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Chapter 9 SIE
| Term | Definition |
|---|---|
| Contemporaneous Trader | a trader without inside information who enters at the same time as a trader with inside information |
| cost basis | the original purchase price of a security, inclusive of sales charges, used to calculate capital gains and losses |
| Market sentiment | the feeling or tone of the market; the prevailing attitude of investors as to the direction of the market |
| Russell 2000 | an equity index that is used as a benchmark for small-cap stocks and mutual finds |
| S&P 500 | a market cap-weighted index that is a common benchmark for the broader U.S. equity market |
| Specific Identification | allows an investor who is selling securities that have been acquired through a series of purchases to select those shares that provide the most favorable cost basis for tax purposes |
| Systematic risk | also called market risk or undiversifiable risk, is the risk that affects the entire securities market. This risk results from factors that are external to and, therefore, beyond the control of any one company. examples include macroeconomic shifts |
| Nonsystematic risks | risk that affects a particular company or industry sector of the market, such as credit risk, regulatory risk, and liquidity risk. Can be reduced through diversification. |
| Capital Risk | also known as principal risk, the risk that the investor will lose all invested capital because of the circumstances either related or unrelated to an issuer's financial strength. |
| Business risk | associated with the specific circumstances of any particular company, such as possible obstacles and threats to achieving the company's financial goals, as they might affect the price of that company's securities. Includes market share |
| Credit risk | the risk that an issuer may not be able to meet interest or principal payments on fixed income securities. Associated with the specific circumstances of any particular company. |
| currency exchange risk | foreign investments may be impacted by changes in currency exchange rates. Securities affected by this include international stocks, ADRs, and foreign bonds |
| Inflation Risk | aka purchasing power risk. the value of money may decrease as inflation causes purchasing power to shrink. All fixed income securities are subject to this, with the greatest impact on bonds with longer maturities (treasury bonds) |
| Interest rate risk | loss in the value of an asset due to changes in interest rates. They directly affect the market value of fixed income securities. Longer maturities are at greater risk of this than short-term maturities |
| Liquidity risk | the risk that an investor may sustain a loss if a security must be liquidated. This risk increases as the quantity of securities decreases. The more volatile an investment is, the higher of this risk. |
| Political risk | the risk that a particular investment might suffer due to political changes, such as those related to governments and political parties, military control, and legislative bodies. Securities issued in countries with unstable governments carry this risk. |
| Prepayment risk | the risk that a borrower will repay the principal on a loan before its maturity date, particularly if interest rates drop. The investor (lender) might lose the stream of income generated by the loan or bond. |
| extension risk | if rates rise, maturities might lengthen because homeowners would be less likely to refinance. Consequently, the investor would receive the principal LATER than expected.q |
| Reinvestment risk | if interest rates have fallen, the income produced by the currently available bond yields may be much less upon maturity |
| defensive strategy | an investor who typically invests in instruments that are not as susceptible to market fluctuation or risk of principal. An example is an investment in short-term instruments such as money market instruments |
| defensive stocks | securities in industries that are likely to perform steadily in spite of changes in the economic cycle. Examples are consumer goods that satisfy basic needs such as food, clothing, toiletries, and utilities. |
| Cyclical Stocks | perform in line with economic cycles- they do well during expansionary phases and poorly during contractions. Examples include durable goods such as cars, appliances, and construction related materials and equipment. |
| Aggressive strategy | Investors that invest in more volatile industries like tech or biotech. or in less developed or emerging growth countries that are less stable politically. Investors with this strategy are not concerned with short-term price fluctuations. |
| Risk | can be reduced through diversification, portfolio rebalancing and hedging. |
| Diversification | strategy that reduces risk by spreading investments among different companies, industry sectors, geographic areas, and market. It is done to avoid excessively weighting a portfolio in any one asset class, market sector, or security. |
| Asset allocation | an investment strategy that seeks to reduce risk by spreading investments over 3 basic asset classes- stocks, bonds, and cash equivalents |
| Rebalancing | the process of realigning a portfolio to match its original asset allocation mix. This is done by taking profits on or selling those securities, industry sectors or asset classes that have appreciated and now represent a larger portion of the portfolio |
| Hedging | strategy used to protect their investments against loss and to control risk. It involves reducing the risk associated with an investment by using a second investment to offset a potential loss on the first. |
| Protective put purchase | protects a long stock position by purchasing puts on the stock that is owned. |
| Protective call purchase | protects a short stock position by purchasing calls on the short stock |
| Market order | a security purchase or sale order where no price is specified. The firm must execute the order right away. |
| priority | the trade that gets there first gets filled first |
| precedence | the larger order will get filled first if they arrive at the same time |
| parity | coin toss |
| limit order | an order to buy at or below a specified price, or to sell a stock at or above a specified price. They are not guaranteed. |
| Stock ahead | market orders are filled first and prevent the execution of a limit order |
| Stop & stop limits | instructions that indicate if a stock goes down or up to a specified price, then an order is entered |
| sell stop orders | are bearish and are placed below the market. If a stock goes down to the stop price, the stop is triggered, and the order becomes a market order. |
| buy stop orders | are bullish and are placed above the market and are executed at or above stop price. when the market hits the order price, releasing the stop, the order is executed at the next trade. |
| Good til canceled (GTC) | order remains in effect until filled or cancelled by the customer |
| all or none or day order | must be filled by the end of the trading day or it is cancelled |
| immediate or cancel (IOC) | must be filled immediately with as many shares as are available, unfilled shares are cancelled |
| Fill or Kill (FOK) | must be filled immediately and entirely, or the whole order is cancelled |
| discretionary trade | any trade in which the registered representative chooses one or more of the following: Asset (security), action (buy or sell) or Amount (in shares or dollars) |
| Solicited Trade | a trade in which the broker initiates the trade by contacting the customer with a buy or sell recommendation |
| unsolicited trade | a trade in which the customer initiates the trade. |
| Bid price | the price at which the customer can sell the shares, and the highest price that the dealer is willing to pay for a security |
| Offer/ask price | the price at which the customer can buy shares, and the lowest price that the dealer is willing to accept when selling the security |
| trading spread | the difference between the bid and the offer |
| Best execution | Requires member firms to use reasonable diligence in routing a customer to the best market to execute a trade so that the customer receives the best possible price |
| Interpositioning | prohibited action, members may not introduce a 3rd party between the member and the best market for a security unless the order cannot be executed directly with the market. This applies to both agent & principal transactions |
| commission | a broker/dealer acting as an agent charges this |
| markup | a broker/dealer acting as a dealer or principal buys and sells from its own inventory and charges this |
| markdown | when the firm buys and places a security into its own inventroy |
| principal trade | one executed for a client from the inventory held by the firm |
| Long a stock | when an investor owns the shares |
| short a stock | when an investor sells a stock that he does not own |
| Naked option | the investor does not own the underlying stock |
| covered option | underlying shares are owned by the investor |
| Bullish | investors expect the value of a security or the market to appreciate and would likely buy. Includes call options |
| Bearish | investors expect the value of a particular stock or the market to decline and would likely sell. Includes put options |
| Realized gain | the capital gain an investor earns on an investment when the security is sold. they have tax implications for investors |
| unrealized gain | the appreciation in the value of a stock holding that has not yet been sold. It is also called a paper gain. They are not taxable until the security is sold and the gain is realized. |
| dividends | common & preferred stockholders are owners in a corporation & receive these typically on a quarterly basis. They are paid out of retained earnings which represent the profits of the business |
| interest | bond investors receive this when coupons are paid by the issuer, generally semiannually. Bondholders are lenders & collect this from the issuer of the bond |
| total return | includes gains & losses from the sale of a security, plus dividends. |
| Return on investment (ROI) | a performance metric that measure the gain or loss generated on an investment relative to the amount of money invested. It is expressed as a % |
| cost basis | equal to the original price paid for a security, plus sales charges or commissions. |
| capital gain | securities sold for more than their cost basis |
| capital loss | securities sold for less than their cost basis |
| specific identification (share identification) | allows the investor to specifically choose the shares that have the most favorable cost basis. In order to use this method, the investor must have supporting documentation. |
| First in, First out (FIFO) | The first shares purchased are the first shares sold. Best option for IRS, and worst for investor. |
| weighted average method | the investor calculates an average cost per share., which ends up being the sale price. Used in mutual fund shares. |
| inherited securities | the cost basis is the net asset value of the shares on the day of the owner's death. it is stepped up, or stepped down, to the fair market value of the securities on the day of death. The holding period is considered long term |
| gifted securities | if the current market value is higher that the donor's cost basis, the recipient's cost basis is = to the donors original purchase price. |
| gift tax | it is paid by the donor if the value of this security exceeds $16,000 |
| Charitable donations | not subject to gift tax. It is deductible on a donor's tax return, as long as the security was held for more than 1 year. The donor is not required to pay capital gains tax on the appreciated value of the security. |
| benchmark | a standard that can be used to analyze performance. They are typically indices, either single index or an index construct. |
| Trade Date | the customer gives a purchase order to his broker/dealer. The broker/dealer enters into a trade agreement w/ another broker/dealer to fill the customers order. It is legally binding. The 2 broker/dealers agree on a share quantity & price |
| settlement date | the broker/dealers consummate the terms of their agreement, which is legally binding. They exchange securities & cash. The buyer becomes the legal owner of the securities. The buyers name is recorded & the sellers name is removed. |
| sellers option | gives the seller the option to deliver the security during any time period ranging from 6-60 business days. It is a negotiated settlement and locks in the right to buy & sell the security @ a specific price. |
| Book entry form | securities issued by the treasury department exist only as electronic records on computers without physical certificates of ownerships. |
| custodian | charged with the safekeeping of the fund's securities, and maintain a record of share ownership. |
| corporate action | an event that may affect a company's securities and, by extension, its shareholders and bondholders. They are generally approved by the issuers board of directors and may involve shareholder participation. |
| Mandatory | when shareholders have no choice, they must participate. includes stock splits, spinoffs, mergers and acquisitions |
| Mandatory with options | Event is mandatory and shareholders must participate but are given options. Example is dividend payout with a choice between a cash or stock dividend |
| voluntary | shareholders are permitted to make a choice by sending an instruction. They may also choose to take no action, leaving their securities unaffected by the corporate action. Includes buybacks, tender offers, and rights issues. |
| stock splits | stock distributions of more than 25% of the outstanding stock and are shown as an accounting adjustment to the par value of the outstanding shares. This is done by corporations to make their shares more marketable. They are voted on by the shares. |
| Reverse stock split | increases the value of the shares by reducing the # of shares proportionately. Each outstanding share of the company is converted into a fraction of a share. Used when the value of the shares is low & investors are leery of purchasing low valued shares. |
| stock dividend | an alternative to cash dividends. When they are issued, the #of shares increases & the price per share or cost basis goes down. It allows a corporation to save cash for future growth. |
| buyback | a repurchase by a corporation of its own stock in the open market. It decreased the # of shares outstanding & impacts all per share ratios. Earnings per share would increase due to the lower # of shares. |
| tender offers | a formal offer to the existing shareholders to purchase their stock at a price above current market value. They are frequently hostile takeovers. The shares must be delivered net long to the tender. |
| Net long | the investor has the ability to deliver the shares. |
| exchange offer | an offer by a corporation to exchange one security, such as a bond or preferred stock, for another security, such as common stock. |
| Rights offering | allows existing shareholders to maintain the same % of ownership in a corporation when new shares are issued. These shares are usually offered at a discount to market price and are typically short term. |
| merger | 2 corporations reach an agreement to combine their businesses and become one entity. The stock of both corporations is surrendered, and new stock is issued. Shareholders may receive stock, cash or a combination of both. |
| acquisition | one corporation purchases the stock of another corporation and becomes the new owner. Only the shares of the purchasing corporation continue to trade. |
| Rule 145 | addresses mergers and acquisitions, substituting one security for another and transferring assets from one person to another. It exempts stock splits, changes in par value and stock dividends from filing a registration statement. |
| Market manipulation | prohibited activity that includes spreading false or misleading information about a company, improperly limiting the # of publicly available shares, and rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. |
| Backing away | a market maker does not honor a published quote (bid or ask price) |
| Bear Raiding | a trader or group of traders attempt to push down the price of a security by heavy selling or short selling |
| excessive trading (churning) | a broker engages in excessive buying and selling of securities in a customers account to influence the price of a security or to generate commissions. |
| Free riding | a customer buys shares and then sells them before paying for the original purchase |
| Front running | this occurs when a broker buys a stock for its account in front of a large (or block) trade or trades ahead of customer orders |
| Market rumors | involves spreading false or misleading information about a company to impact the price of a security. |
| Marking the close | The practice of attempting to influence the closing price of a security by executing purchase or sale orders at or near the close of normal trading hours. |
| Marking the open | involves entering a trade when the market opens to influence the price of a security |
| Painting the tape | traders buy and sell a security among themselves to create an artificially high level of activity that doesn't exist in order to influence the price of a stock |
| Pump and dump | Artificially increasing the price of a stock, by making positive statements that are false and misleading, in order to sell the stock at a higher price. |
| Insider | a director, officer, or owner of 10% or more of the stock of a corporation. They are required to notify the SEC within 10 days of assuming this position. |
| Insider trading | the use of information that is unavailable to the general public, material nonpublic information, for the purposes of manipulating or exploiting a market opportunity. It is prohibited by law. |
| Material nonpublic information | information that would affect the market value of a security and has not yet been disseminated to the general public. |
| Chinese Walls | internal procedures that limit and control the passing of potentially sensitive, nonpublic information between departments of a firm |
| Treble damages | a civil penalty that is 3x the profit gained or the loss avoided from the use of inside information. |
| contemporaneous trader | makes a trade without the same information as an investor with inside information, the trader is at a disadvantage and can file a lawsuit for damages against the person who is in violation of insider trading rules. |
Created by:
emulligan