NASD Series 6 & 63 Text Book & Exam Prep Software Package
Books/Exam Info
• Series 6: Investment Company Products/Variable Contract Representative
Qualifies an individual to sell investment company securities, mutual funds, variable annuities, and variable life insurance products.
• Series 63: Uniform Securities Agent State Law Examination
The examination covers the principles of state securities regulation reflected in the Uniform Securities Act; these laws are sometimes called "Blue Sky" laws.
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Series 6 Text Book - Investment Company/Variable Contracts Representative
Series 6 Exam Prep Software - Investment Company/Variable Contracts Representative
Series 63 Text Book - Uniform Securities Agent Examination
Series 63 Exam Prep Software - Uniform Securities Agent Examination
$ 174.95
A Portion of CHAPTER ONE (complete chapter listed in Series 6)
EQUITY AND DEBT SECURITIES
Introduction:
This first chapter will build the foundation upon which the rest of this text is built. A
thorough understanding of this material will be necessary in order to successfully
complete the series six exam. While a series six-registered representative may not directly
sell the securities detailed in this first section, most mutual funds and variable annuities
invest in these securities so it’s an important starting point.
What is a Security?
A security is any investment product that can be exchanged for value and involves risk. In
order for an investment to be considered a security it must be readily transferable between
two parties and the owner must be subject to the loss of some or all of their invested
principal. If the product is not transferable or does not contain risk it is not a security.
Types of securities Types of non securities
Common stock Whole life insurance
Preferred stock Term life insurance
Mutual funds Retirement plans
Variable annuities Fixed annuities
Variable life insurance Prospectus
Securities are broken up into two major categories for the series six equity and debt. Let’s
begin by comparing the two differed types of securities:
Equity = Stock
The term equity is synonymous with the term stock. Throughout your preparation for this
exam and on the exam itself, you will find many terms that are used interchangeably.
Equity or stock creates an ownership relationship with the issuing company. Once an
investor has purchased stock in a corporation they become an owner of that corporation.
The corporation sells off pieces of itself to investors in the form of shares in an effort to
raise working capital. Equity is perpetual, meaning there is no maturity date for the shares
and the investor may own the shares until they decide to sell them. Most corporations use
the sale of equity as their main source of business capital.
Debt = Bonds
A bond or any other debt instrument is actually a loan to the issuer. By purchasing a
bond, the investor has in fact made a loan to the corporation and has become a creditor of
the company that issued the instrument.
Debt instruments, unlike their equity counterparts, have a time frame or maturity date
associated with them. Whether it is one year, five years, or thirty years, at some point the
issue is going to mature and the investor will receive their principal back and will cease to
be a creditor of the corporation. We will examine how investors may purchase stocks and
bonds, but first we must look at how the corporation uses the sale of these securities to
meet their organizational goals.
Capitalization
The term capitalization refers to the sources and make up of the company’s financial
picture. To determine a company’s capital composition, an investor must look at the
corporation’s balance sheet. The balance sheet is like a snap shot of the corporation’s
finances at the time it was taken. It shows a list of all of the company’s assets and
liabilities as well as the company’s net worth or stockholders’ equity. Most publicly
traded companies have to disclose or report their performance at least quarterly.
The balance sheet equation
Assets – Liabilities = Net Worth
Assets
Assets are everything that a company owns including cash, securities, investments,
inventory, property, and accounts receivable.
Liabilities
Liabilities are everything that a company owes including accounts payable, both long and
short term debt along with any other obligations.
Net Worth
The company’s net worth is equal to the value of all assets after all liabilities have been
paid. This corporation’s net worth is the stockholders’ equity. Remember that the
stockholders own the company.
Common Stock
There are thousands of companies whose stock trades publicly and who have used the sale
of equity as a source of raising business capital. All publicly traded companies must issue
common stock before they may issue any other type of equity security. There are two
types of equity securities, common stock and preferred stock. While all publicly traded
companies must have sold or issued common stock, not all companies may want to issue
or sell preferred stock. Let’s take a look at the creation of a company and how common
stock is created.
Corporate Time Line
Authorized Stock
Authorized stock is the maximum number of shares that a company may sell to the
investing public in an effort to raise cash to meet the organization’s goals. The number of
authorized shares is arbitrarily determined and is set at the time of incorporation. A
corporation may sell all or part of its authorized stock. If the corporation wants to sell
more shares than it’s authorized to sell, the shareholders must approve an increase in the
number of authorized shares.
Issued Stock
Issued stock is stock that has been authorized for sale and that has actually been sold to
the investing public. The total number of authorized shares typically exceeds the total
number of issued shares so that the corporation may sell additional shares in the future to
meet its needs. Once shares have been sold to the investing public they will always be
counted as issued shares regardless of their ownership or subsequent repurchase by the
corporation. It’s important to note that the total number of issued shares may never
exceed the total number of authorized shares.
Additional authorized shares may be issued in the future for any of the following reasons:
- To pay a stock dividend
- To expand current operations
- To exchange common shares for convertible preferred or convertible bonds
- To satisfy obligations under employee stock options or purchase plans
Outstanding Stock
Outstanding stock is stock that has been sold or issued to the investing public and that
actually remains in the hands of the investing public.
Treasury Stock
Treasury stock is stock that has been sold to the investing public, which has subsequently
been repurchased by the corporation. The corporation may elect to reissue the shares or it
may retire the shares that it holds in treasury stock. Treasury stock does not receive
dividends nor does it vote.
A corporation may elect to repurchase it’s own shares for any of the following reasons:
- To maintain control of the company
- To increase earnings per share
- To fund employee stock purchase plans
- To use shares to pay for a merger or acquisition
To determine the amount of treasury stock, use the following formula:
Issued stock – outstanding stock = treasury stock
Values of Common Stock
A common stock’s market value is determined by supply and demand and may or may not
have any real relationship to what the shares are actually worth. The market value of
common stock is affected by the current and future expectations for the company.
Book Value
A corporation’s book value is the theoretical liquidation value of the company. It is found
by taking all of the company’s tangible assets and subtracting all of its liabilities. This
will give you the total book value. To determine the book values per share divide the total
book value by the total number of outstanding common shares.
Par Value
Par value in a discussion regarding common stock is only important if you are an
accountant looking at the balance sheet. For investors, it has no relationship to any
measure of value which may otherwise be employed.
Rights of Common Stockholders
As an owner of common stock, investors are owners of the corporation. As such,
investors have certain rights which are granted to all common stock holders.
Preemptive Rights
As a stockholder, an investor has the right to maintain their percentage interest in the
company. This is known as a preemptive right. Should the company wish to sell
additional shares to raise new capital, they must first offer the new shares to existing
shareholders. Should the existing shareholders decide not to purchase the new shares they
may be offered to the general public.
Test Focus!
Number of Existing Shares Number of New Shares Total Shares After Offering
100,000 100,000 200,000
10,000 10,000 20,000
10% ownership 10% of offering 10% ownership
In the example above, the company has 100,000 shares of stock outstanding and an
investor has purchased 10,000 of those original shares. As a result, they own 10% of the
corporation. The company wishing to sell 100,000 new shares to raise new capital must
first offer 10% of the new shares to the current investor (10,000 shares) before the shares
may be offered to the general public. So if the investor decides to purchase the additional
shares as is the case in the example, the investor will have maintained their 10% interest in
the company.
A shareholder’s preemptive right is ensured through a rights offering. The existing
shareholders will have the right to purchase the new shares at a discount to the current
market value for 45 days. This is known as the subscription price. Once the subscription
price is set, it remains constant for the 45 days, while the price of the stock is moving up
and down in the market place. There are three possible outcomes for a right. They are:
- Exercised:
The investor decides to purchase the additional shares and sends in the money along with
the rights to receive the additional shares.
- Sold:
The rights have value and if the investor does not want to purchase the additional shares
they may be sold to another investor who would like to purchase the shares.
- Expire:
The rights will expire when no one wants to purchase the stock. This will only occur
when the market price of the share has fallen below the subscription price of the right and
the 45 days has elapsed.
Voting
As a common stockholder, you have the right to vote on the major issues facing the
corporation. You are a part owner of the company, and as a result, you have a right to say
how the company is run. The biggest emphasis is placed on the election of the board of
directors.
Common stockholders may also vote on:
- The issuance of bonds or additional common shares
- Stock splits
- Mergers and acquisitions
- Major changes in corporate policy
Methods of voting
There are two methods by which the voting process may be conducted, they are known as
the statutory and cumulative methods of voting. A stockholder may cast one vote for each
share of stock owned and the statutory or cumulative methods will determine how those
votes are cast. The test focuses on the election of the board of directors, so we will use
that in our example.
Test Focus!
An investor own 200 shares of XYZ. There are two board members to be elected and
there are four people running in the election. Under both the statutory and cumulative
methods of voting, you take the number of shares owned and multiply them by the
number of people to be elected to determine how many votes the shareholder has. In this
case, 200 shares x 2 = 400 votes. The cumulative or statutory methods dictate how those
votes may be cast.
Candidate Statutory Cumulative
1 200 votes 400 votes
2
3
4 200 votes
SERIES 63 (complete listing in series 63)
SECTION TWO
DEFINITION OF TERMS
Introduction
In order to successfully complete the Series 63 exam, it is important to have an in-depth
understanding of the terms used within the securities industry—specifically within the
framework of the Uniform Securities Act. The terms used by the USA, also known as the
Act, may have broader meanings than we are accustomed to in everyday usage.
Security
A security is anything that can be exchanged for value that involves a risk to the holder.
A security also represents an investment in an entity managed by a third party. The
Howey Test was used by the Supreme Court to determine a security, and states that a
security must meet the following four characteristics. It must:
- Be an investment of money
- Involve a common enterprise
- Give the investor an expectation of a profit
- Entail the management of a third party
The following are examples of securities:
- Stocks
- Bonds
- Notes
- Debentures
- Evidence of indebtedness
- Transferable shares
- Warrants, rights, or options for securities
Most times when you see the term “certificate,” you have a security that is a:
- Certificate of interest in profit sharing or a partnership agreement
- Preorganization certificate
- Collateral trust certificate
- Voting trust certificate
- Certificate of interest in oil or a gas mining title
- Certificate of deposit for a security such as an American depository receipt (ADR) or an American depository share (ADS)
The term “variable” will also identify a security, as in:
- Variable annuity
- Variable life insurance
- Variable contract
The phrase “interest in” is another key to identifying a security on the Series 63 exam.
All of the following are securities:
Interest in:
- Farmland and animals
- Whiskey warehouse receipts
- Commodity options (not futures)
- Insurance company separate accounts
- Real estate condominiums or cooperatives
- Merchandise marketing programs, franchises, or schemes
- Multilevel distributorships such as Amway
The term “option” is also a good way to identify a security, such as:
- Stock option
- Index option
- Futures option
- Commodity futures option
The following are not considered securities:
- Real estate
- Retirement plans (IRAs and 401(k)s)
- Bank accounts
- Collectibles
- Precious metals
- Fixed annuities/fixed contracts
- Whole and term life policies
- Antiques
- Futures contracts (commodities)
- Trade confirmations
- Prospectuses
The term “future” as it appears alone is an indication that a security is not involved. If
the question is asking about a commodity future option, however, then a security is
involved. Also the term “fixed” is a good indication that a security is not involved.
Person
The term “person” as it is used in the USA, refers to any entity that may enter into a
legally binding contract. Any entity that can enter into a legally binding contract may
transact business in the securities markets. Agreeing to buy or sell a security represents a
legally binding contract. For the Series 63, a person is any of the following:
- Natural person
- Corporation
- Trust
- Government organization
- Partnership
- Joint stock company
- Sole proprietor
- Association
- Unincorporated organization
A non-person is an individual or entity that may not enter into a legally binding contract
and therefore may not transact business in the securities market. A non-person is:
- A minor
- Someone deemed to be legally incompetent
- A deceased individual
Broker Dealer
A broker dealer is a person or a firm that maintains a place of business and affects
transactions in the securities markets for its own account or for the account of others. A
broker dealer must be registered in its home state as well as in the states of its
“individual” clients. A broker dealer is not:
- An agent
- A bank
- A savings and loan
- A person with no place of business in the state, who deals exclusively with financial institutions or issuers
- A person who conducts business with existing clients who do not reside in the state and are in state for less than 30 days
Agent
An agent or Registered Representative may only be an individual who represents the
issuer or a broker dealer in the purchase and sale or the attempted purchase and sale of
securities with the public. Agents are required to register in their home state, their state
of employment, and the state of residence of their customers. An agent is not required to
register if:
- They represent the issuer or a broker dealer in an underwriting transaction
- They represent a bank or a savings and loan in the issuance of securities
Agents who represent exempt issuers are not required to register. Examples of exempt
issuers are:
- U.S. Government
- State and municipal governments
- Canadian federal and municipal governments
- Commercial paper with maturities of less than 270 days, sold in denominations exceeding $50,000
- Investment contracts associated with employee pension plans, profit sharing, stock purchase, or savings plans
- Foreign national governments recognized by the United States
Issuer
An issuer is any person that issues or simply proposes to issue a security. Issuers include:
- Corporations
- U.S. government and agencies
- State and local governments
In an issuer or primary transaction, the issuer receives the proceeds from the sale.
Non-Issuer
A non-issuer is anyone who does not issue or propose to issue a security. All secondary
market transactions that take place on an exchange or in the over-the-counter (OTC)
market are non-issuer transactions, and the selling security holder receives the proceeds
from the sale.
Investment Advisor
An investment advisor is any person who is actively involved in and receives a fee for
any of the following:
- Issuing research reports or analysis
- Publishing a market letter with an annual subscription price of $200 or more
- Advising clients as to the advisability of the purchase or sale of a security
- Providing investment advisory services as a complement to their services and claiming to provide such services for a fee
- Presenting themselves as investment advisors, also known as the Shingle Rule
An investment advisor is not:
- A bank or savings and loan
- A broker dealer
- An agent
- A lawyer, accountant, teacher, engineer (LATE) whose services are incidental to their business and who do not receive a specific fee for such services
- Any person exempted by the administrator
- A federally covered advisor
- Publishers of newspapers and magazines
Investment Advisor Representative
An investment advisor representative is a person who is under the control of the
investment advisor and includes:
- Officers and directors
- Partners
- Solicitors
- Supervisors
Clerical employees are not considered investment advisory representatives and are not
required to register.
Institutional Investor
An institutional investor is a person or firm that trades securities for his or her own
account or for the account of others. Institutional investors are generally limited to large
financial companies. Because of their size and sophistication, fewer protective laws
cover institutional investors. It is important to note that there is no minimum size for an
institutional account. Institutional investors include:
- Broker dealers
- Investment advisors
- Investment companies
- Insurance companies
- Banks
- Trusts
- Savings and loans
- Government agencies
- Employment benefit plans with more than $1,000,000 in assets
Accredited Investor
An accredited investor is an individual who meets one or more of the following criteria:
- Has a net worth of $1,000,000 excluding their primary residence
or
- Earns $200,000 per year or more for the last two years and has the expectation of earning the same in the current year
or
- Is part of a couple earning $300,000 per year or more
Qualified Purchaser
A qualified purchaser must meet strict minimum financial requirements. Securities sold
to qualified purchasers are not required to register in the state where the qualified
purchaser resides. A qualified purchaser is:
- An individual with at least $5,000,000 in investments
- A family owned business with at least $5,000,000 in investments
- A trust sponsored by qualified purchasers
Private Investment Company
A private investment company is an unregistered investment company or hedge fund that
raises funds through the sale of securities to qualified purchasers for any business
purposes.
NASD Series 6 & 63 Text Book & Exam Prep Software Package
Series 6:
Investment Company Representative
(Pub. 2007, 200+ pages)
Copyright © 2007
The Securities Institute of America, Inc.
All Rights Reserved.
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Within 5 - 7 days of purchase and included in price
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ABOUT THE SUBJECT MATTER EXPERT:
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Series 63:
Uniform Securities Exam
(Pub. 2007)
Copyright © 2007
The Securities Institute of America, Inc.
All Rights Reserved.
SHIPPING:
Within 5 - 7 days of purchase and included in price.
ABOUT THE SUBJECT MATTER EXPERT:
This Text Book is brought to you by The Securities Institute of America, Inc.
Exam Prep Software
Series 63 Exam Prep
Hundreds of Questions!
Copyright © 2007
The Securities Institute of America, Inc.
All Rights Reserved.
.
INSTALLATION INSTRUCTIONS:
Upon purchase you will receive an email with installation instructions.
Featuring INSTANT DOWNLOAD Service
(you can install it immediately after purchase)
ABOUT THE SUBJECT MATTER EXPERT:
Exam Prep Software is brought to you by The Securities Institute of America, Inc.
NASD Series 6 & 63 Text Book & Exam Prep Software Package
NASD Securities
Education & Training
