11/20/2019 #JeffTharpsr #TheSecuritiesGuys 1 Chapter One Knowledge of Capital Markets 12 Questions - 16% of the exam 6 1
11/20/2019 Types of Markets First/Primary Market Issuer Transaction, Issuer Benefits. Centralized Location, requires Prospectus Second/Secondary Market Transactions between investors. Centralized Location. Auction Style. Third Market Transaction between investors, non-centralized. Negotiated Format Fourth Market Instinet, large block trades between institutions. Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 7 Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 10 2
11/20/2019 Broker Dealers Introducing/Fully ‐ Disclosed Firms Introduce clients to the clearing firm who actually handles the transactions Carrying/Clearing firms Holds the customer firms (carrying), and actually helps clear/settle the transactions. Full back office. Prime Broker Dealers Special broker dealers for certain special clients; Hedge fund, money managers, etc. Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 11 Securities Offerings Public Offering – Securities sold to general public. Usually large number of investors, large amounts of money Private Offering – Securities sold to smaller groups of private investors. Usually small number of investors, small amounts of money Initial Public Offering – First time securities are brought to market. Primary Market. Subsequent/Additional Public Offering – Any time after first time securities are brought to market. Primary Market. Secondary Market – Large blocks with proceeds going to existing stockholders. Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 12 3
11/20/2019 Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 13 Monetary Policy Controlled by the Federal Reserve Board Primary focus to control inflation Supervises and regulates banks Maintains stable financial system Tighten/Loosen money policy Regulation T Margin Requirements Currently 50% must be down payment ($2,000 minimum) Must pay BD within 4 business days or account frozen for 90 days Only cash trades, no borrowing No mutual funds on margin Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 14 4
11/20/2019 Monetary Policy Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 15 Fiscal Policy Controlled by President and Congress Taxes and Expenditures of Federal Dollars. Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 16 5
11/20/2019 Economic Theories Keynesian – (Demand Side), government expenditures, in short term, influences economic growth. Monetarist – Controlling money supply, influences economic growth. Supply ‐ side – Lowering taxes and regulations (helping suppliers), influences economic growth. Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 17 Interest Rates Discount Rate : Rate set by the FRB, and charged for loans to member banks Federal Funds Rate : The rate members banks charge each other for overnight loans Prime Rate : The rate large US banks charge their best corporate customers Broker Call Loan : Rate BDs charged by banks on Margin Accounts. Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 18 6
11/20/2019 Chapter Two Understanding Products and Their Risks 33 Questions - 44% of the exam 19 Common Stock Objective A customer would buy common stock for growth and for potential dividends (income) The # 1 security for a hedge against inflation Purchaser is hoping the price will go up Always more risky than debt of the same issuer Voting rights Pre ‐ emptive rights Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 20 7
11/20/2019 Common Stock Risks Stock price could go down Can only lose the money you put in (limited liability) Dividends are not guaranteed Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 21 Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 22 8
11/20/2019 Preferred Stock Objective Purchased for INCOME Stated interest rate on certificate, representing annual income as a percentage of par Par Value is $100 Higher liquidation claims in bankruptcy than common stock No voting and No preemptive rights Can be Cumulative, Participating, Convertible, or Callable Dividends are not guaranteed Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 23 Equity Securities Preferred Stock Types (Attachments) Straight Preferred: Nothing other than stated rate if BOD declares dividend Convertible: Investor can convert the security into common shares Lower stated return than straight. ��� ����� � $ ���� ���������� ����� = (Number of Common Stock Shares) Benefit to investor Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 24 9
11/20/2019 Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 25 Control and Restricted Stock (SEC) Control Stock Owned by officer, directors and persons who own 10% or more of outstanding shares Restricted Stock (Letter Stock or Legend Stock) Unregistered stock owned by a control person (affiliate) or a non-control person Control Person aka Affiliate Non ‐ control Person aka non ‐ affiliate Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 26 10
11/20/2019 Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 27 Debt Securities (Bonds) Bought for INCOME You are loaning your money to the issuer, you are a creditor They agree to pay your money back plus interest, semi ‐ annually Terms associated with bonds Par value, face value Premium/Discount Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 28 11
11/20/2019 Debt Securities (Bonds) Yields Nominal (coupon rate) Stated interest rate, or nominal yield printed on the Certificate Interest paid every six months (semiannually). Annual income is the coupon times par, or coupon percentage times $1000. Example: Take percentage and multiply by 10. 5% coupon pays $50 a year, 7.5% coupon pays $75 a year Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 29 Debt Securities (Bonds) Current Yield ������ ������ ������� ������ ����� Yield to maturity (basis) total yield anticipated if the bond is held until it matures Yield to Call Exists if the bond is callable. Bond may be redeemed prior to maturity Callable bond only, and only matters if premium Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 30 12
11/20/2019 Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 31 Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 32 13
11/20/2019 Mortgage Bond (Secured Bond) Secured Bonds These are bonds backed by Collateral, something the person loaning the money will get, if the issuer doesn’t pay them back. Mortgage Bonds, most common type. Backed by real property Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 33 Equipment Trust Certificate (Secured Bond) Equipment Trust Certificate Backed by specific piece of equipment Example: Airplanes or Railroad cars (rolling stock) Not backed by issuer Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 34 14
11/20/2019 Collateral Trust Certificate (Secured Bond) Issued by corporations that own subsidiaries companies Stock of the subsidiary company pledged as collateral for their bond issue Backed by stocks and bonds that are owned by the corporation and are held in trust for the bondholder Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 35 Municipal Bonds Debt security issued by a state, municipality or county Federally tax exempt Most suitable for people in high income tax brackets Two types General Obligation Backed by taxes (full faith and credit of the issuer) Court house, fire station, etc Revenue Bond backed by revenue from a project backed by user fees, not taxes (toll road/bridges, stadiums, etc) Hi gh- I nt ens i t y SI E Cl as s w w w . TheSecuri ti esG uys. guru 36 15
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