Retail Securities flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Bid-ask spread

The difference between the highest price a buyer will pay and the lowest price a seller will accept. A wider spread means higher implicit trading cost for retail investors.

Limit order

An order to buy at or below a specified price, or sell at or above it. It guarantees price if filled but not execution, so it may remain unfilled.

Stop order

An order that becomes a market order once the stop price is reached. It does not guarantee the execution price, especially in fast or illiquid markets.

T+1 settlement

Standard settlement cycle for most U.S. corporate securities and options, under which trades settle one business day after the trade date. Cash must be available then.

Net asset value

A fund's per-share value calculated as total assets minus liabilities divided by shares outstanding. Mutual fund orders typically execute at the next computed NAV.

Regulation Best Interest

Standard requiring broker-dealers to act in a retail customer's best interest, disclose conflicts, and avoid misleading recommendations. It applies to recommendations, not to every transaction.

Suitability obligation

Requirement that a recommendation be reasonably based on the customer's investment profile, including risk tolerance, time horizon, liquidity needs, and existing holdings.

Regulation T initial margin

Federal Reserve rule setting the initial margin for long equity purchases at 50% of the purchase price, with the broker-dealer financing the remaining balance.

Maintenance margin

Minimum equity a margin account must hold, commonly 25% of long market value under FINRA rules. Falling below triggers a maintenance call from the firm.

Margin call equity

Equity equals long market value minus the debit balance. A call arises when that equity falls below the required percentage of market value.

Pattern day trader

A margin customer making four or more day trades in five business days, where those exceed 6% of total trades. Minimum equity is $25,000.

SIPC protection

Coverage of up to $500,000 per customer, including $250,000 for cash claims, against broker-dealer failure. It does not cover market losses.

Joint tenants with survivorship

Account ownership in which each owner holds an undivided interest and the deceased owner's share passes automatically to the surviving owner, avoiding probate.

Transfer on death

Registration naming a beneficiary who receives assets when the owner dies. It avoids probate for those assets but does not reduce estate tax liability.

Custodial account

An irrevocable gift to a minor managed by a custodian under state law. The minor gains control at the age of majority, and assets cannot be reclaimed.

Free riding

Purchasing securities and selling them before paying for the purchase with settled funds. It violates Regulation T and can lead to account restrictions.

Bond price-yield relationship

Bond prices and yields move inversely. When market yields rise, existing fixed-coupon bond prices fall, and when yields fall, prices rise.

Yield to maturity

Total return expected if a bond is held to maturity, accounting for coupon payments, purchase price, redemption value, and time remaining. It assumes coupon reinvestment.

Duration

Approximate percentage change in a bond's price for a one percentage point change in yield. Higher duration means greater interest rate sensitivity.

Tax-equivalent yield

Municipal yield divided by one minus the investor's marginal tax rate. It shows the taxable yield needed to match a tax-exempt municipal bond's return.

Call risk

Risk that an issuer redeems a bond before maturity, usually when rates fall, forcing the investor to reinvest at lower yields. Call protection limits this risk.

Expense ratio

Annual fund operating costs expressed as a percentage of assets. It directly reduces net returns regardless of fund performance.

Variable annuity

An insurance contract whose investment risk falls on the owner through subaccounts. It carries mortality and expense charges and may offer living benefit riders.

Insider trading

Trading on material nonpublic information obtained through a duty of trust or confidence. Tipping others or misappropriating information also violates securities law.

Selling away

Conducting securities business outside the employing firm without written notice and approval. It violates firm policy and FINRA rules and can result in discipline.

Churning

Excessive trading relative to the customer's objectives, measured by turnover and cost-to-equity ratios. It breaches the duty of fair dealing and incurs unnecessary costs.

Unauthorized trading

Executing a transaction without the customer's authorization or firm-accepted discretion. It violates firm policy and creates potential liability for the representative.

Customer identification program

Anti-money-laundering requirement to verify customer identity, maintain records, and check government lists before opening accounts. It supports suspicious activity reporting.

Beta

A measure of a security's sensitivity to market movements. A beta above 1 indicates greater volatility than the market; below 1 indicates less.

Sharpe ratio

Portfolio return minus the risk-free rate, divided by portfolio standard deviation. It measures excess return per unit of total risk; higher values indicate better risk-adjusted return.

Diversification

Combining assets with less than perfect correlation to reduce unsystematic risk. It lowers portfolio volatility without necessarily sacrificing expected return.

Asset allocation

The distribution of portfolio assets among equities, fixed income, and cash. It is a primary determinant of long-run return and variability for retail portfolios.

Real return

Nominal return minus inflation, approximating the change in purchasing power. Positive real return is required to preserve purchasing power over time.