Securities Industry Essentials (SIE) Exam Review

These flashcards cover key vocabulary and concepts from the Securities Industry Essentials (SIE) exam, highlighting crucial definitions and terms.

Broker-dealer

Think of a broker-dealer as a financial company that acts like a middleman. They help you buy and sell stocks, bonds, and other investments. They can also buy and sell these things for themselves.

Primary market

This is where brand new stocks or bonds are first sold to the general public by the company or government creating them. It's like the 'first sale' aisle for investments.

Secondary market

After new stocks or bonds are sold in the primary market, they get traded here. This is where investors buy and sell existing investments among themselves, like a used car market, but for stocks.

Public offering

When a company wants to sell its stocks or bonds to pretty much anyone who wants to buy them, they do a 'public offering'. The government (SEC) has to check it out first to make sure everything is fair.

Private placement

Instead of selling to everyone, a company might sell its stocks or bonds privately to a few big-shot investors or wealthy individuals. It's like an exclusive, invite-only sale.

Blue sky laws

These are state laws designed to protect investors from fraud. They make sure that the investment being sold in that state isn't a scam or selling something that's literally 'blue sky' (worthless).

Business cycle phases

The economy goes through ups and downs, like a roller coaster. The 'business cycle' describes these stages:

• Expansion: The economy is growing, jobs are increasing.
• Peak: The top of the growth, things can't get much better.
• Contraction (Recession): The economy starts shrinking, jobs might be lost.
• Trough: The bottom of the slump, things start to stabilize before growing again.

Interest rate

This is how much it costs you to borrow money, or how much you earn when you lend money (like putting it in a savings account). It's essentially the 'rent' you pay or receive for using money.

Inflation

When prices for almost everything (gas, food, clothes) keep going up. This means your money buys less than it used to, like if a dollar bought a candy bar yesterday, but only half a candy bar today.

Market risk

This is the risk that all your investments might go down just because the entire stock market or economy is having a bad day, not because of anything specific to your investment.

Interest-rate risk

This mostly affects bonds. If interest rates go up, new bonds being issued will offer better returns. This makes older bonds (with lower interest rates) less attractive, so their price might fall if you try to sell them.

Credit risk

This is the worry that the company or government you lent money to (by buying their bond) won't be able to pay you back the regular interest or the original loan amount when it's due. They might 'default'.

Cash equivalents

These are super safe, super easy-to-access investments that are almost like having cash, but might earn a tiny bit of interest. Think of your bank savings account or very short-term government IOUs (T-bills).

Par value

For a bond, this is the original amount that the bond issuer promises to pay back to the bond owner when the bond matures. It's usually 1,000, like the stamp amount on a gift certificate.

Yield

This is how much money you actually get back from an investment, expressed as a percentage, compared to how much you paid for it. It's the real 'bang for your buck'.

U.S. Treasuries

These are bonds issued by the U.S. government. They are considered very safe investments because the chance of the U.S. government not paying you back is extremely, extremely low.

Corporate bonds

These are bonds issued by companies (not the government) when they want to borrow money. They typically pay more interest than U.S. Treasuries, but there's a higher chance the company might hit hard times and not pay you back.

Preferred stock

This is a special kind of stock. Owners get a fixed payment (dividend) usually before regular stock owners, but they typically don't get to vote on company matters. It's kind of a hybrid between a stock and a bond.

Mutual funds

Imagine a big pot where many people throw in their money. A professional money manager then uses all that pooled money to buy a bunch of different stocks, bonds, and other investments. This helps spread out risk and is a hands-off way to invest.

Exchange-traded funds (ETFs)

Similar to mutual funds, ETFs also pool investor money to buy many different investments. But the cool thing about ETFs is that you can buy and sell them throughout the day, just like regular stocks, and they often come with lower costs.

Options

These are contracts that give you the right (but not the obligation) to buy or sell a specific stock at a specific price by a specific date. You're buying the opportunity, or 'option', to make a future trade.

Call option

This type of option gives you the right to buy a stock at a specific price, even if the market price goes higher. You'd buy this if you think the stock's price is going to shoot up.

Put option

This type of option gives you the right to sell a stock at a specific price, even if the market price goes lower. You'd buy this if you think the stock's price is going to drop.

Margin account

This is a special investment account where you can borrow money from your broker to buy more investments than you could with just your own cash. It's like investing on credit, which can boost gains but also increase losses.

Churning

This is a naughty thing some unethical brokers do. They make way too many trades in your account, not to benefit you, but just to rack up fees and commissions for themselves. It's illegal and bad for your money.

Insider trading

This is when someone buys or sells stocks using secret information that isn't available to the rest of the public, giving them an unfair advantage. It's like playing poker knowing what cards everyone else has, and it's highly illegal.

Securities Act of 1933

This is a law that says when companies sell brand new stocks or bonds to the public, they have to tell everyone all the important details. No hiding bad stuff, so investors can make smart choices.

Securities Exchange Act of 1934

This law deals with the buying and selling of existing stocks and bonds, making sure those markets are fair. It also created the SEC, which is like the police force for the stock market.

Anti-Money Laundering (AML)

These are rules and procedures that banks and financial companies must follow to stop criminals from 'washing' dirty money (money gained illegally) to make it look clean. They try to spot suspicious transactions.

SIPC

If your brokerage firm goes out of business, SIPC steps in to protect your investments (up to a certain amount). It's like FDIC for bank accounts, but for your stocks and bonds held at a failed brokerage. It doesn't protect against market losses, only if the firm itself fails.

Continuing Education (CE)

People who work as financial advisors or brokers have to regularly take courses and pass tests to make sure they're always up-to-date on all the new rules and laws. It keeps them smart and compliant.

Know Your Customer (KYC)

This is super important! Brokers and financial advisors have to collect a lot of info about you – your age, what you earn, your goals, how much risk you're okay with – to make sure they recommend investments that are actually good for you and not just random stuff.

Tax status

This refers to how you're treated by the tax man. Are you single? Married? What's your income bracket? This information helps determine how different investments will affect your taxes.

Settlement date

When you buy or sell a stock, the 'settlement date' is the official day when the money actually moves from one account to another, and the ownership of the stock officially changes hands. It's usually a few business days after the trade happens.