Chapter 1 Essentials of Invest

● Investments are current commitments of money in expectations of future returns

● An economy is measured by material wealth or real assets that it can create
● Financial assets are claims in real assets
● Real assets provide net income
● An asset that you hold is a liability of another person
● When these assets and liabilities are cancelled out, real assets are the only true wealth
of the economy
● Fixed income assets provide a stream of income based on a specific formula
● These can vary on different maturities and payment provisions
● Money market debt is short term, highly marketable, and low risk (T-bills, CDs)
● Capital market securities are treasury bonds and junk bonds and are riskier and longer
term
● Equity assets are an ownership share in a firm and performance is directly tied to
performance for real assets
● Derivatives are securities whose value depends on the performance on other assets
● Derivatives can be used to hedge risks or take speculative positions
● Investors also trade real assets such as commodities
● Stock prices measure the general opinion of investors on firms
● These prices drive capital allocation
● Capital allocation can be wasteful and fail such as in certain bubble periods like the tech
bubble
● Financial assets are used to store excess income
● The firms acting in the best interest of the shareholders may encourage proper allocation
of capital
● Agency problems happen when executives don't act in the shareholders best interest
● Board of directors, performance based compensation (stock options), and security
analysts have mitigated agency problems
● A proxy contest is when shareholders overall board of directors even though most fail
● However conflicts of interest and lax oversight can lead to scandalous activities within
companies of not acting the shareholders interest
● A portfolio is a collection of assets
● The two decisions investors must make are asset allocation (which assets to invest in)
and security analysis (which specific investments in each asset to invest in
● Some investors who are top down care about asset allocation first but bottom up
investors care a lot about security analysis
● The highly competitive nature of markets creates a low amount of free lunches and a
risk-return trade off
● The players in financial markets are households who supply capital, firms who purchase
it, and governments who can do both
● Financial intermediaries such as banks and insurance companies bring demanders and
suppliers of capital together and pocket interest rate spreads in deposits/loans as their
profit
● Financial intermediaries have almost all financial assets and a diversified portfolio of
investments
● Investment companies pool, research, and invest money into portfolios
● They can be specialized portfolios such as hedge funds and pension funds
● Investment bankers sell securities to the public through public offerings
● They underwrite securities in the primary market and those securities eventually go to
the secondary market
● Venture capital and private equity firms invest in private and startup companies
sometimes as angel investors
● The 2008 financial crisis was caused by a huge boom in the housing market which
fueled mass securitization by Fannie and Freddie
● The thirst for higher yield lead to a boom in ARM and subprime mortgages which were
given AAA ratings
● Insurance for these called credit default swaps also came

● Real assets create wealth. Financial assets represent claims to parts or all of that
wealth.
● Financial assets determine how the ownership of real assets is distributed among
investors.
● Financial assets can be categorized as fixed-income (debt), equity, or derivative
instruments.
● Top-down portfolio construction techniques start with the asset allocation decision—the
allocation of funds across broad asset classes—and then progress to more specific
security-selection decisions.
● Competition in financial markets leads to a risk-return trade-off, in which securities that
offer higher expected rates of return also impose greater risks on investors. The
presence of risk, however, implies that actual returns can differ considerably from
expected returns at the beginning of the investment period.
● Competition among security analysts also results in financial markets that are nearly
informationally efficient, meaning that prices reflect all available information concerning
the value of the security. Passive investment strategies may make sense in nearly
efficient markets.
● Financial intermediaries pool investor funds and invest them. Their services are in
demand because small investors cannot efficiently gather information, diversify, and
monitor portfolios.
● The financial intermediary, in contrast, is a large investor that can take advantage of
● scale economies.
● Investment banking brings efficiency to corporate fund raising. Investment bankers
develop expertise in pricing new issues and in marketing them to investors.
● By the end of 2008, all the major stand-alone U.S. investment banks had been absorbed
into commercial banks or had reorganized themselves into bank holding companies. In
Europe, where universal banking had never been prohibited, large banks had long
maintained both commercial and investment banking divisions.
 ● The financial crisis of 2008 showed the importance of systemic risk. Systemic risk can be
limited by transparency that allows traders and investors to assess the risk of their
counterparties, capital requirements to prevent trading participants from being brought
down by potential losses, frequent settlement of gains or losses to prevent losses from
● accumulating beyond an institution’s ability to bear them, incentives to discourage
excessive risk taking, and accurate and unbiased analysis by those charged with
evaluating
● security risk.

Chapter 2 Essentials of Invest

● The money market is a subsector of the debt market and is traded in large quantities so
it's out of reach to retail investors
● However, money market mutual funds are easily accessible
● Treasury bills are the safest and most marketable money market securities
● Investors buy these at a discount to maturity and get the face value at maturity
● The maturities are 4, 13, 26, 52 weeks
● They are highly liquid and the lowest denomination is $100, it is also except from state
and local taxes but not from federal taxes
● Yields are calculated using the bank discount method
● Certificates of deposit are time deposits in banks and cannot be withdrawn until the
period is over
● It pays interest until the end of the period
● Short term CDs are highly marketable, but the market dries up for CDs with maturities
after 3 months
● Commercial paper is short term debt supplied by companies usually for working capital
and has a maximum maturity of 270 days
● CP is sometimes backed by a bank line of credit to ensure payoff
● They are issued in denominations of 100k, but retail investors sue money market mutual
funds
● Asset backed CP is used to buy assets and the asset is used as collateral (commonly
used for subprime mortgages)
● A bankers' acceptance is an order to a bank by a customer that the bank will pay a sum
of money at a predetermined date to someone
● It is like a postdated check and can be traded in secondary markets
● Eurodollars are dollar denominated deposits outside of the US in to avoid regulation
● An alternative is European CDs which can be cashed out early on compared to a time
deposit
● Most Eurodollar deposits are in large sums and have less than 6 months maturity
● Repurchase agreements are very short term, usually overnight borrowing in which one
party sells an asset to another party and buys it back at a higher price, the difference is
the interest
● Term repos are the same thing except they are for higher, usually 30 day maturities
● A reverse repo is when securities are bought first and sold at a higher price
● Brokers calls are funds borrowed from banks which are lent to investors using margin,
they can be redeemed on demand
● Federal funds are the bank deposits with the federal reserve
● Banks with extra funds lend to banks with a shortage, usually overnight at the fed funds
rate, which is a key monetary policy rate
● The banks lend to meet reserve requirements
● LIBOR is essentially the London version of Fed funds and is a key metric in money
market transactions
● Money market securities are usually safe havens for investors
● The bond market consists of more longer term securities
● T bonds are government securities that have maturities from 10 to 30 years
● T notes have maturities up to 10 years
● They make semiannual coupon interest payments
● TIPS are inflation protected securities whose principal is adjusted to changes in CPI
● Agencies like Fannie Mae and Freddie Mac also issue debt
● Eurobonds are bonds which are denominated in currencies other than the one in which it
was issued, it doesn't have to apply to Europe only
● Municipal bonds are issued by state and local governments
● Industrial development bond are revenue bonds for commercial enterprises like factories
● Municipal bonds are exempt from state and local taxes
● In mortgage backed securities, most mortgages are conforming mortgages which pass
most or all underwriting guidelines
● Common stock gives the holder voting power, and shareholders can vote by proxy or in
other words, elect another party to represent them
● Most proxy power goes to management which gives them considerable control over the
company
● Stockholders have residual claim which means they are last In line for claims of the
company's assets or income
● However, they have limited liability which means they only lose what they invested
● Preferred stocks have no voting right but they get a steady stream of cumulative
dividends each year, and sometimes they are convertible to common stock
● The DJIA is known as the best measure of the US stock market
● It is the average of 30 blue chip stocks and is weighted to the price of each company
● The average is adjusted to stock splits, large dividend payments, and changes in stocks
in the average
● The S&P 500 is a market value weighted index and consist of 500 stocks
● An ETF is a portfolio of stocks that can be traded as a unit
● The international indexes are FTSE, DAX, TSX, and Hang Seng
● The Wilshire 5000 is the ultimate measure of the stock market since it has so many
stocks
Chapter 3 Essentials of Invest
● Transactions are conducted on primary and secondary markets
● Private transactions are done through private placement
● A firm commitment is the typical underwriting agreement where the investment bank
buys the securities and sells them to the public
● Shelf registration is the gradual sale of securities to the market
● Bankers go on roadshows and they engage in book building by trying to attract
investment interest
● Dealer markets have a go between person called a dealer who acts as a go between
buyers and sellers, dealers execute on their own behalf
● Direct search markets are unregulated and OTC
● Brokered markets have brokers that act as agents and conduct searching processes for
securities
● In older times, specific specialists acted as middlemen in securities trading for brokers,
but that has been replaced by computers
● Also, computers have been used in actual trading with HFT and Algos
● Some trading venues are off the books like in dark pools
● The Sarbanes Oxley act created regulations for publicly traded companies and protected
investors from fraud

Chapter 4 Essentials of Invest

● Unit investment trusts are unmanaged fixed portfolios in which shares, also called
redeemable trust certificates, are issued to the public
● These trusts have a life
● The trust sponsors sell shares at a premium of NAV to make a profit
● Comingled funds are investors who pool their money together and give it to a manager,
shares called units are issued and sold at NAV
● There are many types of funds
● Mutual funds are at a pass through status in that taxes are paid by the investor, this is as
long as it meets conditions such as that almost all of the fund's returns are given to
investors
● ETFs are portfolios that are traded like stocks
● The SEC, Morningstar, and yahoo finance are good places to look at funds
● There are lots of fees on funds

Chapter 10 Essentials of Investments: Bond Prices

and Yields
● Bonds are IOU and periodically pay interest payments called Coupon Payments
● When the bond matures, the issuer pays the bond's par value or face value
● Bonds are typically sold in denominations of 1000
● Accrued interest = (Annual interest/2) * (Days from last coupon payment)/(days
separating coupon payments)
● Accrued interest is crucial for the actual price of the bond and is added to the stated
price
● Most bonds are bought through a computer quotation system
● Bonds with high bond ratings have lower YTMs
● Callable bonds give issuers the option to repurchase bonds at a lower price when the
issuer wants to or extend bonds and offers a higher interest rate due to this kind of risk
to investors
● Some callable bonds have call protection periods
● Convertible bonds have the ability to convert and the conversion ratio is the number of
shares per bond that can be exchanged
● Convertible bonds have lower interest rates and YTMs due to the added benefit of
conversion
● Puttable bonds are just like callable bonds except bondholders have the option to extend
or exchange bonds instead of bond issuers
● Floating rate bonds have interest rates that are tied to some measure of market
conditions such as the T-bill or LIBOR, the downside is that the interest rate is not tied to
the financial condition of the firm which leaves no protection against firm failures
● Preferred stock is a fixed income investment that provides a fixed dividend over a period
of time and come before stocks but after bonds in the capital structure, it has no voting
rights
● Foreign bonds are sold in another country in the currency of the bond it's sold in, these
bonds have nicknames like Yankee bonds, Samurai bonds, and bulldog bonds
● Eurobonds are issued in the original currency and sold in other markets, an example is
Eurodollar bonds which are sold in the US but are in Euros and are from Europe
● Inverse floater bonds are just like regular floaters but the interest rate is inversely
correlated with the benchmark
● Asset backed bonds are correlated with the performance of an asset, for example,
Disney issued bonds that correlated with their film performance
● Pay in kind bonds are bonds that can eb paid off by either more bonds or cash
● Catastrophe bonds are just like regular bonds except if a catastrophic event happens,
the bond's obligations are totally voided, these bonds have higher interest rates because
of this
● Indexed bonds have interest rates correlated with indexes such as the CPI, oil, and gold
● Speculative bonds, also known as junk bonds, have a S&P rating below BBB
● Indentures are the contract for the bond
● A sinking fund is a indenture that calls for a pool of money to be formed to gradually
repay the debt
● Subordination clauses are in indentures that prevent firms from going under by
restricting borrowing past a certain point to stop loading on debt
● Some indentures also have dividend restrctions
● Since some corporate bonds can default, firms offer a default premium which is extra
interest on top of a regular govt. bond
Chapter 1 Principles of Risk Management and
Insurance
● Risk is the defined uncertainty concerning the occurrence of a loss and can cause loss
exposure
● Objective risk is how much the actual loss varies from the expected loss, it is also called
degree of risk and declines are the number of risk exposure increases

Morningstar stuff

Section 1: Investment Fundamentals: Terminology

Key investment terminology:
● Two key domestic exchanges: NYSE and American Stock Exhange
● Five Regional Exchanges: Boston, Chicago, Cincinatti, Pacific, Philadelphia stock
exchanges
● Specialists, or designated market makers: Type of market maker, determine bid/ask
prices for each security traded on the NYSE
○ He can also buy and sell for his own gain, called the principal, or be a
matchmaker who facilitates trades on a particular security
○ Works for exchange
● Market makers usually focus on OTC markets
○ Works for an investment company
○ The source of profits for a market maker is the spread or the difference between
bid and ask prices
● On the NASDAQ , there are two types of securities that can be traded which are
NASDAQ Global Market Securities and Capital Market Securities
○ Global market securities (GMS) are more heavily regulated and more reputable
○ More information
● The NASDAQ provides 3 levels of stock quotation
○ Level 1: Gives the best bid/ask prices however, when one buys, they are not
guaranteed those process due to market fluctuation, most investors use level 1
○ Level 2: Higher level service for brokers who place orders, gives access to
market makers
○ Level 3: Provides subscribers with levels 1 & 2 and allows for the most real time
access, allows them to enter their own bid/ask prices, and has the best
execution, it is for market makers
● Securities firms can assume one of two roles when trading on an exchange
○ Agent: Buy/sells on client's behalf, acts as matchmaker
○ Principal/dealer: Buys/sells for himself
● IPO Terminology
○ Types of IPO agreements:
 ○ Firm commitment: Most commonly used type of underwriting contract in which
the underwriter buys securities from issuer, sells it, and pays the proceeds to
company
■ Unsold securities are given to all underwriters by proportion of
participation
■ Underwriter assumes all inventory risk and ask as dealers
■ Issuer essentially lends shares to underwriter
○ Best efforts gives the firm an option to buy and an authority to sell the securities
■ The underwriters act as salesman and not as dealers
■ These usually have to do with risky investments
■ All unsold securities are absorbed by issuer
■ Low risk for underwriters
○ All or None give the underwriter and authority to sell all shares and if any shares
remain, the entire underwriting is cancelled
■ Hard for underwriters to deceive
○ Standby underwriting allows a company to purchase all unsold shares at a
subscription price which is lower than the price of the offering
● Trade date Is when the sale or deal of a security is executed
● Settlement date is when the transaction of securities must be completed
○ A regular way settlement, or normal settlement date for corporate stocks,
corporate bonds, and municipal bonds/securities is three days after the sale
○ For treasury securities and options, the settlement date is one day after
○ Cash transactions settle on the same day
● Dividend distribution dates are when companies pay out dividends
○ Ex dividend dates are when the stock trades without a dividend payment, this is
two days prior to record date
○ Record date is the date in which after that date, new investors are ineligible for
dividends
○ Payment date is when the dividend is paid out to shareholders
○ Declaration date: When company announces that they will pay a dividend
● Market value: Current price of security bid or ask
● Bid: Price in which an investor would sell security
● Ask: Price in which an investor would buy a security
● NAV: Total value of mutual fund's portfolio minus liabilities
● Par value: Stated price of security (usually for bonds)
● Nominal yield: Stated yield
● Current yield: Nominal yield adjusted for price fluctuations
○ Formula for this yield is (Annual interest payment)/(Market Price)
● Yield to maturity: Full yield if bond is held to its maturity date
● Duration: Measure of the volatility of a bond
○ Longer the duration, more the price will fluctuate due to interest rates
○ Duration is equal or less than year to maturity of bond
● Stop limit order: stock must reach stop price to activate limit order
● Market on open orders: Executed at market open
 ● Market on close orders: Executed at market close
● Not held orders: Broker has control of timing of trade
● Fill or kill: Order must be executed at full or terminated
● Immediate or Cancel: Order is placed, if a part can't be placed, that part is cancelled
● All or none: Order is executed but not immedietely
● All orders are day orders in which the order is cancelled at end of the day
● Good till cancelled orders are in place until cancelled or filled

Section 1: Investment Fundamentals: Savings

● Savings are what is left after expenditures in disposable income
● People can invest or save with savings bonds
● These are bonds guaranteed by the US Treasury
● They are not subject to State or Local Taxes
● One type is Series EE Bonds
○ These are no longer available
○ Garunteed to double in value
○ Usually about 20 yrs maturity
st
○ Rates are set twice per year on May and Nov. 1
○ Minimum Investment $25
○ Bonds which are over 10 yrs old are non marketable
● Another type is Series I Bonds
○ They are non marketable and have variable inflation rate
■ Adjusted every Nov. And May
■ Adjusted for Consumer Price Index
○ Interest changes over time
○ Low Risk

Section 1: Investment Fundamentals: Stages of

Investing
● There are five stages of investing
● Put and Take is when you put your money in a checking account aka savings
○ This is low risk and it grows at a slow and steady rate
○ You can take money out for whatever purpose you need
● Accumulation is when you gather money
○ This is preparing to invest and "prepping your troops"
○ This should be after the put and take account is stable
○ One should begin investing in low risk assets like mutual funds and bonds
○ Many people start this when they are 20 or 30
● Next is Systematic Investing
○ This is when the investor slowly funds his account with an amount periodically
○ Constant investing this lower risk assets
 ○ Happens when 40 yrs old or when one has enough money from stage 2
● Next is strategic investing
○ This is when if one has money from systematic, they invest strategically or they
actively manage their account usually by changing the proportion of stocks and
bonds
○ They invest in other investments such as baskets of securities as well
● Speculative Investing is when one has extra money from all steps and invests in high
risk assets
○ Some never get to this step
○ People invest in penny stocks and collectables
○ They can make and lose most amount of money

Section 1: Investment Fundamentals: Sources of

Financial Information to make Investment Decisions
● There are many and good and bad sources for financial information
● An especially good source is the SEC
○ One can find forms such as 10-K (Yearly Results), 10-Q (Quarterly Results), and
form 3, 4, and 5 (trading of insiders), and other key forms
● Another place is company websites which can store earnings and other key news
reports and statements
● One last good place is analysts
○ These can come from banks or other places
○ They may not as reliable since they can have a conflict of interest

Section 2: Individual Savings Accounts

● Retirement Accounts can either be sponsored by an employer or it can be sponsored by
an individual
● These accounts are usually tax deductible
○ This applies for income tax and the amount invested in an account is not
considred in an income tax form
○ You don't have to pay capital gains taxes until you pull out of the account
● Most people can invest up to 5500 dollars into IRA per year
○ However, people over 50 can invest 6500 per year to "catch up" from previous
years (additional contribution of 1000 dollars
● IRA withdrawals (distributions) cannot be made before the age of 59 and a half without
penalty
○ These penalties include state and federal tax penalties
● These withdrawals can only be made when terminating IRA or financial hardship
(unemployment or debt, etc.)
● Withdrawals must begin before age of 70 and a half or a tax penalty on half the amount
not withdrawn will be conducted
● Married couples can establish spousal accounts
 ● IRA's can be given to a beneficiary as an inheritance after death
● Money can be transferred from other retirement accounts to IRAs quietly without any tax
penalties
● In Roth IRAs, money is not tax free but can be withdrawn tax free after 5 years
●

Employer Sponsored Plans

● Employer sponsored retirement accounts can either be qualified or unqualified (tax
deferred or not
○ An example of a qualified plan in called a 401K
○ This is usually the norm qualified plan
○ Someone can invest up to 15500 dollars per in a plan and cannot withdraw .
without a 10% tax penalty until they are 59 and a half
○ Employees 50 years or older can make additional "catch up" contributions of
5000 dollars
● The two types of qualified plans are Defined Contribution and Defined Benefit plans
○ Defined contribution plans are when the employer gives a fixed amount of
income to the plan with the employee contributing however he wants however the
amount of income distributed at retirement varies with investment income and the
market
■ 401K plans are designed this way
○ Defined benefit plans is when the amount distributed is fixed however the
contribution is not
■ Pension plans are designed this way
● Employee Retirement Income Security Act of 1974 is a law requiring managers of plans
to have a plan to make sure that managers don't violate fiduciary responsibilities
● Keogh plans are plans that are for unincorporated businesses (sole prop or
partnerships) or self-employed persons
○ This is a tax deferred pension plan
○ These can be set up as a defined benefit or defined contribution plans
○ Tax deductible for up to 25% of income with limit of 47,000 dollars
○ Higher upkeep and administrative costs but require less employer contributions
which make them good choices for small businesses
● 403(b) plans are annuity plans
○ Offered to public school, nonprofit, and govt. Agency employees
○ Max contribution per year of 15000 dollars
○ People over 50 can make catch up donations of 5000 dollars
○ Each employee has an account in which they can invest

Section 2: Pensions
● Two types of pensions are defined benefit and defined contribution (Look at ISAs)
○ Defined benefits are increasingly rare
● A pension fund is a company sponsored fund that provides income in retirement
 ● Usually employers invest fixed contributions in a tax deferred account
● Employees access it through withdrawals
● Private pension funds are becoming increasingly scarce
● The amount that one gets is a percentage of an employee's final salary or highest salary
○ The formula is years of service * final average salry * benefit multiplier
○ Benefit multiplier is usually 1-2%
● Pension funds are the number one institutional investor
● Things that influence how much money will be in pension fund
○ Size and number of contrubutions
○ Growth rate
○ How long fund is is allowed to grow
○ Charges and costs
● When one gets older, they can do three things with the pension money
○ Buy an annuity
○ Keep money in fund
○ Withdraw money
● Companies also have obligations to give money to pension funds
● Companies may make pre-payments in anticipation of changes
● Over/underfunded status is recorded in balance sheet as pension asset/liability
● Five components of pension expenses
○ Service cost
○ Interest cost
○ Less than expected return on plan assets. First 3 recognized immediately. Last
two have delayed recognition.
○ Amortization of prior service costs
○ Amortization of net gain or loss = pension expense
● PBO is the present value of an employee's pension that is, how much one person's
account has accumulated

Section 2: Taxes
● Many investment wrappers are tax deferred
● For example, when withdrawing income from a pension, 25% of the money is tax free
● The main taxes include income tax, savings tax, capital gains taxes

Section 3: Loans
● Debt is an investment security and those securities are called bonds
● The types of bonds include treasury, municipal, and corporate bonds
● Corporate debt can be secured or unsecured
○ Secured is when the debt is insured by some kind of collateral
■ Mortgages are secured by a house
■ Equipment trust certificates are secured by a piece of equipment
○ Unsecured or debentures are only secured by faith and good credit
 ● Some special types of bonds include Junk bonds or those rated below BBB by S&P or
Baa by Moody's
● Another type is convertible
● Zero coupon bonds are debt securities that don't pay a coupon and only pay one coupon
at maturity
● Money market bonds are liquid, short term bonds that provide safety, liquidity, and are
sold at .a sharp discount to the face value
● The yield curve measures how much each bond pays for each time period
● Financial institutions raise debt through vehicles such as commercial paper, certificates
of deposit, and federal funds, etc.
● Treasury bills are less than a year, notes last from 1-10 years, and bonds are from 10-30
years
● There are many savings bonds (Look at Section 1)
○ Series HH savings bonds are 20 year investments that pay semi annual interest
● There are two types of municipal bonds
○ General Obligation bonds are for public facilities in general
○ Revenue bonds are for a particular public works project
■ A net revenue pledge means that costs will be paid first, then the
bondholders and a gross revenue pledge means that bondholders will be
paid first
● Municipal bonds are free of federal tax

Section 3: Mortgages
● Mortgage backed securities are mortgages compiled by a bank
○ They securitize it and place it in its own corporation called a Special Purpose
Entity and sell shares
● CMOs, or collateralized mortgage obligations, are purchased in $1000 increments
○ These are divided into tranches which are of different quality and pay interest
based on that quality
○ Interest payments last a certain amount of time and when interest rate payments
on that tranche is over, the next tranche pays out interest

Section 3: Life Insurance

● Life insurance protects the dependents of someone in the case of an expected death
● The three components of life insurance are the death benefit, premium payments and
cash value
○ Death benefit: Money dependents would receive upon the death of the insured
person
○ Premium payment: Cost of the insurance: Determined by age, medical history,
etc.
○ Cash value or surrender value is the savings account that is given to the insured
if the insured cancels the contract
Section 3: Unit Investment Trusts
● Unit investment trusts are hybrids of closed and open investment companies
● They have a date in which they will dissolve
● There is no limit on the lifespan and some may take 50 years to terminate
● When it does terminate, the portfolio is distributed to investors
● The investment portfolio is generally fixed
● A UIT has sponsors, but no board of directors or investment advisors however it is
supervised by a trustee
● A fixed number of shares are sold

Section 3: Opened ended investment companies

● These do not have restrictions on the number of shares it can issue
● Shares are bought and sold based on the NAV
● There are multiple people involved in these companies
○ A board of directors defines the funds offered to the public
○ A sponsor or underwriter sells shares to the public
○ A custodian is responsible for the possession of the securities purchased by the
investment company for its portfolio
○ An investment advisor invests the money in the fund
○ A transfer agent manages share issuance, cancellation, redemption, etc.
○ Dealers actually do the work of the sponsors In that they sell the shares
● These funds can be specialized in different ways

Alternative:
● UK company/fund traded on London exchange that is structured to invest in other
companies
● They can adjust their investment criteria
● Investors pay a charge of 2% when buying new shares

Section 3: Pricing, Dealing, Settlement

● Open mutual funds are usually priced based on NAV
● Closed mutual funds are priced based on supply and demand
● Mutual fund share marketing are regulated by Investment Company Act of 1940
● They must disclose that
○ The data represents past performance and is not an indication of future
results
○ An investor's principal value will fluctuate and may be worth less than the
original amount invested.
● Investors must pay "full price": that is NAV + sales charge
○ Also called public offering price
● Net Asset Value is calculated by dividing total equity (Assets-Liabilities) by shares
 ● Most mutual fund shares are settled on next day
● ETFs take three days like stocks
● Mutual fund shares cannot be bought on margin or be sold short
● When selling or redeeming shares, it must be settled within seven days

Section 3: Investment Trusts/Closed ended funds

● Closed Ended funds are another option in investing
● Their price moves with supply and demand
○ They can trade at premiums or discount
● They can use leverage
● They are often designed for income
● These usually have higher fees
● There are a fixed number of shares available
● Closed end funds have initial public offering of shares
● They have specialized portfolios
● The shares of a fund are not redeemed by the fund
● They are managed by an investment advisor

Section 4: Explain how stock market benefits

investors and companies
● The stock market is one of two main ways for companies to raise money
○ One way is issuing stock and the other way is issuing debt
● The stock market also gives the public an opportunity to get higher returns on
investments and diversify
● Furthermore, the stock market boosts the economy with companies using the capital
from the public offerings
Section 4: Read stock tables for investment related
information

● Column 1: 52 week high

● Column 2: 52 week low
● Column 3: Company name
● Column 4: Stock ticker
● Column 5: Dividend (If it has one)
● Column 6: Dividend Yield (Dividend/share price)
● Column 7: Price to earnings ratio
● Column 8: Volume in hundreds
● Column 9: High for day
● Column 10: Low for day
● Column 11: Closing price
● Column 12: Change in price

Section 4: Subsections 3-6

● One should diversify their investments
● Types of investments: stocks, bonds, mutual funds, derivatives, ETFs, Real Estate,
Hedge funds
● Primary markets are the first market in which the IPO is sold and the secondary market
is where the people who buy those shares sell their shares
● Bull market: Market going up
● Bear market: Market going down
● Pig market: Anyone who gets fat with confidence and buys stocks blindly

Section 5: Subsections 1-6 (All Sections)

● Compound interest is simply interest on interest
○ The formula is (1+n)^I where n is the interest rate and I is the number of periods
 ○ You can find the number of years it takes to double your money using compound
interest by using the Rule of 72: Use the formula 72/n where n is the compound
interest rate
○ The three components are interest rate, amount invested, and time
● Compound interest makes the stock market different from other markets in that it
compounds
○ Bond, currency, and commodity markets do not compound while the stock
market does
● Other investments that earn compound interest include bank accounts, CDs, a few
bonds such as zero coupon bonds,
● This is why investing as early as possible is so important
● A company's purpose is to take capital from investors and creditors make profits out of
them
○ Ratio of profit on capital to capital is called the return on investment/capital
○ Return on stock is Shareholder return + capital gains + dividends
○ This makes benefits in the stock market because in the stock market, someone
has the full weight of a management team, employees, etc ensuring that they
grow their investment
○ Some companies pay out their profits as dividends or reinvest their money back
into the business
● Creditors are called "loaners" and stockholders are called "owners"
○ Creditors are typically banks, bondholders, and suppliers
○ Stockholders are banks, mutual funds, hedge funds, and private investors
● Broker-dealers (clients) and financial advisors registered with the SEC have a fiduciary
responsibility and have to place their clients interests first
○ A fiduciary duty or obligation is the obligation of one party to act in the interest of
another
○ This also happens in trustee/beneficiary situations and principle/agent
relationships
● A key place to look for financial information is public filings
○ This includes the 10-K annual report which shows basic information such as
wealth, number of employees, financial statements, and strategies
■ You can find this with the SEC
○ Another document is the 10-Q report which contains the same information as
10-K except on a quarterly basis
○ The DEF 14a reports information on the board of directors
○ Form 4s report on insider movement in the stock
○ 8-K reports have earnings details
● Company websites and industry websites are also great resources for company and
industry news
○ Seek expert opinions on other sites as well such as cnbc etc.
● After looking at public filings and websites, etc, create a watchlist
● There are three financial statements
 ○ The income statement shows revenues/sales, expenses (Cost of goods sold),
and profits
○ The balance sheet shows assets, liabilities, and equity
■ Assets have noncurrent and current assets
■ Liabilities have current and noncurrent liabilities
■ Equity shows the amount owned by shareholders (Assets minus liabilities)
■ Split into paid in capital and retained earnings
○ The cash flow statement shows the amount of money coming in and out of a
company
■ The three sections are operating cash flow, investment cash flow, and
financing cash flow (cash flow to creditors and shareholders)
■ Free cash flow is the amount of excess cash generated by a company
■ Cash from operations - Capital expenditures = Free Cash Flow
● Earnings per share: Total Earnings/Share Price
○ Two types: Basic and diluted: Diluted EPS is actual outstanding shares while
diluted is all outstanding plus potential outstanding such as stock options etc.
● Market Capitalization = Stock price * Shares outstanding: This is the market value of a
company
● Profit Margins
○ Gross Margin: Gross Profits/Revenue
○ Net Margin: Net Profits/Revenue
○ Operating Margin: Operating Profits/Revenue
● P/E Ratio: Price/Earnings: Shows the market perception and valuation of a stock relative
to earnings
● Earnings Yield: 1/(P/E) or EPS/Stock Price
● Price/Cash Flow = Stock price/operating cash flow
● Dividend Yield = Annual Dividends per share/Stock Price: Used for valuation
● PEG (Price Earnings to growth) ratio: (Forward P/E Ratio)/5 Year EPS Growth Rate:
Shows how much investors are paying for a company's growth
○ Forward P/E Ratio is Price/Predicted Growth
● Price/Sales: Market Cap/Total Sales or Share Price/Sales per share: Same function as
earnings, but with sales, which is much harder to manipulate, used to compare
companies in the same industry
● Price/Book Ratio: Share price/book value per share or Market Cap/Total Shareholder
Equity: This is another valuation method, book value is Assets minus debt
○ Book Value Per share: Shareholders Equity/Shares Outstanding
■ Shareholders equity shown on balance sheet

Section 6: Understanding Total Return

● The return of a mutual fund is complicated: NAV can fall but the fund can still turn out a
profit etc.
● Mutual fund performance is measured in total return
 ○ The two components of total return are income (dividends and interest yield), and
capital appreciation/depreciation (rise in prices)
○ Income, or yield, can be calculate in a variety of ways
■ A way to calculate this figure is summing the income over the last year
and divide it by the NAV plus capital gains
■ Yield = (Income over past 12 months)/(NAV + Capital appreciation)
■ Yield only applies to income
● The NAV is the reflection of the value of the security
○ This is the portfolio value/shares outstanding
● NAV is not the best way to measure return since it is vulnerable to changes that do not
reflect the actual value of the fund
○ For example, a mutual fund makes payments to shareholders known as
distributions from their income and capital gains
○ These distributions make the NAV drop however do not affect the performance of
the fund or the wealth of the shareholders (they got new income in exchange for
the price dropping)
○ For example, if a fund's NAV is 50, and it makes a 2 dollar distribution, then the
NAV is 48
● Most total return numbers reported assume that distributions are reinvested by
shareholders

Section 6: Mutual Funds and Taxes

● One of the weaknesses of mutual funds is taxes
● Taxes are paid on distribution
○ These taxes are capital gains taxes
○ The long term tax rate is 15% for people in the 25% or higher bracket and 5% fir
those in 10 or 15% tax brackets
● When funds lose, they make big distributions when the fund lost money
○ This can cause a person to pay taxes even when the fund is losing
● Ways to avoid tax headaches
○ Ask is the fund gives distributions and if they are imminent
○ Find if the fund has tax loss carryforwards (capital losses "credits" which can be
used to offset capital gains in good years)
○ Place tax inefficient funds in tax differed accounts such as IRAs
○ Search for low turnover funds
■ High turnover funds are not tax efficient
○ Favor funds run by managers that have their own money invested
○ Consider municipal bond funds if you are considering buying a bond fund and
you are in a higher tax bracket
■ These are usually tax exempt
○ Consider tax managed funds
● The fund manager controls how much funds distribute
● The worst time to buy a fund from a tax standpoint is before a fund makes a distribution
Section 6: Purchasing Mutual Funds
● One person to buy a mutual fund from is a financial advisor
○ This can include planners, brokers, etc.
● These people charge a fee
○ This can include a flat fee or a percentage or both
○ These are called loads or sales charges
○ Funds that charge this are called load funds
● Investors who want to invest on their own should focus on no-load funds
○ No load fund families include Fidelity, Vanguard, and T Rowe Price
● Fund families offer diversification especially larger ones
● No transaction fee networks (supermarkets), are a fast and easy way for individual
investors to invest in funds
○ However, supermarkets do charge funds which carries fees to shareholders
○ Supermarkets also encourage rapid trading according to Jack Bogle

Section 6: Investment in Mutual Funds

● There are many times and ways to invest in a mutual fund
● One is market timing or catching the bottom
● However, this does not work because investors tend to buy the top and sell the bottom
● Another strategy is investing all at once or lump sum investing
○ Many advisors recommend this approach
● It is best to invest a fixed amount (usually per month) in an investment
○ This is called dollar cost averaging
● The benefits to dollar cost averaging are:
○ It can reduce risk since some money is always on the sidelines
○ It instills discipline in investing
○ It is a good way to invest in mutual funds in that some mutual funds waive initial
investment requirements if a dollar cost averaging plan is set up
● According to Morningstar, someone has to be right in timing the market two thirds of the
time to outperform

Section 6: Fund Costs

● Mutual fund fees can be broken down into one time fees and ongoing annual expenses
● One time fees include:
○ Sales commissions, or loads, that are paid if someone buys shares in the fund to
an advisor
■ Front end loads can't be higher than 8.5%, back end loads can't be higher
than 6%
○ Redemption fees are paid directly to the fund
■ These are fees for people who hold the fund for fewer than 90 days
■ This is to discourage short term trading
 ○ Some companies charge account maintenance fees for smaller accounts to keep
the balance higher
● Ongoing fees are in the expense ratio
○ This contains fees calculated in such as management fees, etc
○ Another fee is the 12b-1 fee which covers advertising
■ Levied by half of all funds
○ Brokerage costs are fees paid to a fund when one buys them
○ Interest expenses are what a fund charges shareholders if a fund borrows money
to buy securities
● It's best to invest in funds with expenses below 1%
● Avoid bond funds with expense ratios above .6%
● Take foreign funds with fees of 1.2%
● Take stock funds with fees at about 0.85% or lower

Section 7: Bond Duration

● Bond maturity and duration are key terms in bonds
● A bond is issued with a face (par) value which is the amount the investor will get at
maturity
○ The par value remains fixed
● Most bonds pay a coupon consistently
○ The rate paid is called a coupon rate
● Yield to maturity is the total return of a bond
● Present value is the current worth of a stream of cash flows, in this case a bond
● Duration: Number of years required to recover the true cost of the bond
○ This is expressed as the number of years from its purchase date
○ This is used to compare bonds with different maturity dates, coupons, and YTMs
○ Duration is calculated using present value of coupon rates, YTM, and time to
maturity
● Reinvestment risk is the risk that the profits of an investment will be reinvested at a lower
interest rate which gives lower returns
○ This is factored in when calculating bond duration
● The higher the coupon rate, the shorter the duration since the bond takes less time since
there is more money coming at each period
○ This also means that that bond has a shorter maturity and higher yield
● Bond duration affects interest rate risk
○ This is because duration is correlated to yield and coupon rates
● Longer duration bonds will be more sensitive to interest rate fluctuations
● Duration determines the economic life of a bond

Section 7: Buying Bonds

● There are many factors to consider when buying bonds
● Bonds are typically more stable than stocks but have a lower return
● Bonds are loans and are IOUs
 ● Short term bonds are the most conservative way to invest in the bond market
● The two main factors affecting bond prices are interest rates and the credit quality
● One can purchase treasury bonds from the secondary market or the Federal Reserve
○ The treasury holds auctions four times a year in the first weeks of February, May,
August, and November
● One can buy corporate bonds through bond dealers
○ There is a lot of active trading in the corporate bond market
● Face values can fluctuate in the secondary market
● Most bonds are sold over the counter
● The interest of a bond is usually paid twice a year
● The bond can be sold before maturity
● If the price of bond goes above face value, it is at a premium
● If it goes below face value, it is at a discount
● The difference between the price and how much the client pays for the bond is the
bond's markup
○ This markup is the transaction cost that the broker takes
○ This happens on the secondary market
○ This is usually 1-5% of the bond's value
○ Bond dealers usually charge higher markups for smaller bond dales
● Th price of a brand new bond that is paid is called the offering price
○ The broker "marks up" this price
● If you sell a bond before maturity, the broker will "mark down" the price and pay less than
current value
● Bonds bought on exchanges have higher markups than OTC
● Unit Investment Trusts are ways to indirectly invest in the bond market
○ In the trust, one will know exactly how much someone will get when the bonds
mature
○ UITs are conservative options
○ They allow the opportunity to buy bonds in a portfolio that does not change
○ Some UITs are specialized
○ UITs provide stable income to the buyer
○ A trustee supervises the bonds in the trust but cannot sell or buy new bonds
○ The bonds remain fixed until all initial investments are returned
● Another way is a bond mutual fund
○ There is no maturity date and profits can be reinvested with no reinvestment risk
● Things to consider when buying a bond include: Duration, where to buy them, how to
buy them, premium or discount, new or old issue, costs
● The NASDAQ is the prime place for bond trading

Section 7: Process of Issuing Bonds

● Issuing bonds is a long and complicated process
● Investment banks (IB) typically issue bonds
○ Issuers contact the bank for advice and for clients
 ○ The investment bank sells the bonds as a brokers since they have an
understanding of capital markets
● Investment banks begin helping long before issuance and the relationship may endure
long after issuance
● Investment banks serve as underwriters
○ They buy the bonds and sell them to the public
○ They earn a profit between the purchase and sale price
■ This is called the underwriting spread
● When the IB works with a client, they submit documents to the Securities and Exchange
Commission (SEC)
● The IB works in conjunction with other banks to form a syndicate
○ This spreads the risk of the bonds
● Sometimes the IB simply sells the issue but does not buy (underwrite) the bonds
○ This is called a best efforts agreement and the IB receives a commission
● IBs reach out to investors through the press, their extensive networks of brokers and
salesmen, or simply they will reach out to governments and institutions
● If a bond is purchased for investment and not resale (underwriting), they don't have to be
registered with the SEC
○ Securities that cannot be sold in the market places are called letter securities
● Bonds sold through private placement are sold to institutions
○ They don't have to register with the SEC

Section 7: Role of Collateral

● Collateral is an asset that secures a loan's debt
● This minimizes the risk of default and makes it marketable
● Then an asset is has collateral, it is said to be collateralized or secure
● To secure bonds, some companies use a portfolio of securities
● A repurchase agreement is when the purchaser of a security receives the collateral and
the issuer gets the loan or investment
○ Both parties sign an agreement to exchange the two securities in the future
○ If the issuer defaults, the buyer sells the securities on the market
● Collateral trust bonds have a portfolio of securities as collateral
○ The securities are managed by a trustee
● Other investments such as equipment trust certificates use things such as railcars, Arline
equipment, etc for transportation companies
○ The equipment is held by a trustee
○ For example, if a railroad wishes to finance rail cars, they will get them from a
trustee who will lease it to them until the investment is paid keeping the cars as
collateral
● Houses are used as collateral in mortgages
○ Collateralized Mortgage Obligations are a special kind of bond that divides the
bond into tranches and classes
 ● Local governments, when building roads or bridges, issue revenue bonds and use the
revenue of the project as collateral
● Securities with collateral offer lower returns
● Unsecured government bonds may have a better credit rating than collateralized
○ This is because unsecured bonds are backed by tax revenue which is more
secure than simply collateral

Section 7: Secured and Unsecured Bonds

● Federal bonds are only backed by the credit history and good faith of the government
● Mortgages are secured by real estate and are thought to be safe
○ They are essentially corporate bonds
○ They may be first or junior mortgage bonds
■ If an issuer has to liquidate and can't pay, first mortgage bonds are paid
first
● Secured bonds are perceived as safer
○ A third party trustee usually holds the collateral
● Unsecured bonds are called debentures
○ They are backed with "full faith and credit"
● If a company holding debentures defaults or liquidates, then they will pay debentures
and then subordinated debentures after the secure bond holders
● Treasure bonds are debentures and are guaranteed by the treasury
● General Obligation bonds are municipal bond debentures
● Income bonds are bonds in which payments are made only after the issuer earns a
certain income
○ These are the most junior bonds
● Convertible bonds give the investor the option to convert the bonds into shares of stock

Section 7: Introduction to Government Bonds

● Most treasuries don't offer collateral but Treasury Bonds are the safest because of the
credit worthiness
● They offer fixed interest rates and have maturities ranging from one to fifty years
○ Bonds that mature in less than a year are part of the money market
● Treasury Bonds (T Bonds) mature from 10 to 30 years and pay interest semiannually
○ They are issued in denominations of 1000 dollars
○ They are non callable
○ Interest is taxable only on the federal level
● T Notes last from one to ten years and are not callable (some issued before 1984 are)
○ They pay interest semiannually
○ Notes with two or three year maturity are sold in 5000 dollar units while others
are sold in 1000s
○ Sold through auction
● Collateralized Mortgage Obligations are split into tranches and are complicated
○ The collateral is the home
 ○ These were created to reduce the prepayment risk from refinanced mortgages
● Agency bonds are sold to certain government agencies and are considered safe but not
guaranteed by the government
○ Most agency bonds are Mortgage backed securities (MBS)
○ They provide higher yields and range from 1 to 50 year maturities and are sold in
1000 or 5000 dollar units
○ Other agencies include Ginnie Mae, Fannie Fae, Freddie Mac, Postal Service,
and Federal Land Banks
● There are many types of savings bonds
● One type is Series EE Bonds
○ These are no longer available
○ Do not distribute interest periodically
○ Purchased at a discount from face value called "par" and get full face value at
maturity
○ The minimum face value is 50 dollars while the maximum is 30,000 dollars
○ They can be purchased through banks
○ The owner can defer taxes on interest until redemption
○ Based on the rate of treasury securities (90% yield of treasuries)
● Another type is Series I Bonds
○ They are non marketable and have variable inflation rate
■ Adjusted every Nov. And May
■ Adjusted for Consumer Price Index
○ Have a mimimum face value of 50
○ Low Risk
○ Must hold Series EE and I bonds for at least six months
○ Earn interest for thirty years
○ Sold at full face value
● Series HH bonds pay interest once per year and their denominations range from 500 to
10000 dollars
○ Can be redeemed after six months and normally mature after 10 years but can
be extended to 20
○ No longer available as of 2004
○ Come with fixed rates of interest

Section 7: Government Agency Bonds and Savings

Bonds
● Government agency bonds are separate from the government
○ Because of their affiliation with the government, they are secure
● They receive favorable treatment among bond investors
● Agencies like Ginnie or Fannie Mae or Freddie Mac buy mortgages from financial
institutions and pool them and then sell shares of these pools to investors
● They have a higher return than treasury securities but higher volatility
 ● Ginnie Mae (Government National Mortgage Association), is an agency of the US HUD
department
○ Their bonds are also called Ginnie May Passes since they pass through a bank
which collects a fee
○ The minimum investment is 25,000 dollars
○ Owners of the bond receive a monthly payment of interest and possibly some
principal
○ These bonds are highly liquid
○ Many banks, credit unions, and pension funds buy these
● Fannie and Freddie are similar to Ginnie Mae
○ Chartered in 1938 in the depression
○ In 1960, it got separated and went on the NYSE in 1970
○ It went fully public in 1989
● Agency bonds have a low risk of default but are less solid as treasuries
● One risk of them is prepayment risk for mortgages when someone pays their mortgage
early which can affect the yield and keep the investor trapped in a low interest rate
environment
○ They are least likely to prepay their mortgage if they take out a home equity loan
● Savings bonds were established in 1941 as "war bonds"
● They are backed by the US Government
● They are accessible for almost anyone
● They provide a tax shelter since one is not required to pay income tax on earnings until
redemption
● They provide a shield against inflation and a steady return
● Savings bonds can be bought from the Bureau of Public Debt, Banks, Federal Reserves,
and credit unions
● There are no sellers fees or commissions when buying a bond
● Before 1980, there were Series E and H bonds but were replaced with Series EE and
HH
● In 1998, inflation indexed Series I bonds were introduced
● Savings bonds can be redeemed for full value (provided they are held for at least 5
years) at a local financial institution
● These can be bought in the name of children and for education saving purposes
(Education bond program of 1990)

Section 8: Futures
● Futures are derivatives that are contracts to buy or sell a specific financial instrument at
a specific date in the future
● Futures can be used by businesses to mitigate a price to hedge price change since the
price is locked in
● For example, farmers can lock in prices to hedge a position if a contract goes wrong
● Futures can also be used to speculate on financial markets
● There are five standard components of a contract
 ○ Futures markets are open 24 hours a day six days a week
■ Each product has its own unique trading hours
○ Tick sizes, or how much the price can fluctuate, differ
○ One contract represents a certain amount of something
■ One contract of oil represents 1000 barrels one gold contract is 100 troy
ounces
○ Contract value is another component (number of contracts * price)
○ Futures are either financially or physically settled
■ Financially settled contracts make payments in money while physical
contracts pay physical goods
● Futures can be traded with margin or leverage to control massive amounts which can
amplify gains and losses
○ If someone is losing money, they will need to meet a margin call and put more
money
● Futures have their origins in the commodity industry
● S&P 500 Futures are sold in betting on the E Mini S&P 500
● Most futures are sold on the Chicago Mercantile Exchange
● Futures positions are settled on a daily basis
● The US futures market is regulated by the Commodity Futures Trading Commission
(CFTC)
● Futures have expiration dates as well

Section 8: Options
● Options are derivatives
● It is an alternative way to invest in the movement of a security
● Option contracts give someone the right to purchase or sell a security before a date
● They have calls and puts
○ Calls are to buy
○ Puts are to sell
● To buy an option, someone must pay a premium
○ This is calculated by the stock price, time until expiration (Time Value), and
Implied Volatility (how much the price will move)
● Options can be exercised
● If the option passes the expiration date, it expires and is worthless
● Option pricing is very complex
● Options can be sold on the open market
● Options are sold mainly on the Chicago Mercantile Exchange and the Chicago Board of
Options Exchange
● The options clearing corporation guarantees all CBOE traded options if a writer breaches
contract
● Options can be used for many securities
● They can be used for speculation and hedges
● An investor can write or buy an option
 ● The price in which the security is transacted is called the strike price
● A price is in the money when the price is above (or below for puts) the strike price
○ When it is out of the money, it is below (or above for puts) the strike price
● Spreading is using two opposite options positions to hedge and speculate a bet
● American options can be executed before the date but European options are executed
on the date
● LEAPS are long term options

Section 8: Subsections 3-4

● A swap is a type of derivative that is very complex
● It is the exchange of one instrument for another at a predetermined time
● These are not traded OTC or at an exchange and must be negotiated at a bank
● These are used to hedge risks such as interest rate risk and currency risk
● Interest rate and currency swaps are the most commonly traded on the market
○ Interest rate swaps switch interest rates
■ This is for if someone doesn't like their interest rate
○ In a currency swap, a loan in one currency is swapped with a loan in another
currency to get better deals on interest rates that they cannot get by making a
loan from a bank
○ CDSs are insurance contracts to insure a bond in exchange for premiums
● Derivatives are used for risk management to hedge risk
● Derivatives are also used for speculation to maximize returns

Section 9: Financial Services and Markets Act

● After the crash of 1929, the federal government increased financial regulations
● The Securities Act of 1933 ensured that all securities offered to the public were
described rigorously in a registration statement and prospectus
○ It regulates distribution of Investments
○ The SEC can regulate the interstate sale of securities
○ It defines an issuer and underwriter
● The Securities Exchange Act of 1934 governs agents who trade of secondary markets
○ It also regulates brokers and regulates thing such as where specialists can trade
○ Defines broker as someone who transacts for investors and dealer who sells for
their own account
○ It created the SEC which oversaw the enforcement of the act and all acts
○ It prohibited Insider Trading

● The Investment Advisors Act of 1940 regulated financial advisors by requiring them to
register with the SEC
○ It defined Investment Advisors and Representatives
● The Trust Indenture Act of 1939 regulated the issuance of debt securities
○ This included bankruptcy, collateral, and conflicts of interest
● The Investment Company Act of 1940 regulated mutual funds
● Many common types of financial crime include Insider trading, embezzlement, tax fraud,
insurance fraud, identity theft, money laundering, and credit card fraud
○ Many have to do with securities
● Market manupulation is when a person gives false information to the market
● Market abuse is when investors use information not publicly available, use false
information, manipulate the market in any other way