SIE Exam Study Guide with Verified Solutions

SIE Exam Study Guide with Verified Solutions purpose of securities industry - Answer️️ -matching investors with money to issuers that need that money to finance issuer - Answer️️ -legal entity that sells securities in order to finance its operations (business, governments) ie. us treasury, us gov agencies, foreign governments, state and local governments, corps, banks methods issuers use to raise capital - Answer️️ -1) issue debt securities (bonds) and 2) issues equity securities (stocks) debt securities - Answer️️ -publically traded loans = bonds, notes, or debt instruments. The person loaning money/buying a bond is considered a creditor to the issuer and the amount they paid for is the principal that the issuer owes them and also makes interest payments throughout the duration of the loan -can be issued by banks, corps, etc equity securities (common vs preferred) - Answer️️ -raise capital by issuing stock (equity), this time when you buy this, you have ownership in the company and if the company is profitable then you may be entitled to a portion of the profits (this is received through dividend distribution). differs from bonds bc 1) typically no maturity date and 2) dividend payments are optional TITLE: EMILLYCHARLOTTE 2024/2025 ACADEMIC PERIOD OWNER: EMILLYCHARLOTTE COPYRIGHT STATEMENT: ©2024 EMILLYCHARLOTTE. ALL RIGHTS RESERVED FIRST PUBLISHED: SEPTEMBER 2024 2/259 -only banks/corporations sell these and can do so publically or privately to specific group of investors preferred=paid a predetermined dividend (usually received first and higher than those of common holders, but don't get a vote in company matters) common=paid a dividend based on company fortunes broker dealer = brokerage firm (2 capacities) - Answer️️ -2 capacities 1) broker= (ABC - agency, broker, commission)engages in agency transactions in security accounts of others. they match up buys and sells and earn a commission for their work (like a real estate broker, acting on behalf of customers to make commission). no risk to firm, they find party willing to take other side of trade 2) dealer= (PDM - principal, dealer, markup/markdown) firms buying and selling securities for its own accounts. buy securities from clients and hold them in inventory and allow clients to buy from them. like a car dealer... buys for its inventory and sells from its inventory and can mark up and down accordingly. acts as principal and can take other side of the trade, MARK UP OR MARK DOWN -risk & Inventory broker-dealer departments/structure of firms (5) - Answer️️ -1) investment banking 2) research TITLE: EMILLYCHARLOTTE 2024/2025 ACADEMIC PERIOD OWNER: EMILLYCHARLOTTE COPYRIGHT STATEMENT: ©2024 EMILLYCHARLOTTE. ALL RIGHTS RESERVED FIRST PUBLISHED: SEPTEMBER 2024 3/259 3) sales/private client 4) trading 5) operations broker dealer - Investment banking - Answer️️ -referred to as underwriters of securities... they provide advise to issuers in who are looking to issue stocks, bonds, or a combo (structure/arrange security offerings) also can assist with M&A or restructuring for bankruptcy broker dealer - research - Answer️️ -analysts!! study market and issuers to make reccomendations (buy, sell, hold) broker dealer - sales (stock or bond brokers aka registered representatives RR or investment advisor representatives IAR) - Answer️️ -financial professionals who market bonds, stocks, but also packaged products such as mutual funds to people and institutions broker dealer - trading - Answer️️ -execute trades for the firm and the firm's clients and occur in electronic market places NASDAQ or hybrid ones such as NYSE broker dealer - operations - Answer️️ -make sure things are up to standard (paperwork, trades, etc) also generate statements, etc info barriers - Answer️️ -barrier where info shouldn't be shared with other side/other departments (investment banking on one side and research, sales/private client, trading, ops on the other) market maker - Answer️️ -**applies to equity not bonds** TITLE: EMILLYCHARLOTTE 2024/2025 ACADEMIC PERIOD OWNER: EMILLYCHARLOTTE COPYRIGHT STATEMENT: ©2024 EMILLYCHARLOTTE. ALL RIGHTS RESERVED FIRST PUBLISHED: SEPTEMBER 2024 4/259 when broker dealer decides to display quotes on a trading system indicating they want to buy and sell at specific prices... required to do so on a REGULAR basis. stands ready to buy and sell at any given time -maintain inventory -these market makers are two sided... indicating a price they are willing to sell at (ASK/OFFER) and buy at (BID) -usually a min of 100 shares at those prices=ROUND LOT odd lot=anything but groups of 100 shares spread (ask, bid, etc) - Answer️️ -spread=difference between ask and bid price=profitability of market maker, larger the spread=more MM makes bid=what firm will buy at/what client sells at ask=what firm will sell at/what client buys at -more actively traded securities tend to have more narrow spreads **markup (sell price/ask)/markdown (buy price/bid) is in addition to the spread comp for broker dealer, investment advisor, - Answer️️ -1) broker dealer receives $ bc of transaction based compensation (broker receives commission) 2) investment advisor charges fees for managing portfolio, usually based on assets under management traders --> proprietary trading - Answer️️ -trade for the firm without setting price markers like a market maker = no quotes entered. simply execute trades on the quotes made from a market maker TITLE: EMILLYCHARLOTTE 2024/2025 ACADEMIC PERIOD OWNER: EMILLYCHARLOTTE COPYRIGHT STATEMENT: ©2024 EMILLYCHARLOTTE. ALL RIGHTS RESERVED FIRST PUBLISHED: SEPTEMBER 2024 5/259 investment advisor vs broker dealer - Answer️️ -broker-dealers earn commission for executing trades while investment advisors charge fees for providing advise to their clients (based on % of assets under management AUM) and are charged whether trades are executed or not municipal advisors - Answer️️ --provides advice to or on behalf of municipalities (state, city, council) usually the issuer. usually related to municipal finance offering -municipal advisor is an entity that advices municipalities on bond offerings (middle man between municipality itself and broker firm (underwriter potentially) types of investors (4) - Answer️️ -retail, accredited, institutional, QIB retail investors - Answer️️ -(any investor that is not an inst. advisor) regular individuals with regular accounts buying stock and bonds from broker-dealers with limited assets/income accredited investors (what are the qualifications) - Answer️️ -these are people with more assets/income and can assume more risk. These includes directors, exec officers, firms, and individuals with assets/net worth over 1 mil (not including prim. residence), or those who make 200k (or 300k with spouse) each year and have for the lsat two and expect to continue making that much -can be individuals and inst. institutional investors - Answer️️ -large investors that pool money to purchase securities (banks, insurance companies, pension plans, endownments, hedge funds which are referred to as qualified institutional buyers (QIBS) TITLE: EMILLYCHARLOTTE 2024/2025 ACADEMIC PERIOD OWNER: EMILLYCHARLOTTE COPYRIGHT STATEMENT: ©2024 EMILLYCHARLOTTE. ALL RIGHTS RESERVED FIRST PUBLISHED: SEPTEMBER 2024 6/259 -defined by value of assets invested, usually not individuals QIB (3 qualifiications) - Answer️️ -QIBS=qualified institutional buyers criteria --QIB=qualified inst. buyer=entity that must own/invest $100 million of securities & CANNOT be a natural person 1) certain types of investors qualify (NEVER WILL BE AN INDIVIDUAL): insurance companies, registered investment advisors or companies, small business development companies, private/pension plans, certain bank trust funds, corps, some non-profit, etc 2) must manage over 100 mil of securities unrelated to them 3) must be purchasing for their own account or account of another QIB primary market - Answer️️ -where securities are issued, new company issuing stock for ex. beginning of a shares existence = primary distribution of issuers shares. funds are directed to the issuer secondary market - Answer️️ -where securities are traded: those who bought those in the primary market will want to sell them and this is where the secondary market comes into play. funds are no longer directed to the issuer, and instead pass between investors -sells securities with help of underwriter -issuer (needs capital)--> underwriter (facilitates distribution/buys from issuer/resell to investor)--> investor IPO/follow-on - Answer️️ -IPO=initial public offering, primary market, sell some % of the co. and safe some to sell later on usually TITLE: EMILLYCHARLOTTE 2024/2025 ACADEMIC PERIOD OWNER: EMILLYCHARLOTTE COPYRIGHT STATEMENT: ©2024 EMILLYCHARLOTTE. ALL RIGHTS RESERVED FIRST PUBLISHED: SEPTEMBER 2024 7/259 follow-on=existing company sells equities @ a later date=subsequent offering markets within the secondary market (2) - Answer️️ -exchange market, dealer-to- dealer market 1) exchange market= electonric of phsysical (NYSE- has one DMM) centralized trading venue that functions as an auction, auctioneer who controls trading in a given stock is DMM (designated market maker) 2) dealer to dealer market= when stocks don't quality for physical or electronic markets they trade over the counter (OTC, usually low priced/thinly traded, done between two parties without the supervisory role of an exchange) people connect over phones or computers, usually less trading acivity than Nasdaq. most bonds (non-equities) are traded in the OTC market (no organized exchanges aside from certain bonds). securities that are traded over the counter are traded in a dealer to dealer market. for companies that cannot meet requirements to trade on larger/more centralized exchanges. in otc market, spread between bid and ask is larger, usually smaller co since it is timely and expensive ot get on exchange -NASDAQ (has several market makers), is a dealer market but not considered OTC exchanges - Answer️️ -NYSE (where trading is