Chapter 1: What is a Security? - A. Introduction: What is a Security?

Introduction

The series 99 exam is administered by FINRA and qualifies a person as a registered operations professional, licensed to perform a variety of covered operational functions for a broker dealer. The Series 99 exam will be presented in a 100-question multiple-choice format. Each candidate will have two hours and 30 minutes to complete the exam. A score of 68% or higher is required to pass It is recommended that candidates spend at least 70 hours preparing for the exam . The series 99 material has been provided by The Securities Institute to help Investopedia visitors prepare for the exam. In order to successfully complete the exam it is recommended that you read the following material in addition to reading a full textbook and doing as many practice exams as you can. This first chapter will build the foundation upon which the rest of this text is built.

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 & Preferred stock Whole life insurance
Bonds 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 99: equity and debt. Let’s begin by comparing the two different 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 made a loan to the corporation and become a creditor of the issuing company.

Debt instruments, unlike their equity counterparts, have a time frame or maturity date associated with them. Whether it is one year, five years, or 30 years, at some point the issue will 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 makeup 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 snapshot of the corporation’s finances at the time it was produced. It shows a list 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 and both long- and short-term debt as well as 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 that 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.

B. Corporate Time Line


Related Articles
  1. Professionals

    Exam Preparation

    FINRA/NASAA Series 66: Section 16 - Exam Preparation
  2. Professionals

    Sales Activities

    FINRA/NASAA Series 26 Section 7 - Sales Activities
  3. Professionals

    Investment Companies

    FINRA/NASAA Series 26: Section 1 - Investment Companies
  4. Professionals

    Securities

    FINRA/NASAA Series 63: Section 3 - Securities
  5. Professionals

    Portfolio Risks

    FINRA/NASAA Series 66: Section 5 Portfolio Risks
  6. Professionals

    Series 3 - National Commodities Futures

    FINRA Series 3 Exam Guide
  7. Professionals

    Mutual Fund Accounts

    FINRA/NASAA Series 26: Section 2 - Mutual Fund Accounts
  8. Professionals

    Business Practices

    FINRA/NASAA Series 63: Section 4 Business Practices
  9. Professionals

    Regulation of Securities

    FINRA/NASAA Series 66: Section 11 - Regulation of Securities
  10. Professionals

    Measuring Portfolio Returns

    FINRA/NASAA Series 66: Section 2 Measuring Portfolio Returns
RELATED TERMS
  1. Series 66

    An exam administered by the Financial Industry Regulatory Authority ...
  2. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  3. Series 24

    A securities license entitling the holder to supervise and manage ...
  4. Series 51

    An exam offered by the Financial Industry Regulatory Authority ...
  5. Series 86/87

    An exam administered by the Financial Industry Regulatory Authority ...
  6. Series 4

    A securities license entitling the holder to supervise options ...
RELATED FAQS
  1. I have passed the Series 63 and FINRA Series 7, but would like to become licensed ...

    Becoming an investment adviser representative requires more examination than just taking the FINRA Series 63 exam. See what ... Read Answer >>
  2. If I have passed the Series 7 exam, do I need to write the 6 and 63 exams as well?

    Not always. According to the Financial Industry Regulatory Authority (FINRA), (formerly National Association of Securities ... Read Answer >>
  3. What certification series does one need to be a bond broker?

    One major requirement before one can become a bond broker is to pass the General Securities Representative Exam, commonly ... Read Answer >>
  4. What are the differences between the Series 6 exam and the Series 7 exam?

    Learn about the regulatory exams needed to become a limited or registered representative and the main differences between ... Read Answer >>
  5. Do I need to be sponsored or employed by a member firm in order to write the Series ...

    You do not need to be sponsored by a member firm in order to write the Series 66 exam. However, it is important to remember ... Read Answer >>
  6. Do I have to successfully complete the Series 7 exam before I can register for the ...

    There are no prerequisites to register for the Series 63 exam. However, once you have registered for the exam, you must schedule ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center