Series 6 Lesson 8 Mutual Funds pt 1

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

https://gumroad.com/l/ILYu

The Series 22 Exam

https://series6lessons.com/series-22-exam/

The Series 63 Exam

https://series6lessons.com/series-63-exam-lessons/

The Life Health Insurance Exam

https://series6lessons.com/insurance-lessons/

The SIE Exam (Securities Industries Essentials Exam)

https://series6lessons.com/finra-sie/

Click on any of them to find out more

Series 6 Lesson 7 Time Horizon

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

Investment objective

Time Horizon

Risk Tolerance

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,

Series 6 Lesson 6 Investment Objectives

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?

income (bonds)

high yield (municipal bonds/funds)

growth (common stock/stock funds)

portfolio diversification (bonds tock, money market)

preserving capital, Government/Treasury, Ginnie Mae

liquidity (money market funds)

speculation (options, high-yield bonds, precious metals)

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

Series 6 Lesson 5

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 is about Investment Vehicles

Series 6 Lesson 4 is about Investment Vehicles

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.

Series 6 Lesson 3 Know your Customer Rule!

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:

Individual account: Owned by one person

TOD (Transfer on Death) Account: Passes directly to a beneficiary on the death of the account holder without having to go to a probate court. (A TOD agreement has to be signed with a broker-dealer). A second “contingent beneficiary” may be named.

Trading authorization: Someone else has power of attorney over your account.

Joint Account: Two or more people own. If you have the right of survivorship, the assets pass to the survivor if one person dies.

Joint Tenants in Common: If one person dies, that person’s assets go to the person’s estate, not to the other tenant or tenants.

Custodial Accounts: An adult opening an account on behalf of a minor. The adult is the nominal owner and the minor is the beneficial owner. The account can be set up as an UGMA or UTMA (Uniform Gifts to Minors/Uniform Transfers to Minors Act) so that the money can be gifted to the minor when he or she comes of age. There can only be one custodian per account of this type. Gifts cannot be taken back once given.

Trust Account: An account for the benefit of another with stipulations on it, such as how much can be withdrawn in a year, what types of investments can be made with the account, etc. The grantor is the person who creates the trust and sets down the rules that are set down in a document, called the trust agreement.

Estate Accounts: An account created after a person passes away, which requires a great deal of supporting documentation, such as a tax ID, a death certificate, and court documents. This estate holds the deceased person’s assets until they can be dispersed.

Discretionary Accounts: An account where the broker-dealer is allowed to buy and sell at his or her discretion, while still collecting a commission. The customer would have to sign a discretionary authorization form.

Guardian Accounts: This is created for a minor when his guardians become mentally incompetent or die. A person has to act as that person’s guardian until they come of age or recover.

Business Accounts: An investment account opened by a corporation or partnership. You will have to look at the founding documents of the corporation or partnership to see who has authority to conduct business in their behalf.

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

Series 6 Lesson 2

This Series 6 lesson 2 covers

Types of Investments

Series 6 Lesson 2 delves into Bank deposits are backed by the FDIC, which the insurance from the federal government. This money is not at risk. The rewards/interest on this kind of investment are low.

Money that is invested with a broker-dealer is not backed by any government institution. The potential rewards/interest/dividends on these kinds of investments are potentially much higher.

Broker-dealers help clients invest in securities, such as stocks, bonds, and mutual funds. This kind of money is always at risk to some degree.

Opening an investment account is highly regulated by the federal government.

Company Books

The term “books” is used for records of financial transactions.

Originally, these books were physical records, but now, they are mostly electronic.

CPAs use accounting software to quickly generate reports, etc. These kinds of books are relatively simple.

Broker-dealers also have to keep books and they are much more complex.

Broker-Dealer Records

Things that have to be recorded: All client correspondence, all buy and sell orders, all deposits and withdrawals, etc.

These things are all stipulated under the Securities Exchange Act of 1934 and other FINRA rules.

All records have to be kept at least three years and sometimes up to six years.

Records much be made available to FINRA or SEC workers when they are performing an audit.

The records must be stored on a non-erasable, non-rewritable format, such as optical disks or magnetic tape/microfilm. Companies also need to provide means for an auditor to access and read all records, such as computers or film readers.

Records need to be labeled with the time and date.

Customer Accounts

FINRA requires that broker-dealers keep records about each customer, including the following information:

Name

Residence

Name of Customer’s Representative, if applicable

Signature of the principal

Those with Power of Attorney if the Customer is a Business

Signatures of those with Power of Discretion for Discretionary Accounts

Taxpayer Identification Number (TIN), such as a Social Security Number

Customer Occupation and Employer Address

Customer FINRA Membership Status

Eligibility Information (Financial Status, etc.)

Once you have obtained the customer’s information, you have to provide a copy of it to them so that they can verify that it is accurate.

Customers must be asked if the interest and dividend checks should be sent to him or her directly or to be credited to a specific account. Sometimes, people simply want their profits to be reinvested back into the mutual fund or stock in order to keep growing their investment until they are ready to cash out.

Customer information needs to be updated and verified on a regular basis to make sure that you are operating on the most current information. Many factors can change your decision makings, such as a change in finances, familial status, employment status, etc.

Broker-dealers make recommendations to customers, but they never invest or spend money without the customer’s approval. The customer must always provide written authorization before any transaction can be completed.

Once a year, each member receives a notice with the FINRA BrokerCheck hotline number and the FINRA website address, a statement that says that the customer can get a brochure explaining BrokerCheck.

BrokerCheck provides registration and disclosure information about broker-dealers, agents, and principals. If an agent has been suspended for any sort of misdeed, this will be recorded in BrokerCheck. Any written complaints from customers have to be acted upon and the all records of such correspondence and responses must be kept under FINRA rules.

Transferring Funds

Customers are allowed to transfer funds from one broker-dealer to another and both sides are required to expedite this process by...

What is the Series 6 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

You must be sponsored by a FINRA member firm.

The firm must fill out Form U4 (Uniform Application for Securities Industry Registration or Transfer)

The firm must pay the examination fee through FINRA’s Central Registration Depository (CRD)

Find a a Prometric Testing Center in the United States, Canada, Mexico, or their territories (https://securereg3.prometric.com/Welcome.aspx)

Series 6 Lessons

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.

Table of Contents

Lesson 1: Exam Overview (25:06)

Lesson 2: (27:26)

Lesson 3: (25:59)

Lesson 4: (25:10)

Lesson 5: (25:30)

Lesson 6: (22:35)

Lesson 7: (26:40)

Lesson 8: (25:03)

Lesson 9: (25:01)

Lesson 10: (26:18)

Lesson 11: (26:10)

Lesson 12: (26:52)

Lesson 13: (25:11)

Lesson 14: (25:06)

Lesson 15: (25:01)

Lesson 16: (25:15)

Lesson 17: (25:50)

Lesson 18: Review 1 (26:29)

Lesson 19: Review 2 (27:38)

Lesson 20: Review 3 (25:03)

Series 6 Lessons

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.

Table of Contents

Lesson 1: Exam Overview (25:06)

Lesson 2: (27:26)

Lesson 3: (25:59)

Lesson 4: (25:10)

Lesson 5: (25:30)

Lesson 6: (22:35)

Lesson 7: (26:40)

Lesson 8: (25:03)

Lesson 9: (25:01)

Lesson 10: (26:18)

Lesson 11: (26:10)

Lesson 12: (26:52)

Lesson 13: (25:11)

Lesson 14: (25:06)

Lesson 15: (25:01)

Lesson 16: (25:15)

Lesson 17: (25:50)

Lesson 18: Review 1 (26:29)

Lesson 19: Review 2 (27:38)

Lesson 20: Review 3 (25:03)