Chapter One - Equity Securities 9
What is a Security? 9
Types of Securities and Non-Securities 9
Equity = Stock 9
Common Stock 10
Corporate Time Line 10
Authorized Stock 10
Issued Stock 10
Outstanding Stock 10
Treasury Stock 11
Values of Common Stock 11
Book Value 11
Par Value 12
Rights of Common Stockholders 12
Preemptive Rights 12
Exercised 13
Sold 13
Expire 13
Characteristics of a Rights Offering 13
Determining The Value of a Right Cum Rights 13
Determining The Value of a Right Ex Rights 14
Voting 15
Methods of Voting 15
Limited Liability 16
Freely Transferable 16
The Transfer Agent 16
The Registrar 16
CUSIP Numbers 17
Inspection of Books and Records 17
Residual Claim to Assets 17
Why do people buy common stock? 17
Income 17
What Are The Risks of Owning Common Stock? 18
Dividends May Be Stopped or Reduced 18
Junior Claim on Corporate Assets 18
How Does Someone Become a Stockholder? 18
Trade Date 18
Settlement Date 18
Payment Date 19
Violation 19
Preferred Stock 19
Features of all preferred stock 19
Par Value 19
Payment of Dividends 20
Distribution of Assets 20
Perpetual 20
Non-Voting 20
Interest Rate Sensitive 20
Types of Preferred stock 20
Straight / Non-Cumulative 20
Cumulative Preferred 21
Participating Preferred 21
Convertible Preferred 21
Callable Preferred 22
Types of Dividends 22
Cash 22
Stock 22
Property / Product 23
Dividend Distribution 23
Declaration Date 23
Ex-Dividend Date 23
Record Date 23
Payment Date 24
Stock Price and the Ex Dividend Date 24
Taxation of Dividends 24
Selling Dividends 24
Dividend Disbursement Process 25
Warrants 25
How Do People Get Warrants? 25
Units 25
Attached to Bonds 25
Secondary Market 25
Possible Outcomes of a Warrant 25
Rights vs. Warrants 26
American Depository Receipts (ADR’s)/
American Depository Shares (ADS’s) 26
Currency Risks 26
Functions of The Custodian Bank Issuing ADRs 26
Real Estate Investment Trusts / REITs 27

Chapter Two - Debt Securities 33
Debt Securities / Bonds 33
Corporate Bonds 33
Types of Bond Issuance 33
Bearer Bonds 33
Registered Bonds 34
Principal Only Registration 34
Fully Registered 34
Book Entry / Journal Entry 34
Bond Certificate 34
Bond Pricing 35
Par Value 35
Discount 35
Premium 35
Corporate Bond Pricing 35
Bond Yields 36
Nominal Yield 36
Current Yield 36
Yield to Maturity 37
Yield to Maturity – Premium Bond 37
Yield to Maturity – Discount Bond 37
Calculating The Yield to Maturity 37
Calculating the Yield to Call 38
Bond Maturities 39
Term Maturity 39
Serial Maturity 39
Balloon Maturity 39
Series Issue 39
Types of Corporate Bonds 39
Secured Bonds 39
Mortgage Bonds 40
Equipment Trust Certificates 40
Collateral Trust Certificates 40
Unsecured Bonds 40
Subordinated Debentures 40
Income / Adjustment Bonds 41
Zero Coupon Bonds 41
Guaranteed Bonds 41
Convertible Bonds 41
Converting Bonds into Common Stock 41
Parity Price: 42
Advantages of Issuing Convertible Bonds 42
Disadvantages of Issuing Convertible Bonds 43
Convertible Bonds and Stock Splits 43
The Trust Indenture Act of 1939 43
Bond Indenture 43
Ratings Considerations 43
Retiring Corporate Bonds 44
Redemption 44
Refunding 44
Prerefunding 45
Calling in Bonds 45
Putting Bonds to The Company 45
Tender Offers 45
Open Market Purchases 45
Collateralized Mortgage Obligation (CMO) 46
CMOs and Interest Rates 46
Types of CMOs 46
Principal Only CMOs 46
Interest Only CMOs 47
Planned Amortization Class CMO (PAC) 47
Targeted Amortization Class (TAC) 47

Chapter Three - Government Securities 51
The United States Government 51
Series EE Bonds: 51
Series HH Bonds 51
Treasury Bills, Notes, and Bonds 51
Purchasing Treasury Bills 51
Treasury Notes 52
Treasury Bonds 52
Treasury Bond and Note Pricing 52
Treasury Strips 53
Treasury Receipts 53
Treasury Inflation Protected Securities / TIPS 53
Agency Issues 54
Government National Mortgage Association
(GNMA) 54
Federal National Mortgage Association (FNM) 54
Federal Home Loan Mortgage Corporation
(FHLMC) 55
Federal Farm Credit System 55

Chapter Four - The Money Market 57
The Money Market 57
Money Market Instruments 57
Corporate Money Market Instruments 57
Banker’s Acceptances 57
Negotiable Certificates of Deposit 57
Commercial Paper 58
Federal Fund Loans 58
Repurchase Agreements 58
Reverse Repurchase Agreement 58
Fixed Vs. Open Repurchase Agreements 58
Government Money Market Instruments 59
Municipal Money Market Instruments 59
International Money Market Instruments 59
Interest Rates 59
The Discount Rate 60
Federal Funds Rate 60
Broker Call Loan Rate 60
Prime Rate 60

Chapter Five – Economic Fundamentals 63
Gross Domestic Product 63
Expansion 64
Peak 64
Contraction 64
Trough 64
Recession 64
Depression 64
Economic Indicators 65
Leading Indicators 65
Coincident Indicators 65
Lagging Indicators 66
Economic Policy 66
Tools of The Federal Reserve Board 66
Reserve Requirement 66
Changing the Discount Rate 67
Federal Open Market Committee 67
Money Supply 67
M1 67
M2 68
M3 68
Disintermediation 68
Moral Suasion 68
Fiscal Policy 68
The Consumer Price Index (CPI) 69
Inflation / Deflation 69
Real GDP 69
International Monetary Considerations 70

Chapter Six - Issuing Corporate Securities 73
The Prospectus 73
The Final Prospectus 74
Prospectus To Be Provided To Aftermarket
Purchasers 74
SEC Disclaimer 74
Misrepresentations 75
Tombstone Ads 75
Free Riding and Withholding/NASD
Rule 2790 75
Underwriting Corporate Securities 76
Types of Underwriting Commitments 76
Firm Commitment 76
Market Out Clause 76
Best Efforts 77
Mini-Maxi 77
All or None / AON 77
Standby 77
Types of Offerings 77
Initial Public Offering (IPO) / New Issue 77
Subsequent Primary / Additional Issues 77
Primary Offering vs. Secondary Offering 78
Awarding the Issue 78
The Underwriting Syndicate 78
Selling Group 78
Underwriter’s Compensation 78
Management Fee 78
Underwriter’s Fee 79
Selling Concession 79
Underwriting Spread 79
Factors That Determine The Size of
The Underwriting Spread 79
Exempt Securities 80
Exempt Transactions 80
Private Placements / Regulation D Offerings 80
Rule 144 81
Regulation A Offerings 82
Rule 145 82
Rule 147 Intrastate Offering 82

Chapter Seven – Trading Securities 87
Types of Orders 87
Market Orders 87
Buy Limit Orders 87
Sell Limit Orders 88
Stop Orders / Stop Loss Orders 88
Buy Stop Orders 88
Sell Stop Orders 88
Stop Limit Orders 89
Other Types of Orders 89
The Exchanges 90
Priority of Exchange Orders 90
The Role of The Specialist 90
The Specialist Acting as a Principal 90
The Specialist Acting As an Agent 91
Crossing Stock 92
Do Not Reduce / DNR 93
Adjustments For Stock Splits 93
Stopping Stock 94
Commission House Broker 94
Two Dollar Broker 94
Registered Traders 95
Super DOT 95
Short Sales 95
Regulation of Exchange Short Sales 95
Affirmative Determination 96
Short Against The Box 97
Block Trades 97
Trading Along 97
Circuit Breakers 98
Listing Requirements for The NYSE 98
Nine Bond Rule 99
Reading the Consolidated Tape 99
Exchange Qualifications 100
Over The Counter / NASDAQ 101
Market Makers 101
NASDAQ Subscription Levels 101
Registering as a Market Maker 102
NASDAQ Quotes 102
Locked and Crossed Markets 102
Nominal NASDAQ Quotes 103
NASDAQ Execution Systems 103
Super Montage 103
Quotes Entered Through Super Montage 104
Updating NASDAQ Quotes 105
Non-Directed Orders 105
Preferenced Orders 105
Directed Orders 106
The Alternative Display Facility / ADF 106
Advanced Computerized Execution System / ACES 107
Electronic Communication Networks / ECNs 107
Unlisted Trading Privileges 107
Market Centers 107
NASDAQ International 108
NASDAQ NMS Short Sales 109
Non NASDAQ OTCBB 109
Pink Sheets 110
Third Market 110
CAES / ITS 110
Fourth Market 110
Market Maker Regulations & Responsibilities 111
Times For Entering a Quote 111
Withdrawing Quotes 111
Handling and Displaying Customer Limit Orders 112
The Manning Rule 114
Automated Confirmation System / ACT 115
ACT Trade Scan 115
Which Side of The Trade Reports to Act? 115
Bunching Trades / Aggregate Reporting to ACT 116
The Role of ACT in Third Market Transactions 117
Market Making During Syndication 118
Regulation M, Rule 101 119
Penalty Bids 119
Regulation M, Rule 102 120
Regulation M, Rule 103 120
Passive Market Makers’ Daily Purchase Limit 120
Regulation M, Rule 104 121
Syndicate Short Positions 122
Regulation M, Rule 105 122
Trade Reporting and Compliance Engine / TRACE 122
Broker Vs. Dealer 124
NASD 5% Markup Policy 125
Mark Ups / Mark downs When Acting as a Principal 125
Riskless Principal Transactions 126
Proceeds Transactions 126
Firm Quote Rule 126
Trade Complaints Between Members 127
Arbitrage 127

Chapter Eight - Customer Accounts 133
Holding Securities 134
Transfer and Ship 134
Transfer and Hold in Safekeeping 134
Hold in Street Name 135
Receipt Vs. Payment / Delivery Vs.
Payment RVP / DVP 135
Mailing Instructions 135
Types of Accounts 135
Individual Account 135
Joint Account 135

Joint Tenants With Rights of Survivorship
(JTWROS) 135
Joint Tenants in Common (JTIC) 136
Transfer on Death (TOD) 136
Death of a Customer 136
Partnership Accounts 136
Corporate Accounts 137
Trading Authorization 137
Operating a Discretionary Account 137
Managing Discretionary Accounts 138
Third Party and Fiduciary Accounts 138
Uniform Gift to Minors Account (UGMA) 139
Responsibilities of the Custodian 139
Contributions of a UGMA Account 140
UGMA Taxation 140
Death of a Minor or Custodian 140
Uniform Transfer to Minors Act 140
Accounts for Employees of Other
Broker Dealers 140
Numbered Accounts 141
Account Transfer 141
Option Accounts 141
Margin Accounts 142
The Credit Agreement 142
The Hypothecation Agreement 142
Loan Consent 142
Commingling Customer’s Pledged Securities 143
Wrap Accounts 143
Regulation S-P 143

Chapter Nine - Margin Accounts 149
Regulation of Credit 149
Regulation T 149
House Rules 151
Establishing a Long Position in a
Margin Account 151
An Increase in The Long Market Value 152
Special Memorandum Account/
SMA Long Margin Account 154
A Decrease in The Long Market Value 155
Minimum Equity Requirement
Long Margin Accounts 155
Establishing a Short Position in a
Margin Account 156
A Decrease in The Short Market Value 157
Special Memorandum Account/
SMA Short Margin Account 158
An Increase in The Short Market Value 159
Minimum Equity Requirement
Short Margin Accounts 159
Combined Margin Accounts 160

Chapter Ten - Retirement Plans 165
Individual Plans 165
Individual Retirement Accounts (IRA’s) 165
Traditional IRA 166
Roth IRA 166
Simplified Employee Pension IRA / SEP IRA 167
Participation 167
Employer Contributions 167
SEP IRA Taxation 167
IRA Contributions 168
IRA Accounts 168
IRA Investments 168
It is Not Wise To Put A Municipal Bond
In an IRA 168
Rollover Vs. Transfer 168
Rollover 169
Transfer 169
Educational IRA / Coverdell IRA 169
529 Plans 169
Keogh Plans (HR-10) 169
Contributions 170
An Eligible Employee is Defined As One That 170
Tax Sheltered Annuities (TSA’s)
Tax Deferred Accounts (TDA’s) 170
Public Educational Institutions (403B) 171
Non Profit Organizations /
Tax Exempt Organizations (501C3) 171
Contributions 171
Tax Treatment of Distributions 172
Corporate Plans 172
Non Qualified Corporate Retirement Plans 172
Payroll Deductions 172
Deferred Compensation Plans 172
Qualified Plans 173
Types of plans 173
Defined Benefit Plan 173
Defined Contribution Plan 173
Profit Sharing Plans 174
401K Thrift Plans 174
Rolling Over A Pension Plan 174
Employee Retirement Income Security
Act of 1974 (ERISA) 174
Plan Participation 174
Funding 175
Vesting 175
Communication 175
Beneficiaries 175

Chapter Eleven - Brokerage Office Procedure 179
Executing an Order 179
Order Room / Wire Room 179
Purchase and Sales Department 179
Margin Department 179
Cashiering Department 180
Customer Confirmations 180
Clearly Erroneous Reports 180
Execution Errors 181
Corporate and Municipal Securities
Settlement Options 181
RVP / DVP / COD 181
When Issued Securities 182
Government Securities Settlement Options 182
Accrued Interest 182
Calculating Accrued interest 183
Accrued Interest for Government Notes
and Bonds 184
Rules For Good Delivery 185
Delivery of Round Lots 186
Delivery of Bond Certificates 186
Rejection of Delivery 186
Don’t Know Procedures / DK 187
Fail to Deliver / Fail to Receive 187
Due Bills 187
Customer Account Statements 187
Carrying of Customer Accounts 188
Proxies 188

Chapter Twelve - Fundamental &
Technical Analysis 195
Fundamental Analysis 195
The Balance Sheet 195
Capitalization 197
Changes in The Balance Sheet 199
The Income Statement 201
Industry Fundamentals 203
Technical Analysis 203
Market Theories and Indicators 207

Chapter Thirteen –
Customer Recommendations
Professional Conduct and Taxation 211
Professional Conduct in the
Securities Industry 211
Fair Dealings with Customers 212
Churning 212
Manipulative and Deceptive Devises 212
Unauthorized Trading 213
Fraud 213
Blanket Recommendations 213
Selling Dividends 214
Misrepresentations 214
Omitting Material Facts 214
Guarantees 214
Recommendations to an Institutional Customer 214
Recommending Mutual Funds 215
Periodic Payment Plans 215
Mutual Fund Current Yield 215
Information Obtained From an Issuer 216
Disclosure of Client Information 216
Borrowing and Lending Money 216
Gift Rule 216
Outside Employment 217
Private Securities Transactions 217
Customer Complaints 217
Investor Information 217
Know Your Customer NYSE Rule 405 218
Investment Objectives 219
Income 219
Growth 219
Preservation of Capital 219
Tax Benefits 220
Liquidity 220
Speculation 220
Risk vs. Reward 220
Capital Risk 221
Market Risk 221
Nonsystematic Risk 221
Legislative Risk 221
Timing Risk 221
Credit risk 221
Reinvestment Risk 221
Call Risk 221
Liquidity Risk 222
Alpha 222
Beta 222
Tax Structure 222
Investment Taxation 222
Calculating Gains and Losses 223
Cost Base of Multiple Purchases 223
FIFO First In First Out 223
Share Identification 224
Average Cost 224
Deducting Capital Losses 224
Wash Sales 224
Taxation of Interest income 225
Inherited Securities 225
Donating Securities To Charity 225
Gift Taxes 226
Estate Taxes 226
Withholding Tax 226
Corporate Dividend Exclusion 226
Alternative Minimum Tax / AMT 226
Taxes on Foreign Securities 227

Chapter Fourteen – Securities
Industry Rules & Regulations 233
The Securities Exchange Act of 1934 233
The Securities Exchange Commission/SEC 233
Extension of Credit 234
The National Association of Securities
Dealers/NASD 234
The Rules of Fair Practice/Rules of Conduct 234
The Uniform Practice Code 235
The Code of Procedure 235
The Code of Arbitration 235
Becoming A Member of The NASD 235
Registration of Agents / Associated Persons 236
Disciplinary Actions Against a Registered
Representative 237
Resignation of a Registered Representative 237
Termination For Cause 237
Retiring Representatives / Continuing
Commissions 237
State Registration 238
Registration Exemptions 238
Persons Ineligible to Register 238
Advertising and Sales Literature 238
Advertising 239
Sales Literature 239
Group Correspondence 239
Blind Recruiting Ads 239
Generic Advertising 240
Tombstone Ads 240
Tombstone Ads Must Include: 240
Filing and Retention Requirements 240
Testimonials 241
Free Services 241
Misleading Advertising and Sales Literature 241
Securities Investor Protection Corporation
Act of 1970 (SIPC) 241
Net Capital Requirement 242
Customer Coverage 242
Fidelity Bond 242
The Securities Acts Amendments of 1975 243
The Insider Trading & Securities Fraud
Enforcement Act of 1988 243
Fire Wall 243
The Telephone Consumer Protection
Act of 1991 244
Exemption from the Telephone Consumer
Protection Act of 1991 244
The Penny Stock Cold Call Rule 244
The Role of the Principal 245
Violations and Complaints 245
Resolution of Allegations 245
Summary Complaint Procedure/Acceptance
Waiver & Consent 245
Code of Arbitration 246
The Arbitration Process 246
Simplified Arbitration 247
Larger Disputes 247
Awards Under Arbitration 247
Currency Transactions 247
The Patriot Act 247
US Accounts 248
Foreign Accounts 248
The Uniform Securities Act 248

PRE-TEST ANSWER KEY
Chapter One
Equity Securities 28 255
Chapter Two
Debt Securities 48 257
Chapter Three
Government Securities 56 258
Chapter Four
Money Market 61 259
Chapter Five
Economic Fundamentals 71 260
Chapter Six
Issuing Corporate Securities 83 261
Chapter Seven
Trading Securities 129 262
Chapter Eight
Customer Accounts 144 263
Chapter Nine
Margin Accounts 162 265
Chapter Ten
Retirement Plans 176 266
Chapter Eleven
Brokerage Office Procedure 189 267
Chapter Twelve
Fundamental &
Technical Analysis 208 269
Chapter Thirteen
Customer Recommendations 228 270
Chapter Fourteen
Securities Industry
Rules & Regulations 249 272