Securities Industry Essentials (SIE) Vocabulary Review

This set covers essential vocabulary and definitions for the SIE Exam based on market participants, regulation, equities, debt, packaged products, and economic factors.

Issuer

A legal entity that sells securities, such as stocks or bonds, in order to finance its operations.

Broker-Dealer

A financial firm that can operate in two capacities: as a broker effecting agency transactions for commissions, or as a dealer buying and selling from its own inventory for a markup or markdown.

Market Maker

A broker-dealer that displays a two-sided quote, indicating a readiness to buy at a specific bid price and sell at a specific ask price.

Investment Adviser (IA)

A firm that provides advice, operates as a business, and receives compensation (fees usually based on a percentage of $\text{AUM}$) for its services.

Accredited Investor

Investors viewed as sophisticated, including individuals with a net worth of at least $\$1,000,000$ (excluding primary residence) or a gross annual income of at least $\$200,000$ (or $\$300,000$ with a spouse).

Qualified Institutional Buyers (QIBS)

Entities that own and invest at least $\$100\,\text{million}$ of securities of unaffiliated issuers; individuals are never considered $\text{QIBs}$.

Primary Market

The market where an issuer sells securities to investors for the first time to raise capital, regulated under the Securities Act of $\text{1933}$.

Secondary Market

The market where investors trade existing securities with each other, and the funds pass between investors rather than back to the issuer.

The Third Market

Exchange-listed securities being traded over-the-counter or away from traditional physical or electronic exchanges.

The Fourth Market

Direct institution-to-institution trading that does not involve public markets or exchanges, often facilitated by Proprietary Trading Systems ($\text{PTSs}$).

Dark Pool

A system that allows large institutional investors to trade large blocks of stock anonymously without disseminating public quotes.

Clearing

The process where the buyer and seller agree on the terms of a transaction after a trade has occurred.

Settlement

The simultaneous payment for and delivery of a security between two parties to complete a transaction.

Depository Trust & Clearing Corporation (DTCC)

A non-profit, industry-owned corporation that automates and centralizes the clearing and settlement of securities trades to increase speed and reduce costs.

Self-Regulatory Organization (SRO)

Self-policing organizations like $\text{FINRA}$ or the $\text{MSRB}$ that promote fair and equitable trading practices but lack the power to arrest or imprison.

Blue-Sky Regulation

State-level laws established under the Uniform Securities Act ($\text{USA}$) that require registration of securities, broker-dealers, and agents.

Securities Act of 1933

The first federal legislation to cover the securities industry, focused on providing full and fair disclosure in the primary market through a prospectus.

Securities Exchange Act of 1934

Regulation establishing rules for the secondary market, which also created the $\text{SEC}$ and gave the $\text{FRB}$ oversight of margin requirements.

Securities Investor Protection Corporation (SIPC)

An industry-funded, non-profit insurance entity providing coverage for customer accounts up to $\$500,000$ (including up to $\$250,000$ for cash) in the event of a broker-dealer's bankruptcy.

Insider Trading

The illegal practice of trading on material, non-public information, which can lead to criminal fines of up to $\$5\,\text{million}$ and up to $\text{20}$ years in prison.

Common Stock

The basic unit of corporate ownership and the last to be paid if a corporation declares bankruptcy; usually carries voting rights and potential dividends.

Treasury Stock

Shares that have been issued and subsequently repurchased by the corporation; they have no voting rights and do not receive dividends.

Statutory Voting

A voting method where a shareholder is given one vote per share owned per voting issue, which tends to benefit larger shareholders.

Cumulative Voting

A voting method that allows shareholders to multiply shares owned by the number of issues and cast them in any manner, favoring minority shareholders.

Rule 144

Regulates the sale of restricted (unregistered) and control (affiliated) securities; requires a $\text{6-month}$ holding period for restricted stock of reporting companies.

American Depositary Receipt (ADR)

Facilitates the trading of foreign stocks in the $\text{U.S.}$ by representing a claim to underlying shares held by $\text{U.S.}$ banks located overseas.

Preferred Stock

A senior equity security that receives preference over common stock regarding dividends and liquidation, normally issued with a par value of $\$100$.

Preemptive Rights

The privilege allowing existing common stockholders to maintain their percentage of ownership by purchasing new shares before they are offered to the public.

Warrant

A derivative that gives the holder the ability to buy stock at a specified price in the future; usually long-term and issued as a 'sweetener' with other securities.

Coupon Rate

The fixed rate of annual interest paid on a bond, calculated based on the bond's $\$1,000$ par value.

Zero-Coupon Bond

A debt instrument purchased at a deep discount that does not pay periodic interest but is redeemed for full face value at maturity.

General Obligation (GO) Bonds

Municipal bonds secured by the full faith, credit, and taxing power of the issuer, requiring voter approval for issuance.

Revenue Bonds

Municipal bonds issued to fund specific projects, repaid using the revenues generated by that project (e.g., tolls or usage fees).

Money-Market Securities

Short-term debt instruments with $\text{one year}$ or less to maturity, such as commercial paper, bankers' acceptances, and certificates of deposit.

Ex-Dividend Date

The date on which a stock begins to trade without its dividend; the price of the stock is reduced by the dividend amount on this date.

Current Yield (Bonds)

A measure of annual interest divided by the bond's current market price: $\frac{\text{Annual Interest}}{\text{Current Market Price}}$.

Yield-to-Maturity (YTM)

An effective return calculation that accounts for interest payments plus the gain or loss an investor realizes by holding the bond until maturity.

Net Asset Value (NAV)

The intrinsic value of a mutual find share, found by: $\frac{\text{Total Net Assets}}{\text{Number of Outstanding Shares}}$.

12b-1 Charges

Asset-based fees deducted from a mutual fund's portfolio to cover the costs of distributing and marketing the fund's shares.

Expense Ratio

The percentage of a fund's assets used to pay operating costs, calculated as: $\frac{\text{Total Expenses}}{\text{Average Net Assets}}$.

Breakpoints

Dollar levels at which a mutual fund's sales charge is reduced, serving as a volume discount for large purchases.

Unit Investment Trust (UIT)

An unmanaged investment company formed under an indenture that invests in a fixed portfolio of income-producing securities.

Closed-End Investment Company

A management company that issues a fixed number of shares that trade in the secondary market at prices determined by supply and demand.

Variable Annuity

A contract where the insurance company provides fluctuating income payments based on the performance of investments in a separate account.

529 College Savings Plan

A state-sponsored, tax-deferred vehicle used to set aside funds for future education costs with potentially tax-free withdrawals for qualified expenses.

Exchange-Traded Fund (ETF)

Shares representing an interest in an underlying basket of securities that mirrors an index and trades on an exchange throughout the day.

Real Estate Investment Trust (REIT)

A corporation that manages a portfolio of real estate investments and avoids double taxation if it distributes at least $\text{90\%}$ of its ordinary income.

Direct Participation Program (DPP)

A business structure, often a limited partnership, where profits and losses flow directly through to investors' tax returns without being taxed at the entity level.

Call Option

A contract giving the owner the right to buy the underlying security at a fixed strike price for a specified period.

Put Option

A contract giving the owner the right to sell the underlying security at a fixed strike price for a specified period.

Underwriting Spread

The difference between the amount paid by the investing public ($\text{POP}$) and the amount received by the issuing corporation.

Limit Order

An order to buy or sell a security at a specified price or better; buy limits are placed below the market and sell limits are placed above.

Stop Order

A contingent order that becomes a market order once the security trades at or through a specified stop price.

Churning

The prohibited practice of excessive trading in a customer's account primarily to generate additional fees and commissions.

Form U4

The Uniform Application for Securities Industry Registration or Transfer used to collect an applicant's background and disciplinary history.

Form U5

The Uniform Termination Notice filed by a broker-dealer within $\text{30}$ days of an associated person resigning or being terminated.

Gross Domestic Product (GDP)

The total value of all goods and services produced within the $\text{U.S.}$ and a key measure of aggregate economic activity.

Systematic Risk

Also called non-diversifiable risk, it is caused by factors such as interest rates or recession that affect the entire market.

Beta

A measurement of the non-diversifiable risk or volatility of a particular asset relative to the total market (\text{S&P 500}).

Alpha

A measurement of the risk that is specific to a particular company, representing its actual return minus its expected return based on its beta.