Glossary of Key Terms for the SIE Exam: Comprehensive Definitions and Insights

8.1 Glossary of Key Terms

Welcome to the Glossary of Key Terms section of the “Master the Securities Industry Essentials (SIE) Exam: The Ultimate Comprehensive Guide to Securities Foundations.” This glossary is designed to provide you with clear and concise definitions of important terms that are essential for mastering the SIE Exam. Understanding these terms will not only help you in your exam preparation but also enhance your comprehension of the securities industry as a whole.

Purpose of the Glossary

• Quick Reference: The glossary serves as a quick reference tool to reinforce your understanding of key concepts.
• Exam Preparation: Mastery of these terms is crucial for understanding exam questions and comprehending complex securities concepts and regulations.
• Industry Standards: Definitions are aligned with industry standards to ensure accuracy and relevance.

Organization

• Alphabetical Order: Terms are arranged alphabetically for easy navigation.
• Cross-Referencing: Related terms or concepts are cross-referenced to provide a broader understanding of interconnected ideas.

Usage Tips

• Regular Review: Regularly review the glossary to reinforce memory and understanding.
• Study Aid: Use the glossary when encountering unfamiliar terms during your study sessions.

Glossary

A

• Arbitrage: The simultaneous purchase and sale of an asset to profit from a difference in the price. This strategy exploits price discrepancies in different markets or forms.

• Asset-Backed Securities (ABS): Investment securities backed by a pool of assets such as loans, leases, credit card debt, or receivables. ABS provide a way for issuers to obtain funds by selling securities backed by the cash flows from these assets.

B

• Balance Sheet: A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It provides a snapshot of the company’s financial condition.

• Bid-Ask Spread: The difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. This spread is a measure of market liquidity.

C

• Call Option: A financial contract that gives the buyer the right, but not the obligation, to purchase a stock or other asset at a specified price within a specific time period.

• Capital Markets: Markets where buyers and sellers engage in the trade of financial securities like bonds, stocks, etc. The capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government, and individuals.

D

• Derivative: A financial security whose value is dependent upon or derived from an underlying asset or group of assets. Common derivatives include futures contracts, options, and swaps.

• Dividend: A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.

E

• Equity Security: A financial instrument that represents ownership in a company, typically in the form of common or preferred stock.

• Exchange-Traded Fund (ETF): A type of investment fund and exchange-traded product, i.e., they are traded on stock exchanges. ETFs hold assets such as stocks, commodities, or bonds and generally operate with an arbitrage mechanism designed to keep trading close to its net asset value.

F

• Fiduciary Duty: A legal obligation of one party to act in the best interest of another. The fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the “principal”): they must not put their personal interests before the duty and must not profit from their position as a fiduciary, unless the principal consents.

• Fixed Income Security: A type of investment that pays regular income in the form of interest or dividends. Examples include bonds, preferred stocks, and certificates of deposit (CDs).

G

• Gross Domestic Product (GDP): The total value of goods produced and services provided in a country during one year. It is a broad measure of a nation’s overall economic activity.

• Growth Stock: A stock from a company which is expected to grow at an above-average rate compared to its industry or the overall market.

H

• Hedge Fund: An alternative investment fund that pools capital from accredited investors or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk management techniques.

• High-Yield Bond: A bond that is rated below investment grade by the major credit rating agencies. These bonds are considered to be at a higher risk of default, but offer higher yields than investment-grade bonds to compensate for the increased risk.

I

• Initial Public Offering (IPO): The process through which a private company can go public by sale of its stocks to general public. It is often used by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

• Insider Trading: The trading of a public company’s stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company.

J

• Junk Bond: A colloquial term for a high-yield or non-investment grade bond. These bonds carry a higher risk of default and, as a result, offer higher yields than more creditworthy bonds.

• Joint Account: A bank or brokerage account shared between two or more individuals. Each individual can deposit and withdraw funds and is equally responsible for the account.

K

• Know Your Customer (KYC): A standard in the investment industry that ensures investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position.

• Key Performance Indicators (KPIs): A set of quantifiable measures that a company uses to gauge its performance over time.

L

• Liquidity: The ease with which an asset can be converted into cash without affecting its market price. High liquidity means an asset can be easily bought or sold, while low liquidity means it is harder to buy or sell.

• Leveraged Buyout (LBO): The acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.

M

• Market Capitalization: The total market value of a company’s outstanding shares of stock. It is calculated by multiplying the current share price by the total number of outstanding shares.

• Mutual Fund: An investment vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.

N

• Net Asset Value (NAV): The value per share of a mutual fund or an ETF on a specific date or time. It is calculated by dividing the total value of all the securities in the portfolio, minus any liabilities, by the number of fund shares outstanding.

• Nominal Yield: The interest rate stated on a bond, also known as the coupon rate. It is the percentage of the bond’s face value that will be paid annually in interest to the bondholder.

O

• Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy or sell a security or other financial asset at an agreed-upon price during a certain period of time or on a specific date.

• Over-the-Counter (OTC): A decentralized market where trading of financial instruments, such as stocks, bonds, commodities, or derivatives, is conducted directly between two parties. OTC markets do not have a physical location and are less formal than exchanges.

P

• Preferred Stock: A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders and the shares usually do not carry voting rights.

• Price-to-Earnings Ratio (P/E Ratio): A valuation ratio of a company’s current share price compared to its per-share earnings. It is used by investors to determine the relative value of a company’s shares in an apples-to-apples comparison.

Q

• Qualified Institutional Buyer (QIB): A company that manages at least $100 million in securities on a discretionary basis or is a registered broker-dealer investing at least $10 million in non-affiliated securities. QIBs are deemed to be more sophisticated and are subject to fewer regulatory requirements.

• Quantitative Easing (QE): An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment.

R

• Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-producing real estate. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to buy, manage, or finance any properties themselves.

• Risk Tolerance: The degree of variability in investment returns that an individual is willing to withstand in their investment portfolio. It is an important component in investing and financial planning.

S

• Securities and Exchange Commission (SEC): A U.S. government agency responsible for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets.

• Short Sale: The sale of a security that the seller has borrowed. A short seller profits if a security’s price declines and loses if the price rises.

T

• Treasury Bond: A long-term, interest-bearing security issued by the U.S. Treasury with a maturity of 10 years or more. Treasury bonds pay interest semiannually and the principal is paid back at maturity.

• Trading Volume: The amount of an asset or security that changes hands over some period of time, often over the course of a day. Trading volume is an important technical indicator that investors use to confirm a trend or trend reversal.

U

• Underwriting: The process through which an individual or institution takes on financial risk for a fee. Underwriters assess the risk of insuring a home, car, driver, or an individual’s health or life. In the securities industry, underwriting involves the process of issuing new securities to the public.

• Unsecured Debt: A loan that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of bankruptcy or liquidation.

V

• Volatility: A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured using the standard deviation or variance between returns from that same security or market index.

• Venture Capital: A form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.

W

• Warrant: A derivative that gives the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration.

• Working Capital: A measure of a company’s efficiency and its short-term financial health. Working capital is calculated as current assets minus current liabilities.

X

• Ex-Dividend Date: The date on which a stock starts trading without the value of its next dividend payment. If you purchase a stock on or after its ex-dividend date, you will not receive the next dividend payment.

• Exchange Rate: The value of one currency for the purpose of conversion to another. It is the rate at which one currency will be exchanged for another.

Y

• Yield to Maturity (YTM): The total return anticipated on a bond if the bond is held until it matures. YTM is considered a long-term bond yield expressed as an annual rate.

• Yield Curve: A line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.

Z

• Zero-Coupon Bond: A bond that is issued at a deep discount to its face value but pays no interest. The bondholder receives the full face value at maturity.

• Zombie Company: A company that earns just enough money to continue operating and service its debt but is unable to pay off its debt. Such companies, given their inability to reduce their debt, are at risk of bankruptcy if they hit a rough patch.

SIE Exam Practice Questions: Glossary of Key Terms

This glossary is intended to be a dynamic tool that you can refer to throughout your study and beyond as you embark on your career in the securities industry. Understanding these terms will not only aid in your exam preparation but also provide a solid foundation for your professional development.