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 syndicate

 2) 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 exchange

2) Second market= unlisted securities trading OTC
3) Third Market= Listed security trading OTC
4) 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