Securities

Industry
Essentials
Exam

The Securities Industry Essentials Exam

75 multiple-choice 1 hour 45 minutes Scoring = Pass or Fail

questions 105 minutes Passing score is 70%.
plus 10 unidentified Your score is not on the
“experimental” questions report if you pass.

SIE Question Breakdown

est opic um er o uestions

Knowledge of Capital Markets 12

Understanding Products and Their
Risks 33
Understanding Trading, Customer
Accounts, and Prohibited Activities 23
Overview of Regulatory
Framework 7
 UNIT Primary Markets and Secondary
1 Market Trading

Primary Market Secondary Market

When Securities trade
Is when The issuer

Unit 1
is investor to investor
Receive The Money
Direct From the
investor
Issuers sell to vs. Investors sell
investors in order securities to Broker dealers trade to
Issuers can make to raise capital. investors. investor
unlimited securites

Governments use the primary markets to raise money for infrastructure projects (such as bridges, roads, dam, ports, etc.)

Initial Public Offering

(IPO) nitia P ic erin P
The first time an issuer irst time issuin securities to the pu lic
distributes securities to the
public, it is called an initial ule applies.
public offering
(IPO). Any subsequent dditiona P ic erin P additional public
offerings are known as
APOs. he security ein o ered is currently availa le in offerings (APOs),
the secondary market. subsequent public
offerings, or follow-on
ule does N apply. offerings

Corporations may issue ISSUER SYNDICATE

both equities (stocks)
and debt issues (bonds).
A group of broker-dealers,
Corporations investment bankers, and other
The Federal
Government and U.S. Government* underwriters formed to assist
an issuer in offering its
Agencies The largest Municipalities* securities
issuer of debt in the
United States is the
Treasury Department *Exempt from registration SELLING GROUP
Municipal
governments issue
Broker-dealers with no
municipal bonds and financial commitment
other types of debt
This debt is
sometimes called
munis.
 Underwriters (Broker-Dealers, Investment Bankers)
An underwriter is a type of broker-dealer (BD) (also called an investment banker) that works with an issuer to bring its securities
to the market and sell them to the investing public.

Types of Underwriting Offers simple words acting on the

best interested of the client

Unit 1
When The underwriters buy
shares from the issuer, resell
the securities to the public at a
Firm Best This means that the
higher price try to make some Commitment Efforts underwriters are not
committed to purchasing
profit the shares themselves and
are therefore not at risk.

Please note that a firm may Syndicate agrees

Syndicate purchased
never guarantee to a customer to do its “best” to
shares from the issuer
that it will repurchase the sell shares The underwriter is acting as an agent
shares at the POP if the deal
subsequently trades lower. contingent on the underwriter’s
ability to sell shares in either a public
offering or a private placement.

Investors in the Primary Markets

n tit tiona
n e tor

 anks An institutional investor is an entity that pools money to purchase securities and other
 ther investment assets. Institutional investors can include banks, insurance companies, employee
roker benefit plans like pensions, hedge funds, investment advisers, and mutual funds.
dealers
 Nonretail

etai
n e tor
The typical retail investor is investing their own assets As they tend to be less knowledgeable than
 vera e investor institutional investors,sales to retail investors have higher communication and disclosure
 Not savvy expectations.
e uires ull
disclosure
 o risk

ccredited
n e tor

 Institutional
Those who meet certain financial criteria
investors 1-An income of at least $200,000 or more the past two years and are expected to meet that criteria in
 Insiders and the current year
issuers 2-Or have a net worth of $1,000,000 or more
 Income net worth
 Underwriting Phases

1-The cooling-off period lasts for a minimum of 20 calendar days

2-During the cooling-off period, no one can solicit sales of the securities
3-The Issuer May Place a Tombstone Advertisement(
4-A Preliminary Prospectus (Red Herring) May Be Delivered

ie oo in
e i tration ecti e
Statement ate
Period

Final Prospectus The cooling-off period ends with the delivery of a final prospectus, which is made
available at release.
The final prospectus will be delivered to all who purchase the new security at the IPO.
It will contain the same information as the preliminary prospectus plus two additional items: the release
date and the POP.

Activities During Cooling-Off Period

Allowed Not Allowed

istri ute preliminary er securities or sale

prospectus istri ute inal prospectus
Pu lish tom stone isseminate sales literature
advertisements ake orders
ather indications o
ccept postdated checks
interest
 The Registration Statement
When an issuer desires to sell a security that does not meet one of the
exemptions to registration under the Act of 1933

The Securities Act of 1933

Unit 1
em tion rom S e i tration Exemp issues
Exemp Issuers ecurities issues y

empt ecurities Maturities 270 or less

1-commercial paper, bankers’ acceptances, and other securities that

have maturities of 270 days or less
2-insurance policies and fixed annuity contracts (but not variable
These exempt issuers include: annuities).
1-the U.S. government;
2-municipalities;
3-national and state banks (but not bank holding companies);
4-building and loans and savings and loans (S&Ls);
5-charitable, religious, educational, and nonprofit associations;
6-common carriers (e.g., railroad equipment trust certificates).

RRegulation A: Small- and Medium-Sized Offerings

Regulation A Finally, remembering that

Regulation A is intended for
Tier 1. small- and medium-sized
Securities offerings up mall and Medium i ed erin s companies,the regulation
to $20 million in a specifically excludes investment
12-month period companies

Tier 1: Max of $20 million

Tier 2. Securities Tier 2: Max of $75 million

offerings up to $75
million in a 12-month
period
 Rule 147
Intrastate Offering Rule

Securities may not be

Offerings that take place in resold to nonresidents for
one state six months after initial
purchase

80% rule

• It receives at least 80% of its income in the state.

• At least 80% of the issuer’s assets are located within the state.
• At least 80% of the offering proceeds are used within the state.
• The majority of the company’s employees work in the state. Also, if there is a BD acting as underwriter, the BD must be
based in the state.

Securities sold under Rule 147 may not be resold to nonresidents of the state for six months after the initial purchase.

e ation e e ation e c
ri ina e Sti ai a e S ct o

ecurities are o ered ecurities are o ered

under e ulation
under e ulation
e emption
e emption ll purchasers must e
p to nonaccredited accredited investors
investors usiness must take
No eneral solicitations reasona le steps to veri y
advertisin allowed purchasers are accredited
 The trading of securities in the secondary market is regulated under the Securities Exchange Act
of 1934. The Act of 1934 created the SEC

Trading Securities in the Secondary Markets

Over-the-Counter Market
- A S -OTC Third Market Fourth Market

Unit 1
• • Unlisted stocks and • Market makers in • Trading activity that
most bonds the OTC market may occurs through
•
(corporate, deal in exchange- electronic
• municipal, and listed stocks (OTC communication
• government) trading of listed networks (ECN)
• • Not a physical securities) • Sometimes called
location • This trading activity dark pools of liquidity
Exchanges (listed securities) • Dealers buy and sell is called the third or just dark pools
Physical location (NYSE is a security from market
the model) inventory to provide
Auction market liquidity

In the primary markets, the seller is always the issuer in the secondary markets, the seller is never the issuer. Investors sell
securities in the secondary markets and keep the money for their own use.

ustomer rder

ABC
Broker-Dealer

ecution eport
 Participants in Secondary Markets

1-Retail investors
2-Day trader Investor Broker-Dealer
3-Acredited Investor
4-Institutional

Unit 1
Investor
5-fiduciaries ects securities
uys and sells securities or
(custodians/trustees transactions or customers
own purpose
etail and day traders and own account
ccredited and institutional Introducin irms
Censure
Investment advisers and learin irms
iduciaries *Facilitators
• Broker-Dealers
• Carrying Firms or
clearing firm,

ustodians 1-A fiduciary is a person that manages assets usually financial for another person, a beneficiary.
rustees 2-Trustee. A trustee is a fiduciary that oversees a trust.
3-Guardians and executors. Guardians are normally court-appointed custodians over a minor or
ther an incapacitated adult.
iduciaries

Transfer Agents
The transfer and registration of stock certificates are two distinct functions that, by law,
rans er cannot be performed by a single person or department operating within the same
ents institution.

Investment Advisers (IAs)

There is a three-prong test for who is an investment adviser. Anyone who
(1) gives investment advice
Investment (2) as a regular part of their business and
dvisers I s ( 3) does so for compensation must register as an investment adviser (IA) under the
Investment Advisers Act of 1940 and the Uniform Securities Act.

Depositories and Clearing Agencies

A clearing agency (sometimes called a clearing corporation) is an intermediary
epositories
and learin between the buy and the sell sides of a transaction
orporations
N The clearing agency receives and delivers payments and securities on behalf of both
parties
 Placing a Trade
Quotes: Bid and Ask
SALE
Bid Ask (Offer)
BUY

Unit 1
i hest price anyone is willin owest price anyone is
GAIN OF SALES to pay to purchase the securities willin to accept to sell
the securities

pread he di erence etween the id and ask

The Bulls and the Bears

The terms bull and bear (not to mention bullish and bearish) are used widely in the securities business.

Bull. If a person believes that a given market or stock is likely to go up

in value rather than down, that person is bullish or “a bull.”

Bear. If a person believes that a given market or stock is going to go down in value rather
than up, that person is bearish or “a bear.” If you are short a stock, you are a bear.
 Unit 1
Trigger—first trade at or through stop price.

A stop order is not an order but is a trigger

Buy Stop Limit or Sell Stop Limit Stop limit order. price that,when reached, will trigger an
Buy or sell, this order type also has a stop price order. Stop orders have no standing as to
and does not become a “live” working order until time priority. Time priority is covered
the stock trades at or through the stop price. later in this section.

ay rder
Any order entered with no other qualifier is a day order
Any unexecuted portion at end of day will be canceled

ood ti ance ed rder

GTC orders stay on the books until filled or canceled

B C

Fill Restrictions
Fill or Kill
Buy 300 shares XYZ @ 30 FOK
If nothing is done, the order is
canceled.
Immediate or Cancel
Buy 300 shares XYZ @ 30 IOC
If 200 shares are executed,
balance to buy 100 is canceled.

All or None
Buy 300 shares XYZ @ 30 AON
If nothing done, order to buy
300 remains as GTC.
 Buying an selling

Selling Short Long position

An investor can also sell a in that security, meaning
security to open a position. he
To do this, an investor is now owns the security.
actually selling
a security he does not own.
 Regular Way Settlement
Regular way settlement occurs by the end of the business day either one or two business
days following the trade date.

Reg T:
Regulation T T+4 or S+2

+2 +2 Cash Settlement

• Settlement occurs on
the same day a trade
is executed
• Stock or bonds sold
must be available on
Stock normally the spot for delivery
Regular Way trade in
Corporate and Municipals “Round” lots of
100 shares.
• Govies T+1 Lots less than
• Mutual funds “settle” 100 are termed
the next time the NAV “Odd” lots.
is calculated

Cash Settlement
Cash settlement, or same-day settlement, requires delivery of securities from the seller and payment from
the buyer on the same day a trade is executed.
Both parties to the transaction would have to agree before the trade takes place for cash settlement to occur.

Differences between Broker And Broker Dealer

The Broker will charge a commission for performing this service.
Dealer can keep holding the securities under their own risk

Broker Dealer
Other terms: Other terms:
Agent Principal
Agency Market Maker

Broker Buys and sells on

behalf of the customer
Buys into inventory,
sells from inventory

vs. (no inventory) (maintains inventory)

Dealer Profits on the difference

between the buy and sell
Charges commission
price (spread, mark-up,
mark-down)

Little capital at risk Significant capital at risk

 UNIT
Equity Securities
2

Market Capitalization

Large-Cap Stocks
ar e ap Large-cap stocks are the largest companies.
tocks These can be rapidly growing technology companies or big, long-established firms.

illion

Mid-Cap Stocks
Mid ap tocks Mid-cap stocks are still large by most standards, just not as huge as the large-cap stocks.
A company that is too large to be a small cap, but not large enough to be a large cap, is a mid cap.
$2 billion
to <$10
billion

Small-Cap Stocks The smallest stocks that are still large enough to be listed on national
exchanges are small caps. They tend to be oriented toward growth and produce very little
dividends.

mall ap
tocks
million
to illion

Penny Stocks
A penny stock is an unlisted (not listed on a U.S. stock exchange) security trading at less than $5
per share. Equity securities defined as penny stocks are considered highly speculative.

Penny tocks
a share
nlisted

Growth Stocks — Income Producing Stocks — Foreign Stocks

 Dividends From Common Stock
Dividends are distributions of a company’s profits to its shareholders. Investors who buy stock are entitled to
dividends if and when the BOD votes to make such distributions.

Unit 2
Cash dividends.
Cash dividends are Cash Stock Product Product dividends.
normally distributed
Though rare, some
by check if an investor
companies will pay a
holds the stock MIJ Common Stock dividend by sending a
certificate
sample of the company’s
product to shareholders.

Stock dividends.
If a company wishes to reinvest its profits for business purposes its BOD may declare a stock dividend.

Dividend Disbursement Dates

There are four dates to remember that are associated
with the dividend disbursing process:

ec ared y t e oard o irector The ex-dividend date is

set by a regulator
(exchange or FINRA).
ec aration ate the declares the dividend

di idend ecord ate usiness day

ecord Must e owner to e entitled to dividend

Paya e ividend paid to those entitled

Common shareholders enjoy numerous benefits, including voting rights, the opportunity for capital
appreciation, and current income, as well as limited liability.

Preemptive Rights
Freely transferable Common Stock
interest

n investor owns shares Inc. • Limited Access to

Books and Records
 Financials
Stat tory otin  Minutes
ote ote ote

VOTE

a or in e tor it ar e n m er o are

Benefits and Risks of Common Stock

m ati e otin
m er o are ✕ m er o o en eat
✕ ote
Growth / Capital Value Risk / Failure
50 200 0 150
Appreciation Dividends Not Votes Votes Votes Votes
Income Guaranteed

Limited Liability Last Position in

Liquidation / Residual
Value Favors investors with fewer shares
 Although preferred stock does not typically have the same growth potential as common stock, preferred stockholders have some
advantages over common stockholders:

Interest rate sensitivity. Like a fixed-income security, when interest rates rise, the
value of preferred shares declines.

Decreased or no dividend income. As with common stock ownership, there is the

possibility of dividend income decreasing or ceasing entirely if the company
loses money

Purchasing power risk. This is the potential that, because of inflation, the fixed
income produced will not purchase as much in the future as it does today.

risk to issuer call for repurchase before maturity

Convertible preferred. A
preferred stock is es of referred Sto
convertible if the
owner can exchange Straight (noncumulative)
the shares for a fixed
number of shares of Cumulative preferred
the issuing
corporation’s common Convertible preferred
stock.
Participating preferred

Callable preferred

Adjustable-rate preferred
 American Depositary Receipts (ADRs)
Each ADR may
represent one or more
shares of the foreign American Depositary Receipts Domestic Markets
company’s shares held
on deposit.

The ADR provides U.S. Depositary

investors with a
convenient way to Bank
diversify their holdings Shares
beyond domestic ADRs
companies. Foreign Stock

The company pays dividends in its home currency

and the issuing bank converts to and pays out those dividends in U.S. dollars.

1-Ease of use. Typically, ADRs will be listed

on the NYSE or Nasdaq, but some may
betraded over the counter (OTC).
2-ADR taxation. Dividends paid to a U.S.
investor may be subject to a withholding
tax by the home country of the underlying
foreign stock issuer

3-Currency and political risk. ADRs are

issued and pay dividends in U.S. dollars.
That means these securities eliminate the
complications of currency conversion.

Currency and political risk. ADRs are issued and pay

dividends in U.S. dollars. That means these securities
eliminate the complications of currency conversion.

ADR taxation. Dividends paid to a U.S. investor may be subject

to a withholding tax by the home country of the underlying
foreign stock issuer
 Control Stock Restricted
Control stocks are those owned by securities may not be sold until
directors, officers, or persons who they have been held fully paid
own or control 10% or
for six months
more of the issuer’s voting stock.

When a control person (also called an affiliate) wants to sell shares, that person must complete

a Form 144. The form is used to determine the number of shares the control person may sell
over a 90-day period.
The volume limitations under Rule 144 are the greater of:
• 1% of the outstanding shares of the company or
• the average weekly trading volume over the most recent four weeks.
 Stock Rights (Preemptive Rights) When a corporation wants to issue more common shares in order
to raise capital [an additional primary offering or additional public offering (APO)], they normally allow existing
shareholders the opportunity to purchase enough of the new shares to maintain their proportional ownership

Warrants A warrant is a certificate granting its owner the right to purchase

securities from the issuer at a specified price, normally higher than the current market price at the time the
warrants are issued, and at some time in the future. 13 Months to complete the order

Nonstandard Corporate Action

M&A
(mergers Stock buy-
Takeover Spin-off Tender offer
and back
acquisitions)

Generally, not a Generally, not a

Generally, cash Generally, cash
taxable event if taxable event if Generally, not a
is received and is received and
shares are shares are taxable event if
is treated as a is treated as a
received to received to shares are
sale of the sale of the
replace canceled replace canceled received
position position
shares shares