Appendix A: Key Terms and Definitions
Introduction
A deep understanding of the key terms and definitions is crucial for success in the FINRA Series 6 exam. This comprehensive glossary provides clear explanations and practical examples, reinforcing the meanings of important concepts you’ll encounter in both exam scenarios and your future career as an investment company and variable contracts products representative.
Detailed Explanations
Investment Company
An investment company is a corporation or trust engaged in the business of investing the pooled capital of investors in financial securities. This includes mutual funds, unit investment trusts (UITs), and closed-end funds.
Example: A mutual fund is a common type of investment company, pooling money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
Variable Annuities
Variable annuities are contracts with insurance companies where the return is based upon the performance of the chosen investments, usually mutual funds.
Example: An investor chooses to invest in a variable annuity, selecting a portfolio of growth and value funds to potentially increase their retirement income.
Unit Investment Trust (UIT)
A UIT is a registered investment company that buys and holds a fixed portfolio of stocks or bonds for a specified period.
Practical Application: UITs often appeal to conservative investors seeking stable, predictable returns since they offer a fixed portfolio.
Visual Aids
Types of Investment Companies
graph TD;
A[Investment Companies]
B[Mutual Funds]
C[Closed-End Funds]
D[Unit Investment Trusts (UITs)]
A --> B
A --> C
A --> D
Practice Questions
Test your understanding of these key terms with the questions below:
### What is a mutual fund?
- [x] A type of investment company pooling funds to buy a diversified portfolio
- [ ] An insurance product offering guaranteed returns
- [ ] A savings account earning fixed interest
- [ ] A type of individual retirement account
> **Explanation:** A mutual fund is a type of investment company that pools money from multiple investors to invest in a diverse portfolio of securities.
### What is the primary benefit of investing in a UIT?
- [x] Fixed portfolio over a specified period
- [ ] Highly liquid and frequently traded
- [ ] Provides ownership in real estate
- [ ] Offers guaranteed principal return
> **Explanation:** UITs are known for maintaining a fixed portfolio, providing predictable returns over the duration of the trust.
### What are variable annuities best known for?
- [x] Providing a return based on selected mutual funds' performance
- [ ] Offering a fixed interest rate over a term
- [ ] Being a type of non-participating life insurance
- [ ] Offering ownership in a specific property
> **Explanation:** Variable annuities offer returns based on the performance of the chosen investments, typically mutual funds, making them suitable for investors seeking potential growth.
### What distinguishes a closed-end fund from an open-end mutual fund?
- [x] Having a fixed number of shares
- [ ] Continuously offering new shares for sale
- [ ] Focused solely on government securities
- [ ] Allowing investment anytime without a broker
> **Explanation:** Closed-end funds issue a fixed number of shares at an initial public offering, unlike open-end mutual funds, which continuously offer new shares.
### What type of securities can a Series 6 representative sell?
- [x] Mutual funds
- [ ] Individual equities
- [ ] Corporate bonds directly
- [x] Variable annuities
> **Explanation:** A Series 6 license allows representatives to sell mutual funds and variable products, such as annuities, not individual securities like stocks and bonds.
### True or False: A variable annuity is a type of registered investment company.
- [ ] True
- [x] False
> **Explanation:** While variable annuities include investment elements, they are primarily insurance products, not registered investment companies.
Summary Points
- Investment Companies encompass mutual funds, closed-end funds, and unit investment trusts.
- Variable Annuities offer returns based on selected investments, ideal for growth-oriented investors.
- Series 6 Representatives are qualified to sell mutual funds and variable products but not individual stocks.
Glossary
- Investment Company: An entity engaged in investing pooled capital into financial securities.
- Variable Annuity: A fluctuating insurance investment product based on mutual fund performance.
- Unit Investment Trust (UIT): An investment company holding a fixed asset portfolio for a set period.
- Closed-End Fund: An investment company with a fixed number of issued shares.
Additional Resources
The mastery of these terms and definitions not only aids in passing the Series 6 exam but also in performing the functions of an informed investment representative effectively.