlled by the FOMC) Fed increases money supply by buying T-bills and other securities from banks
M1= currency+ checking deposits+ NOW accounts (interest paying accounts)
M2= everything in M1 + savings + money market accounts
M3= everything in M2+ jumbo CD’s
Trade deficit= strong dollar + more imports than exports
Trade credit= weak dollar+ more exports than imports (more competitive)
Recession= mild 6 month decline in business and stock activity
Depression= 18 month economic decline
CPI= measures change in prices of consumer goods
Deflation= price of consumer goods decrease
Disinflation= when inflation rates decrease
Stagflation= increased inflation in a slow economy (price of commodities increase is common cause)
Gross domestic product= sum of all goods and services produced in an economy (considers inflation)
Disintermediation= people take money out of savings to put in to short term money markets (tight money is common cause)
Fiscal spending= taxes and government spending and use towards controlling the economy
Keynesian= theory that government should stay active through spending and intervention to ensure economic growth
Supply side= theory that governments should stay inactive and let the economy grow by itself
Monetarist= theory that money supply needs to be controlled for economy to prosper
Moral suasion= when chairmen of the fed asks banks to expand or contract their lending levels
Economic indicators:
1) Leading indicators= how the economy is going to do: money supply/ stock prices/ fed funds rate/ discount rate/ reserve requirements/ housing and new construction+ unemployment+ orders for durable goods
2) Coincidental indicators= how the economy is performing right now: industrial production+ personal income+ GDP
3) Lagging indicator= mirror leading indicators but reach peaks and trough at later dates: prime rate+ call loan rate + corporate profits+ credit cards+ duration of unemployment
Contraction= high levels of consumer debt+ bearish stock market+ decreasing GNP+ rising corporate inventories+ rising number of bond defaults and inventories
Expansion then peak then contraction then trough
Whip theory= change in interest rates cause long term bonds to change more in price than short term debt however short term debt changes more quickly
Breakout= when price breaks out of normal trading range by at least %3
Trading channel= area between resistance (upper portion of trading range) and support (lower portion)
Advance-decline ratio= determines whether the majority of stocks are up or down
Odd lot theory= small investors are usually wrong so if odd lot volume increases you should be bearish
Short interest theory= based on number of short sales because investors must eventually cover their shorts (if shorts increase then bullish)
Random walk/ dartboard/ efficient market theory= every security is correctly priced and undervalue/ arbitrage does not exist
Beta = volatility in respect to overall market (beta>1 more volatile if beta=1 then equally volatile if beta<1 then less volatile)
Alpha(Sharpe ratio)= volatility of a stock in comparison to that companies industry(large alpha means performed better than expected compared to its beta)
Accumulation/distribution line= tracks relationship between stock price and trading volume
Moving average chart= line graph of prices of a security over a period of time
Capital asset pricing model= model that prices stock by evaluating risk to expected return
Narrow based index= tracks performance of a particular industry
Broad based= tracks an overall market
S+P 500=500 listed and OTC common
Wilshire= largest index tracking 6000 listed and OTC
Russell 2000 = index of small cap
Lipper= mutual fund index
DJ composite= 65 common stock (63 NYSE and 2 OTC)
DJ: Industrial (30) transportation (20) utilities (15)
Circuit breaker=NYSE will restrict trading if DJIA moves up or down dramatically
Rule 80a= restricts program trading if DJIA changes up or down by more than 2%
Rule 80b= all trading is halted for a period of time because of dramatic decreases in the DJIA
Decreases in DJIA:
1) Level 1= declines by> 10% 2) Level 2= declines by >20%3) Level 3= declines by at least 30% exchange halts for remainder of the day