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Series 6 Lesson 9 Mutual Funds pt 2 Fund of Funds = a mutual fund that holds shares of many other funds
Principal Protected Funds = These funds are focused on protecting the investor’s principal. They take many steps in order to keep everything stable. These can be expensive.
Every mutual fund will have a prospectus that can help you understand their strategy, such as what kinds of investments they go after or what kind of strategies they employ. It is a good place to start when comparing mutual funds. They will often show the historical performance of the fund over time as a way to show what investors might expect in the future. They always have the disclaimer “past results are not predictive of future results”.
All funds have different expenses that are usually deducted from the proceeds. Some funds have a sales expense. This is detailed in the prospectus.
Capital appreciation happens when a mutual fund goes up in value. The mutual fund will pay out dividend on all the stock and bonds that are part of the fund. They will also give capital gains dividends to shareholders if they can. After fulfilling these requirements, the fund is then compared to where it was when it started to calculate the net asset value. If you start with $15 per share and end at $17 per share, that is $2 in capital appreciation. You also have to take any applicable taxes into consideration.
Fees can either be classified as A-shares, which charge fees up front or B-shares, which charge fees when you sell. Some funds charge a percentage fees called 12b-1 fees. C-shares do not charge an upfront fee, but they have high 12b-1 fees.
A shares: long term with over $50,000
B shares: mid or long term with a small investment
C shares: short term investor with less than $500,000 to invest
Series 6 Lesson 9 Breakpoints
The more that you invest, you can qualify for breakpoints, which is a reduction in the sales charge. The more you invest, the more you can save, based on different breakpoints.
When you want to cash in your shares, this is known as redeeming your shares. When you do this, you get the NAV per share, minus any charges if they are A-shares. This will require a signature under certain conditions:
-If the redemption is over $75,000.
-If the redemption is to someone other than the registered shareholder
-If the redemption is sent to an address other than the address of record.
Some funds will charge a redemption fee if you try to redeem them during the first year. They want you to hold onto your investment.
Investors can also set up an automatic withdrawal plan. They can get a fixed periodic payment, such as $500/month or a certain percentage every so often, quarterly, etc. You can say that you want to sell X number of shares every so often, or you can have it withdrawn over a specific amount of time, two years, etc.
A mutual fund has a Board of Directors. They establish investment policy, they appoint other people oversight positions, establish policies about capital gains and dividends, and review/approve 12b-1 plans. They oversee operations, but do not make the investment decisions themselves, just like any normal company.
The investment adviser/portfolio manager is appointed by the BOD. He or she is the one who actually manages the fund’s investments according to the fund’s stated policies. They are paid a percentage of the fund’s net assets.
The custodian is a bank that holds all of the assets of the mutual fund, such as cash and securities. They are the container for all of the fund’s securities.
The transfer agent is the party that issues shares of the mutual fund to buyers and redeems shares from sellers. They distribute dividends to investors.
Mutual fund shareholders are like normal company shareholders and so they get to vote about matters of fund business, such as when there are changes in investment strategies, changes in fees, elections of board members, changing from an open-end to close-end fund, etc.
Management Companies
Open-end Funds vs. Closed-end Funds
Traditional mutual funds are open-end funds. There are not a fixed number of shares.
Closed-end Funds are an IPO and they have a fixed number of shares. You have to trade it like a normal share of stock. You will get whatever a buyer is willing to pay for the share. You have to buy a round number of shares, no partial shares for closed-end funds.
ETF Fund = exchange-traded fund. This is a fund that trades on an exchange and the investors want it to do well on a particular exchange, such as the S & P 500.
We also offer lessons for:
The Series 7 Exam
The Series 22 Exam
The Series 63 Exam
The Life Health Insurance Exam
The SIE Exam (Securities Industries Essentials Exam)
Click on any of them to find out more
Series 6 Lesson 8 Mutual Funds pt 1 is our first discussion on Mutual Funds
This is a big investment portfolio that can give as many shares as investors want to buy. The shares of the fund do not change value when investors buy shares. Shares become more valuable when the securities in the portfolio give out income. There is no guarantee that the securities will gain in value. These funds are strongly diversified and run by a professional investment advisor. This helps people invest without too much effort.
Advantages:
-You have the expertise of a professional investor.
-It is easy to diversify
-You can liquidate some part of it without losing diversity
-It is simpler on taxes
-It is easier to keep records about
-Easier to purchase
-Automatic reinvestments of capital gains
Ways that Mutual Funds Diversify
-Different kinds of industries
-Types of investments instruments
-Types of securities issuers
-Different geographic areas
Types of Mutual Funds
Equity Funds: These focus in investing in equity securities.
Growth Funds: Invest in companies that are aggressively growing. They have high prices, but can bring in high returns.
Value Funds: These have a low price, but offer low returns.
Blend Funds: In the middle between value and growth funds.
Growth and Income Funds: A mix of some stocks that are growing and some that provide dependable income.
International Funds: Invests in companies outside the U.S.
Global Funds: Funds in the U.S. and in other countries.
Bond Funds: Collections of bonds together. Treasury funds have low risk/yield and corporate bond funds have high risk/high yield. These are taxable.
Tax-Exempt Bond Fund: These are collections of municipal bonds.
Money Market Mutual Funds: Tax free, very low returns. Keeps a stable value.
Specialized Fund: These funds specialize in a certain strategy, just one industry or group.
Asset Allocation Funds: These funds will allocate your funds on your behalf.
Precious Metals Funds: Invests in precious metals, such as gold, silver, and platinum.
Hedge Funds: These are funds that are only available to accredited investors that have over $1 million in net worth and makes more than $200,000 per year. If they are married, they can pool their net worth and they have to make at least $300,000 per year.
Hedge funds use diverse, high-risk strategies, which means that people need to have some money in the bank. They are illiquid. They cannot be sold for at least a year. They charge high management fees and about 20% of the gains. Even if you are non-accredited investors can buy mutual funds that invest in hedge funds.
We also offer lessons for:
The Series 7 Exam
The Series 22 Exam
The Series 63 Exam
The Life Health Insurance Exam
The SIE Exam (Securities Industries Essentials Exam)
Click on any of them to find out more
In Series 6 Lesson 7 we discuss Time Horizon
Time Horizon
You have to think about the time horizon of your investments. The longer the time horizon the more volatility the person who is investing can withstand. The longer you have, the more you a risk and vice versa. If you only have a few years, it is probably good to stay out of the stock market, but if you have a longer timeframe, the stock market can be a better choice, because you can withstand more volatility. If you are a young investor trying to invest so that you will have retirement money, they can take more risks that will have ups and downs, because they have more time to recoup potential losses. If you are older and are using investments for income, you will need to have lower-risk investments.
Three Major Factors
U.S. Treasury Bonds
These are very safe, but also low yield. There is no risk of default and you are going to get the entire amount at maturity. There are different categories of bonds based on how much time you have. Short term = T-Bills. Mid term = T-Notes Long term = T-Bonds. T-STRIPS are bought at a deep discount and then they make money when the bond matures by getting the face value back. ($500 price, then matures to $1000).
Non-Marketable Government Securities
Series EE Bonds: Purchased at a discount and redeemed at their face value when they mature. The taxes can be deferred until maturity or they can be converted into HH Bonds.
Series HH Bonds: These can only be purchased by converting Series EE Bonds at maturity. They pay semi-annual interest, and they can be redeemed for their face value at any time.
I-Bonds
This is issued by the U.S. Treasury, which means that it is backed and exempt from state and local income taxes. It has a guaranteed rate, which can rise if inflation rises. The interest is added to the value of the bond, which means taxes can be deferred. If you use the proceeds for education costs, then the income is tax free. (Has to be within the same year as the redemption of the bonds)
All of these types of bonds are “non-marketable”, which means that they cannot be traded. That is why they are sometimes called “Savings Bonds”
Municipal Bonds
A municipality is any state or local government. (school district, park districts, etc) These are bond issued by these governments. They pay tax-free interest to investors. This means that they pay lower rates than corporate bonds, but you will still probably come out ahead, because you do not have to pay taxes. You can be taxed by other governments that did not issue the bond, but not by the issuing government.
Mortgage Backed Securities
Mortgages are pooled together and packaged and then sold to investors. These investors get interest and principal payments from that pool. These debts are eventually paid off and might even be paid off earlier than scheduled, which is known as prepayment risk.
GNMA is the Government National Mortgage Association, sometimes Ginne Mae. If you buy a pass-through certificate from GNMA, you get a mortgage-backed security that is backed by the U.S. Treasury.
FNMA is sometimes called Fannie Mae and if you buy through them, the U.S. Treasury is not required to bail out investors, but it can choose to do so.
CMO
This is a collateralized mortgage obligation It also gets value from mortgages and mortgage-backed securities that are called tranches, which are grouped by when they mature. (become amortized)
REMIC
This is a Real Estate Mortgage Investment Conduit. This is another kind of mortgage backed pass-through vehicle. They are separated into different risk classes, not different maturity classes.
Money Market Securities
Money market are debt securities, not including stock, that are going to mature in a year or less. These are securities that are highly liquid. They pay short-term interest rates, so if you only have a short time, you can put your money in the money market securities, which means you should get your money back plus some interest.
We also offer lessons for:
The Series 7 Exam
The Series 22 Exam
The Series 63 Exam
The Life Health Insurance Exam
The SIE Exam (Securities Industries Essentials Exam)
Click on any of them to find out more
Series 6 Lesson 6
You need to spend time getting to know your customer so that you understand what kind of recommendations you should make. Recommendations that are based on knowledge of the customer are said to be suitable. You have to use reasonable diligence in getting to know your customer and establishing the “essential facts” before making recommendations. You need to understand the customer’s investment profile, including things like: their goals, needs, time constraints, tolerance for risk, age, other investments, liquidity needs, investment experience, etc.
A recommendation is a communication that could reasonably be seen as suggesting that a customer do something or refrain from doing something coming from either a person or a software program, when it has to do with a security or an investment strategy. It is not a recommendation if a broker-dealer simply explains investment strategies in general without suggesting a specific one. Both the recommendation to sell or the recommendation to hold are considered official recommendations.
For a suggestion to be suitable, the agent has to be diligent in understanding the potential risks and rewards associated with a specific security and must determine that that security must be suitable for at least some investors. Then the broker-dealer must do enough research to make sure the investment is suitable for that specific customer. You also have to make sure that the number of transactions that you are suggesting makes sense given this particular customer’s investment profile.
If a customer does not provide all the information requested, the broker-dealer has to decide if they have enough information to go on, using his or her best professional judgement. Broker-dealers must also act a fiduciary, which means they always must act in the customer’s best interests and not in their own. You should not recommend something based on a higher commission for yourself at the expense of the customer, for example. This does not mean that you always have to recommend the least expensive investment, but it does mean that it has to make sense.
Investment Objectives = what does your customer want to accomplish with this investment?
Growth vs Aggressive Growth
Aggressive growth investments are international funds, sector funds (like healthcare, financial services, etc.) and funds from emerging markets. Are you playing offense or defense?
If you are going to be an aggressive investor, you need to have the following things: steady employment, a long time horizon, good cash flow to invest, and a high tolerance for risk. You will more likely invest in stocks and in mutual funds, though not all stocks are equally aggressive. Blue chip stocks are relatively stable, but low cap stocks are more aggressive. It is also more offensive to invest in luxuries and unproven technologies that may or may not take off. If they do, you stand to make a lot of money, but if they don’t, you may lose everything.
A defensive investor will invest in stocks that sell things that will survive an economic downturn, things that are essential rather than luxuries. These can include food, clothing, and healthcare products.
We also offer lessons for:
The Series 63 Exam
The Series 22 Exam
The SIE Exam (Securities Industries Essentials Exam)
The Series 7 Exam
The Life Health Insurance Exam
click on any of them to find out more
Lesson 5: Unit 1, Part IV
In Series 6 Lesson 5 we cover Debt Securities
Debt Securities (Bonds)
Companies let other people buy up their debt without having to give them voting rights in their company or paying them dividends. You simply have to pay them the interest on the loan and make regular payments. Unlike stock, the people who buy these are not part owners of the company. They are simply lenders looking to make some money on interest. The bond is bought, all the money is paid upfront and all the money is due again with interest by the end of the term/maturity date. Most bonds have a par value of $1,000.
A company’s common stock + preferred stock + debt securities = capital structure
Annual dividend divided by the market price = yield
Inverse relationship = when one thing goes up, the other goes down, such as if a price goes one way, the yield goes the other way.
Bond’s prices can fluctuate, regardless of the face value. This happens because the interest rate on the bond will fluctuate throughout the life of the bond. You want to hold if the rate is above the coupon rate (printed rate) and you might want to sell if the the rate falls lower.
Current Yield = Annual interested divided by the bond price
A bond that is trading below the par value is called a discount bond. A bond that has a current yield that is lower than the coupon rate, you have a premium bond.
Bonds have different investment grades, given on two systems: Standard and Poor’s and Moody’s. In S and P’s, the best you can get is an AAA rating and the worst you can get is a BBB rating. Anything lower than that is a called a junk bond. In Moody’s system, the highest rating is Aaa and the lowest Baa. Anything lower than that is also a junk bond, that presents a significant risk. There would be substantial doubt as to the soundness of the company’s finances and it probably would not be a good investment.
Series 6 Lesson 5 Many companies create a sinking fund, which is a low-risk, slow-growing fund that provides security for bonds that it issues. This helps increase its bond rating, which encourages more people to invest.
Secured bonds are backed up by specific assets or collateral. If the person who took out the bond defaults, then the borrower can repossess the collateral.
Buying a bond that is only based on good faith means that you are buying what is called a debenture, which is considered a general creditor that is below secured bondholders in getting money paid out if a company has to liquidate. You can also be a subordinated debenture, which has an even lower claim on corporate assets.
An income bond is a kind of bond that only pays income if a company has income. They are often created by companies coming out of bankruptcy and offered an attractive discount in order to offset their risk.
A convertible bond can be converted into a certain number of shares of the company’s common stock at will. When they choose to do that, they get a conversion price, which is how much each share of stock will cost. They can then take the face value of the bond and purchase an according number of shares of stock with that money.
We should also Point out that if you are interested in the Professional education bundle it is available HERE
And if you are interested in our Series 7 Lessons they may be found HERE
Series 6 Lesson 4 Investment Vehicles Lesson discusses
Investment Vehicles
This are different ways you can suggest people invest their money. Each carries a different level of risk vs. reward.
Series 6 Lesson 4 covers Equity Investments: The investor buys equity in a company, which means they own a certain percentage of the company and are given that percentage of the profits. This is a high-risk security, because if the company does not do well, the person will not make much money.
Common Stock: The investor buys shares of a company. They can make money if their shares appreciate in value or if they are paid dividends when the company is doing well. Different stocks carry different amounts of risk. Many stocks can be quite volatile. The investor has limited liability that is only equal to the number of shares you own. If the company goes bankrupt, the creditors cannot came after the stockholders. Shareholders can transfer their shares to others, both by selling them or by giving them away. Companies have transfer agents, who oversee the transfer of shares and who can reissue your stock certificates if you lose them in return for a fee. A registrar, another financial institution, makes sure all the numbers are adding up correctly. Shareholders have the right to inspect the books/records of the company.
Stock can also pay dividends if the Board of Directors for a company declares them. This usually happens if things are going well for the company. The more stock you own, the greater the dividends are going to be.
Stock owners also have what is called a pre-emptive right. This means if new shares of stock are going open to the public, the existing stock holders have the right to purchase their proportion of the new shares before others get to buy them. This means that they get the chance to maintain the percentage of the company that they own so that their own shares are not “watered down”. You can enjoy a subscription right as a stock holder, which allows you to buy new stock below the regular market price for the period of a few weeks.
Another stock term is a warrant, which a certificate that lets you buy a specific stock at a certain guarded price. You can wait for the stock to become much more valuable and then purchase that stock at the best price to make a lot of money.
American Depository Receipt: (ADR) This is a receipt given to someone against shares of foreign stock that is simply held in a bank. You can invest in foreign companies but instead buy through an ADR, which trades on the American system so that you don’t have worry about exchange rates when actually purchasing the shares and time differences in distant European or Asian markets. You have to worry about currency exchange risk, which means that when you are collecting dividends, those are still issued in the foreign currency, Euros or Yen, or whatever else, and if the exchange rate is not favorable to the dollar, you may end up losing out.
Preferred Stock: This kind of stock pays a fixed income stream, but its actually still an equity position. Unlike regular stock, it does not rise in value when a company’s profits increase. It does not have the same risk as common stock, but it also does not have the same potential rewards that common stock can offer. It is called preferred stock, because these shares are given preferred treatment if the company has to be liquidated. The preferred shareholders get their dividends all paid out before any of the common stock holders get any of their money. Unlike common stock, it has its rate of return printed right on it (3% or 5%, etc.) This is a percentage of the par value of the stock. If that were $1,000, a 3% stock would pay $30 per share per year.
Measuring Yield
There are two things you need to take into consideration: growth (capital appreciation) and income (dividends). Growth means that your shares grow in value. If you buy your shares at $8/share and then sell them for $11/share, you have made money through capital appreciation. If you pay $10 for a share of stock and you get a $3 dividend on that share, that means you have made a 30% dividends. If you add the two together, you get what is known as the total return.
Dividends are paid quarterly, which means four times per year. If you want to calculate the annual dividend on something, you need to multiply it by four. ($3 x 4 = $12)
Options
These are contracts between two parties that let the owner buy a certain number of shares of stock at a certain price or sell a certain number of shares of stock for a set price. The option to buy stock is known as “calls” and the option to sell stock is known as “puts”.
We also offer a Professional Bundle of lessons for the Serious Financial Professional
In Series 6 Lesson 3 we talk about your know your customer rule an essential tenent of investment management!
Sales Blotter
This is a daily record that shows all the movements of cash and securities that a broker-dealer is responsible for during the business day.
“Ledger” is another word for “record”. You are expected to keep ledgers of just about everything you do:
Assets vs. liability’s
Income vs. Expenses
Movements of all cash and securities within each customer account.
Types of Account Ownership:
Anti-Money Laundering (AML)
Every broker-dealer is required to enact AML measures under the Bank Secrecy Act. This act requires all financial institution to keep detailed records, which are subject to being audited. They are required to report any suspicious activity to the treasury department, and these are filed away as Suspicious Activity Reports. (SAR-SF). The USA Patriot Act makes it a legal requirement for all broker-dealers to monitor activity that could be related to money laundering. You have to look at individual transactions, but also at patterns of transactions for suspicious activity.
More specific records have to be kept for transfers over $3000 and cash transactions over $10,000. This is a way to combat money laundering, which funds criminal organizations and terrorists groups. This means that these organizations are trying to make money that has been obtained from illegal sources look like it has been obtained from legitimate sources.
Three layers of laundering:
Placement: Money is moved into the system.
Layering: A confusing set of transactions is made to hide the money trail
Integration: Funds are invested in legitimate investments
There are four criteria that can be used when considering a SAR-SF.
After filling a report, you should also contact the appropriate law enforcement agency if applicable.
Remember in addition to passing the Series 6 Exam you also need to pass the SIE Exam Here is the link for more information for the SIE Exam
Series 6 Lesson 1. This podcast is an introduction to what is required to pass the FINRA Series 6 Exam.
In Series 6 Lesson 1 we cover:
What is the FINRA Exam?
FINRA = Financial Industry Regulatory Authority, Inc.
It is the self-regulating body for setting standards and regulation for financial professionals.
The FINRA exam is an essential part of becoming a successful financial professional.
Requirements to Take the Exam
Lesson 1: Exam Overview (25:06)
The Series 6 Lessons is a podcast for those preparing to take this exam. It consists of portions of the audio lessons designed to help the student prepare and pass for the series 6 Exam. The series 6 Exam is an entry level exam allowing those who pass the exam and work for a firm licensed to sell investment company products and variable contract products.
The FINRA Series 6 Exam assesses the competency of an entry-level representative to perform their job as an investment company and variable contracts products representative.
Candidates must pass the Securities Industry Essentials (SIE) exam and the Series 6 exam to obtain the Investment Company and Variable Contracts Products registration
For the SIE Exam refer to the SIE Podcast available on Apple Podcasts
The next exam the Finance Professional will want to pass would probably be the Series 7 Exam.
Lesson 1: Exam Overview (25:06)
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