Securities Industry Essentials Exam QuickSheet
KNOWLEDGE OF CAPITAL MARKETS
Types of Capital Markets
■■ Primary: issuers sell securities to raise
capital.
■■ Secondary: transactions between investors.
Types of Offerings
■■ Public securities offering: securities sold to
the general public.
■■ Private securities offering: securities sold to
private investors.
■■ Primary offering: proceeds go to the issuer.
■■ Initial public offering (IPO): an issuer’s
first distribution of securities to the public;
proceeds go to the issuer.
■■ Additional primary offering (APO): a
distribution of securities to the public after
an IPO; proceeds go to the issuer.
■■ Split (combo) offering: part of the proceeds
goes to the issuer and part goes to existing
shareholders.
■■ Secondary offering: proceeds go to existing
stockholders.
Market Centers (Secondary Market
Transactions)
■■ Exchanges: physical location, an auction
market with designated market makers,
listed securities.
■■ Over-the-counter (OTC): decentralized,
trades between market makers (dealers).
■■ Third market: exchanged-listed securities
trading OTC.
■■ Fourth market: trading between
institutions via electronic communications
networks (ECNs).
Types of Broker-Dealers
■■ Carrying (clearing) firm: carries customer
accounts; accepts funds and securities.
■■ Introducing (fully disclosed) firm:
introduces its customers to a clearing firm.
■■ Prime BD: handles custody of securities
and other services utilizing other BDs for
execution services.
Business Cycle—Four Stages
Peak, contraction, trough, expansion.
Economic Policy
■■ Monetary: policies enacted by the Federal
Reserve Board to influence the money
supply (e.g., Friedman).
■■ Fiscal: policies enacted by Congress and
the president to influence the demand for
goods and services (e.g., Keynes).
■■ Supply-side: prices determined by market
forces where sellers of goods will price them
to meet demand and remain profitable.
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Interest Rates
■■ Federal funds: the rate fed. member banks
charge each other for overnight loans.
■■ Prime: the rate large U.S. money center
banks charge their best corporate customers.
■■ Discount: the rate charged by the FRB for
loans to depository institutions.
■■ Broker call loan: the rate banks charge
broker-dealers for funds borrowed to lend
to margin account customers.
PRODUCTS
Equity
■■ Common stock: issued to raise capital;
provides investor’s growth.
■■ Preferred stock: issued to raise capital;
provides investor’s income. Preferred share
types:
–– Straight (noncumulative): missed
dividends are not payable.
–– Cumulative: missed dividend (dividends
in arrears and current preferred dividends
must be paid before common).
–– Callable: issuer may buy back shares after
a specified date at a specified price.
–– Participating: issuer may pay more than
stated dividend.
–– Adjustable rate: dividend tied to another
rate (e.g., T-bill rate).
■■ Rights and warrants:
–– Rights: available to existing shareholders,
short term, exercise price below CMV.
Opportunity for existing stockholders to
maintain percentage of ownership.
–– Warrants: offered with other securities,
sold as units (e.g., bond with warrant
attached), long term, exercise price above
CMV when issued (anticipated value
with time).
■■ Real estate investment trusts (REITs):
–– Traded on exchanges or OTC.
–– Provide liquidity for real estate investors.
Debt Securities (Bonds)
Bond maturities:
■■ Term: entire issue matures on one date.
■■ Serial: issue matures over a period of years.
■■ Balloon: a repayment schedule over a
period of years having the largest number of
bonds maturing at the final maturity date.
Bond features:
■■Callable:
–– Issuer can buy back bonds as of a
specified date prior to maturity at a
specified price.
–– Issuer will call bonds in anticipation of
current interest rates falling. “When rates
fall, expect a call.”
–– Allows issuer to lower the cost of
borrowing.
■■ Puttable:
–– Investor can put bonds to the issuer as
of a specified date prior to maturity at a
specified price.
–– Investor will put bonds back in anticipa-
tion of current interest rates rising.
–– Allows investor to reinvest at higher
current rates.
■■ Convertible:
–– Allows investor to convert debt
instrument to equity (stock).
Par Value and Bond Yields:
■■ Par value: assume $1,000 unless specified
differently.
■■ Bond yields:
–– Coupon, nominal, or stated yield.
Annual interest / par value
Ex: bond pays $60 annual interest
$60 / $1,000 = 6% coupon yield
–– Current yield:
Annual interest / current market value
Ex: bond trading @ $1,200 pays $60
annual interest
$60 / $1,200 = 5% current yield
–– Yield to maturity:
Annualized return if held to maturity.
–– Yield to call:
Return reflecting early redemption and
acceleration of discount gain or premium
loss.
Corporate Debt Securities:
■■ Secured:
–– Mortgage bond: backed by real estate.
–– Collateral trust bond: backed by
other securities the issuer owns
(e.g., government debt).
–– Equipment trust certificate: backed by
equipment used in the issuer’s business.
■■ Unsecured:
–– Debenture: backed by issuer’s full faith
and credit.
–– Subordinated debenture: paid last of all
debt if issuer is in default.
–– Guaranteed bond: guaranteed by a
third party (parent company guarantees
subsidiary’s debt).
–– Income (adjustment) bond: interest
payable only if earned (risky; not suitable
for investors seeking income).
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 –– In-, At-, and Out-of-the-Money (Calls) ■■ Option exercise settlement: settlement for the
Corporate Debt Liquidation Priority: transaction results when an option contract is
In-, Out-,
■■ Secured bonds. Ex: Calls Intrinsic Value exercised will be the same as the underlying
At‑the-Money
■■ Debentures and general creditors. (Accrued security.
40 call, 2 points In-the-money Ex: Equity securities settle T+2; therefore,
Wages and Taxes at this level.)
stock @ 42 2 points when an equity option is exercised, the
■■ Subordinated debentures.
■■ Preferred stock.
40 call, 0 points (stock = At-the-money resulting stock transaction will settle as the
■■ Common stock.
stock @ 40 strike price) underlying equity security settles (T+2). Index
40 call, 0 points Out-of-the or currency option exercises settle in 1 business
Zero Coupon Bonds: stock @ 38 money day (next day, or T+1).
■■ Treasury receipts: issued and backed by
broker-dealers, mature at par. Money Market Securities
–– In-, At-, and Out-of-the-Money (Puts)
■■ Treasury STRIPS: issued by U.S. Treasury, ■■ General characteristics:
In-, Out-, –– Highly liquid.
mature at par. Ex: Puts Intrinsic Value
At‑the-Money –– Generally high quality.
Government Debt Securities—Treasury Bills,
40 put, 3 points In-the-money –– One year or less to maturity.
Notes, & Bonds stock @ 37 3 points ■■ Types of money market securities:

Security Maturity Quoted Callable 40 put, 0 points (stock = At-the-money –– Treasury bills: direct obligations of the U.S.
stock @ 40 strike price) government.
T-bill 1 year or Annualized No
40 put, 0 points Out-of-the- –– Repurchase agreements: raising capital
less % discount
from par stock @ 44 money by selling securities with an agreement to
repurchase at a slightly higher price.
T-note 2–10 years % of par in No ■■ Basic Options Positions –– Banker’s acceptance (BA): short-term time
32nds draft issued by a bank.
Position Premium If Exercised
T-bond 10 years % of par in Yes –– Commercial paper (promissory notes):
Long call Pay out Right to BUY stock
and over 32nds short-term debt issued by corporations to
(Buy) at the strike price
finance immediate needs.
Municipal Debt Securities Short call Receive Obligation to SELL –– Negotiable certificates of deposit (CDs): a
Types of Municipal Bonds (Sell or write) stock at the strike
■■ bank’s version of a promissory note; a CD
price
General Obligation that can be traded in the secondary market.
Revenue Bond Long put Pay out Right to SELL stock
Bond (GO) Direct Participation Programs (DPPs)
(Buy) at the strike price
Backed Issuing municipality User fees (self- ■■ General characteristics:
Short put Receive Obligation to BUY
by (taxes) supporting) –– Business structure that reports to the IRS
(Sell or write) stock at the strike
Voter Required Not required price
but is not taxed as a business entity.
approval –– All tax consequences flow through to
■■ Market Attitude (Bullish or Bearish) partners.
Limits May be subject to May be subject
statutory debt limits to additional Buy Write –– Income is reportable.
bonds test –– Expenses are deductible.
Call Bull ↑ Bear ↓
■■ Types of programs—real estate, oil & gas,
Analysis Tolerance to taxes, Feasibility Put Bear ↓ Bull ↑
based on debt statement, and studies and
and leasing.
debt ratios debt service ■■ Calculating Maximum Loss, Maximum –– Limited partnerships—general and limited
coverage ratio Gain, and Breakeven partners
Note: XP = strike (exercise) price, General Partner Limited Partner
Options CMV = current market value of stock
■■ Standard contracts:
Manages the partnership No management
Posi- responsibility
–– Equity option contract: Attitude Max. Loss Max. Gain Breakeven
tion
1 contract = 100 shares. May appoint others to Passive investors only
–– Premiums: 1 point = $100. Long Bullish Premium Unlimited XP + manage the assets
Ex: 1 XYZ January 35 Call @ 2 premium call paid Premium
Unlimited liability; can Limited liability;
= 2(100 shares) = $200 Short Bearish Unlimited Premium XP + lose more than invested cannot lose more than
–– Intrinsic value: difference between strike call received Premium invested
price and current market value of stock. Long Bearish Premium Breakeven XP – Fiduciary responsibility No fiduciary
Ex: XYZ July 40 Call, XYZ stock trading put paid to zero Premium to partners; can be sued responsibility
@ 43 intrinsic value = 43 – 40 = 3 Short Bullish Breakeven Premium XP – May not compete with No limitations applied
–– Time value: premium – intrinsic value put to zero received Premium the partnership to other investments
Ex: XYZ July 40 Call at 5, XYZ stock
Ex: Long 1 XYZ July 30 Call @ 3
trading @ 43 Investment Company Products
maximum loss = premium paid
intrinsic value = 43 – 40 = 3, time value ■■ Management company: portfolio managed by
= 3(100 shares) = $300
5–3=2 specific objective.
maximum gain = upside potential
formula IV + TV = premium Ex: Growth, income, specialized (banking,
(stock could rise to infinity) = unlimited
■■ In-, at-, and out-of-the-money: an option is technology, geographic area)
BE = XP + premium = 30 + 3 = 33
in-the-money by the amount of its intrinsic
■■ Option transaction settlement: all option
value.
transactions (equity, index, debt, and
currency) settle next business day (T+1).

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 ■■ Open-End (Mutual Fund) vs. Closed-End TRADING, CUSTOMER ACCOUNTS, Ex: 100 shares @ $55 = $5,500
Management Companies
AND PROHIBITED ACTIVITIES After 10% dividend, position becomes:
110 shares @ $50 = $5,500
Open-End Closed-End
Order Types Note: 100 shares × 10% = 10 additional
(Mutual Fund) Company Company
■■ Day orders: cancel any unexecuted portion shares
Continuous primary Number of shares ■■ Stock split:
at end of day.
offering; every share is fixed
■■ Good till canceled (GTC): any unexecuted –– Price of stock adjusts down for split.
an IPO
portion remains working until the last –– Investor receives additional shares.
Prospectus required No prospectus –– Aggregate value remains the same.
trading day of April or October (unless
required after IPO –– Taxable when shares are sold.
renewed).
Can issue common shares Can issue common ■■ Fill or kill (FOK): execute entire order Ex: Even split: 100 shares @ $30 = $3,000
only and preferred immediately or cancel entire order. After 2-for-1 even split, position becomes:
shares; can issue ■■ Immediate or cancel (IOC): 200 shares @ $15 = $3,000
debt instruments Note: $3,000 / 200 shares = $15 adjusted
–– Execute any portion available
Company must redeem Shares are not immediately. stock price
shares redeemable –– Cancel any balance remaining. Ex: Uneven split: 100 shares @ $30 = $3,000
No secondary market After IPO shares ■■ All or none (AON): After 3-for-2 uneven split, position becomes:
trading trade in the –– Execute all if available. 150 shares @ $20 = $3,000
secondary markets –– If entire order cannot be executed, hold Note: $3,000 / 150 shares = $20 adjusted
(exchanges and order as good till canceled (GTC). stock price
OTC) ■■ Market at open: ■■ Reverse stock split adjustment:
Priced by formula, Priced by supply –– Execute at or near the open of the day. –– Price of stock adjusts up for reverse split.
forward pricing: net asset and demand –– Not guaranteed exact opening price. –– Investor will have fewer shares.
value + $ sales charge ■■ Market on close: –– Aggregate value remains the same.
= public offering price –– Execute at or near the close of the day. Types of Settlement
(NAV + $SC = POP) –– Not guaranteed exact closing price. ■■ Regular way (corporate and municipal):
8.5% maximum sales Commissions ■■ Market, Limit, and Stop Orders
trade date + 2 business days (T+2).
charge
Order Entered Concept ■■ Regular way (government): trade date +
■■ Exchange-traded funds (ETFs): Market At the Execute immediately at
1 business day (T+1).
–– Priced by supply and demand throughout ■■ Cash: same day; BD approval required.
(buy or market next available price
the trading day. sell) Account Types
–– Marginable. ■■ Cash: payment in full.
Buy Below Buy at limit price or
–– Low operating costs and expenses. limit CMV better (lower) ■■ Margin
–– Not taxed until shares are sold. Execution not guaranteed –– Borrows up to 50%.
Insurance Company Products Sell Above Sell at limit price or better –– Regulation T—50% initial margin, set by
■■ Fixed annuity: promised stated rate of limit CMV (higher) the Federal Reserve Board.
return; insurance company assumes risk. Execution not guaranteed Margin Account Agreement Forms
■■ Variable annuity: return based on Buy Above Triggered at or above stop Agreement Required Details
investments; annuitant assumes risk. stop CMV price
Execute immediately at Credit Yes ■■ Truth-in-lending
Investment Risks
next available price document
■■ Systematic: ■■ Details all margin
–– Risk that changes in the economy impact Buy Above Triggered at or above stop account requirements
individual investments. stop CMV price and obligations
–– Types of systematic risks: limit Execute at limit price or
better (lower) Hypotheca- Yes ■■ Investor pledges
• Market risk. tion collateral (securities)
Execution not guaranteed
• Interest rate risk. to BD
• Reinvestment risk. Sell Below Triggered at or below stop
Loan Optional ■■ Allows BD to lend
• Inflation (purchasing power) risk. stop CMV price
consent customer securities to
Execute immediately at
■■ Nonsystematic: other customers
next available price
–– Risks that are unique to certain
issuers, industries, or investment types. Sell Below Triggered at or below stop Account Registrations
Diversification reduces nonsystematic stop CMV price ■■ Individual: one beneficial owner.
risk. limit Execute at limit price or ■■ Joint: two or more beneficial owners:
better (higher) –– Tenants in common (TIC): deceased
–– Types of nonsystematic risks:
Execution not guaranteed
• Capital risk. tenant’s interest retained by tenant’s estate.
• Business risk. Adjustment for Corporate Actions –– Joint tenants with right of survivorship
• Financial risk. ■■Stock dividend: (JTWROS): deceased tenant’s interest
• Call risk. –– Price of stock adjusts down for dividend. passes to the surviving tenant(s).
• Currency risk. ■■ Corporate: corporate charter and resolution
–– Investor receives additional shares.
• Liquidity risk. –– Aggregate value remains the same. required.
• Regulatory risk. ■■ Partnership: partnership agreement and
–– Taxable when shares are sold.
• Legislative risk. resolution of the partners required.
• Political risk.

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 Record Retention ■■ Telephone Consumer Protection Act of
■■ Lifetime: original books and records of 1991:
■■ Fiduciary: partnership or incorporation. –– Administered by the Federal
–– Investments made for the benefit of the ■■ Six year: Communications Commission (FCC).
account owner. –– Blotters. –– Protects consumers from unwanted
–– Managed by the fiduciary. –– General ledgers. telephone solicitations.
■■ Custodial (UGMA and UTMA): –– Defines the requirements and limitations
–– Stock records.
–– Investments for the benefit of a minor. –– Customer ledgers (statements). applied when making unsolicited calls.
–– Managed by the custodian. –– Customer account records. ■■ Bank Secrecy Act:
■■ Retirement –– Establishes the U.S. Treasury as the
■■ Four year:
–– Qualified vs. Nonqualified Plans –– Customer complaints. lead agency for developing anti-money
Qualified Nonqualified –– Quarterly filings. laundering programs.
■■ Three year: –– Requires currency transaction reports
IRS approval required No IRS approval needed
–– Advertising. (CTRs) to be filed for amounts greater
Contributions tax Contributions not tax than $10,000.
–– Trial balances.
deductible deductible ■■ Uniform Securities Act:
–– Forms U4 and U5.
Plan cannot Plan may allow only –– Customer confirmations. –– Establishes a framework for state
discriminate certain employees to registration.
–– Order tickets.
participate –– Applies to securities, broker-dealers
–– Compliance and procedures manuals.
Tax on accumulation Tax on accumulation may (BDs), registered representatives (RRs,
is deferred be deferred called agents under the USA), investment
All withdrawals taxed Only excess over cost REGULATORY

FRAMEWORK advisers (IAs), and IA reps (IARs).
basis is taxed at time of Percentages to Know
withdrawal Regulatory Acts
■■ 0.25%: maximum 12b-1 fee for no-load
Plan is set up with No plan trustee required ■■ Securities Act of 1933:
–– Paper act, prospectus act. fund.
trustee
■■ 1%: maximum 12b-1 fee-loaded funds.
–– Regulates new issues; requires registration
• Types of qualified plans: ■■ 8.5%: maximum sales charge for open-end
of securities.
-- Individual retirement accounts ■■ Securities and Exchange Act of 1934:
(mutual fund) company.
(IRAs, both traditional and Roth). ■■ 10%: penalty for premature IRA
–– People and places act.
-- Simplified employee pension plans –– Regulates BDs and associated persons; distribution.
(SEPs). ■■ 50%:
requires registration.
-- Tax-sheltered annuities (TSAs), both –– Antifraud provision; defined inside –– Regulation T.
403(b) and 501(c)(3). information. –– Penalty for insufficient IRA distribution
-- Savings incentive match plans for ■■ Investment Company Act of 1940:
after age 72.
employees (SIMPLEs). –– Classified three types of ICs (face Business Days and Calendar Days to Know
-- 401(k), both traditional and Roth. amount certificate, unit investment trust, ■■ Same business day: settlement date for cash
-- Defined benefit plans (traditional management co.). transactions.
pensions). –– Regulates ICs. ■■ 1 business day: regular way settlement for
• Types of nonqualified plans: ■■ Securities Investor Protection Act of 1970: U.S. government securities and options.
-- Payroll deduction. –– Protects customers from BD failure and ■■ 2 business days: regular way settlement for
-- Deferred compensation and insolvency up to maximum limits for both corporate and municipal securities.
457 plans. cash and/or securities. ■■ 15 calendar days: maximum length of time
Prohibited Activities –– Created the Securities Investor Protection a customer can place options orders before
■■ Market manipulation: Corporation (SIPC). the signed option agreement is required.
–– Market rumors. ■■ Insider Trading and Securities Fraud ■■ 20 calendar days:
–– Pump and dump. Enforcement Act of 1988: –– Cooling-off period: minimum time
–– Excessive trading (churning). –– Specifies significant penalties for inside between filing date and registration.
–– Freeriding. trading and securities fraud. ■■ 30 calendar days: IRS wash-sale period
–– Front running. before and after a trade.
■■ Other prohibited activities: ■■ 60 calendar days: maximum period of time
–– Breakpoint sales (mutual funds). to roll over holdings from one qualified
–– Guarantees of profit or against loss. plan to another without penalty.
–– Improper use of customers’ securities or
funds.
–– Commissions to unregistered persons. Securities Industry Essentials Exam
–– Falsifying or withholding documents. QuickSheet, 2nd Edition
–– Misleading or omitting information ISBN: 978-1-07-880323-6
(advertising).

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