SIE Chapter 1 Flashcards

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.