I used several test prep companies to pass the series 7
& 66 exams. The following is a stream-lined conglomerate of what I found
usual from those resources:
Series 7 (~242 items)
The General Securities Representative Exam (GSRE)
FINRA – Financial Industry Regulatory Authority
260 questions, 250 count – 2 sessions (130 questions each)
6 hours – 2 sessions (3 hours each)
at least 72% to pass
Breakdown:
70 questions (28%)
Provides Customers
with Information on Investments and Makes Suitable Recommendations
68 questions (27%)
Seeks Business for
the Broker-Dealer through Customers and Potential Customers
58 questions (23%)
Obtains and
Verifies Customer's Purchase and Sales Instructions, Enters Orders, and Follows
Up
27 questions (11%)
Evaluates
Customers' Other Security Holdings, Financial Situation and Needs, Financial
Status, Tax Status, and
Investment Objectives
27 questions (11%)
Opens Accounts,
Transfers Assets, and Maintains Appropriate Account Records
Series 7 Equities
Short Against the Box
When a customer is long
a stock in their account and sells the same stock short, this is considered to
be a neutral market position.
Short position
Investor
"borrows" stock from their B/D and then sells the stock that they
borrowed.
Time and Price
Discretion (Not Held Order)
Oorders where the RR
determines the Time and Price ONLY. The RR cannot determine the Size of the
order or the Security being traded.
Short Sale
attempts to make money
by borrowing and then selling a company’s stock at a high price and then
later buying and replacing that amount of stock at a lower price. Investors
that sell stock short generally expect the market price of the stock to decline
(bearish).
Short Sale
The sale of stock by a
customer who has borrowed the stock from their Broker-Dealer. Customers intend
to make money at a later date by buying the stock at a lower price and
replacing the shares that they borrowed.
Long Position
When an investor
"buys" and owns any security.
Discretionary Authority
When a person other than
the individual who owns the account has discretion to make purchases and sales
in an account. This can be a registered representative at the firm, or an
investment adviser representative, etc. Prior to executing discretion, written
authorization from the client is required.
Common stock
Equity security that
represents ownership in a corporation. Those who purchase common stock are
referred to as shareholders and have equity in the corporation.
Regular way settlement
Trade date plus three business
days (T + 3).
The order of asset
distributions upon liquidation
1. Taxes 2. Secured debt
3. Unsecured debt 4. Preferred stockholders 5. Common stockholders
Preferred stock
Equity security that
represents ownership in the corporation and has priority over common stock in
receiving dividends and sharing in assets if the company is dissolved. Typically
pays a fixed dividend and generally classified as a fixed income security.
Record date
Date on which the
corporation closes the updating of the stock record book.
Series 7 Treasury
T-Bonds
Fixed
income securities which pay semi-annual interest and mature in 10-30 years
Treasury Bills (T-Bills)
Direct short-term debt
obligations of the federal government - an extremely liquid investment of the
highest quality.
T-Notes
Fixed income securities
which pay semi-annual interest payments and mature in 2-10 years.
T-Notes and T-Bonds
minimum denomination
$1,000
T-Notes and T-Bonds
settlement
T + 1
Treasury
Inflation-Protected Securities (TIPS)
Treasury notes and bonds
where the interest and redemption payments are indexed to the current inflation
rate based on the Consumer Price Index (CPI).
Series 7 Investment Company
Net Asset Value (NAV)
Reflects the closing
market value of all the securities in the funds' portfolio plus any interest or
dividend income received on the securities in the portfolio. Net Asset Value is
presented on a per share basis, which requires the total NAV to be divided by
the number of fund shares outstanding.
Breakpoints
When an investor
receives a reduced sales charge based on a quantity investment.
Managed Companies: Open
End
Also called Mutual
Funds, they issue only redeemable shares (no secondary market).
Managed Companies:
Closed End
They issue shares once, which
are then publicly traded in the secondary market.
Offering Price formula
Offering Price = Net
Asset Value (NAV)/(100% - Sales Load %)
Investment Company
A financial institution
principally engaged in investing in securities. Investment companies pool the
money of investors and invest the funds in securities, attempting to achieve a
stated goal.
Dollar Cost Averaging
Purchasing a mutual fund
by investing a fixed dollar amount at set intervals.
Dollar Cost Averaging
Purchasing equal dollar
amounts of a specific security at regular pre-established time intervals.
Series 7 Orders
Two orders entered below
the market
Buy Limit and Sell Stop
Market Order
Order to buy or sell a
security at the best price available when it reaches the marketplace.
Stop Order
A memorandum order from
a customer that becomes a market order if a trade takes place at or through the
price stated in the memorandum.
Two orders entered above
the market
Sell Limit and Buy Stop
Stop Order Purpose
Can protect a profit or
limit losses on an existing position, but cannot assure a specific price of
execution.
Limit Order
Order to buy or sell a
security at a specific price or better.
Stop Limit Order
A combination of a stop
and a limit order. It is first a stop order, then becomes a limit order.
Series 7 Account Types
Tenants in Common
If one of the tenants
dies, his interest will pass to his estate and not to the other joint owner.
Individual Accounts
Accounts opened for one
person only.
529 College Plans
Established and
maintained by States and allow individuals to set up plans to pay for student's
qualified higher education expenses with tax-free withdrawals for qualified
educational expenses.
Transfer on Death (TOD)
Upon the death of an
individual investor, or the last surviving account owner in a joint account,
the assets in the account are passed on to beneficiaries according to the
written TOD agreement, thus eliminating the need for probate.
Cash Account
Requires the customer to
pay cash in full for all securities purchased in account.
Trust Accounts
A trust is an
arrangement in which property is managed by one person for the benefit of
another person.
Coverdell and Education
Savings Accounts
Tax-exempt accounts for
the qualified education expenses of a designated beneficiary to pay for
education expenses.
Pre-Paid Tuition 529
Plans
allow anyone to
establish an account in the name of a beneficiary and "lock in" the
cost of a specific number of academic periods or units at current prices for
use in the future by the beneficiary.
Joint Tenants with
Rights of Survivorship (JTWROS)
Account for two or more
people. Upon the death of either party, the surviving tenant becomes the sole
owner of the securities.
Coverdell - Education
Savings Accounts Contribution Limits
Contributions must be in
cash and are limited to $2,000 per year per beneficiary. Contributions are not
tax deductible. Eligibility is phased out for taxpayers with certain levels of
modified AGI.
Uniform Gift to Minors
Act (UGMA)
Uniform Transfer to
Minors Act (UTMA)
Series 7 Margin
NYSE minimum maintenance
for a LONG margin account
Customer must maintain
25% of the current market value of securities in the form of equity in the
account.
What can be used to meet
the initial margin requirement in a margin account long?
1. A deposit of cash
equal to the Reg T amount, OR 2. A deposit of securities which have a market
value that is 2 X the Reg T requirement
Reg T Initial
Requirements for a Margin Account Long
Customer must deposit
50% of the purchase price or $2000, whichever is greater. An exception to this
rule is if the purchase price in the account is less than $2,000, then the
customer must deposit the full amount of the purchase.
NYSE minimum maintenance
for a SHORT margin account
Customer must maintain 30% of the current market value of securities in the form of
equity in the short margin account.
Regulation T settlement
Trade date plus five
business days (T + 5).
Regulation T margin
deposit
Generally 50% of the
purchase price. This means that the customer deposits 50% of the purchased
amount and can borrow the remaining 50% from the broker/dealer (loan value).
Special Memorandum
Account (SMA)
A line of credit
available to the client based on prior buying power within the margin account.
Reg T Initial
Requirements for a Margin Account Short
1. Minimum equity to
open a short account is $2,000, no exceptions
2. Stock price of: a. $0 up to $5: Deposit of $2.50 per share or 100% of
the market value, whichever is greater; b. $5 up to $17: Deposit of
$5.00 per share; c. $17 and over: Regulation T (50%)
Margin Account
Account where the
customer can use borrowing power to purchase additional securities (Reg T 50%
deposit, 50% borrowing), called leverage and will magnify gains and losses to account.
Clients must have a margin account to sell stock short.
Series 7 Capital
Gains/Losses
Long Term Capital Gains
Realized profits on
assets held over 12 months.
Short Term Capital Gains
Realized profits on
assets held 12 months or less.
Net losses may be written off against ordinary income up to a
maximum of $3,000 per year.
Tax liability for a Long
Term Capital Gain
15%, unless the investor
is in the 39.6% tax bracket then the long term capital gain rate would be 20%.
Tax liability for a
short Term Capital Gains
The rate of the
investor's income tax rate
Series 7 Alternative
Investments?
Exchange Traded Funds
(ETF)
Funds similar to normal
index mutual funds with a portfolio that mirrors a specific index or industry
sector basket of securities. The primary difference between an ETF and an index
is that ETFs have shares that trade like common stock shares.
General Partners
Mange the DPPs, General
Partnerships, and Limited Partnerships.
Main advantages offered
by Oil and Gas Partnerships
Intangible drilling
costs, depletion, tax deferral, flow through of tax benefits, depreciation
deductions
What can Real Estate
Direct Participation Programs invest in?
Residential, commercial,
industrial, Government assisted housing, condominium securities, and raw land
properties
Direct Participation
Program (DPP)
A program which allows
investors certain tax advantages for the underlying asset.
Limited Partners
Liability is limited to the amount of their "at
risk" investment in the entity
Priority of claims to be
paid upon dissolution of an LP
1. Creditors - secured
then general creditors 2. Limited Partners - profit claims, then capital claims
3. General Partners - profit claims, then capital claims
The Tax Code allows up to $25,000 of losses from
rental real estate activities to be deducted each year against ordinary income.
Unit Investment Trusts
(UIT)
Generally have a fixed
portfolio of diverse municipal or corporate bonds. They only issue redeemable
units and they are not managed but are supervised.
Eurodollar Certificates
of Deposit (Eurodollar CDs)
Short term instruments
issued by banks outside the US.
Exchange Traded Notes
(ETN)
Debt instruments issued
by banks. The bank promises to repay the principal amount less investor fees at
final maturity and the performance of the ETN is linked to a specific index or
a particular strategy of investing.
Eurodollar Bonds
Bonds issued outside the
US by either foreign or domestic corporations.
Individual Certificates
of Deposit (CDs)
Short term instruments
which are guaranteed by banks in return for time deposits.
Real Estate Investment
Trust (REITs)
companies that manage a portfolio of real estate to earn profits
for their shareholders, generally formed to invest in real estate.
Equipment trust
certificate
An instrument of debt
that is generally issued by transportation companies to purchase new equipment,
which are secured by the new equipment. These bonds are usually not callable,
are normally issued in serial form, and rarely ever default.
Jumbo Certificates of
Deposit (Jumbo CDs)
Short term instruments
with a minimum deposit of $100,000 issued and guaranteed by banks.
Eurodollars
Deposits in US dollars with
banks outside of the US that are frequently used to settle international
transactions.
Banker's Acceptances
Used to finance foreign
trade.
Ginnie Mae (GNMA)
A government agency which
offers investors an undivided interest in a pool of mortgages (VA and FHA) guaranteed
by the US Government.
Collateralized Mortgage
Obligation (CMO)
A bond that is secured
by a pool of mortgage loans. CMOs are mortgage-backed securities.
Freddie Mac (FHLMC)
A publically owned,
government sponsored company which trades on the NYSE using conventional
mortgage payments made by homeowners to pay principal and interest.
Collateral trust
certificate
An instrument of debt
issued by a company using securities of other companies as collateral (mostly
stocks and bonds). The securities are placed on deposit with a trustee while
the collateral trust certificates are outstanding.
Fannie Mae (FNMA)
A publically owned
government sponsored company which trades on the NYSE. It buys mortgages from
lenders and is the largest source of home mortgage funds (VA and FHA) for low,
moderate, and middle income home buyers in the U.S.
Commercial Paper
Unsecured promissory
notes of corporations - one of the best ways for a corporation to raise short
term funds.
Repurchase Agreements
(REPOs)
Short-term money market
instruments sold by a firm with the agreement to repurchase them at a later
date at an agreed upon price.
American Depositary
Receipts (ADR)
Receipts traded in the
U.S. for foreign securities held in bearer form by an American bank in the
foreign country. They have no voting privileges, dividends are paid in U.S.
dollars, and they are not issued as callable.
Series 7 Bonds
Bond Point
1 bond point = $10
Municipal Bond
Bonds issued by state
and local government entities such as cities, counties, school districts,
authorities (transit, etc), and the state.
Flows of funds - Order
of payment for a Net Revenue Pledge
1. Operation and
maintenance fund 2. Bond service account for principal and interest 3. Debt
service reserve fund and/or sinking fund 4. Reserve maintenance fund 5. Surplus
fund or general fund of the municipality
Revenue Bonds
Bonds for which the
payment of bond interest and principal depends on specific identified
sources of revenues such as user charges, lease payments, licenses fees, or
"special" taxes.
How are General
Obligation bonds secured?
General Obligation bonds
are secured by taxes collected by the municipality. They are not secured
by revenues from revenue-generating facilities (these would be revenue bonds).
During periods of inflation, you would buy short term bonds
Double Barreled Bonds
Revenue bonds which are
also backed by the full faith and credit of a municipality.
Premium bond
The bond's market price
is above par value.
Flows of funds - Order of
payment for a Gross Revenue Pledge
1. Bond service account
for principal and interest 2. Operation and maintenance fund 3. Debt service
reserve fund and/or sinking fund 4. Reserve maintenance fund 5. Surplus fund or
general fund of the municipality
During periods of deflation, you would buy long term bonds
Long term bonds react the greatest to changes in interest
rates.
Zero coupon bonds
sold at a deep discount
and pay no interest while the bonds are outstanding.
Sinking Fund
Ensures that money is
set aside for the redemption of bond principal at maturity when required
Short term bonds react the quickest to changes in interest
rates.
Interest on Municipal
Bonds
Municipal bonds pay
interest semi-annually. Interest from munis is exempt from federal income tax
and exempt from state and local taxes in the state of issuance. Outside of the
state of issuance, interest may be subject to state and local income taxes.
Legal Opinion
A statement from a
reputable independent law firm hired by the issuer pertaining to the tax-exempt
status of municipal bonds.
A discount bond
The bond's market price
is below par value.
If interest rates go DOWN, prices on bonds go UP.
Par Value of a Bond
$1,000
Zero Coupon Bonds
Bonds sold at a deep
discount which mature at face value.
Refunding Bonds
Bonds issued by a
municipality to pay off existing bonds.
Bonds
A debt security - investor
becomes a creditor who receives interest payments for lending capital.
If interest rates go UP, prices on bonds go DOWN
Term Bonds
Bonds that are all issued
with the same maturity date.
Coupon Rate/Nominal
Yield
Fixed rate of interest paid
to investors.
Serial Bonds
Bonds issued with
staggered maturity dates.
General Obligation Bonds
(GOs)
Bonds that are a general
obligation of the issuing municipality (state, country, city, school district,
etc.).
Series 7 MISC?
Who needs to sign the
New Account Report Form?
The Branch Manager or
Principal and the Registered Representative. The customer does not need to sign
the form, once completed
Type of security an
older client should invest in?
Fixed income securities
and some cash
Asset Allocation
The diversification of
investments in a customer's account determining the percentage of assets which
should be invested in stocks, bonds, real estate, and other asset classes.
Considerations when
determining a customer's risk tolerance
1. Number of dependents
and their educational needs 2. Investment objectives 3. Net worth 4. Time
Horizon
Type of security a
younger client should invest in
Equities
Customers wishing to
minimize risk in a common stock portfolio can accomplish this by investing so
that:
1. The largest
percentage of the securities in the portfolio are affected differently by
economic conditions, and 2. The largest percentage of the portfolio consists of
leading common stocks.
Foreign currency values will generally move inversely to
the U.S. Dollar.
To stimulate the economy, the Fed would BUY US Gov't
securities. This pumps money into the economy.
Federal Funds
Funds deposited by
commercial banks at Federal Reserve Banks that are in excess of bank reserve
requirements.
To slow down the economy
the Fed would SELL US Gov't securities. This takes money out of the
economy.
A US balance of payments
deficit would decrease (improve) due to:
New foreign investments
in the US, Commodity exports, Spending by foreign tourist in the US, Increased
dividend and interest earned on foreign investments, Money coming into the US
A US balance of payments
deficit would Increase (worsen) due to:
An increase in US investments abroad, US tourists spending abroad,
US loans to other countries, raising dividends and interest payments on
foreign-owned securities, money going out of the US
Efficient Market
Hypothesis
Investment theory that
states it is impossible to "beat the market" because the stock market
is efficient, meaning that current share prices always reflect all relevant
information.
Fundamental Analysis
Concerned with a
specific company and factors specific to the company such as the company's
earnings, price per share, debt level, etc.
Technical Analysis
concerned with market
price movements and market trends. For example charting is a form of technical
analysis.
Maximum gift tax
exclusion?
One person = $13,000
Married couple = $26,000
Under MSRB rules, municipal securities dealers are prohibited from
giving a gift in excess of $100 dollars per person per year.
Maximum gift amount to
spouse
Unlimited
Gift Limits between
associated persons and from associated persons to customers
Gifts are computed
annually and may not exceed $100 giving or receiving per person per year.
solicitations may be placed only between the hours of 8 a.m.
and 9 p.m. local time of the party called.
Fiduciary
A person vested with
legal rights and powers to be exercised for the benefit of other persons.
Examples include: Trustees, Executors, Administrators, Guardians, Custodians,
and accounts For the Benefit Of (FBO) another person.
Series 7 IRA & ERISA
Employee Retirement
Income Security Act (ERISA)
Provides for minimum
standards for established private sector retirement plans: disclosure,
standards, accountability, remedies, guarantees. It does not compel an employer
to have a retirement plan or to provide minimum benefits in a plan.
Roth IRAs - Qualified
Distributions
There are no tax
consequences on the distribution.
Roth IRAs
Another way for
individuals to save for retirement. Contribution's are NOT tax deductible from
the owner's gross income but the incentive to invest is that the withdrawals of
the contributions and qualified earnings are tax-free if certain conditions are
met.
Traditional IRA -
Distributions
may begin at age 59.5
and are mandatory by 70.5.
Rollovers
Distributions from one
retirement plan to another retirement plan or account.
Rollover from an Roth
plan to a Qualified Plan
It is NOT permissible to
rollover from a Roth plan to a Qualified plan.
Traditional IRAs -
Individuals who ARE active in a retirement plan at work maybe able to deduct
contributions to an IRA depending upon income limitations and adjusted gross
income.
The Simplified Employee
Pension Plan (SEP)
Plan used by small
businesses to provide retirement benefits for themselves and their employees used
due to low administrative costs. Employer makes tax-deductible contributions
into IRA and employees make their own additional contributions.
Roth IRAs - Contribution
Conditions
1. Contributions may be
made annually up to specific limits. 2. Individuals who are at least 50 years
of age may contribute an additional "Catch up". 3. Contributions are
NOT tax deductible (After-tax dollars are used). 4. Contributions may continue
after age 70.5.
Traditional IRAs -
Contribution Conditions
1. Contributions may be
made annually up to specified limits. 2. Individuals who are at least 50 years
of age may contribute an additional "Catch Up" 3. Contributions may
not be made after age 70.5.
Is it permissible to
rollover from a Qualified Plan to a Roth plan?
Yes, but the rollover
would be subject to income taxes.
Roth IRAs -
Non-qualified Distributions
A portion of the
distribution may be included in the account owner's gross income and will
generally be subject to a 10% early withdrawal penalty.
Traditional IRAs - Individuals
who are NOT active in a retirement plan at work may deduct ALL of their
contributions up to annual contribution limitations.
Traditional IRA
Account designed to
encourage employed individuals to save for retirement by providing them with
tax incentives. Tax incentives include a deduction for contributions for
individuals whose income does not exceed maximum amounts and tax deferral of
growth within the account. Distributions after retirement are taxed as ordinary
income.
Series 7 Annuities
Annuities
A contract issued by a
life insurance company to provide a series of periodic payments (stream of
payments) to an annuitant(s) for life.
Qualified or Tax
Qualified Annuity
Annuity where the
investor contributes pre-tax dollars
Non-tax Qualified
Annuity
Annuity where after-tax
dollars are contributed.
Fixed Annuities
Fixed structure, meaning
it pays the same predetermined dollar amount each period.
Variable Annuities
Variable in structure.
Premiums paid by annuity holders go into a separate account and are invested
according to the annuity holder's wishes. Variable annuities participate in
market movements, offering more risk, but the potential for more returns. They are
classified as securities.
Series 7 Investment
Banking (IPO)
Investment Banker
A firm dedicated to
assisting in distributions of new securities as well as other corporate-related
matters.
Three primary functions
of an Investment Banker
1. Raise capital for
corporations through the issuance of securities 2. Serve as underwriters,
sponsors, distributors, or syndicate members in an underwriting 3. Provide
advice on corporate mergers and acquisitions
Underwriting / Syndicate
Member
When a new issue of securities
is coming to market, a syndicate is formed. Members of the syndicate are
referred to as syndicate members or underwriters. These are firms that are
involved in the distribution of the new issue of securities and are typically
headed by a Managing Underwriter.
Third Market
Where exchange-listed
securities are traded OTC.
Fourth Market
Financial institutions
trading directly with each other.
Reallowance
A fee paid to
non-syndicate outside broker/dealer firms who requested shares or assisted in
the distribution of shares during an underwriting.
Good Delivery of Stock
Certificates:
Units of 100 shares,
Multiples of 100 shares, or Combinations permitting 100 share units
Good Delivery
A stock or bond certificate is in a readily transferred form of ownership
between Broker-Dealers
Secondary Distribution
The redistribution of a
large block of securities typically held by a few owners (insiders).
Primary Distribution
The distribution of
authorized but previously unissued shares to the public.
Ex-dividend date
The date on which the
stock begins to trade without a declared dividend. When buying on or after the
ex-date, new owners are not entitled to the dividend.
Designated Market Maker
(Formerly Specialist)
The DMM is the key
individual on an exchange trading floor who is required to maintain a fair and
orderly market in the security assigned to him or her.
OTC Bulletin Board
(OTCBB)
A quotation service that
displays real-time quotes, last-sale prices, and volume information in low
priced OTC securities and other thinly traded securities.
Tombstone Ads
Announce the
availability of a new issue for sale.
Manager's Fee
Fee collected by the
managing underwriter for performing managerial functions for the syndicate.
Dual Member Firm
When a member firm is a
participant with both the OTC market and the Exchanges.
NYSE(New York Stock
Exchange)
The largest stock
exchange in the world by dollar value of its listed securities.
Shelf Registration
Using a single
registration statement, a corporation can register all securities it intends to
issue in the upcoming three-year period, then issue them from the
"shelf" without filing again with the SEC.
Managing Underwriter
The firm that serves as
head of the syndicate group and determines the scale on a serial bond or the
pricing on a term bond issue.
Over the Counter Market
(OTC)
All securities trades
that take place off the floor of an organized exchange.
Insider
An officer, director, or
principal stockholder (more that 10% ownership in a company).
Selling Concession
A fee collected by
selling group members for their assistance in distribution of an underwriting.
Competitive Bidding
Municipality requests
sealed bids from underwriters or underwriting syndicates and awards the bonds
to the group which offers the municipality the lowest net interest cost.
Western Agreement (Divided)
Each member is
responsible for their own bonds and not for any other member's unsold bonds.
Eastern Agreement (Undivided)
Each member of the
syndicate is severally and jointly responsible for the underwriting according
to their fixed participation percentage.
Underwriter's
Compensation
A fee collected by
selling syndicate members for participation in an underwriting and any
financial risk taken.
Negotiated Underwriting
The managing underwriter
is hired and the terms of the new issue are negotiated (commonly used for
municipal revenue bond issues)
Series 7 Options, etc.
What happens when the
buyer of an equity call option exercises?
The buyer of the call
buys 100 shares of underlying common stock at the exercise price.
The seller of a Call has the obligation to Sell Stock.
The buyer of a Put has the right to Sell Stock.
Long Puts protect or hedge a LONG stock position.
The seller of a Put has the obligation to Buy Stock.
Equity option contract:
typical number of shares
1 option contract = 100
shares of stock
Long Calls protect or hedge a SHORT stock position.
Investors who are bullish will either SELL a put option or BUY
a call option.
What happens when the
seller of an equity call option receives an exercise notice?
The seller of the call
option is obligated to sell 100 shares of the underlying common stock at the
exercise price.
Buyer of a Call has the right to Buy Stock.
When must a customer be
approved for options trading?
Each customer must be specifically
approved for options trading by a Registered Options Principal (ROP) prior
to the time that the firm accepts an option order from the customer.
Registered Options Principals (ROPs)
approve customer options trading
Investors who are bearish will either SELL a call option or
BUY a put option.
In the Money or
Intrinsic Value for a Put
When the market price of
the stock is less than the exercise price of the option
In the Money or
Intrinsic Value for a Call
When the market price of
the stock is greater than the exercise price of the option
Memory Aid: "Call Up" (+) "Put Down" (-)
Breakeven formula for
put options (No stock transactions involved)
Exercise Price - Premium
= Breakeven
Exercise or Strike Price
The fixed price of an
option contract at which call buyers buy stock on exercise and put buyers sell
stock on exercise.
Options Premium
The price at which an
option contract trades. Premiums are paid by buyers and received by sellers.
What happens when the
buyer of an equity put option exercises?
The buyer of the put option sells 100 shares of the
underlying common stock at the exercise price.
Index Options
Options (puts and calls) on stock indices (ex. S&P 500) that
settle in CASH, not stock.
Straddle
An equal number of puts
and calls, both Long or both short, on the same stock with the same strike
price, and the same expiration month. Long Straddle = Buy Call and Buy Put.
Short Straddle = Sell Call and Sell Put
Spread
A long and short
position in two call contracts or two put contracts on the same underlying
stock. Call Spread = Buy Call and Sell Call. Put Spread = Buy Put and Sell Put
Bull Spread
will profit from a RISE
in the market price of the stock.
Bear Spread
will profit from a DECLINE
in the market price of the stock.
An investor who establishes a Short Straddle expects the market to
remain neutral.
An investor who
establishes a Long Straddle expects the market to make a major move, either
up or down.
World Currency Options
Foreign currency options
that are U.S. Dollar-settled and are issued and guaranteed by the OCC.
Interest Rate Options
Options on the YIELD of
U.S. Treasury securities (not price). The value of these options is based on
the interest rate and interest rate movements, not on the market price of the
underlying treasuries.
Long-term Equity
Anticipation Securities (LEAPS)
Long-term options on
stocks and on stock indexes
Current yield formula
Current Yield = Annual
Interest / Current Market Price
Breakeven formula for
call options (No stock transactions involved)
Breakeven = Exercise Price
+ Premium
Corporate Equivalent Yield
Formula
Taxable Equivalent Yield =
Municipal Yield / (100% - Investors Tax Rate)
Annual coupon amount
Coupon Rate X Par Value
Formula: Equity in a Long
Margin Account
Equity = Current Market
Value Long - Debit Balance
Equity in a short margin
account = Proceeds of the Short Sale + Reg T deposit = Credit Balance - Current
Market value short
Current yield formula
Current Yield = Annual
Dividends / Market price
Parity Formula for
Convertible Securities when given the Market Price of the Convertible Security
Parity Pricce = Market
Value of the Bond or Preferred Stock / Common Shares Produced in the Conversion
Formula
Series 7 Regulations
Money Laundering
The acceptance of large
amounts of cash from individuals or businesses where the money is suspected of
being used for illegal purposes.
Suspicious Activity
Report (SAR)
must be filed when any
transaction conducted through a Broker Dealer involving funds or assets of $5,000
or more takes place and where the Broker-Dealer detects any known or suspected
Federal Criminal Violation.
Securities Investor
Protection Act of 1970 (SIPC)
Put into place for the
purpose of protecting public customers against the risk of loss due to the
failure of a Broker-Dealer.
SIPC will provide protection for customers of up to $500,000 per
separate customer for cash and securities, but not more than $250,000 may be
paid for a cash claim.
SIPC protection limits
provided for customers :
up to $500,000 per
separate customer for cash and securities, but not more than $250,000 may be
paid for a cash claim.
MSRB rules are enforced
by:
The SEC, FINRA,
Governors of the Federal Reserve Banks, the Comptroller of Currency, and the
Federal Deposit Insurance Corporations (FDIC)
Self Regulatory
Organizations (SRO)
SROs set rules,
regulations, and penalties related to the securities and transations which they
oversee. Examples include FINRA, the MSRB, and Excanges such as the NYSE.
Insider Trading
A violation of Federal
Securities Laws and applies to anyone that trades securities based on material,
non-public information.
The MSRB requires charges (commission, mark-up/down, prices) to be
fair and reasonable.
FINRA Code of Arbitration
Its purpose is to handle
any disputes, claims, or controversies arising out of or in connection with the
business of any member of FINRA.
The Municipal Securities
Rulemaking Board (MSRB)
was created in 1975 to formulate rules to regulate all
firms transacting business in municipal
securities.
Securities Exchange Act
of 1934
Designed to protect the
public against unfair and inequitable practices in secondary market securities
transactions.
The five ways the
Federal Reserve regulates the flow of money and credit in the economy
1. Open Market
Operations 2. Changing the primary reserve requirement 3. Changing the discount
rate 4. Changing the margin required by broker-dealers 5. Moral suasion
Decisions by Code of
Arbitration
Are final and binding on
all parties.
FINRA's 5% Markup Policy
Applies to all OTC
principal and/or agency trades.
When does the 5% markup
policy Not apply?
When a prospectus or
offering circular must be delivered. For example: New Issues, Registered
Secondary Offerings, and Sales of Open End Investment Company Shares.
Broker Dealers who transfer funds, including wire fund transfers
of $3,000 or more, must collect, retain, and record certain information.
Account statement timing
requirement
Statements must be sent
out monthly if there is activity and quarterly if there has been
no activity in the account.
SEC Rule 144: control
stock that can be sold within a 90 day window
1. 1% of the outstanding
stock; OR 2. the average trading volume for the previous 4 weeks,
whichever is greater
Markup Policy
The 5% guideline that
must be used when calculating the markup or markdown on transactions between a
market maker and customer.
SEC Rule 144
sets forth the
conditions under which a holder of unregistered securities may make a public
sale without filing a registration statement with the SEC. It covers the resale
of restricted and control stock.
Restricted stock holding
period
Restricted securities
must be fully paid for and owned for at least 6 months.
FINRA Code of Procedure
Purpose: to handle trade
practice complaints relating to violations of the rules.
The Securities Act of
1933
1. Requires registration
of new issues with the SEC before sale to the public. 2. Calls for full and
fair disclosure 3. Requires the delivery of a prospectus for the sale of new
issues 4. prohibits fraud in the sale of new issues
FINRA (Financial
Industry Regulatory Authority)
the SRO that was created
when the regulatory divisions of the NYSE and the NASD joined to form one
regulatory body, eliminating duplication of regulation of members.
Currency Transaction
Reports (CTR)
Broker-Dealers must file
CTRs for transactions involving currency (cash) over $10,000.
