November 26, 2020 | Last updated: February 26, 2023
By: Jeffrey Van Blarcom
In this article we are going to provide you with a list of the 10 topics you must know in order to pass your SIE exam.
1) Primary Market – The primary Market consists exclusively of issuer to investor transactions. In a primary Market transaction the issuing entity receives the proceeds of the sale. For example, if XYZ Company wished to raise money through the sale of common stock, XYZ Company would be the issuer and would receive the proceeds when the common stock was sold to investors. The primary market is regulated by the Securities Act of 1933. This act requires non-exempt issuers to provide full and fair disclosure of all material facts to investors. A non-exempt issuer is typically a corporate issuer and the disclosure requirements will be met through the delivery of both a preliminary and final prospectus. Other issuers such as the United States government or state and local governments will often issue bonds to meet capital requirements. These issuers are exempt from the disclosure requirements of the Securities Act of 1933. An easy way to identify an issuer on your exam is to remember that the issuer is the entity whose name appears on the security. If you were to look at a $5 bill you would see the United States of America printed on that bill In much the same way that an issuer’s name appears on a stock or bond.
2) Secondary Market – The secondary market is made up of transactions that take place between two investors. The proceeds of the sale are received by the individual who is selling the security, not by the issuer or entity whose name appears on the security. The New York Stock Exchange, NASDAQ and other OTC markets provide the facility for investors to purchase and sell securities in the secondary market. In most cases, each time an investor enters an order to buy or sell a stock or bond, that order will be routed to the market for that security. The individual who is purchasing the security pays the purchase price to the seller and the seller delivers the security to the buyer in exchange for those funds. This process of exchanging cash and securities is facilitated through each party’s broker-dealer.
3) Redeemable Securities – Unlike securities that are traded in the secondary market, redeemable securities are purchased from and redeemed to the issuer of the securities. Open end mutual funds do not have their shares trading in the secondary market. An investor who wishes to purchase an open-end mutual fund will purchase the shares directly from the mutual fund / investment Company. When an investor wishes to sell their shares in the mutual fund portfolio, the investor will redeem their shares to the mutual fund company/ investment company and the mutual fund is required to forward the proceeds of that redemption directly to the investor. Issuers of redeemable securities are required to provide the investors the opportunity to redeem or liquidate their shares by selling their interest directly back to the issuer. A Unit Investment Trust is another type of investment company that is required to redeem their own securities for investors who wish to liquidate their holdings.
4) Equity Securities – There are two main types of equity securities, common stock and preferred stock. While common stock and preferred stock differ in many ways, it is important to understand that each security represents an ownership interest in the company. Common stock is purchased for capital appreciation or growth. Investors who wish to see the value of their money increase over time must either purchase common stock or invest in a portfolio that owns common stock. When an investor purchases common shares the investor obtains several rights enjoyed by all common stockholders. Common stockholders have the right to vote on the major issues facing the corporation including the election of the board of directors. Investors who purchase preferred stock are also owners of the corporation but they do not have voting rights. Preferred stockholders purchase the shares to receive a stated rate of income. The dividend on preferred stock is promised to the preferred stockholder. Common stockholders will only receive dividends after dividends have been paid to preferred stockholders and only if the board of directors declares a dividend to be paid to common stockholders
5 )Debt Securities – Investors who purchase debt securities become creditors of the issuer. The investor has effectively loaned money in exchange for a promise to pay interest. Much like that of a bank who makes a mortgage loan, the Investor’s investment objective is interest income. Corporations, states and the US government all borrow money through the sale of debt securities, many of which are issued in the form of long-term bonds. On your SIE exam unless otherwise indicated each bond will have a par value of $1,000. This par value represents the amount the investor has loaned to the issuer for each bond purchased. The par value is extremely important as this is the amount on which the investor will be receiving interest. For example, if an individual purchased an 8% bond, the individual would be earning 8% interest on $1,000 each year. As a result the individual in this case would earn $80 in interest income every year. Most bonds on your exam will be paying interest semi-annually or every 6 months and investors will receive their final semi-annual interest payment and their $1,000 principal payment upon maturity of the bond.
6)Regular Way Settlement – On the SIE exam you’ll be required to have a full understanding of the way securities transactions are executed, how the transactions settle as well as when investors are required to pay for the securities purchased. The standard way in which these processes take place is known as regular way settlement. When an investor purchases common stock, the transaction is executed on the trade date. The investor who purchased the security must have their name recorded as an owner of record on the books of the corporation and the seller of the security must have their name removed from the ownership records of the corporation. This process takes two business days and on this day known as the settlement date the purchaser will become an owner of record with the corporation. Regular way settlement is always two business days following the trade date. The Securities Act of 1934 granted the authority to the Federal Reserve board to regulate the extension of credit for Securities purchases under regulation T. Regulation T states that investors who purchase securities have 4 business days from the date of purchase to pay for the securities. Looking at this another way, payment date is 2 business days after the settlement date for a regular way transaction. If an investor fails to pay for the security by the expiration of the fourth business day, the investor will have committed a violation and the securities that were purchased will be sold out by the broker-dealer. Investors who have been subject to a sellout will have the extension of credit frozen in their account for 90 days. After the expiration of the 90-day period, the investor will be considered to have re-establish good credit and may once again transact business on the regular way. Regular way settlement for stock, corporate and municipal bonds is always trade day plus 2 business days. Regular way settlement for treasury securities and options is trade date plus one business day
7) Dividend Distribution – In order to successfully complete the Securities industry Essentials exam you must have a comprehensive understanding of the dividend distribution process. Common stockholders are not promised any dividend payments by the corporation. In order for a common stockholder to be entitled to receive a dividend on their common shares, the corporation must elect to pay a dividend to common stockholders. The day on which the corporation elects to pay a dividend is known as the declaration date. On the declaration date the corporation sets the amount of the dividend to be received and determines who will be entitled to receive the dividend that the corporation has declared for payment. All stockholders who are owners of the shares on the date set by the corporation will be entitled to receive the dividend that has been declared for payment. This date is known as the record date and all stockholders whose name appears on the ownership records of the corporation on the record date will receive the dividend payment. Investors who already own the shares and who are not considering selling the shares after a dividend has been declared by the corporation are not required to take any action and the dividend payment will be credited to their brokerage account or mailed to them by the corporation. Investors who are considering purchasing or selling the shares after the corporation has declared a dividend for payment need to pay particular attention to the record date set by the corporation. Because it takes 2 business days for a transaction to settle and the purchaser to become an owner of record, anyone who is interested in purchasing the securities and receiving the dividend must purchase the securities at least 2 business days prior to the record date. Anyone who purchases the security 1 business day prior to the record date will no longer be entitled to receive the dividend that had previously been declared. This is because the transaction would not settle on or before the record date. One business day prior to the record date the stock will be trading without the dividend attached to it; this is known as the ex-dividend date. The ex-dividend date is set by FINRA under the Uniform Practice Code and is always 1 business day prior to the record date. Because individuals who purchase the securities on the ex-dividend date will not be entitled to receive the dividend, the value of the stock will be reduced down by the amount of the dividend prior to the opening of the market. The dividend distribution process concludes with the payment date. On this day the corporation sends out the dividend to investors who were owners of record on the record date.
8) Margin Accounts – We’ve received some very interesting feedback from SIE exam takers regarding how margin accounts are being tested on the SIE exam. A margin account is one that allows an investor to borrow money to purchase securities. The amount that the investor is required to deposit to purchase securities is known as margin. The Securities Exchange Act of 1934 under regulation T sets the terms under which money may be loaned to customers to buy securities. Securities that trade on a National Exchange may be purchased on margin as well as securities that appear on the Federal Reserve Board approved list, these Securities that appear on the Federal Reserve board’s approved list are known as eligible OTC securities. Investors who purchase securities on margin will be required to deposit 50% of the purchase price and the broker-dealer may loan the individual the other half of the purchase price. This is known as initial margin. Once the investor has met the initial margin, the minimum requirements are set by the New York Stock Exchange and FINRA. If an investor purchases securities on margin and those Securities fall in value, the New York Stock Exchange requires investors to maintain a minimum equity in the account equal to 25% of the securities’ market value if the equity in the account falls below 25% the individual will receive a margin call and will be required to deposit additional funds. When an investor establishes a new margin account industry regulators require the individual to maintain an initial minimum of at least $2,000. On your exam watch out for any question that states the following:
“ in a new margin account”
“in an initial transaction”
“ with no other positions in the account”
if you see this on your exam you know to be on the lookout for the $2,000 minimum Equity requirement. investors are required to deposit the greater of 50% of the purchase price for $2,000. SIE exam test takers have stated seeing many variations of this exact question.
9)Call Options – All option transactions must be executed between a buyer and a seller. An individual may not purchase an option if someone is not willing to sell an option to that individual. Buyers of options obtain rights and sellers of options take on an obligation to perform under the contract. The buyer of a call has the right to buy the stock at a set price, known as the exercise price or strike price and has paid a premium to the seller to acquire this right. Because the seller of the call option has received the premium payment, the seller of the call has an obligation to sell the stock to the buyer at the exercise price until the option expires. Buyers of calls are bullish on the stock they want the stock to appreciate and have a maximum gain potential that is unlimited just as if the person had purchased the stock outright. The seller of a call is bearish. This individual wants the stock to go down. The seller of the call has a maximum loss potential that is theoretically unlimited because there is no limit to how high the stock can appreciate. The buyer’s maximum gain is always the seller’s maximum loss because an option is a two-party option contract.
10 )Put Options – An investor who purchases a put contract has acquired the right to sell the underlying stock at the strike price until the expiration of the option. The buyer of the put pays the premium to the seller and the seller of the put has taken on an obligation to buy the stock at the strike price until the expiration date. The buyer of a put is bearish; they want the stock to fall and generally feel that the stock is overvalued and is due for a correction in the marketplace. The seller of the put is bullish on the underlying stock. This individual thinks that purchasing the stock at the strike price would represent a good value and they are more than willing to do so. Because the individual received the premium from the buyer they must purchase the security if the put buyer elects to exercise their option. Nothing is ever unlimited with a put because there is always zero. The price of a stock cannot fall below zero, therefore neither the buyers maximum gain nor the sellers maximum loss would be Unlimited.
These are just some small examples of the top 10 terms you must know to pass your SIE exam. Our textbooks, video lectures and test banks provide substantially more detail. Our complete SIE training package includes 15 hours of video lectures , more than 1,100 test questions, SIE textbook and ebook, free shipping and our Greenlight money back pass guarantee – All for just $109. Click here for more SIE exam prep materials
Good luck on your exam!
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