What's an IPO?
What type of information can be found in a company's prospectus?
Why's a preliminary prospectus sometime called a red herring?
What's Sarbanes-Oxley, and how does it affect public companies?
How's an "affinity fraud" perpetuated by a scam artist?
What's the "Big Board," and where's it located?
What's the difference between primary and secondary markets?
Are there other stock exchanges besides the New York Stock Exchange?
What's a futures contract?
What's the National Association of Securities Dealers Automated Quotation System (NASDAQ)?
What's the difference between corporate stocks and bonds?
What's a call and put option?
How does a Ponzi scheme work?
What are the stages of money laundering?
What are some advantages of offshore banking?
What does GAAP stand for?
What types of disputes can be handled with securities arbitration?
Is a stockbroker limited on how many times he can buy and sell securities for an investor?
How do I determine capital gain on an investment for my federal tax return?
What types of risk do investors face when they purchase securities?
What's the role of the US Securities and Exchange Commission (SEC)?
An initial public offering (IPO) is a company's first offer to sell stock to the public in the stock market.
A: A prospectus is a document that tells potential investors all about a company's security. Information found in a prospectus includes:
Red ink is used on the front page of a preliminary prospectus to indicate that certain information may change before it becomes the official prospectus.
The Sarbanes-Oxley Act of 2002 was passed by the federal government in reaction to a number of business scandals to protect investors from corporate and accounting fraud. Public companies have greater corporate and financial reporting responsibilities under Sarbanes-Oxley.
An affinity fraud is an investment scam perpetrated on groups that have common interests. Examples include church members, hobbyists, charities and professional groups. The members end up selling each other on the scam investments. People feel more comfortable investing in something that's being sold by a friend or relative.
The New York Stock Exchange (NYSE) is also called the "Big Board." It's considered the largest organized stock exchange in the US. It's located at Wall Street in New York City.
Securities markets are divided into two categories: primary and secondary. The primary market is used for new securities. Companies use this market when they have securities they want to sell for the first time. Secondary markets are used to trade securities that already exist. Securities are usually traded in secondary markets once they've been issued in the primary market.
There are stock exchanges all over the world, including the United Kingdom, China and Brazil. There are also regional stock exchanges in the US, including the Boston, Philadelphia and Chicago stock exchanges.
A futures contract is an agreement to purchase or sell a specific commodity for a specific price in the future. Investors use futures contracts to help manage their investment risk. The trading of futures contracts is monitored by the US Commodity Futures Trading Commission (CFTC).
NASDAQ is the largest electronic network for trading securities. It's a dealer's market since investors buy and sell securities through dealers. There's no physical location since everything is on a telecommunications network.
A corporate stock is an equity security that gives you an ownership interest in the company. A corporate bond is a debt instrument that's a loan to the company.
A call option is the right to buy stock at a certain price for a period of time. A put option is the right to sell the stock at a certain price for a period of time.
The initial investors of a Ponzi scheme will actually receive high returns at the beginning. However, the problem is where these high returns come from. The money doesn't come from the profits of the investment. It comes from new investors to the scheme. The new investors pay the returns of the earlier investors. Investors will get paid in a Ponzi scheme as long as new investors keep contributing to the investment. However, this constant flow of money can't last forever. There's not enough money if investors drop out or new investors don't join. Most investors will lose their money since there's no real investment to earn profits. Their money is just used to pay other investors or to pay the scam artists.
The first stage of money laundering is placement. Illegal activities can produce a large amount of cash. This cash needs to be removed from the illegal activity to avoid detection. It can be deposited in a legitimate business, such as a bank or brokerage account. The cash can be converted into money orders or traveler's checks. It can also be used to buy property or other assets.
The second stage of money laundering is layering. This means that the money is moved and transferred to different areas. The goal is to create multiple layers so that the original source is untraceable. The cash may be moved to different financial accounts or other banks. It may be put into trusts or other businesses. The money may travel to different countries and jurisdictions. Property and other goods bought with the money may be sold or exchanged.
The last stage of money laundering is integration. The money is placed back into the economy or financial system. The "cleaned" money can be used to purchase legitimate assets or services. The criminal appears to have legally earned the money. It can be difficult for authorities to trace the money back to the original crime.
Offshore banking can offer tax benefits and privacy to depositors. They also can provide asset protection and greater flexibility over domestic banks.
GAAP stands for "generally accepted accounting principles." These principles guide companies on how to compile their financial statements.
A: Arbitration can be used to settle many different types of securities disputes between investors and their stockbrokers. Some examples include:
Excessive trading by a broker for personal gain is called churning. The broker abuses the investor's trust and makes trades not with his best interests in mind. Churning is considered fraud and violates federal and state securities laws.
The amount you pay for the investment is called the cost basis. The cost basis is usually the purchase price plus any sales charges. If your cost basis is less than the selling price, you have a capital gain and must report this amount on your tax return.
A: Investment risk is the chance that your stock or bond will fail to earn what you expect. It may even lose money. Examples of investment risk include:
The SEC has numerous responsibilities in helping to protect investors. It's responsible for interpreting existing securities laws. It also must create new rules and amend existing rules as it enforces these laws. The SEC is responsible for overseeing the inspection of many investment organizations. This includes brokers, investment advisers, securities firms and rating agencies. It must also oversee private regulatory organizations in three fields: accounting, auditing and securities.