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Chapter 7 SIE
| Term | Definition |
|---|---|
| Discount | a price below par (a bond selling below its par value) |
| Diversification | portfolio strategy that seeks to minimize risk by spreading investments over different securities, industry sectors and asset classes |
| Maturity date | the final payment date on a bond when interest and principal are repaid by the borrower |
| no-load funds | mutual finds sold without a commission or sales charge. They cannot charge a 12b-1 fee greater that 25 basis points so they may have lower expense rations than those with a load. |
| portfolio | a basket of stocks, bonds, and other securities holdings owned by individual investors or managed by financial institutions |
| premium | a price above par; a bond selling above its par value |
| REMIC | Real Estate Mortgage Investment conduit, a type of real estate trust that invests in mortgages as opposed to the actual real estate |
| investment company | an issuer in the business of investing, reinvesting, owning holding or trading in securities. They are structured as either corporations or trusts in which investors are able to pool their funds for increased diversification & professional management |
| 3 types of investment companies | management companies, face amount certificate companies, and unit investment trusts |
| Unit Investment Trusts (UITs) | established as a trust and operates as a holding company for the fixed portfolio, They have units that are redeemable; there is no secondary market trading. |
| Face amount certificates | issue debt certificates with predetermined interest rates. Can be redeemed for a fixed amount on a specified date or redeemed prior to maturity (24 months) for their stated surrender value. Rarely used. |
| Management Companies | can be closed-end or open-end funds |
| closed-end funds | capitalized through a 1-time public offering of a fixed number of shares |
| Open-end Management Companies | investment companies are synonymous with mutual funds. They provide continual offering and redemption of shares |
| Board of directors of a mutual fund | appoints and oversees investment advisers, and establishes the investment policy and the dividend and capital gains policies for the fund. |
| Rights of mutual fund shareholders | voting, receive dividends, approve changes in investment objectives and policies, approve investment advisory agreements, approve changes in fees, elect directors and ratify the selection of independent auditors. |
| The ex-dividend date for mutual funds | 1 business day after the record date. For stocks, it is 1 day BEFORE the record date. |
| investment adviser | manages the fund's portfolio and is paid a fee for advisory services |
| custodian | holds customers' securities for safekeeping. |
| Transfer agents | issue shares, disburse dividends, and handle redemptions. |
| book entry | means that the shares are owned, recorded and transferred electronically without issuing a psychical stock or bond certificate. |
| underwriter | a mutual funds sponsor, or distributor. Also called the wholesaler. Has an exclusive agreement with the fund that allows it to purchase fund shares at the current net asset value |
| management fee | paid to the investment adviser, is usually the largest expense of operating a fund |
| expense ratio | found by dividing the funds expenses by its average net asset value. |
| Net Asset Value (NAV) | computed once a day, at market close. Investors redeem mutual fund shares at this value. |
| forward pricing | The redemption value of a mutual find is based on NAV after the order it is received based on the next price to be computed |
| Continuous Primary offering | each share sold is a new share created for that investor. A prospectus must accompany each sale. |
| summary prospectus | contains key information about the fund |
| 12b-1 fee | an expense of a fund, like the management fee, and cover the cost of marketing and distributing fund shares, including the cost of printing prospectuses and sales materials. |
| Class A shares | purchased at the POP and have no deferred sales charge. They have a front-end load. Most appropriate for large investments with long-term time horizon |
| Class B Shares | are purchased at NAV, but have potential back-end load known as a contingent deferred sales charge (CDSC). This charge declines each year until it reaches 0%, at which time Class B convert to Class A shares. |
| Class C Shares | purchased at NAV, but have a back-end load that lasts for one year. They are investment neutral and short term time horizons. |
| Sales charge | expressed as a percentage of the public offering price. |
| breakpoints | dollar levels at which the sales charge is reduced. They must apply uniformly to all recipients and meet disclosure requirements |
| late trading | buying or selling after the close of the exchange. Mutual fund companies are prohibited from allowing certain investors to engage in this. |
| breakpoint selling | selling just shy or short of a breakpoint because it does not allow the investor to benefit from a potentially lower sales charge. it is prohibited. |
| Letter of Intent (LOI) | allows an investor to qualify for the sales discounts without initially investing the entire amount required. It states the investor's intent to invest the required amount over the next 13 months. They must be backdated 90 days. They are not binding |
| Rights of Accumulation | allow investors and their immediate family to combine prior mutual find purchases with current purchases in the same mutual fund or fund family to qualify for a breakpoint. They are also available to large groups such as schools, hospitals or corporations |
| Total return | includes the effect of reinvested distributions and share price appreciation, net of sales charges and expenses for the period |
| Expense ratio | higher expenses that have the effect of reducing current yields and total returns. |
| Exchange-Traded Products (ETPs) | include securities that are priced based on the value of other underlying instruments, such as stocks, interest rates, commodities and currencies. |
| Exchange Traded Funds (ETFs) | are ETPs that invest in the securities of companies in a market index such as the S&P 500 or an industry sector. They are not traded on an exchange. They have lower expenses and fees than mutual funds. |
| Passive ETFs | designed to passively track a particular market index. They invest in all or a representative sample of the stocks in an index. They have a fixed portfolio and lower management fees. |
| Active ETFs | managed by a portfolio manager who buys and sells stocks based on a defined investment strategy, rather than tracking an index. They have higher costs. |
| Exchange Traded Notes (ETNs) | senior unsecured debt instruments that track the performance of an underlying index or benchmark. They have a maturity date. They can be traded on an exchange. It carries both market risk and credit risk. They are complex investments |
| Real Estate Investment Trusts (REITs) | companies that own and usually operate income-producing real estate or products related to real estate, giving individual investors the opportunity to invest in large scale, income producing real estate. They do not flow through or distribute losses |
| Listed REITs | publicly traded or exchange traded. They are registered with the SEC and are traded in the secondary market. They are liquid investments. |
| Nonlisted REITs | nontraded. They are registered with the SEC but are not listed on an exchange and are not publicly traded. They are associated with greater risks because of lack of liquidity and high fees. |
| Private REITs | real estate funds or companies that are exempt from SEC registration and whose shares do not trade on a national stock exchange. Usually illiquid and share redemption programs may be limited. Externally advised & managed. |
| Equity REITs | invest in real estate either for income or capital appreciation. Objective is to profit through appreciation. |
| Mortgage REITs | invest in real estate mortgages. Typically held on commercial properties and provide immediate income to investors. |
| Hybrid REITs | a combination of an equity & a mortgage REIT. It is more diversified in its activities. Can provide both income & potential capital appreciation. |
| Hedge Funds | pooled investment vehicles that are typically structured as limited partnerships or limited liability companies. They strive to preserve capital and provide positive or absolute returns under all market conditions. Very risky and not liquid. |
| leverage | hedge fund technique of borrowing money |
| arbitrage | simultaneously buying and selling a security in different markets to take advantage of the difference in prices |
| short sellign | selling a security that is not owned |
| Hedging | buying a security to offset a potential loss |
| concentrating positions | investing in a single issuer or market index |
| blind pool | less that 75% of the investments are known in advance |
| blank check company | a company that has no specific business plan |
| Private equity funds | use capital raised from institutional and high net worth investors to invest in privately owned entities. They have high minimum investment requirements, and typically invest in high risk ventures such as startups and developing technologies. |
| index funds | includes both index mutual funds and ETFs that are passively managed, and are associated with lower management fees due to lower portfolio turnover |
Created by:
emulligan