SIE Chapter 1 Flashcards

Questions and Answers

What is an issuer?

Entities that raise capital (provide liquidity) through securities.

What are five examples of issuers? (Select all that apply)

US Treasury & Government Agencies (correct)

Corporations (correct)

State and Local Governments (correct)

Foreign Governments (correct)

Banks (correct)

What types of securities may be issued?

Equity and Debt.

What does equity represent in finance?

Ownership in a corporation. Signup and view all the answers

What is debt in financial terms?

Notes and bonds representing an issuer's promise to pay. Signup and view all the answers

Who bridges the gap between issuers and investors?

Financial Firms: BDs & IAs. Signup and view all the answers

What is a dealer?

Acts as a principal, taking the other side of trades and making a profit. Signup and view all the answers

What is a broker?

Acts as an agent and collects commission for facilitating trades. Signup and view all the answers

Markup occurs when a client is buying and a firm is selling at a ______.

higher price. Signup and view all the answers

Markdown occurs when a client is selling and a firm is buying at a ______.

lower price. Signup and view all the answers

What is the broker-dealer department known as Investment Banking?

Underwriter, assists issuers with structuring their securities. Signup and view all the answers

What is the broker-dealer department known as Research?

Provides recommendations for buy, sell, or hold. Signup and view all the answers

What do you call the broker-dealer department known as Private Client?

Retail Brokerage. Signup and view all the answers

What is a market maker?

A BD that displays quotes to buy/sell securities at specific prices. Signup and view all the answers

What is a bid price?

The price at which a client is selling to a brokerage firm. Signup and view all the answers

What is an ask price?

The price at which a brokerage firm is selling to a client. Signup and view all the answers

What is the spread?

The difference between the bid and ask price. Signup and view all the answers

What does a wider spread indicate for a market maker?

Makes more profit. Signup and view all the answers

What is an Investment Adviser?

A firm that charges a fee for managing portfolios. Signup and view all the answers

What is a Municipal Advisor (MA)?

Advises municipalities on bond offerings and must be registered with the SEC. Signup and view all the answers

What is a Qualified Institutional Buyer (QIB)?

Buyer must own and invest a minimum of $100 million. Signup and view all the answers

What is the primary market?

The new issue market where issuers hire underwriters to facilitate sales. Signup and view all the answers

What is an IPO?

Initial public offering, a corporation's first offer to sell shares to the public. Signup and view all the answers

What are OTCBB and OTC Pink Markets?

They are the two systems for real-time quotations for OTCs. Signup and view all the answers

Who monitors trading in exchanges?

Specialist or Designated Market Maker. Signup and view all the answers

What is DTCC?

Depository Trust Clearing Corporation that automates and centralizes trade clearing. Signup and view all the answers

Who are the owners of DTCC?

BDs, Investment Banks, Mutual Funds, commercial banks. Signup and view all the answers

What does the Options Clearing Corporation (OCC) guarantee?

Guarantees all options contracts. Signup and view all the answers

What is Prime Brokerage?

A service offered to large clients to centralize trade executions with multiple broker-dealers. Signup and view all the answers

Study Notes

Issuers

Entities that raise capital by providing liquidity through securities.
Examples include corporations, US Treasury, state and local governments, banks, and foreign governments.

Types of Securities

Equity represents ownership, primarily issued by corporations through stock.
Debt includes notes and bonds, representing the issuer's promise to pay and a method for raising funds.

Financial Firms

Broker-dealers (BD) and investment advisers (IA) act as intermediaries between issuers and investors.
Brokers operate as agents, facilitating trades for clients without taking on risk, earning commissions.
Dealers act as principals, taking on the other side of a trade, and are entitled to markups/markdowns on sales.

Market Mechanisms and Pricing

A market maker displays quotes to indicate the readiness to buy/sell securities, maintaining an inventory.
Bid price is the price at which a client can sell, while ask price is what a client pays to buy, with the difference known as the spread.
Actively traded securities typically have a smaller spread, indicating lower costs for investors.
Wider spreads increase profitability for market makers.

Broker-Dealer Departments

Investment Banking: Arranges and structures issuances and assists in mergers and acquisitions.
Research: Provides buy, sell, or hold recommendations.
Private Client: Also known as retail brokerage, deals directly with individual investors.
Sales: Markets individual and packaged securities to retail and institutional clients.
Trading: Executes trades.
Operations: Manages paperwork and securities transfers according to industry standards.
Information Barriers: Prevent certain information sharing between departments to avoid insider trading risks.

Investment Advisers and Advisors

Investment Advisers charge fees for portfolio management based on assets under management (AUM).
Municipal Advisors serve municipalities regarding bond offerings and must register with the SEC.

Institutional Investors

Defined as entities with large assets, including banks, insurance companies, and pension plans.
Accredited investors have a net worth of at least $1 million or certain income thresholds.

Markets

Primary Market: The new issue market where issuers hire underwriters to facilitate distribution.
IPO: Initial Public Offering marks a company's first sale of stock to the public, followed by follow-on offerings.
Secondary Market: Trading of stocks post-IPO, facilitated through exchanges like NYSE and NASDAQ or OTC markets.

Trading Venues and Market Structure

OTC includes low-priced, thinly traded issues not listed on exchanges.
Third Market: Listed securities traded over-the-counter.
Fourth Market: Direct transactions between institutions.
Dark Pools provide anonymous trading platforms for institutional investors.

Clearing and Settlement

DTCC (Depository Trust Clearing Corporation) centralizes and automates trade clearing to reduce costs and increase speed.
NSCC (National Securities Clearing Corporation) focuses on equities, while FICC (Fixed Income Clearing Corporation) handles debt.
Clearing firms facilitate order execution and settlement, while introducing firms work alongside clearing firms to connect clients.

Options and Prime Brokerage

OCC (Options Clearing Corporation) guarantees options contracts, acting as a counterparty for trades.
Prime Brokerage offers centralized trade clearing for large clients, facilitating execution across multiple broker-dealers.

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Description

Test your knowledge with flashcards covering key concepts from Chapter 1 of the SIE exam, including definitions of issuers, types of securities, and examples of issuers. This quiz is a valuable resource for anyone preparing for the Securities Industry Essentials exam.