Securities Industry Essentials Exam For Dummies with Online Practice

Steven M. Rice, founding partner and educator at Empire Stockbroker Training Institute, is the author of Series 7 Exam For Dummies. Rice also co-developed a complete library of securities training manuals for the Series 4, Series 6, Series 7, Series 24, Series 63, Series 65, and Series 66 exams.

Introduction 1


About This Book 1


Foolish Assumptions 2


Icons Used in This Book 2


Beyond the Book 2


Where to Go from Here 3


Part 1: Getting Started with the SIE Exam 5


Chapter 1: Introducing the SIE (Securities Industry Essentials) Exam 7


What Is the SIE Exam, Anyway? 7


Profiling the SIE Exam-Taker 8


One’s Not Enough: Tackling the Co-Requisite Exams 8


Series 6: Investment Company and Variable Products Representative Exam 9


Series 7: General Securities Representative Exam 9


Series 22: DPP Representative Exam 9


Series 57: Securities Trader Exam 9


Series 79: Investment Banking Representative Exam 9


Series 82: Private Securities Offerings Representative Exam 9


Series 7 + Series 86 + Series 87: Research Analyst Exam 10


Series 99: Operations Professional Exam 10


Signing Up 10


Filling out an application to enroll 10


It’s a date! Scheduling your exam 10


Planning ahead for special accommodations 11


Just in case: Cancelling as an option 12


Taking a Peek at the Tested Topics 12


Understanding the Exam Format and Other Exam Details 14


Reviewing the exam basics 14


Practicing on ten additional trial questions 14


Mastering the computerized format and features 14


Instant gratification: Receiving and evaluating your score 16


Chapter 2: Preparing for the SIE Exam 19


Courses and Training Materials: Determining the Best Way to Study 19


Back to school: Attending a prep course 19


Selecting prep material to study on your own 21


Managing Your Study Time Wisely 22


Blocking out some time to study 23


It’s a plan: Getting into a study routine 23


Give it a rest: Taking short breaks 24


Staying focused from day to day 24


Devoting time to practice tests 25


Avoiding study groups 25


Staying in shape 25


Exploring Study Strategies 26


Developing Solid Test-Taking Skills 26


Read the question carefully 27


Look for phrases that lead to the topic tested 27


Work with what you have 27


Don’t obsess; mark for review 27


Keep track of time 27


Master the process of elimination 28


Maintain your concentration 28


Think carefully before changing your answers 29


Use the scrap paper wisely 29


Knowing When You’re Ready 29


Chapter 3: Examining and Mastering Question Types 31


Familiarizing Yourself with Question Formats 31


Working with the straight shooters: The straightforward types 32


Encountering quirky questions with qualifiers 33


Roman hell: Complex multiple choice 34


Looking at exhibits: Diagram questions 36


Shredding the Questions: Tips and Tricks 38


Focusing on key information 38


Answer me this: Picking the correct answer 39


Don’t make the same mistake twice 41


Chapter 4: Surviving Test Day 43


Composing Yourself the Day Before 43


Making the Most of the Morning 44


Arriving on the Scene 45


Taking advantage of one last chance to cram 45


Signing in 45


Getting seated 45


Tackling the SIE 46


Getting the Results: Drum Roll, Please 47


Part 2: Mastering Basic Security Investments 49


Chapter 5: Underwriting Securities 51


Bringing New Issues to the Market 51


Starting out: What the issuer does 51


Role call: Introducing the team players 54


Getting the skinny on the issue and issuer: The prospectus 56


Counting the securities along the way 57


Getting Up to Speed on the Types of Securities Offerings 57


Reviewing Exemptions 58


Exempt securities 58


Exempt transactions 59


Chapter 6: Corporate Ownership: Equity Securities 61


Beginning with the Basics: Common Stock 61


Understanding a stockholder’s voting rights 62


Categorizing shares corporations can sell 63


Considering the par value of common stock 64


Corporate actions 64


Splitting common stock 65


Sharing corporate profits through dividends 66


Getting Preferential Treatment: Preferred Stock 68


Considering characteristics of preferred stock 68


Getting familiar with types of preferred stock 69


Securities with a Twist 71


Opening national borders: ADRs 71


Rights: The right to buy new shares at a discount 71


Warrants: The right to buy stock at a fixed price 72


Chapter 7: Debt Securities: Corporate and US Government Loans 73


Tackling Bond Terms, Types, and Traits 73


Remembering bond terminology 73


Following bond issue and maturity schedules 75


Comparing secured and unsecured bonds 75


Making Basic Bond Price and Yield Calculations 77


Finding bond yields 77


Determining the Best Investment: Comparing Bonds 79


Considering bond credit ratings 79


Contrasting callable and put bonds 81


Popping the top on convertible bonds 82


Exploring US Government Securities 82


Understanding the types and characteristics of US government securities 82


Playing It Safe: Short-Term Loans or Money Market Instruments 84


Chapter 8: Municipal Bonds: Local Government Securities 87


General Obligation Bonds: Backing Bonds with Taxes 87


General characteristics of GOs 88


Analyzing GO bonds 88


Dealing with Revenue Bonds: Raising Money for Utilities and Such 89


General characteristics of revenue bonds 90


Analyzing revenue bonds 90


The Primary Market: Bringing New Municipal Bonds to Market 91


Allocation of orders 92


Definitions for new issues 92


Examining Other Types of Municipal Bonds on the Test 92


Taxable Municipal Bonds 94


Don’t Forget Municipal Notes! 94


Municipal Fund Securities 95


Section 529 Plans 95


ABLE accounts 96


Local Government Investment Pools 96


Understanding the Taxes on Municipal Bonds 96


Comparing municipal and corporate bonds equally 97


Scot-free! Taking a look at triple tax-free municipal bonds 97


Following Municipal Bond Rules 98


Confirmations 98


Advertising and record keeping 99


Gifts 99


Commissions 99


Gathering Municipal Bond Info 100


The bond resolution (indenture) 100


Legal opinion 100


Official statement 100


“G” That’s a Whole Lot of Rules 101


Part 3: Delving Deeper: Security Investments with a Twist 105


Chapter 9: Delivering Diversification with Packaged Securities 107


Diversifying through Management Investment Companies 108


Comparing open- and closed-end funds 108


Keeping your customer’s investment objectives in mind 110


Dealing with discounts 112


Figuring the sales charge and public offering price of open-end funds 114


Considering Other Investment Company Options 115


Face-amount certificate companies 116


Unit investment trusts (UITs) 116


Exchange-traded products (ETPs) 116


Investment company rules 17a-6 and 17a-7 117


Adding Annuities to a Portfolio 117


Looking at fixed annuities 118


Checking out variable annuities 118


Putting money into (and receiving money from) annuities 118


Exploring Variable Life and Variable Universal Life Insurance 120


Chapter 10: Working with Direct Participation Programs and REITs 121


Searching for Identity: What DPPs Are (and Aren’t) 122


The DPP Characters: General and Limited Partners 122


Pushing through Partnership Paperwork 123


Partnership agreement 123


Certificate of limited partnership 124


Subscription agreement 124


Passive Income and Losses: Looking at Taxes on Partnerships 124


Evaluating Direct Participation Programs 125


Checking Out Types of Partnerships 125


Building on real-estate partnership info 125


Gearing up with equipment leasing 126


Strengthening your grasp on oil and gas 127


Reducing Real-Estate Risk with REITs 128


Private (private placement) REITs 129


Registered non-listed REITs 129


Listed REITs 129


Chapter 11: Options: The Right to Buy or Sell at a Fixed Price 131


Brushing Up on Option Basics 131


Reading an option 132


Looking at call options: The right to buy 133


Checking out put options: The right to sell 133


Getting your money back: Options in-, at-, or out-of-the-money 133


Paying the premium: The cost of an option 135


Incorporating Standard Option Math 136


Calls same: Buying or selling call options 137


Puts switch: Buying or selling put options 139


Trading options: Opening and closing transactions 142


Gaining Additional Option Info 144


Clearing through the OCC 144


That’s ODD: Options risk disclosure document 144


Getting the go-ahead: Registered options principal 144


Options account agreement 144


Order ticket 145


Last trade, last exercise, and expiration of an option 145


Exercise and assignment 145


Additional definitions 146


Some additional option rules 147


Part 4: Playing Nicely: Serving Your Customers and Following the Rules 149


Chapter 12: Serving Your Customers: Customer Accounts 151


Following Protocol When Opening Accounts 151


Filing the facts on the new account form 151


Selecting the appropriate type of account 154


Investment advisers 156


Cash or margin? 157


Getting Margin Paperwork Out of the Way 157


Introducing Long and Short Margin Accounts 158


Playing by the Federal Reserve Board’s Rules 158


Regulation T 158


Margin call 159


Opening a Margin Account: The Initial Requirements 159


Starting long accounts 160


Opening short accounts 160


Obeying the Telephone Act of 1991 160


Chapter 13: Doing a Little Market Research: Securities Analysis 163


Knowing Your Securities and Markets: Securities Analysis 163


Regarding risk 164


Mitigation of risk 165


Deciding what to buy: Fundamental analysis 166


Deciding when to buy: Technical analysis 168


Following the Green: Money Supply 171


Influencing the money supply 171


Opening the Federal Reserve Board’s toolbox 172


Reading Economic Indicators 173


Leading indicators 174


Coincident (coincidental) indicators 174


Lagging indicators 174


GDP versus GNP 175


How Economic Factors Affect Securities 175


Cyclical 175


Defensive 175


Growth 175


Principal Economic Theories 176


Keynesian (demand side) 176


Supply side (Reaganomics) 176


Monetarist 176


Chapter 14: Going to Market: Orders and Trades 177


Shopping at Primary and Secondary Markets 177


Buying new in the primary market 177


Buying used in the secondary market 178


Making the Trade 178


Auctioning securities at securities exchanges 178


Negotiating trades over-the-counter 179


Understanding the Role of a Broker-Dealer 179


Introducing broker (IB) 180


Clearing (carrying) broker 180


Prime broker 180


Receiving Orders from Customers 181


Talking about order types 181


Factoring in order features 183


Looking at Market Participants 185


Chapter 15: Making Sure the IRS Gets Its Share 187


Everything in Its Place: Checking Out Tax and Income Categories 187


Touring the tax categories 187


Looking at types of income 188


Noting Taxes on Investments 188


Interest income 188


Dividends 189


At the sale: Capital gains and losses 190


Exploring Retirement Plan Tax Advantages 192


Qualified versus nonqualified plans 192


IRA types and contribution limits 193


401(k) and 403(b) 194


Chapter 16: No Fooling Around: Rules and Regulations 197


The Market Watchdogs: Securities Regulatory Organizations 197


The Securities and Exchange Commission 197


Self-regulatory organizations 198


Investor education and protection 199


State regulators 200


Department of the Treasury/IRS 200


FINRA Registration and Reporting Requirements 200


Disqualification 201


Fingerprints 202


Continuing education 202


Resignation and termination 203


Associated persons exempt from registration 203


Reporting requirements 203


Trading by the Book When the Account Is Open 204


Filling out an order ticket 205


Checking your calendar: Payment and settlement dates 207


Regulation S-P 208


Confirming a trade 208


Financial exploitation of specified adults 209


Borrowing from or lending to 210


Following up with account statements 210


Keeping your dividend dates straight 210


Handling complaints 212


Retail communications 213


Record-keeping 214


Committing Other Important Rules to Memory 215


Sticking to the 5 percent markup policy 215


Avoiding violations 216


Following the money: Anti-money-laundering rules 218


AML compliance program 220


Insider trading rules 220


The Investor’s Bankruptcy Shield: FDIC and SIPC 221


Holding a customer’s mail 222


Business continuity plans and emergency contact information 222


Part 5: Putting Your Knowledge to Good Use: Practice Exams 225


Chapter 17: Bring It On: Practice Exam 1 227


Chapter 18: Answers & Explanations to Practice Exam 1 241


Making the Grade 249


Answer Key for Practice Exam 1 250


Chapter 19: Nothing But Net: Practice Exam 2 251


Chapter 20: Answers & Explanations to Practice Exam 2 265


Knowing the Score 274


Answer Key for Practice Exam 2 275


Part 6: The Part of Tens 277


Chapter 21: Ten SIE Exam Traps to Avoid 279


Easing Up on the Studying 279


Assuming the Question’s Intent 280


Reading into the Question 280


Becoming Distracted When Others Finish 280


Not Dressing for Comfort 280


Forgetting to Breathe 281


Trying to Work Out Equations in Your Head Instead of Writing


Them Down 281


Spending Too Much Time on One Question 281


Changing Your Answers for the Wrong Reasons 281


Calculating Your Final Score Prematurely 282


Chapter 22: Ten Ways to Start Your Career Off Right 283


Win at the Numbers Game 283


Be an Apprentice 284


Do Your Homework 284


Treat the Minnow like a Whale 284


Smile When You Dial 284


When a Security Falls, Don’t Be a Stranger 284


Put In the Hours 285


Broaden Your Horizons 285


Pay Yourself First 285


Set Some Goals: The Brass Ring 286


Index 287