Series 6 Exam Key Terms Glossary: Comprehensive Guide

16.1 Glossary of Key Terms

The Series 6 Exam is a crucial step for professionals in the securities industry, focusing on investment company and variable contracts products. To succeed, it’s essential to understand the terminology used in the exam. This comprehensive glossary provides definitions and explanations of key terms, acronyms, and concepts that are critical for the exam and your career in the securities industry. Use this glossary as a reference tool to clarify terms and reinforce your understanding of the material.

A

Accumulation Phase
The period during which an investor is contributing to an investment, such as a variable annuity, and the investment is growing tax-deferred. This phase precedes the annuitization phase.

Accrued Interest
Interest that has accumulated on a bond since the last interest payment up to, but not including, the settlement date. It is paid by the buyer of the bond to the seller.

Advisory Fee
A fee charged by an investment adviser for managing an investment portfolio. This fee is typically a percentage of the assets under management.

Annual Report
A comprehensive report on a company’s activities throughout the preceding year. It provides shareholders with information about the company’s financial performance.

Annuity
A financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees.

Arbitration
A method of resolving disputes outside the courts, where the parties to a dispute refer it to one or more arbitrators, whose decision they agree to be bound by.

B

Back-End Load (CDSC)
A sales charge or commission paid when an investor sells mutual fund shares, also known as a contingent deferred sales charge (CDSC).

Balanced Fund
A mutual fund that invests in a mix of equities and fixed-income securities, aiming to provide a balance of risk and return.

Basis Point
One one-hundredth of a percentage point (0.01%). Used to denote changes in interest rates or yields.

Bear Market
A market condition where securities prices fall, and widespread pessimism causes the negative sentiment to be self-sustaining.

Beneficiary
An individual or entity designated to receive the benefits from a financial product, such as an annuity or life insurance policy, upon the death of the policyholder.

C

Capital Gain
The profit from the sale of a security or investment, calculated as the difference between the selling price and the purchase price.

Capital Loss
The loss incurred when a security or investment is sold for less than its purchase price.

Closed-End Fund
A type of investment company that issues a fixed number of shares, which are traded on a stock exchange. Unlike mutual funds, closed-end funds do not issue or redeem shares on demand.

Custodian
A financial institution that holds customers’ securities for safekeeping to prevent them from being stolen or lost.

Custodial Account
An account set up for the benefit of a minor, managed by a custodian until the minor reaches the age of majority.

D

Deferred Annuity
An annuity contract that delays income payments until the investor elects to receive them, typically at retirement.

Diversification
A risk management strategy that mixes a wide variety of investments within a portfolio to reduce exposure to any single asset or risk.

Dividend
A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.

Dollar-Cost Averaging
An investment strategy where an investor divides up the total amount to be invested across periodic purchases of a target asset, aiming to reduce the impact of volatility.

E

Equity Fund
A mutual fund that invests primarily in stocks, aiming for capital gains and dividend income.

Exchange-Traded Fund (ETF)
A type of investment fund traded on stock exchanges, much like stocks. 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.

Ex-Dividend Date
The date on which a stock begins trading without the value of its next dividend payment. Investors who purchase the stock on or after this date are not entitled to the declared dividend.

F

Fiduciary
An individual or organization that acts on behalf of another person or persons to manage assets. A fiduciary is bound ethically to act in the other’s best interests.

FINRA (Financial Industry Regulatory Authority)
A self-regulatory organization that oversees brokerage firms and exchange markets in the United States.

Front-End Load
A sales charge or commission paid when an investor buys mutual fund shares, typically used to compensate the broker for selling the fund.

Full Faith and Credit
A phrase used to describe the unconditional guarantee or commitment by one entity to back the interest and principal of another entity’s debt.

G

Growth Fund
A mutual fund or ETF that invests in stocks of companies expected to grow at an above-average rate compared to their industry or the overall market.

Gross Domestic Product (GDP)
The total value of all goods and services produced within a country over a specific time period, used as a broad measure of overall economic activity.

H

Hedge Fund
An alternative investment using pooled funds that employ numerous different strategies to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage.

High-Yield Bond
A bond that is rated below investment grade by the major credit rating agencies. These bonds are riskier than investment-grade bonds and therefore offer higher yields.

I

Index Fund
A type of mutual fund or ETF with a portfolio constructed to match or track the components of a financial market index, such as the S&P 500.

Inflation
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Insider Trading
The buying or selling of a publicly-traded company’s stock by someone who has non-public, material information about that stock.

Investment Adviser
An individual or firm that is in the business of giving advice about securities to clients. Investment advisers are required to register with the SEC or state regulators.

J

Joint Account
An account shared by two or more individuals, where each individual has the right to deposit and withdraw funds. Common types include Joint Tenants with Rights of Survivorship (JTWROS) and Tenants in Common (TIC).

Junk Bond
A high-yield or non-investment-grade bond. These bonds carry a higher risk of default than investment-grade bonds.

K

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

L

Liquidity
The degree to which an asset can be quickly bought or sold in the market without affecting its price. Cash is considered the most liquid asset.

Load Fund
A mutual fund that comes with a sales charge or commission. This fee is paid by the investor when buying or selling shares in the fund.

Long-Term Capital Gain
A profit from the sale of an asset held for more than a year, taxed at a lower rate than short-term capital gains.

M

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

Money Market Fund
A type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents.

Municipal Bond
A debt security issued by a state, municipality, or county to finance its capital expenditures, such as building highways, schools, or sewer systems. These bonds are exempt from federal taxes and often from state and local taxes.

N

Net Asset Value (NAV)
The value per share of a mutual fund or ETF, calculated by dividing the total value of all the securities in the fund’s portfolio, less any liabilities, by the number of outstanding shares.

No-Load Fund
A mutual fund that does not charge any type of sales load. Shares are sold without a commission or sales charge.

O

Open-End Fund
A type of mutual fund that does not have restrictions on the amount of shares the fund can issue. Shares are bought and sold on demand at the fund’s current NAV.

Options
Financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price before a certain date.

P

Portfolio
A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including mutual funds and ETFs.

Prospectus
A formal legal document that provides details about an investment offering for sale to the public. It contains information that a potential investor needs to make an informed decision about the investment.

Put Option
A financial contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.

Q

Qualified Plan
A retirement plan that meets the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA), offering tax benefits.

R

Recession
A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in GDP, real income, employment, industrial production, and wholesale-retail sales.

Risk Tolerance
The degree of variability in investment returns that an individual is willing to withstand in their investment portfolio.

Roth IRA
A type of individual retirement account (IRA) where contributions are made with after-tax dollars, and qualified withdrawals are tax-free.

S

Securities and Exchange Commission (SEC)
The U.S. government agency responsible for regulating the securities industry and enforcing federal securities laws.

Self-Regulatory Organization (SRO)
An organization that exercises some degree of regulatory authority over an industry or profession. In the securities industry, FINRA is a notable example.

Stock Split
An action taken by a company to divide its existing shares into multiple shares, increasing the number of shares outstanding while lowering the price per share.

Systematic Risk
The risk inherent to the entire market or market segment, also known as market risk. It is not specific to a particular company or industry.

T

Tax-Deferred
Investment earnings such as interest, dividends, or capital gains that accumulate tax-free until the investor takes constructive receipt of the gains.

Tenants in Common (TIC)
A form of ownership in which two or more individuals have an undivided interest in a property. Unlike JTWROS, there is no right of survivorship.

Trust Account
An account established by an individual to be administered by a trustee for the benefit of a beneficiary.

U

Underwriter
An entity that administers the public issuance and distribution of securities from a corporation or other issuing body.

Unit Investment Trust (UIT)
An investment company offering a fixed, unmanaged portfolio of securities having a definite life.

Universal Life Insurance
A type of cash value life insurance, under which the excess of premium payments above the current cost of insurance is credited to the cash value of the policy.

V

Variable Annuity
An annuity contract in which the payout amounts are not guaranteed, varying according to the performance of the underlying investments.

Variable Life Insurance
A type of life insurance policy that allows the policyholder to allocate a portion of the premium dollars to a separate account comprised of various instruments and investment funds within the insurance company’s portfolio.

W

Whole Life Insurance
A type of permanent life insurance that remains in force for the insured’s whole life and requires (in most cases) premiums to be paid every year into the policy.

Wrap Account
An account that charges a single fee for a bundle of services, including investment advice, brokerage, and administrative expenses.

Y

Yield
The income return on an investment, such as the interest or dividends received from holding a particular security.

Yield to Maturity (YTM)
The total return anticipated on a bond if the bond is held until it matures.

Z

Zero-Coupon Bond
A bond that is issued at a discount and does not pay interest during its life. Instead, it pays the face value at maturity.

Series 6 Exam Practice Questions: Glossary of Key Terms

Use this glossary as a reference tool to enhance your understanding of key terms and concepts for the Series 6 Exam. Regularly review and test yourself to reinforce your knowledge and ensure exam success.