Exhaustive Academic Study Notes for the Securities Industry Essentials (SIE) License Exam Manual
Unit 1: Equity Securities
A security is formally defined as an intangible financial asset that may be bought, sold, or gifted between persons, represented either by paper certificates or electronic records. Based on the 1946 Supreme Court ruling, this definition distinguishes securities from commodities (tangible assets like beef or oil), precious metals, and currencies. The industry focuses on two basic types: stocks, which represent ownership or equity in a corporation, and bonds, which represent debt or an IOU where the investor is the creditor.
Common stock is the primary equity security. By purchasing a share, the smallest unit of stock, investors participate in a company's success through capital appreciation (selling shares for a higher price) and dividends (distributions of profits). Common stockholders elect a board of directors (BOD) at annual meetings to oversee management but do not participate in daily operations. Stock is classified into four states: Authorized (the number of shares a company is legally permitted to issue per its charter), Issued (authorized stock sold to the public), Outstanding (issued shares remaining in the hands of investors), and Treasury (shares a corporation has repurchased, which carry no voting or dividend rights).
Market capitalization measures a corporation's size by multiplying outstanding shares by the current market value (CMV). Large-cap stocks exceed billion in market cap and include "blue-chip" stocks with long dividend histories. Mid-caps range from billion to billion, and small-caps range from million to billion. Penny stocks are unlisted securities trading at less than per share. They are highly speculative, requiring a signed risk disclosure before the first trade and monthly account statements regardless of activity. Under cold-calling rules, representatives must determine suitability and obtain a signed statement unless the client is an "established customer" (account held for year or made at least penny stock purchases from different issuers).
Stockholder rights include statutory voting (one vote per share for each director seat) or cumulative voting (allocating total votes in any manner, benefitting smaller shareholders), and the right to information (audited Form 10-K financial statements). Preemptive rights allow existing shareholders to maintain their proportionate ownership by purchasing shares of new issues before the general public. Dividends are paid quarterly if declared by the BOD. The dividend process follows the DERP sequence: Declaration date, Ex-dividend date (set by FINRA or the exchange, usually the same as the record date; buyers on or after this date do not get the dividend), Record date (owners on this day get the dividend), and Payable date (checks are sent). Cash dividends are taxable annually, while stock dividends adjust the cost basis downward rather than being immediately taxable.
Preferred stock is an equity security with bond-like characteristics, primarily providing a fixed rate of return stated as a dollar amount or percentage of par (assume par is ). Preferred owners have dividend preference (paid before common) and priority at dissolution but generally lack voting and preemptive rights. Types include Straight (noncumulative; missed dividends are lost), Cumulative (accrues dividends in arrears), Callable (can be repurchased by the firm), Convertible (can be exchanged for common stock), Adjustable-rate (variable dividends tied to benchmarks like T-bills), and Participating (offers a share of corporate profits beyond the fixed dividend).
Unit 2: Other Equities and Corporate Actions
American Depositary Receipts (ADRs) are equity securities that simplify foreign investing. U.S. depositary banks buy shares of foreign companies in their home markets and issue dollar-denominated receipts. While ADRs trade and settle like U.S. stocks, they carry currency risk as exchange rate shifts affect dividend values. Foreign governments may withhold taxes on dividends, which can typically be applied as a credit against U.S. tax liability.
Rule 144 of the Securities Act of 1933 governs restricted and control stock. Restricted stock (unregistered) must be held for months before sale. Control stock is held by affiliates (directors, officers, or owners of or more of voting stock). Affiliates must file Form 144 to sell, with volume limits over a -day period set at the greater of of outstanding shares or the average weekly trading volume over the most recent weeks.
Warrants are long-term instruments bundled as "sweeteners" with bonds or preferred stock, granting the right to buy shares at a set price usually above the CMV at issuance. In contrast, Rights are short-term (30–45 days) and allow existing shareholders to buy shares below CMV. Corporations may also engage in splits: Forward splits increase the share count and lower the price (e.g., a split on shares at results in shares at ), while Reverse splits decrease the share count to raise the price (e.g., a split on shares at results in shares at ). Total position value remains unchanged in both.
Corporate actions like Mergers (two combined operations), Acquisitions (one taking over another), and Spin-offs (forming a subsidiary) generally occur without immediate tax if only stock is received. Buybacks and Tender offers (offers to buy securities directly from owners) are usually cash transactions and represent taxable events. Issuers must provide notice of corporate actions at least days before the record date. Under proxy voting rules, member firms acting as nominal owners must forward proxies to beneficial owners. If a customer fails to return a proxy by the day before a meeting, the firm may vote on minor matters but must remain silent on major matters like mergers.
Unit 3: Debt Securities
Bonds are debt instruments where the issuer owes principal and interest to investors. Key features include Par Value ( principal), Maturity (Term matures all at once; Serial matures at intervals; Balloon matures mostly at the end), and Coupon Rate (stated yield). Accrued interest is paid by the buyer to the seller if the bond trades between payment dates (semi-annual cycles). Price and yields have an inverse relationship: if interest rates rise, bond prices fall, and vice versa. Bond pricing is measured in points (). A bond trading at is worth .
Yield measurements include Nominal (fixed coupon), Current Yield (), Yield to Maturity (basis), and Yield to Call. For discount bonds, . For premium bonds, . Optional features include Call features (issuer redeems early, usually during falling rates; requires higher coupons) and Put features (investor forces redemption, usually during rising rates; allows lower coupons). Zero-coupon bonds are issued at a deep discount, pay no periodic interest, and mature at par, creating "phantom income" taxable annually (accretion).
Bond ratings by S&P and Moody's measure default risk. Investment grade includes S&P ratings AAA through BBB (Moody's Aaa through Baa). High-yield (junk) bonds are rated BB/Ba or lower. Volatility is influenced by time to maturity and coupon rate: longer maturities and lower coupons produce higher volatility (duration). Secured debt is backed by collateral: Mortgage Bonds (real estate), Equipment Trust Certificates (rolling stock), and Collateral Trust Bonds (securities held in trust). Unsecured debt (debentures) is backed only by the issuer's full faith and credit. In liquidation, the order is: Secured Debt, Unsecured Debt/General Creditors, Subordinated Debt, Preferred Stock, and Common Stock.
Treasury securities are issued by the U.S. government and involve T+1 settlement. T-bills mature in weeks and are issued at a discount. T-notes ( years) and T-bonds ( years) pay semi-annual interest. TIPS (Inflation-Protected) adjust the principal value every months based on inflation. GNMAs (Ginnie Mae) are the only agency securities backed by the full faith and credit of the federal government; they pay monthly principal and interest (pass-through). GNMA, FNMA, and FHLMC certificates are mortgage-backed and subject to prepayment risk.
Municipal bonds (munis) are issued by state/local governments and are generally federal tax-exempt. General Obligation (GO) bonds are backed by taxing power (ad valorem property taxes for local, income/sales for states) and require voter approval. Revenue bonds finance self-supporting facilities (e.g., toll roads) and are backed by project income. Short-term municipal notes include TANs (Tax Anticipation), RANs (Revenue), and BANs (Bond). Tax-equivalent yield calculations help compare munis to corporate bonds: .
Money market instruments are high-quality, liquid debt with year or less to maturity. Examples include Negotiable (Jumbo) CDs ( min), Commercial Paper (unsecured corporate debt, max days), Banker's Acceptances (finance international trade, max days), and Repurchase Agreements (Repo; selling an asset with an agreement to buy back at a higher price). Asset-backed securities like CMOs (Collateralized Mortgage Obligations) and CDOs pool assets into tranches with varied risk/return profiles.
Unit 4: Investment Companies
The Investment Company Act of 1940 classifies investment companies into three types: Face-Amount Certificates (FACs), Unit Investment Trusts (UITs - unmanaged with fixed portfolios and end dates), and Management Companies. Management companies are either Closed-end (fixed number of shares, trade in the secondary market, can trade at a discount or premium to NAV) or Open-end (Mutual Funds - continuous primary offering, must redeem shares, trade at NAV plus sales charge).
Mutual fund share classes include Class A (front-end load, best for large, long-term investments), Class B (back-end load/CDSC, converts to A after roughly years), and Class C (level load, usually annual fee, best for short-term year horizons). Breakpoints provide quantity discounts on Class A shares. Investors can sign a Letter of Intent (LOI) to reach a breakpoint over months (can be backdated days). Rights of Accumulation allow reduced loads on current purchases based on previous investments' growth and value. Mutual funds use forward pricing; orders are executed at the next calculated NAV (minimum once daily at market close). The expense ratio () reflects operating costs but excludes sales loads. Under Subchapter M (Conduit Theory), funds avoid triple taxation if they distribute at least of Net Investment Income ().
Prospectus requirements include the Statutory Prospectus (full disclosure), Summary Prospectus (Rule 498 short form), and the Statement of Additional Information (SAI; available within business days of request). Annuities provide retirement income. Fixed annuities carry inflation risk for the investor and investment risk for the insurer (not a security). Variable annuities (VAs) are securities; the investor chooses subaccounts (separate accounts) and assumes market risk. Payouts (annuitization) are determined by the SAAPI formula: Sex, Age, Amount, Payout option, and AIR (Assumed Interest Rate). VAs are tax-deferred; growth is taxed as ordinary income upon withdrawal. A 1035 Exchange allows tax-free transfer between annuities.
Unit 5: Options
Options are contracts between buyers (holders/long) and sellers (writers/short). One contract equals shares of an underlying security. Call options give the buyer the right to buy; Put options give the buyer the right to sell. Premiums () are paid by the buyer to the seller (writer). Monthly options expire on the third Friday of the month. American-style options can be exercised any time; European-style only at expiration.
Intrinsic value occurs when an option is "in the money." Calls are in the money when . Puts are in the money when . Premium = . Breakeven for calls is ; for puts, it is . Max gain for long calls is unlimited; max loss for long options is the premium. Sellers of uncovered (naked) calls face unlimited risk.
Strategies include Hedging (Long Stock + Long Put protects against price drops; Short Stock + Long Call protects against price rises) and Writing Covered Calls (selling calls on owned stock to generate income). Index options are nonequity options settled in cash based on the difference between the strike and the index closing value. The Options Clearing Corporation (OCC) standardizes and guarantees performance. An account must be approved for options by a Registered Options Principal (ROP), and the customer must return the signed options agreement within days of approval.
Unit 6: Other Investment Types
Municipal fund securities include Section 529 Plans for education (withdrawals are tax-free for qualified expenses; limit for K-12 tuition annually), Local Government Investment Pools (LGIPs; short-term vehicles for government entities), and ABLE Accounts (tax-advantaged savings for individuals with disabilities where the onset occurred before age ).
Direct Participation Programs (DPPs) like Limited Partnerships pass through income and passive losses to investors. The General Partner (GP) manages and has unlimited liability; Limited Partners (LPs) have limited liability and no management role. LPs are illiquid and require GP permission to sell. Liquidation priority: Secured Lenders, Other Creditors, LPs (profits then capital), GPs.
Real Estate Investment Trusts (REITs) are organized as trusts. Equity REITs own properties; Mortgage REITs own mortgages. They are not investment companies but follow conduit tax theory (Subchapter M). Exchange-Traded Funds (ETFs) track an index and trade like stock on an exchange (can be sold short/bought on margin). Exchange-Traded Notes (ETNs) are unsecured debt issued by banks where returns are linked to an index; they carry default and liquidity risk.
Unit 7: Issuing Securities
The Primary Market involves issuers selling new securities to raise capital under the Securities Act of 1933. Participants include Underwriters (BDs/investment bankers), Institutional Investors (e.g., QIBs with million in assets), and Accredited Investors (insiders, individuals with \200,000\text{ income/}"\ million net worth excluding residence, or certain licensed professionals). Offerings include IPOs (first time) and APOs (follow-on).
Underwriting commitments are Best Efforts (agent role; includes All-or-None and Mini-Max) or Firm Commitment (principal role; underwriter buys all and resells). Process: Registration statement (Form S-1) -> Cooling-off period (min days; only red herrings, tombstones, and indications of interest allowed) -> Effective date (offering begins). Shelf offerings allow registration of securities for up to years to sell portions later. Exemptions include Regulation A (up to million for small/medium firms), Rule 147 (intrastate; in-state, -month hold for out-of-state resale), and Regulation D (Private Placements; Rule 506(b) max 35 non-accredited, no advertising; Rule 506(c) only accredited, advertising allowed).
Unit 8: Trading Securities
The Secondary Market involves investor-to-investor trading under the Securities Exchange Act of 1934. Market centers include Exchanges (auction markets with DMMs), OTC (decentralized dealer market), Third Market (listed stocks trading OTC), and Fourth Market (institutional ECNs/dark pools). Participants include Carrying/Clearing Firms (hold assets), Introducing Firms (forward to clearing), Prime Brokers (centralized custody for active accounts), and Transfer Agents (maintain ownership records).
Quotes consist of a Bid (price seller receives) and an Ask (price buyer pays). Size is in round lots ( shares). Orders include Market (execute at best price), Limit (execute at specified price or better), and Stop (trigger a market/limit order at a set price). Position states include Long (bullish) and Short (bearish; involves borrowing stock and selling). Broker-dealers act as Agents (collect commission) or Principals (markup/down from inventory). Regular way settlement is T+1; Cash settlement is same-day.
Unit 9-11: Accounts and Features
Basic accounts include Individual, Joint (JTWROS: equal ownership/survivorship; TIC: pro-rata ownership/no survivorship rights), and TOD (Transfer on Death). Sole Proprietors and Partnerships require specific agreements. Trusts include Revocable (grantor can change) and Irrevocable (removes assets from estate). Minors use UTMA/UGMA accounts (one custodian, one minor; taxed at minor's rate) or Coverdell ESAs ( annual limit for education). Fiduciaries (custodians, trustees) follow the prudent investor rule. Powers of Attorney (POA) include Full or Limited; Durable POA survives incapacity but all POAs end at death.
Retirement Accounts: Traditional IRAs offer tax-deductible contributions if income allows; RMDs begin at age . Roth IRAs use after-tax dollars; distributions are tax-free if held years and age . Employer-sponsored plans include Defined Benefit (Pension) and Defined Contribution (401k/Profit Sharing).
Margin accounts allow borrowing. Requirements: initial per Reg T ( min per FINRA). Maintenance requirement is . Restricted accounts include IRAs and UTMAs (cannot use margin). Wrap accounts charge a flat fee for all services and require IA registration. Discretionary trading requires written POA and principal approval, involving the "Three As": Action, Asset, and Amount.
Unit 12-14: Economics, Returns, and Risk
Economics: Business cycles entail Expansion, Peak, Contraction (Recession mo; Depression mo), and Trough. Indicators are Leading (Stock index, M2), Coincident (personal income, GDP), and Lagging (profits, inventory). Monetarism tools: Open Market Operations (Buy expand money), Discount Rate (Fed to bank loans), Reserve Requirement (funds held by banks). Fiscal Policy (Taxes/Spending) is set by Congress. Exchange rates: Strong dollar hurts exports/helps imports. Financial statements include the Balance Sheet (Assets Liabilities + Equity) and Income Statement (EPS, P/E Ratio). Short-term liquidity is measured by Working Capital ().
Returns: Current Yield (); Capital Gains/Losses (Sales Proceeds - Adjusted Cost Basis). Long-term gains (held year) are taxed lower. Net capital losses can offset up to of ordinary income annually. Total Return includes both gain and income divided by cost basis. Wash Sale rule (30 days before/after) prohibits using losses if the position is re-established.
Risk: Systematic risk (market, interest rate, inflation) affects everyone and cannot be diversified. Nonsystematic risk (business, financial, liquidity, legislative) is unique and reduced by diversification. Regulation Best Interest (Reg BI) mandates that BDs act in the best interest of retail customers, involving obligations of Disclosure, Care, Conflict of Interest, and Compliance. Form CRS (Client Relationship Summary) must be delivered to all retail clients.
Unit 15-19: Registration, Regulation, and Ethics
Registration: Form U4 requires -year residency and -year employment history. Felonies within years cause statutory disqualification. Fingerprints are required for those handling cash/securities. Form U5 is filed within days of termination; FINRA jurisdiction remains for years. Continuing Education (CE) has two parts: Firm Element (annual) and Regulatory Element (annual).
Regulators: SEC (primary federal body), FinCEN (AML/suspicious tracking), OFAC (SDN list for terrorists/sanctions), SIPC (covers per customer, max cash in BD bankruptcy), FDIC (covers per depositor in bank failure). FINRA Rules: Conduct (customer relationship), Code of Procedure (enforcement), UPC (trading behavior), Arbitration (monetary dispute resolution; final and binding).
Ethics and Communications: All info must be fair/balanced. Institutional comm ( million assets), Retail ( retail in days), Correspondence ( retail). Telephone solicitations ( AM – PM prospect time). AML stages: Placement, Layering, Integration. SARs filed for ; CTRs filed for . Insider trading penalties are treble damages or million/ years. Rule 5130 restricts IPO sales to industry insiders. Borrowing from customers is prohibited unless immediate family or a bank. Gifts are limited to annually; MFP political contributions to (if eligible to vote). Private securities transactions (selling away) require written notice to the firm.