Type 2 Securities Sales Representative Examination key terms

The primary Hong Kong legislation regulating securities, futures, and leveraged foreign exchange contracts. It establishes the Securities and Futures Commission, defines regulated activities, and sets conduct and disclosure requirements for intermediaries.

Hong Kong's independent statutory regulator responsible for supervising the securities and futures markets. It licenses intermediaries, enforces the SFO, and issues codes and guidelines on conduct and market operations.

A company granted a licence by the SFC to carry on one or more regulated activities, such as dealing in securities or advising on securities. It must comply with licensing conditions and conduct rules.

An activity listed in Schedule 5 of the SFO that requires an SFC licence when carried on as a business, including dealing in securities, advising on securities, and asset management. Each activity has a defined scope.

An SFC licence authorising dealing in securities, which includes executing orders and holding client assets. It is the core licence for securities sales representatives who trade equities and bonds for clients.

A written contract between a licensed intermediary and its client setting out the scope of services, fees, risks, and client obligations. It must be provided before services begin and updated when terms change.

The process of collecting and verifying a client's identity, financial situation, investment experience, and objectives. It underpins suitability assessments and anti-money-laundering checks.

The requirement that a licensed intermediary ensure a recommended investment is reasonably suitable for the client given their known circumstances, including financial situation, investment experience, and risk tolerance.

A structured evaluation of how much investment risk a client can financially and psychologically bear. It informs the suitability of product recommendations and the client's risk profile classification.

The financial goal a client seeks to achieve, such as capital preservation, income, growth, or speculation. It guides product selection and must be documented in the client profile.

The process by which an intermediary evaluates a product's structure, risks, fees, and suitability before recommending or distributing it. It ensures the firm understands the product and can explain it to clients.

A product whose terms, features, or risks are not readily understandable to a typical retail investor, such as structured notes or derivatives. Stricter suitability and disclosure requirements apply.

A written notice explaining the key risks of a product or market, which clients must receive and acknowledge before trading. It helps ensure informed consent and satisfies regulatory disclosure requirements.

The process of receiving, recording, and executing client orders in accordance with instructions and regulatory standards. It includes best execution, timely allocation, and fair treatment of client orders.

The duty to take reasonable steps to obtain the best possible result for clients when executing orders, considering price, cost, speed, likelihood of execution, and settlement. It does not guarantee the best price in every case.

An unethical and often illegal practice where a firm or representative trades ahead of a known client order to profit from the expected price impact. It breaches client priority and market integrity rules.

Conduct that creates a false or misleading appearance of trading activity or price, such as wash trades or ramping. It is prohibited under the SFO and undermines market fairness and integrity.

Trading or tipping others to trade securities while in possession of material, non-public information about the issuer or the securities. It is a civil and criminal offence under the SFO.

An internal information barrier separating departments that hold confidential price-sensitive information from those that trade or advise clients. It helps prevent conflicts of interest and insider dealing.

A situation where a firm's or representative's personal or business interests could improperly influence advice or actions affecting a client. Firms must identify, manage, and disclose such conflicts.

A legal obligation to act in the best interests of another party, placing the client's interests ahead of one's own. It underpins client confidentiality, loyalty, and the avoidance of undisclosed conflicts.

The standards of integrity, fairness, and competence expected of licensed representatives. It includes honesty, avoiding misleading statements, protecting client assets, and complying with applicable laws and codes.

A share representing ownership in a company, entitling the holder to a residual claim on profits and assets. Equities typically carry voting rights and may pay dividends but rank behind debt on liquidation.

The most typical class of equity, carrying voting rights and a residual claim on earnings and assets. Dividends are not guaranteed and common shareholders are last in line on liquidation.

An equity class that typically pays a fixed dividend and ranks ahead of common stock for dividends and liquidation proceeds, often without voting rights. It behaves more like a hybrid between debt and equity.

A distribution of a company's profits to shareholders, usually in cash, declared by the board. The amount and timing depend on earnings, policy, and legal restrictions, and are not guaranteed.

The date on or after which a buyer of shares is not entitled to the next declared dividend; the seller receives it. The share price typically adjusts downward by the dividend amount on that date.

The first sale of a company's shares to the public, raising capital and creating a listed market for the stock. It involves underwriting, a prospectus, and regulatory approval.

A formal document issued in connection with a public offering that discloses the issuer's business, financials, risks, and terms of the securities. It must meet regulatory content and accuracy standards.

A debt security in which the issuer borrows capital from investors and promises to pay interest and repay principal at maturity. Bonds carry credit, interest rate, and liquidity risks.

The periodic interest payment a bond issuer makes to bondholders, usually expressed as an annual percentage of the bond's face value. It may be fixed, floating, or zero for discount bonds.

The total return an investor would earn by holding a bond to maturity, assuming all coupons are reinvested at the same rate. It reflects the bond's current price, coupon, and time to maturity.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. Higher duration means greater price volatility for a given change in yields.

An assessment by a rating agency of an issuer's ability to meet its debt obligations. Ratings range from investment grade to speculative grade and influence a bond's yield and investor demand.

A short-term, highly liquid debt security with a maturity of one year or less, such as Treasury bills, commercial paper, and certificates of deposit. These instruments are used for cash management.

An arrangement pooling money from multiple investors to invest in a portfolio of assets, where investors do not have day-to-day control. It is typically regulated and may take corporate or trust forms.

A type of collective investment scheme that pools investor capital to buy a diversified portfolio, issuing redeemable shares or units. It is managed by a professional fund manager and valued at net asset value.

The value of a fund's assets minus its liabilities, divided by the number of outstanding shares or units. It is the price at which open-end fund units are typically bought and redeemed.

A fund whose shares trade on a stock exchange like individual stocks, typically tracking an index or basket of assets. ETFs offer intraday liquidity and generally lower costs than traditional mutual funds.

A financial instrument whose value is derived from an underlying asset, index, or rate, such as options, futures, and swaps. Derivatives can be used for hedging or speculation and may carry leverage risk.

A contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a set date. The buyer pays a premium to the seller for this right.

A standardized agreement to buy or sell an asset at a predetermined price on a future date, traded on an exchange. Both parties are obligated to perform, and margins are used to manage risk.

The collateral an investor must deposit with a broker or clearing house to cover potential losses on a leveraged or derivative position. It may be initial or variation margin and is subject to calls.

The use of borrowed funds or derivatives to increase the potential return of an investment, which also magnifies potential losses. It introduces the risk of losing more than the initial investment.

The process by which a securities trade is finalized, involving the delivery of securities and payment of cash. It typically occurs on a set number of business days after the trade date.

An order to buy or sell a security at a specified price or better, giving the investor price control but no guarantee of execution. It remains open until filled, cancelled, or expired.

An order to buy or sell a security immediately at the best available current price. It prioritizes execution speed over price certainty and may result in slippage in fast-moving markets.