Tuesday, September 29, 2009

Regular Way Settlement

A customer just sent me an email that represents a concept many Series 7 students struggle with. She wrote:

Why is this answer 5 business days? I thought it was T+3 . . .?

An investor who buys 500 shares of common stock at $25 per share in a regular way transaction is required to deposit the money by
A. Trade Date
B. Settlement date
C. Trade Date plus 3 business days
D. Trade Date plus 5 business days

RESPONSE: broker-dealers must settle at T + 3. If they want to pay for their customer's trade and let the customer slide, they can only let him slide for 2 more business days; after that, they'd have to request an extension. So remember for a test question that firms settle at T + 3, but customers have 2 more business days to pay . . . if the firm wants to be that nice. We could say that customers must pay "5 business days after the trade," or "2 business days after regular-way settlement." It's imperative that we have at least two ways to say everything in this business in order to keep the customer totally confused.

Saturday, September 26, 2009

Ex-Dividend Date

A customer whom I am tutoring recently asked the following question:

Can you provide a timeline which explains why the record date is several weeks after the dividend is declared. I have been assuming the date the dividend was declared was when it was paid as well, therefore am confusing the ex dividend date.

The concept of the declaration, ex-, record, and payable date is almost certain to appear in one or two questions on your Series 7 exam. While options can be difficult, this topic is the equivalent of a two-inch putt in golf. Yes, you could miss it, but no you aren't going to let yourself. I don't care how tricky the question appears, understand that you will never miss an easy question involving the ex- or the record date.
First, the dividend has to be declared/announced by the Board of Directors. That's the declaration date. In the announcement, we discover the payable date, which is the date the dividend checks will be cut and delivered to shareholders. Only if you're a shareholder of record on the record date will you receive the dividend.
That's really the concept right there. If Abbott Labs declares a dividend of $1.00 per share, they announce when it's payable, and they announce the deadline for being an owner of the stock--if you want that dividend.
This is where T + 3 settlement enters in. You don't really own a stock until your purchase has settled/cleared between your broker-dealer and the broker-dealer whose customer sold you the stock. That takes three business days. Once the transaction clears/settles, you are recognized as the owner, but not until. So, if you bought the stock three business days before the record date, you would be recognized as the owner on that date and would, therefore, get the dividend when they pull up the big list of shareholders. However, if you bought the stock just two business days before the record date, you would not be the official owner of the stock in time. So, the seller gets the dividend, not you.
This day, two business days before the record date, is called the ex-dividend date because buyers won't get the dividend. Therefore, they won't pay for it either. If the dividend is $1, the share price drops by $1. Cash is an asset, remember, so if the company is paying out cash, the stock is worth that much less. And that's why it's a violation to hustle a customer into buying just to get this dividend--that's called "selling dividends." It's fraudulent in that it implies something false--the investor could just skip the dividend, buy the stock for that much less, and avoid the taxation on the dividend.

So, actually, these are simple concepts--it's just that they are woven together into a fabric of many, many concepts. You have to know what settlement means, and remember that it's T + 3 for "regular-way settlement." You have to remember that the board of directors declares a dividend, and how the dividend would affect an investor. The Series 7 is some pretty sophisticated stuff. But on any given day 2/3 of all test takers pass it.
Knowing the concepts for real--rather than pretending you've studied--is the only way to be in the happy 2/3 rather than the deflated 1/3 who have to come back in 30 days for another grueling day at the exam center.

If you can find an audience who'll listen, see if you can explain what I just told you about the ex-date, record date, etc. to a friend or loved one. If you can do that, then you know for sure you have a handle on it. On the other hand, if you just want to keep taking the same practice questions over and over again--the easy ones that give you that warm, happy glow inside--on the ex-date or record date, good luck with that. The questions on the Series 7 will look much different the ones you've taken 15 times now.

Thursday, September 24, 2009

Margin Update

Well, things on the margin front are looking very positive lately. My 90 shares of Hospira (HSP) are now worth about $4,000, with the debit balance at about $4,500. When I went into this, I was not planning on purchasing 100 shares FMBI on credit, but I did, and that added about $1,000 to the debit balance. Which is why HSP now has to pull more weight.

Luckily, it appears to be in a cooperative mood.

If it advances another $5-6 a share, I'll place a sell-stop slightly below the then-current market price. That means if the stock sits still or rises, I hold. But, if it drops, I fold.

Wish me luck. And, if I ever take another margin loan, somebody please shoot me.

Friday, September 11, 2009

Private Placement

It's early on a Friday morning, and--as usual--I'm looking through FINRA disciplinary actions and regulatory notices. I see that a firm in Okoboji, Iowa was fined $30,000 for doing "private placements" improperly. Remember that a firm can not, by definition, be doing a private placement if they're calling up a bunch of people they don't know. As FINRA indicates,
"The findings also stated that, in order to comply with Regulation D, the firm was required to have a substantive and preexisting relationship with each investor prior to the time that, acting through its representatives, it offered the company’s investment to prospective investors. The findings also included that the firm used the means of interstate commerce to offer and effect these transactions, engaging in a general solicitation with respect to the offering and, therefore, participated in the sale of unregistered securities."
Oops. Remember that to escape the registration requirement on the offering of securities, the SEC insists that the private placement is actually, you know, private. If you want to solicit a bunch of people, you're doing a public offering and must, therefore, register the stock, deal with the cooling off period, etc.

Tuesday, September 8, 2009

Inside market

The following practice question is likely to show up on everybody's version of the Series 7 in some form or another. I'm betting it will be on there almost verbatim. Not that you could, like, prove me wrong, but in any case, by the time you schedule your Series 7 exam, you should be pretty confident answering a question like this one:

The inside market is:
A. highest bid, lowest ask from the market maker quoting the largest position
B. highest bid, highest ask from all market makers
C. highest bid, lowest ask from all market makers
D. lowest bid, highest ask from all market makers

EXPLANATION: when a customer places a market order to buy or sell stock, he is willing to pay the best available price ASAP to get the stock or sell it. The best prices for the customer would be the highest bid--if he's selling and the lowest ask/offer price--if he's buying.


Monday, September 7, 2009

Balance Sheet

All of the following are affected when a company issues common stock except:
A. working capital
B. current liabilities
C. net worth
D. total assets

EXPLANATION: think through a tough question like this logically. Ask yourself what happens when a company sells stock in an IPO. They take in cash, right? Cash is a current asset, which is part of working capital and, by definition, part of total assets. Choices A and D are eliminated. Net worth is usually called "stockholders' equity," but you have to be flexible to pass the Series 7. Since the par value of the stock is listed under "net worth/stockholders' equity", as well as the "paid-in surplus," reflecting the price of the stock in the IPO, you have to eliminate choice C-net worth.
If that approach doesn't work for you, ask yourself where the "liability" comes into play--is the company borrowing money? No. Even if they issued a bond, that would be a long-term liability, so you can safely go with choice B.


Friday, September 4, 2009

FINRA Regulations

It's Friday morning and, as usual, I'm reading up on recent regulatory actions at the http://www.finra.org/ website. Reading the August recap, I see a pattern of firms being fined for failing to give customers a fair and reasonable price on transactions. But I also notice that often firms get fined by FINRA just for sloppiness. For example, NSM Securities in Palm Beach, Florida was just fined $50,000 for "failure to preserve all of its business-related electronic communications, including communications exchanged with its clearing firm for over a year." Institutional Capital Management of Houston, Texas was fined $10,000 for conducting business when their balance sheet (net capital) was insufficient. Prebon Financial Products, Inc. of Jersey City, New Jersey was fined $10,000 because it "failed to accurately report the execution time for corporate bond transactions to the Trade Reporting and Compliance Engine (TRACE); failed to accurately report the execution time for OTC equity transactions; and failed to accurately report the execution time or price for transactions in NASDAQ National Market securities. The findings also stated that the firm failed to include all of the terms and conditions of orders, the correct execution time on order tickets for equity securities transactions, and order tickets did not indicate whether transactions were long or short. The findings also stated that the firm prepared order tickets for transactions in TRACE-eligible securities that did not include the receipt time."
I am so glad I never did anything crazy like try and open my own broker-dealer. OMG, it would be a never-ending stream of fines and sanctions due to my decided lack of record-keeping skills. In any case, sanctions and fines often have little to do with malice or greed--it's just really hard to stay on top of all the details that need to be attended to in this industry.