SIE Exam Structure, Key Regulations, and Market Types for Financial Securities

SIE exam structure

75 scored questions plus 5 unscored pretest questions, for 80 total questions presented. You have 105 minutes.

SIE passing score

The passing standard is 70%.

SIE exam weighting

Capital Markets is about 16%, Products and Risks about 44%, Trading, Accounts, and Prohibited Activities about 31%, and Regulatory Framework about 9%.

SEC

The federal securities regulator. Its job is investor protection, fair and orderly markets, and capital formation.

FINRA

Self-regulatory organization for broker-dealers and associated persons. FINRA oversees brokerage firms and registered reps.

MSRB

Municipal Securities Rulemaking Board. It writes rules for municipal securities professionals, but other regulators enforce those rules.

Federal Reserve

The central bank of the United States. It handles monetary policy, which affects interest rates and the money supply.

Fiscal policy

Government spending and taxation. Fiscal policy is controlled by Congress and the President, not the Federal Reserve.

State regulators

State securities regulators enforce Blue Sky laws, which are state-level securities laws.

Blue Sky laws

State securities laws designed to protect investors from fraud.

Expansionary monetary policy

Federal Reserve policy used to stimulate the economy by buying securities, lowering rates, or increasing the money supply.

Contractionary monetary policy

Federal Reserve policy used to slow inflation by selling securities, raising rates, or decreasing the money supply.

Federal funds rate

The overnight bank-to-bank lending rate.

Discount rate

The rate charged by the Federal Reserve when banks borrow directly from the Fed.

Business cycle

The economy moves through expansion, peak, contraction, and trough.

Expansion

A period when the economy is growing, employment is improving, and business activity is increasing.

Peak

The highest point of the business cycle before the economy begins to decline.

Contraction

A period when economic activity slows down.

Trough

The lowest point of the business cycle before recovery begins.

Leading indicators

Economic indicators that predict future economic activity.

Coincident indicators

Economic indicators that move at the same time as the economy.

Lagging indicators

Economic indicators that confirm a trend after it has already occurred.

GDP

Gross Domestic Product. Measures the total value of goods and services produced within a country's borders.

Primary market

The market where new securities are sold. The issuer receives the money.

Secondary market

The market where existing securities trade between investors. The issuer does not receive money.

Third market

Exchange-listed securities traded over-the-counter.

Fourth market

Direct institution-to-institution trading without using public exchanges.

Broker

Acts as an agent for a customer and earns a commission.

Dealer

Acts as a principal by buying and selling from its own inventory and earns a markup or markdown.

Agent

Someone who acts on behalf of another party. A broker acts as an agent.

Principal

A firm or dealer trading for its own account.

Market maker

A dealer that provides liquidity by standing ready to buy and sell securities.

Investment banker

Helps issuers raise capital through securities offerings.

IPO

Initial Public Offering. The first time a company sells stock to the public.

Follow-on offering

An additional public offering by a company that is already public.

Primary offering

An offering where proceeds go to the issuer.

Secondary offering

An offering where proceeds go to selling shareholders, not the company.

Firm commitment underwriting

The underwriter buys the entire issue from the issuer and takes the risk of unsold shares.

Best efforts underwriting

The underwriter acts as agent and tries to sell the issue, but does not guarantee all shares will be sold.

All-or-none offering

The entire offering must be sold, or the deal is canceled and money is returned.

Mini-max offering

A minimum amount must be sold for the offering to proceed, but securities can be sold up to a maximum.

Standby underwriting

The underwriter agrees to buy any shares not purchased in a rights offering.

Securities Act of 1933

Regulates new issues and primary offerings. Requires registration and disclosure.

Securities Exchange Act of 1934

Regulates secondary markets, exchanges, broker-dealers, the SEC, and anti-manipulation rules.

Common stock

Equity ownership in a company. Common shareholders may vote and may receive dividends.

Common shareholder

An owner of a company who has residual claim on assets after creditors and preferred shareholders.

Residual claim

Common stockholders get paid last in liquidation, only after creditors and preferred shareholders.

Dividend

A distribution of company profits to shareholders. Dividends are not guaranteed.

Voting rights

Common stockholders usually have the right to vote on major corporate matters.

Preferred stock

Equity security with priority over common stock for dividends and liquidation.

Preferred dividend

A usually fixed dividend paid to preferred shareholders before common shareholders receive dividends.

Cumulative preferred stock

Missed preferred dividends accumulate and must be paid before common dividends can be paid.

Noncumulative preferred stock

Missed dividends do not accumulate. If skipped, they are gone.

Participating preferred stock

Preferred stock that may receive extra dividends beyond its stated dividend.

Convertible preferred stock

Preferred stock that can be converted into common stock.

Callable preferred stock

Preferred stock that the issuer can redeem.

Statutory voting

Voting method where votes are spread across board seats.

Cumulative voting

Voting method that allows shareholders to concentrate votes on one board candidate.

Preemptive rights

Rights that allow existing shareholders to buy new shares first to maintain proportional ownership.

Dilution

A reduction in ownership percentage when new shares are issued.

Market capitalization

Stock price multiplied by shares outstanding.

P/E ratio

Price per share divided by earnings per share.

High P/E ratio

Can suggest investors expect strong future growth.

Low P/E ratio

Can suggest slower growth expectations or undervaluation.

Bond

A debt security. The investor is lending money to the issuer.

Bondholder

A creditor of the issuer, not an owner.

Par value

The face value of a bond, commonly $1,000.

Coupon

The stated interest rate on a bond.

Corporate bond

A bond issued by a corporation.

Municipal bond

A bond issued by a state, city, county, or local government entity.

Treasury security

Debt issued by the U.S. federal government.

Bond quote

A bond quoted as a percentage of par value.

Corporate and municipal bond quotes

Usually quoted as a percentage of par.

Treasury bond quotes

Usually quoted in 32nds.

Bid price

The price a dealer is willing to pay to buy a security.

Ask price

The price a dealer is willing to sell a security for.

Investor buying price

The investor buys at the ask price.

Investor selling price

The investor sells at the bid price.

Interest rates up, bond prices down

When market rates rise, existing lower-rate bonds become less attractive, so prices fall.

Interest rates down, bond prices up

When market rates fall, existing higher-rate bonds become more attractive, so prices rise.

Nominal yield

The coupon rate stated on the bond.

Current yield

Annual interest divided by current market price.

Yield to maturity

The total expected yield if the bond is held to maturity, including coupon income and price movement toward par.

Yield to call

The expected yield if a callable bond is called before maturity.

Discount bond

A bond trading below par value.

Premium bond

A bond trading above par value.

Par bond

A bond trading at face value.

Discount bond yield order

Nominal yield is less than current yield, which is less than YTM, which is less than YTC.

Premium bond yield order

YTC is less than YTM, which is less than current yield, which is less than nominal yield.

Callable bond

A bond the issuer can redeem before maturity.

Call risk

The risk that a bond will be called when rates fall, forcing the investor to reinvest at lower rates.

Reinvestment risk

The risk that income or principal must be reinvested at a lower rate.

Put bond

A bond that allows the investor to sell the bond back to the issuer before maturity.

Interest-rate risk

The risk that bond prices fall when interest rates rise.

Credit risk

The risk that the issuer may default.

Default risk

The risk that the issuer fails to pay interest or principal.

Inflation risk

The risk that purchasing power declines over time.

Purchasing power risk

Another name for inflation risk.

Liquidity risk

The risk that a security cannot be sold quickly at a fair price.

Currency risk

The risk that exchange rate changes affect foreign investments.