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FBLA Securities and Investments

Topic: Investment Fundamentals

1. Terminology
Private Placement: the nonpublic sale of securities
Venture Capitalist: firm specializing in investing in securities, especially stocks of
small, emerging companies
Investment Banker: a middleman who sells a company’s securities to the public
Underwriting: a company sells the security to an investment banker who in turn
sells to the public
Originating House: investment banker who makes the original underwriting
agreement
Syndicate: group of brokerage house formed by the originating house to sell the
security
Preliminary Prospectus: initial document that describes the condition of the firm
issuing a new security; filed with SEC
Shelf-Registration: a document submitted to the SEC when a security is to be issued
after the company’s initial offering
Over-the-Counter: market for unlisted securities not on NYSE, AMEX, etc.; NASDAQ
(National Association of Securities Dealers Automated Quotation system) is example
Dealer: anyone who buys or sells for his own account; for OTC-market makers; for
listed securities-specialists
Round Lot: a normal unit of trading, usually 100
Odd Lot: a unit of trading less than the round lot, ex: 23
Bid and Ask: prices at which a security dealer offers to buy and sell stock
Spread: the difference between the bid and ask prices
Long Position: owning assets for income and possible price appreciation
Bullish: when a person thinks a stock’s price will rise
Short Position: bearish; expecting the price of a stock to fall
Orders
Market Order: order to buy or sell at current price
Limit Order: order to buy when stock reaches a certain price
1. Day Order: expires at end of the day
2. Good-Till-Cancelled Order: lasts until cancelled
3. Stop Order: limit order to sell after a stock is purchased
Confirmation Statement: statement received from broker detailing the buy/sell
transaction
Margin: process by which a broker loans part of the required finds to the investor
Margin Requirement: the portion the investor is required to pay
Maintenance Margin: the minimum equity that in investor must have in a
margin account
Street Name: leaving a security in the brokerage firm’s name, rather than the
investor’s
Discount Broker: broker who charges lower commissions but offers fewer services
Short Sale: a contract to buy a stock in the future at a lower price; stock is borrowed
from broker and sold at high price and when the price drops, you purchase stock
and give it back to the broker
Uptick Rule: the last change in a stock must be positive in order to do a
short sale

2. Savings

3. Stages of investing and relationship between risk and return

4. Sources of financial information to make investment decisions

Topic: Investment Wrappers, Taxation, and Trusts

1. Individual savings accounts


IRA: tax deferred contributions
Roth IRA: contributions are already taxed, but are never taxed again
401(k): employer sponsored tax-deferred account; often matched by employer
Roth 401(k): contributions are already taxed as income but are never taxed again
SIMPLE IRA: tax deferred; offered by some small companies
SEP IRA: for self-employed individuals; tax deductible; higher maximum contribution

2. Pensions

3. Tax

4. Investment bonds

Topic: Investment Product & Funds

1. Loans

2. Mortgages

3. Life Insurance

Whole Life Insurance: payments are made for the rest of the policyholders life, and
the beneficiaries receive a lump sum death benefit upon his/her death; portion of
premium goes into an investment portion and can be deducted or borrowed against
according to the terms of the plan
Universal Life Insurance: like whole life insurance, except premiums, investment
amounts, and death benefit may be changed to suit the policyholder’s needs
Variable Life Insurance: part of the premium is invested in the company’s portfolio
and may affect the death benefit
Variable Universal Life Insurance: monetary amounts can be adjusted and
policyholders can choose what to invest in; classified as securities, regulated by SEC
Term Life Insurance: covers in case of death for a set period of time; does not build
cash value
4. Unit Investment Trusts

Act like mutual funds but contain only bonds

5. Opened ended investment companies

6. Pricing, dealing, and settlement

7. Investment trusts

8. Hedge funds

Topic: Stock Market

1. Explain how stock market benefits investors and companies


Broker: agent who handles buy and sell orders for an investor
Registered Representative: a broker; must pass exam by the National Association of
Securities Dealers

2. Read stock tables for investment related information

YTD-Year to Date Change: change from start of the calendar year


HI/LO-highest and lowest prices during last 52 weeks
STOCK/SYM-name and symbol of stock
DIV-annual dividend paid during previous 52 weeks
YLD%-the dividend divided by the price of the stock
PE-ratio of the price of the stock to the company’s per-share earnings
VOL 100S-number of shares in hundreds traded during the day
LAST-closing price of the stock

3. Options for handling accumulated money/earnings

4. Types of investments

5. Primary vs secondary markets

Primary Market: initial sale of a security; ex: IPO


Secondary Market: market for buying and selling previously issued securities

6. Bull, bear, and pig markets

Topic: Stock versus Other Investments

1. Compounding

2. Purpose of company

3. Describe ethical behavior in support center.


4. Gathering relevant information

5. Financial statements

6. Terminology

Topic: Mutual Funds

Also called open-end investment companies; large collections of diverse investments


that is divided among investors

1. Understanding total return

2. Mutual funds and taxes

Have pass through status-the investor pays taxes, not the fund
Mutual funds are often tax-inefficient because investors cannot decide when to
liquidate assets

3. Purchasing mutual funds

4. Investment in mutual funds

5. Fund costs

Front-End Load: commission is paid when shares are purchased


Back-End Load: commission is paid when shares are sold
Operating Expenses: small fees paid periodically during the period of ownership;
automatically deducted
12b-1 Charges: additional fees that can be used for educational publications or broker
commissions; automatically deducted

Topic: Basics of Bonds

Bond: a long-term liability with a specified amount of interest and specified maturity
date
Principal: the amount owed; the face value of the debt
Maturity Date: the time at which a debt becomes due and the principal must be
returned
Interest: payment for use of money
Coupon Rate: the specified interest rate on a bond
Current Yield: amount earned annually; annual income divided by the current price
of the security
Yield to Maturity: amount earned on a bond from the time it is acquired until the
maturity date
Indenture: a legal document specifying the terms of an issued bond
Default: failure to meet any of a creditor’s conditions
Trustee: an appointee, often a commercial bank, responsible for upholding the
terms of the bond
Registered Bonds: registered in buyer’s name
Bearer Bonds: the person who owns the bond is the owner; not registered in the
owner’s name; also called coupon bonds because there are coupons that must be
detached and turned in for payment; no longer issued
Moody rates Aaa, Aa, A, Baa, Ba, b, Caa, Ca, C and 1-3 within each rating
Standard and Poor’s rates AAA, AAA, A, BBB, BB, B, CCC, C, D with + or –
Flat: a bond not currently paying interest
Sinking Fund: a method of paying off bonds in which a portion of the bonds are paid
periodically; followed by a large final payoff called a balloon payment
Call Feature: the ability to retire a bond before the maturity date
1. Bond duration
The longer the bond takes to mature, the higher the interest rate.
2. Buying bonds
Can be purchased through brokers
They are listed on the NYSE and American market or can be purchased over the
counter
Interest is paid twice per year, so the new owner must pay the seller the interest
accrued while the bond was in his possession

3. Process of issuing bonds

4. Roles of collateral

5. Secured and unsecured bonds

Secured: the debtor puts up collateral


o Mortgage Bond: funds are raised to buy an asset that is then put up as
collateral
o Equipment Trust Certificates: secured by assets with certain resale
prospects, such as airplanes
Unsecured: a bond without collateral
o Debenture: a general unsecured bond
o Income Bonds: interest is paid only if the issuer earns a certain amount
o Convertible Bonds: may be converted into common stock
o Variable Interest Rate Bonds: the interest rate may change, often tied to a
Treasury rate
o Zero Coupon Bond: sold at price lower than face value, but all interest is
paid at maturity
o Eurobonds: a bond issued abroad using US dollars
Other Bonds
o Split Coupon Bonds: little or no interest is paid for the first part of the term,
followed by a high rate
o Reset Bond: the coupon (interest rate) changes periodically
o Increasing Rate Bond: the interest rate may increase
o Extendible Security: the maturity date may be postponed
o Serial Bonds: a portion of the bonds mature each year

6. Introduction to government bonds


7. U.S. government agency bonds and savings bonds

EE Bonds: savings bonds; most widely held; now called Patriot Bonds; interest
changes twice a year; cannot be traded
Treasury Bills: less than a year; no risk; auctioned off
Treasury Notes: mature in one to ten years
Treasury Bonds: matures in over 10 years
STRIPS: government-issued zero coupon bonds
TIPS: an inflation-indexed security; the principal may change as the Consumer Price
Index (the rate of inflation) changes
Federal Agency Bonds: issued by government created corporations, not the federal
government itself
Ginnie Mae Bonds: issued by the Government National Mortgage Association; the
debt is used to provide mortgages; holders are paid monthly and payments may
vary depending on payments made by people who have taken out the mortgage;
Fannie Mae and Freddy Mac work the same way
Municipal Bonds: issued by a state or local government; federal tax-exempt

Topic: Derivatives

Derivatives: security whose value is based on another underlying asset


1. Futures
Futures Contract: an agreement for the future delivery of a commodity at a
specified date
Open Interest: the number of futures contracts in existence for a particular
commodity

2. Options

Option: the right to buy or sell something at a specified price within the specified
time period; a stock is instantly sold and bought
Excise (Strike) Price: the price at which the investor may buy or sell stock through an
option
Expiration Date: the date by which an option must be exercised
Call Option: an option sold by an individual that entitles the buyer to purchase stock
at a specified price within a specified time period
Put Option: an option to sell a specified price within a specified time period
Intrinsic Value: what an option is worth as a stock; the difference between the price
of the stock and the call’s share price
Arbitrage: simultaneous buying and selling of a commodity in different markets to
make a profit
LEAPS: options that last up to three years

3. Swaps

Swap: an agreement between two parties to exchange cash flows


Plain Vanilla Swap Example: Company A agrees to pay Company B 5% on $10 million
each year for 10 years. Company B agrees to pay Company A LIBOR+1% on $10
million each year for ten years.
o LIBOR: London Interbank Offer Rate-the interest rate offered by London
banks on deposits made by other banks within the Eurozone

4. Derivative uses

Topic: Financial Services Regulation

1. Financial Services & Markets Act


Securities Act of 1933: new securities must be registered with the SEC
Securities Exchange Act of 1934: created the SEC; forbids market manipulation and
fraudulent practices; public corporations must keep current information on file with
SEC
Sarbanes-Oxley Act of 2002: created Public Company Accounting Oversight Board;
addressed conflicts of interest, corporate responsibility and fraud, and public
disclosure
Investment Advisors Act of 1940: regulate people compensated for providing advice
about securities; must register with SEC and disclose backgrounds, compensation,
etc.
Securities Investor Protection Corporation: agency that insure investors against
brokerage firm failures; created by Securities Investor Protection Act in 1970;
equivalent of FDIC; protects up to $500000, including $250000 in cash
SEC’s Regulation FD (Fair Disclosure): prohibits firms from divulging information to
one group before another

2. Financial Crime

3. Insider dealing and market abuse

Full Disclosure Laws: federal laws requiring publicly held companies to disclose any
financial or other information that may affect the value of their stock
Blue Sky Laws: state laws to prevent securities fraud

4. Data Protection Act 1998

5. Breaches, complaints, and compensation

Types of Risk

Pure Risk: the only possibilities are loss or no loss; Ex: your motorcycle is stolen or it isn’t
o Personal Risk: risks that directly affect the individual
o Liability Risk: the responsibility to pay for damages you do on another party’s
property
o Property Risk: risk that affects a person’s property
Speculative Loss: the outcomes are loss, gain, or break even; Ex: gambling, investing in
stock, starting a business; not insurable
Fundamental Risk: a non-discriminate risk that occurs from a natural cause, rather than
a specific party; Ex: war, weather, political or economic instability
Particular Risk: affects only a certain individual; Ex: your motorcycle is stolen
Static Risk: losses that occur by a person’s misdoing, rather than a change in the
economy
Dynamic Risk: brought about by a widespread change in the economy

References:

Career Cluster Resources for Marketing, Sales & Service. 2008. National Association of State Directors of
Career Technical Education Consortium. Washington, DC

Career Cluster Resources for Business, Management and Administration. 2008 National Association of
State Directors of Career Technical Education Consortium. Washington, DC

Customer Service Representative Competencies, 2011. HDI-SCA Certification Standard

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