Welcome to Appendix B: Glossary of Terms. This section provides definitions and explanations of key terms that are crucial for understanding and navigating the world of securities, specifically tailored for those preparing for the FINRA Series 7 exam. Mastery of these terms will enhance your ability to understand exam questions and perform successfully.
Securities Act of 1933
The Securities Act of 1933 is a foundational piece of legislation introduced in response to the catastrophic market crash of 1929. Its primary aim is to ensure that investors receive significant information regarding securities being offered for public sale. By mandating the registration of securities, it strives to uphold transparency and protect investors from fraudulent activities.
Security
A Security is a tradable financial asset. Its forms range from stocks, which represent equity or ownership in a corporation, to bonds, which represent a loan from an investor to a borrower, and to derivatives like options, which are contracts offering the right, but not the obligation, to buy or sell an asset at a set price by a specific date.
Straddle
A Straddle is an advanced options trading strategy involving the purchase or sale of both a call and a put option with identical strike prices and expiration dates. It is utilized by traders anticipating high volatility in the market, allowing them to potentially profit from substantial price swings in either direction.
Glossary Summary
- Securities Act of 1933: Ensures full disclosure and transparency in securities trading.
- Security: Represents ownership (stocks), creditor relationship (bonds), or derivative rights (options).
- Straddle: Options strategy predicting high market volatility.
Supplementary Materials
Glossary of Related Terms
- Options: Contracts offering rights to buy or sell underlying assets.
- Strike Price: The predetermined price at which an option can be exercised.
- Expiration Date: The last date on which an options contract can be exercised.
Additional Resources for Further Study
Quizzes
Test your understanding of these concepts with the following quiz questions:
### What is the primary goal of the Securities Act of 1933?
- [x] Ensure transparency and protect investors
- [ ] Simplify trading procedures
- [ ] Provide tax incentives for securities
- [ ] Enforce monetary policies
> **Explanation:** The Securities Act of 1933 was enacted to require full disclosure of pertinent financial information to protect investors from fraud.
### Which of the following is a security?
- [x] Stock
- [ ] Real Estate
- [ ] Automobile
- [x] Bond
> **Explanation:** Securities include financial instruments like stocks and bonds, not physical assets like real estate or automobiles.
### What does a straddle options strategy involve?
- [x] Buying a call and a put with the same strike and expiry
- [ ] Buying two calls with different strike prices
- [ ] Selling a call and buying a put
- [ ] Buying a call and a put with different expirations
> **Explanation:** A straddle involves purchasing both a call and a put option with the same strike price and expiration date, anticipating market volatility.
### What is the function of a security in finance?
- [x] Represents ownership or debt
- [ ] Facilitates transactions only
- [ ] Holds physical assets
- [ ] Guarantees liquidity
> **Explanation:** Securities represent ownership (like stocks) or debt (like bonds) and are instrumental in raising capital for entities.
### Which act was passed in response to the 1929 market crash?
- [x] Securities Act of 1933
- [ ] Investment Company Act of 1940
- [x] Securities Exchange Act of 1934
- [ ] Banking Act of 1933
> **Explanation:** The Securities Act of 1933 and the Securities Exchange Act of 1934 were enacted in response to the 1929 market crash to regulate securities.
### What characteristic does a security typically have?
- [x] Tradability on financial markets
- [ ] Guarantees of returns
- [ ] Physical form and value
- [ ] Exemption from taxes
> **Explanation:** Securities are tradable financial assets, allowing for liquidity and investment opportunities on financial markets.
### Which strategy is used when anticipating market volatility?
- [x] Straddle
- [ ] Iron Condor
- [x] Strangle
- [ ] Butterfly Spread
> **Explanation:** Both straddle and strangle strategies involve trading options to take advantage of expected market volatility.
### What must happen to securities under the 1933 Act?
- [x] They must be registered before public sale
- [ ] They can be traded freely without regulation
- [ ] They are subject to banking laws
- [ ] They are exempt from SEC oversight
> **Explanation:** The 1933 Act mandates the registration of securities to ensure transparency and investor protection.
### What best describes a straddle?
- [x] Buying both a call and a put with the same parameters
- [ ] Selling a call while buying a put
- [ ] Purchasing multiple calls across different expirations
- [ ] Trading stocks and bonds simultaneously
> **Explanation:** A straddle involves buying a call and a put option at the same strike price and expiration, ideal for when significant market movement is anticipated.
### True or False: Securities and options are the same.
- [x] False
- [ ] True
> **Explanation:** Securities include stocks and bonds, while options are derivatives, providing rights to trade underlying securities.
Final Summary
In this appendix, we delved into some of the key terms you’ll encounter while preparing for the FINRA Series 7 exam. By familiarizing yourself with these definitions, you can better understand securities and options trading and the regulatory environment governing these transactions. Use the additional resources and quiz questions as tools for reinforcement to enhance your exam preparedness and financial acumen.