Securities Industry Essentials Flashcards

What is the primary role of FINRA?

Answer: Regulate the securities industry

FINRA (Financial Industry Regulatory Authority) is the largest independent regulator for all securities firms doing business in the United States. Its primary role is to protect investors and ensure market integrity by overseeing broker-dealers, enforcing rules, and examining firms for compliance with federal securities laws. FINRA writes and enforces rules governing the activities of more than 3,700 broker-dealers with 624,000 brokers.

Which financial instrument represents ownership in a company?

Answer: Stocks

Stocks, also known as equities, represent ownership shares in a company. When an investor buys stock, they become a part-owner of the issuing corporation, gaining rights such as voting on company matters (for common stock) and a claim on the company's assets and earnings. This ownership stake allows investors to participate in the company's growth and profitability.

What does the Securities Act of 1933 primarily regulate?

Answer: Issuance of new securities

The Securities Act of 1933 is a foundational piece of U.S. securities law primarily regulating the issuance of new securities to the public. It mandates that companies offering securities for sale must provide investors with material information, typically through a registration statement and prospectus, to ensure transparency and prevent fraud in primary market transactions. This act aims to protect investors by requiring full disclosure.

Which organization insures customer accounts against brokerage firm failures?

Answer: SIPC

The Securities Investor Protection Corporation (SIPC) is a non-profit, member-funded corporation that protects customers of its member brokerage firms in the event the firm fails financially. SIPC protects securities and cash up to $500,000, including $250,000 for cash claims, ensuring investors don't lose their assets if their brokerage goes out of business. It is not an insurance against market losses, but against firm insolvency.

What is the function of a market maker?

Answer: Provide liquidity by buying and selling securities

A market maker is a firm or individual that stands ready to buy and sell a particular stock or other financial instrument on a regular and continuous basis. Their primary function is to provide liquidity to the market by quoting both a bid (buy) and an ask (sell) price. This facilitates trading and ensures that investors can always find a counterparty for their transactions, making markets more efficient.

What is a key difference between common and preferred stock?

Answer: Common stock has voting rights, preferred does not

A key difference between common and preferred stock lies in voting rights and dividend payments. Common stockholders typically have voting rights, allowing them to influence company management and policies, whereas preferred stockholders generally do not. Preferred stock, however, usually offers fixed dividend payments and has priority over common stock in receiving dividends and assets in the event of liquidation.