Core Securities Vocabulary
Key definitions and distinctions — security, issuer, broker vs. dealer, and the people who work at broker-dealers.
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Questions Covered in This Set
11 cards to master
What is a 'security' under the Howey test?
An investment of money in a common enterprise with an expectation of profit, where the investor does not control the venture. Examples: stocks, bonds, options, ETFs, mutual funds, LP interests, variable annuities.
Name the main items that are NOT securities.
Fixed annuities, whole life insurance, commodities/futures, directly held real estate, gold bullion, bank CDs (generally), and collectibles.
Who is the 'issuer'?
The entity that creates and sells a security to raise capital — a corporation issuing shares, the U.S. Treasury issuing bills, a city issuing municipal bonds.
Primary market vs. secondary market — quick tell?
If the money goes to the issuing company, it's primary; if it goes to another investor, it's secondary.
Broker (agent) capacity: role and compensation?
Arranges a trade between buyer and seller, never owns the security, and earns a commission.
Dealer (principal) capacity: role and compensation?
Buys/sells from its own inventory, taking the other side of the customer's trade, and earns a markup/markdown (or spread).
What is a market maker, and what is the spread?
A dealer that continuously quotes a bid (it buys from you) and an ask/offer (it sells to you); the difference is the spread — its gross profit.
Bid vs. ask from the customer's view?
You sell at the bid and buy at the ask — the customer always gets the worse side. The inside market is the highest bid and lowest ask.
Two meanings of 'principal' on the SIE?
(1) A firm trading for its own account/inventory; (2) a supervisory person at a firm (e.g., Series 24) who approves advertising, accounts, and trades.
Registered representative vs. associated person?
An associated person is anyone employed by a broker-dealer in the securities business; an RR deals with customers, takes orders, earns transaction-based pay, and must pass the SIE plus a top-off (Series 7, 6, or 79).
Investment adviser vs. broker-dealer compensation?
An investment adviser is paid a fee for advice (Advisers Act); a broker-dealer is paid per transaction (Exchange Act).
