Series 7

  1. Equity
    • The term's meaning depends very much on the
    • context. In finance, in general, you can think of equity as ownership in
    • any asset after all debts associated with that asset are paid off. For
    • example, a car or house with
    • no outstanding debt is considered the owner's equity because he or
    • she can readily sell the item for cash. Stocks are equity
    • because they represent ownership in a company.
  2. Securities
    • A security is essentially a contract
    • that can be assigned a value and traded.
    • Examples of a security include a note, stock, preferred share, bond,
    • debenture, option, future, swap, right, warrant, or virtually any other financial asset.
  3. Limited
    • Limited liability refers to the terms of limited partnerships,
    • which comprise at least one general partner, who takes on unlimited
    • liability, and one or more limited partners, who would never lose
    • more than their original initial investment in
    • fulfilling the partnership's obligations. Limited liability
    • protects a partner's personal assets from being liquidated should the
    • company become insolvent. Additionally, limited liability can refer to an investment that has
    • limited downside risk, such as a long position in a stock, with which the
    • investor can lose no more than his or her initial investment.
  4. Securities
    Act of 1933
    • The Securities Act of 1933 was the first major piece of federal
    • legislation regarding the sale of securities. Prior to this legislation, the
    • sale of securities was primarily governed by state laws; however, the market crash
    • of 1929 raised some serious questions about the effectiveness of how the
    • markets were being governed. Because of the turmoil surrounding the investing community at this
    • time, the federal government had to bring back stability and investor
    • confidence in the overall system. In general, the legislation was enacted as the need for
    • more information within and about the securities markets was
    • acknowledged. The legislation addressed the need for better
    • disclosure by requiring companies to register with the Securities and Exchange
    • Commission. Registration ensures companies provide the SEC and potential
    • investors with all relevant information by means of the prospectus and registration
    • statement.
  5. Bond
    • The indebted
    • entity (issuer) issues a bond that states the interest
    • rate (coupon) that will be paid and when the loaned funds (bond principal)
    • are to be returned (maturity date). Interest on bonds is usually paid every six
    • months (semi-annually). The main categories of bonds are corporate bonds,
    • municipal bonds, and U.S. Treasury bonds, notes and bills, which are
    • collectively referred to as simply "Treasuries". Two features of a bond - credit quality and duration - are the
    • principal determinants of a bond's interest rate. Bond maturities range from a
    • 90-day Treasury bill to a 30-year government bond. Corporate and
    • municipals are typically in the three to 10-year range
  6. Pass-through Certificate
    • Mortgage-backed certificates are
    • the most common type of pass-through, where homeowners' payments pass from
    • the original bank through a government agency or investment bank to
    • investors.
  7. Treasury Receipts
    • Treasury Receipts In general, stripped U.S. Government
    • bonds are referred to as Treasury receipts but are better known as
    • TIGRS (Treasury Investment Growth
    • Receipts), CATS (Certificates of Accrual on Treasury Securities), etc.
  8. Call
    • The call protection is advantageous to investors because it prevents the
    • issuer from forcing redemption early on in the life of a security. This means
    • that investors will have a minimum number or years, regardless of how poor the
    • market becomes, to reap the benefits of the security.
    • The period for which the bond is protected is known as
    • the "deferment period" or the "cushion".
  9. Insider Trading Act of 1988
    • Insider Trading Act of 1988 An act enabled
    • in 1988 to increase the liability penalties to all involved parties to
    • insider trading. This act was
    • established due to the increase in high profile insider trading cases, as
    • well as the increase in monetary values of the trades. The act allows the
    • SEC to order a penalty of up to three times the profit, and the guilty
    • parties may serve significant jail time according to the extent of their
    • crime. Insider trading occurs when members outside of the establishment
    • are given information which is not available to the public as a whole, and
    • use it to increase their wealth through buying/selling stock.
  10. Private
    Securities Transaction
    • A "Private Securities Transaction", as defined
    • by the NASD, is the sale of a security by a broker working for a NASD-licensed
    • firm wherein a) the security is not recognized by the employer or typically
    • sold by the broker, b) the broker receives outside compensation for the
    • transaction, or c) both.
  11. Underwriters
    • Underwriters generally receive
    • underwriting fees from their issuing clients, but they also
    • usually earn profits when selling the underwritten shares to
    • investors. However, underwriters assume the responsibility of
    • distributing a securities issue to the public. If they can't sell
    • all of the securities at the specified offering price, they may be
    • forced to sell the securities for less than they paid for them, or retain
    • the securities themselves.
  12. Gross Domestic Product
    • Gross Domestic Product The monetary value of all the
    • finished goods and services produced within a country's borders in a
    • specific time period, though GDP is usually calculated on an annual basis.
    • It includes all of private and public consumption, government
    • outlays, investments and exports
    • less imports that occur within a defined territory.

    • GDP = C + G + I +
    • NX


    • "C"
    • is equal to all private consumption, or consumer spending, in a nation's
    • economy
    • "G"
    • is the sum of government spending
    • "I"
    • is the sum of all the country's businesses spending on capital
    • "NX"
    • is the nation's total net exports, calculated as total exports minus
    • total imports. (NX = Exports - Imports)
  13. Call and Put
    • 1. In some exchanges, the call period is
    • an important time in which to match and execute a large number of orders
    • before opening and closing.

    • 2. A call becomes more valuable as the price of the underlying asset
    • (stock) appreciates.

    • When an investor
    • purchases a put, he or she expects the underlying asset will decline
    • in price. The investor will then profit by either selling the put options
    • at a profit, or by exercising the option. If an investor writes a put
    • contract, he or she is estimating the stock will not decline
    • below the exercise price, and will not fall significantly below the exercise
    • price.
  14. Common
    • A security that
    • represents ownership in a corporation. Holders of common stock exercise control
    • by electing a board of directors and voting on corporate policy. Common
    • stockholders are on the bottom of the priority ladder for ownership structure.
    • In the event of liquidation, common shareholders have rights to a company's
    • assets only after bondholders, preferred shareholders and other debtholders
    • have been paid in full.
  15. Risk Tolerance
  16. The degree of uncertainty that an
    • investor can handle in regard to a negative change in the value
    • of his or her portfolio.
  17. Breakpoint
    • Breakpoint For example, suppose that
    • an investor plans to invest $95,000 in a front-end load mutual fund and faces a
    • sales charge of 6.25%, or $6,125. If a breakpoint of $100,000 exists with
    • a lower sales charge of 5.5%, the investor should be advised to
    • invest an additional $5,000. If the investor can add another $5,000
    • to the investment, he or she would benefit from a lower breakpoint
    • sales charge of $5,500, or a savings of $625 on this transaction.

    • Mutual funds are required to give a description of these breakpoints and
    • the eligibility requirements in the fund prospectus. By reaching or
    • surpassing a breakpoint, an investor will face a lower sales charge and
    • save money. Any investor
    • purchase of fund shares that occurs just below a breakpoint is considered
    • unethical and in violation of NASD rules.
  18. Letter of Intent
    • 1. Letters of intent are used
    • during the merger and acquisitions process to outlines a
    • firm's plan to buy/take over another company. For example, the
    • letter of intent will disclose the specific terms of the transaction
    • (whether it is a cash or stock deal).

    • 2. Unlike wills, letters of intent are often not legal documents.
    • However, because a letter of intent represents the wishes and
    • desires of the parents, the courts will still often use it as a benchmark
    • in conjunction with other documents to determine what happens to the
    • children.
  19. Call Risk
    • Call Risk The risk, faced by a holder of a
    • callable bond, that a bond issuer will take advantage of the
    • callable bond feature and redeem the issue prior to maturity. This means
    • the bondholder will receive payment on the value of the bond and, in most
    • cases, will be reinvesting in a less favorable environment (one with a
    • lower interest
    • rate).
  20. Growth-oriented Securities
    • Most growth
    • funds offer higher potential capital appreciation but usually at
    • above-average risk. Growth funds are more volatile than funds in the
    • value and blend categories. The companies in a growth fund portfolio are
    • in an expansion phase and they are not expected to pay dividends. Investing in growth funds
    • requires a tolerance for risk and a holding period with a time horizon of
    • five to 10 years.
  21. Dividend
    • 1. Dividends may be in the form of cash, stock or
    • property. Most secure and stable companies offer dividends to their
    • stockholders. Their share prices might not move much, but the dividend
    • attempts to make up for this.

    • High-growth companies rarely offer dividends because all of their
    • profits are reinvested to help sustain higher-than-average growth.

    • 2. Mutual
    • funds
    • pay out interest and dividend income received from their portfolio
    • holdings as dividends to fund shareholders. In addition, realized capital
    • gains from the portfolio's trading activities are generally paid out
    • (capital gains distribution) as a year-end dividend.
Card Set
Series 7
Prep for Series 7