Steven M. Rice

Cheat Sheet / Updated 06-10-2024

The Securities Industry Essentials (SIE) exam tests your basic knowledge of the securities industry. This exam is a corequisite exam for people who want to become an investment company representative, a general securities representative, a direct participation programs (DPP) representative, a securities trader, an investment banking representative, a private securities offerings representative, a research analyst, or an operations professional.

Article / Updated 08-30-2023

Because of the number of questions that could be asked, the Securities Industry Essentials (SIE) exam is a beast of a test that poses questions in many different ways. You have to deal with multitiered Roman numeral nightmares, open- and closed-ended sentences, and killers like except and not. Straightforward question types on the SIE Straightforward question types include a group of sentences with the facts followed by a question or incomplete sentence; you then get four answer choices, one of which correctly answers the question or completes the idea. Closed-stem questions You’ll find more closed-stem questions than any other question type on the SIE and co-requisite exams, so you’d better get a handle on answering these babies, for sure. Thankfully, closed-stem questions are fairly run-of-the-mill. They begin with one or more sentences containing information and end with a question (and, appropriately enough, a question mark). The question mark is what makes closed-stem questions different from open-stem questions. Your answer choices, lettered (A) through (D), may be complete or incomplete sentences. Here’s a basic closed-stem question. Mr. Bearishnikoff is a conservative investor. Which of the following investments would you recommend to him? (A) Buying put options (B) Buying long-term income adjustment bonds (C) Buying common stock of an aggressive growth company (D) Buying Treasury notes The right answer is Choice (D). The first sentence tells you that Mr. Bearishnikoff is a conservative investor. This detail is all the information you need to answer the question correctly, because you know that conservative investors aren’t looking to take a lot of investment risks and that U.S. government securities such as Treasury notes (T-notes) are considered the safest of all securities — they’re backed by the fact that the government can always print more money to pay off the securities that it issues. Of course, sometimes the phrasing of the answer choices can help you immediately cut down the number of feasible answer choices. For instance, Mr. Bearishnikoff would probably balk at investing in an aggressive growth company, which certainly doesn’t sound stable or safe. By the way, the you in the question refers to you on your good days, when you’re considerate and rational and have had a sufficient amount of sleep. Mr. Bearishnikoff probably wouldn’t appreciate any rogue-elephant investing, even if you think he should be more daring. The question also assumes normal market conditions, so don’t recommend a different investment because you think the government is going to collapse and T-notes are going to take a dive. Just accept the conditions the problem presents to you. Be careful to focus only on the information you need to answer the question. The securities exam creators have an annoying tendency to include extra details in the question (such as the maturity date, coupon rate, investor’s age, and so on) that you may not need. Open-stem questions An open-stem question poses the problem as an incomplete sentence, and your mission, should you choose to accept it, is to complete the sentence with the correct answer. The following example shows how you can skillfully finish other people’s thoughts. The initial maturity on a standard option is (A) three months (B) six months (C) nine months (D) one year The answer you want is Choice (C). Options give the purchaser the right to buy or sell securities at a fixed price. Options are considered derivatives (securities that derive their value from another security) because they’re linked to an underlying security. Standard options have an initial maturity of nine months. On the other hand, Long-Term Equity AnticiPation Securities (LEAPS) may have initial maturities of one, two, or three years. But this example question asks about a standard option; therefore, you don’t assume that it’s a LEAP. The preceding example is quite easy. Anyone who has been studying for the SIE or Series 7 exam should know the answer. However, what makes securities exams so difficult is that the exams are loaded with so many date-oriented details. Not only do you have to memorize the initial maturities of all the different securities, but unfortunately, you also have to remember a truckload of time frames (for example, accounts are frozen for 90 days, new securities can’t be purchased on margin for 30 days, an options account agreement must be returned within 15 days after the account is approved, and so on). Questions with qualifiers on the SIE exam To answer questions with qualifiers, you have to find the best answer to the question. The qualifier keeps all answer choices from being correct because only one answer rises above the rest. Working with extremes: Most, least, best Recognizing the qualifier in the question stem and carefully reading every single answer choice are very important. Check out the following example. Which of the following companies would be MOST affected by interest rate fluctuations? (A) SKNK Perfume Corp. (B) Bulb Utility Co. (C) Crapco Vitamin Supplements, Inc. (D) LQD Water Bottling Co. The answer is Choice (B). Although all companies may be somewhat affected by interest rate fluctuations, the question uses the word most. If interest rates increase, companies have to issue bonds with higher coupon (interest) rates. This higher rate, in turn, greatly affects the companies’ bottom lines. Therefore, you’re looking for a company that issues a lot of bonds. Utility companies are most affected by interest rate fluctuations because they’re highly leveraged (issue a lot of bonds). Making exceptions: Except or not When a question includes the word except or not, you’re looking for the answer that’s the exception to the rule stated in the stem of the question. In other words, the correct answer is always the false answer. The question can be open (as it is in the next example) or closed. Right off the bat, look for an except or not in the stem of every question on the SIE exam. Many students who really know their material accidentally pick the wrong answer on a few questions because they carelessly miss the except or not. Take a look at the following exception problem. A stockholder owns 800 shares of WHY common stock. WHY stockholders were given cumulative voting rights. If there are three vacancies on the board of directors, stockholders can cast any of the following votes EXCEPT (A) 800 for one candidate (B) 800 for each candidate (C) 2,400 for one candidate (D) 900 for each candidate The answer you’re looking for is Choice (D). Cumulative voting rights give smaller stockholders (not height-wise, but in terms of the number of shares they own) an easier chance to gain representation on the board of directors because a stockholder may combine his total voting rights and vote the cumulative total in any way he wants. Here, the stockholder has a total of 2,400 votes to cast (800 shares × 3 vacancies = 2,400 votes). In this example, you may be tempted to select Choices (A), (B), or (C), any of which would be correct if you were asked for the number of votes this stockholder could cast. For example, the stockholder can use 800 shares to vote for only one candidate (Choice [A]) — he doesn’t have to use all 2,400 votes. Choice (B) is another possible voting arrangement because nobody said the stockholder has to use all his votes for one candidate. Choice (C) is an option because the stockholder has a total of 2,400 votes to cast. In this question, however, you’re looking for the number of votes the stockholder can’t cast because the word except in the question stem requires you to find a false answer. Therefore, Choice (D) is the correct answer because in order to cast 900 votes for each candidate, the stockholder would need a total of 2,700 votes (900 × 3). If you’re one of the unlucky people who gets an “all of the following are false except” question, you have to find the true answer. Don’t forget, two negatives in a sentence make a positive statement. You may want to try rephrasing the question so you know whether you’re looking for a true or false answer. Roman hell: Complex multiple choice on the SIE exam Yes, the SIE exam creators even sneak complex (two-tiered) Roman numeral questions in on you. They can pose the question by asking you to put something in order, or they can ask you to find the best combination in a series of answer choices. To make things even more enjoyable, sometimes they even add except and not to the question. Imposing order: Ranking questions To answer a ranking question, you have to choose the answer that places the information in the correct order — for example, first to last, last to first, highest to lowest, lowest to highest, and so on. Check out the following example. In which order, from first to last, are the following actions taken when opening a new options account? I. Send the customer an ODD. II. Have the ROP approve the account. III. Execute the transaction. IV. Have the customer send in an OAA. (A) I, II, III, IV (B) II, I, IV, III (C) III, I, II, IV (D) I, III, II, IV The correct answer is Choice (A). Wasn’t it nice of me to arrange all the answers in order for you? Because option transactions are so risky, the customer has to receive an options risk disclosure document (ODD) prior to opening the account. Statement I has to come first, so you can immediately eliminate Choices (B) and (C), giving you a 50 percent chance of answering correctly. After the client receives the ODD, the registered options principal (ROP) needs to approve the account before any transactions can be executed; II has to come before III, so you can finish the problem here — the answer is Choice (A). Last but not least, the customer signs and returns an options account agreement (OAA) within 15 days after the account is approved by the ROP. Taking two at a time The Roman numeral format also appears on the SIE with questions that offer two answer choices as the correct response. In these types of questions, you choose the responses that best answer the question. Which TWO of the following are the minimum requirements for an investor to be considered accredited? I. An individual with a net worth of $500,000 II. An individual with a net worth of $1,000,000 III. An individual who earned $200,000 per year in the most recent two years and has a reasonable expectation of reaching that same level in the current year IV. An individual who earned $300,000 per year in the most recent 3 years and has a reasonable expectation of reaching that same level in the current year (A) I and III (B) I and IV (C) II and III (D) II and IV The correct answer is Choice (C). Statements I and II both deal with net worth; III and IV deal with earnings. Therefore, you’re dealing with two questions in one; to be accredited, the answer to at least one of these two questions must be satisfactory: What is the individual’s minimum net worth? What is the individual’s minimum income? To be considered an accredited (sophisticated) investor, the minimum requirement is a net worth of $1,000,000 and/or a yearly income of $200,000 in the most recent two years, with a reasonable expectation of reaching that same level in the current year. If the word minimum were not used in the question, answer IV would also be correct. A little mystery: Dealing with an unknown number of correct statements In the preceding section, the question states that only two responses can be correct. The following question may have one, three, or four correct answers. You can recognize this type of question simply by glancing at your answer choices. To make the problem more difficult (don’t hate me, now), I add an except because I’m feeling really good about you, and I just know you’re up to it. All of the following are true about open-end funds EXCEPT I. they issue common stock II. they issue preferred stock III. they issue debt securities IV. shares can be purchased in the market (A) I only (B) II only (C) II, III, and IV only (D) I, II, III, and IV The correct answer is Choice (C). Open-end funds are mutual funds. Mutual funds are constantly issuing new shares (thus the open-end name). Since mutual funds only issue common stock and can only be purchased directly from the issuer, the only true answer is I. However, since we are looking for the exception(s), answers II, III, and IV are the correct ones. Had the question asked which is true regarding closed-end funds, the answer would’ve been Choice (D). Diagram questions on the SIE exam The SIE exam will not likely give you more than a couple of exhibit questions, if any. However, even if you don’t get an exhibit question on the SIE exam, you can use the following information to help you on one of the companion exams that you’re going to have to take. Exhibit questions may include newspaper clippings, option prices, bond prices, trading patterns, income statements, balance sheets, and so on. Out of the exhibit questions you get, some of them just require you to find the correct information; others require a little calculating. Most of them are quite easy. Take a look at the following problem. When you answer exhibit questions, take care not to miss labels like “in thousands” in headings or scales on a graph that would change your answer. Almost nothing is worse than missing a question that you know because you carelessly overlook something right in front of you.

Cheat Sheet / Updated 07-05-2023

The Series 7 exam is also known as the General Securities Representative Qualification Examination. The Series 7 is the license required by most broker-dealers for their registered representatives. The Series 7 exam is required to ensure that registered representatives dealing with the public have a certain degree of knowledge, abilities, and skills needed to perform the functions of their job. The Series 7 exam is by no means easy and requires a lot of concentration and preparation. Not only do you need a deep understanding of the material covered, you must also perfect your test-taking skills. The more practice questions you take and review, the better.

Cheat Sheet / Updated 07-05-2023

The Securities Industry Essentials (SIE) Exam is your starting point to becoming a registered representative. The SIE must be passed before you can take some of the top-off exams such as the Series 7. The SIE Exam tests your understanding of the basics regarding securities, the market, rules, and such. The SIE Exam is by no means easy and requires a lot of concentration and preparation. Not only do you need a deep understanding of the material covered, but you must also perfect your test-taking skills. The more practice questions you take and review, the better.

Cheat Sheet / Updated 05-15-2023

Taking the Series 7 exam, whether for the first time or the fourteenth, is a huge challenge and requires many hours of preparation. Use this cheat sheet to put your time to good use before the exam even begins and to be successful when it’s completed.

Article / Updated 03-24-2021

Although most analysts use some combination of fundamental analysis and technical analysis to make their securities recommendations, for the Securities Industry Essentials Exam purposes, you need to be able to differentiate between the two types. This article discusses fundamental analysis. Fundamental analysts perform an in-depth analysis of companies. They look at the management of a company and its financial condition (balance sheets, income statements, the industry, management, earnings, and so on) and compare it to other companies in the same industry. They can also compare many years of financial statements to help determine whether a company is heading in the right direction. In addition, fundamental analysts even look at the overall economy and industry conditions to determine whether an investment is good to buy. In simplest terms, fundamental analysts decide what to buy. A fundamental analyst’s goal is to determine the value of a particular security and decide whether it’s underpriced or overpriced. If the security is underpriced, a fundamental analyst recommends buying the security; if the security is overpriced, he recommends selling or selling the security short. Balance sheet components The balance sheet provides an image of a company’s financial position at a given point in time. The SIE exam tests your ability to understand the components (see the following figure) and how financial moves that the company makes (buying equipment, issuing stock, issuing bonds, paying off bonds, and so on) affect the balance sheet. In general, understanding how a balance sheet works is more important than being able to name all the components. People call this statement a balance sheet because the assets must always balance out the liabilities plus the stockholders’ equity. Assets are items that a company owns. They include: Current assets: Owned items that are easily converted into cash within the next 12 months; included in current assets are cash, securities, accounts receivable, inventory, and any prepaid expenses (like rent or advertising). Note: Fundamental analysts also look at methods of inventory valuation, such as LIFO (last in first out) or FIFO (first in first out). In addition, they look at the methods of depreciation, which are either straight line (depreciating an equal amount each year) or accelerated (depreciating more in earlier years and less in later years). Fixed assets: Owned items that aren’t easily converted into cash; included are property, plant(s), and equipment. Because fixed assets wear down over time, they can be depreciated. Intangible assets: Owned items that don’t have any physical properties; included are items such as trademarks, patents, formulas, goodwill (a value based on the reputation of a company — for example, the name McDonald’s is probably worth more than Fred’s Sloppy Burgers), and so on. Liabilities are what a company owes. They may be current or long-term: Current liabilities: Debt obligations that are due to be paid within the next 12 months; included in current liabilities are accounts payable (what a company owes in bills), wages, debt securities due to mature, notes payable (the balance due on money borrowed), declared cash dividends, and taxes. Long-term liabilities: Debt obligation due to be paid after 12 months; included in long-term liabilities are mortgages and outstanding corporate bonds. Stockholders’ equity (net worth) is the difference between the assets and the liabilities (basically, what the company is worth). This value includes Par value of the common stock: The arbitrary amount that the company uses for bookkeeping purposes. If a company issues 1 million shares of common stock with a par value of $1, the par value on the stockholders’ equity portion of the balance sheet is $1 million. Par value of the preferred stock: The value that the company uses for bookkeeping purposes (usually $100 per share). If the company issues 10,000 shares of preferred stock, the par value on the stockholders’ equity portion of the balance sheet is $1 million. Paid in capital: The amount over par value that the company receives for issuing stock. For example, if the par value of the common stock is $1 but the company receives $7 per share, the paid in capital is $6 per share. The same theory holds true for the preferred stock. Treasury stock: Stock that was outstanding in the market but was repurchased by the company. Retained earnings: The percentage of net earnings the company holds after paying out dividends (if any) to its shareholders. Income statement components An income statement tells you how profitable a company is right now. Income statements list a corporation’s expenses and revenues for a specific period of time (quarterly, year-to-date, or yearly). When comparing revenues to expenses, you should be able to see the efficiency of the company and how profitable it is. I don’t think you need to actually see a detailed balance sheet from a company, but knowing the components of an income statement is important. Take a look at this figure to see how an income statement is laid out. Most of the items are self-explanatory.

Article / Updated 03-24-2021

Technical analysts look at the market to determine whether the market is bullish or bearish. They look at trendlines, trading volume, market sentiment, market indices (S&P 500, DJIA, and so on), options volatility, market momentum, available funds, index futures, new highs and lows, the advance-decline ratio, odd lot volume, short interest, put-to-call ratio (options trading), and so on. These analysts believe that history tends to repeat itself and that past performance of securities and the market indicate its future performance. Fundamental analysts decide what to buy, and technical analysts decide when to buy (timing). Not only do technical analysts chart the market, but they also chart individual securities. Technical analysts try to identify market patterns and patterns of particular stocks in an attempt to determine the best time to purchase or sell. Even though a stock’s price may vary a lot from one day to another, when plotting out stock prices over a long period of time, the prices tend to head in a particular direction (up, down, or sideways) and create a trendline. Benchmarks and indices If you watch news stations, read the newspaper, listen to the radio, and so on, you can’t help but see or hear about the DJIA (Dow Jones Industrial Average) or the NASDAQ being up or down. Well, those are indices (indexes) or benchmarks. Benchmarks are typically used to evaluate the performance of individual investments or a group of investments. Most investors compare their investments to certain broad-based indices or narrow-based indices: Narrow-based: Narrow-based indices indicate the performance of a particular industry such as the Dow Jones Transportation Index. Broad-based: Broad-based indices are more indicative of the overall market. Broad-based indices measure securities from many different industries. There are certainly more indices than the ones listed, but for the Securities Industry Essentials Exam purposes, you shouldn’t need to memorize them but mainly understand what indices are and that they are often used as benchmarks. Here are examples of some of the broad-based stock indices: Standard & Poor’s 500 Index (S&P 500): Includes 500 large-cap listed common stocks. Wilshire 5000 Total Market Index: The largest of all stock indexes; includes 5,000 listed common stocks. Russell 2000 Index: An index of 2,000 small-cap (smaller-sized) companies. Lipper Indexes: Track the financial performance of different mutual funds based on their investment strategy. Each Lipper Index tracks the performance of only the largest fund in each category (large-cap growth, mid-cap value, international fund, and so on). Dow Jones Composite Average: An index that tracks 65 stocks from some of the most prominent companies. The Dow Jones Composite is broken down into: DJIA: Tracks 30 stocks from the industrial sector. The DJIA is the most commonly used index to indicate the performance of the market in general. Dow Jones Transportation Average: Tracks 20 stocks from the transportation sector. Dow Jones Utility Average: Tracks 15 stocks from the utility sector. Proponents of the Dow Theory believe that major market trends are confirmed if the DJIA and the Down Jones Transportation Average are trending in the same direction (that is, both advancing or both declining). Logic dictates that if industrial companies are producing more goods, then those same goods need to be transported. Most of the indices listed previously are weighted toward the larger companies. This means that price movement of the larger companies has a greater impact on the particular index than a smaller company does. Stages of the business cycle The business cycle is the natural rise and fall of goods and services (Gross Domestic Product, or GDP) that occur over time. The business cycle has four phases that will occur over and over again. Expansion (A in the figure): Expansion is characterized by increasing demand for goods and services. During expansion, the stock market is generally increasing (bullish), property values are increasing, and industrial production is increasing. Expansion also can be characterized as recovery. Peak (B in the figure): The peak occurs at the top of the expansion phase and happens right before the economy starts to contract. Contraction (C in the figure): Contraction is characterized by higher levels of consumer debt, a stock market that is generally decreasing (bearish), a decreasing demand for goods and services, and an increasing number of bond defaults and bankruptcies. Trough (D in the figure): Trough is the lowest part of the contraction phase and happens right before the economy starts to expand (recover) again. If asked to place them in order on the SIE exam, you can put them in order just as they’re given in the preceding list. Bullish versus bearish When thinking of whether the market is bullish or bearish, think of the terms. You can think of bullish as charging ahead. So, if the market is bullish, it is generally increasing in value. If the market is bearish, it is generally hibernating or sleeping. When the market is bearish, it is generally decreasing in value. Individuals can be bullish or bearish on the market, in general, or bullish or bearish on certain securities. Bullish strategies include buying individual stocks, buying mutual funds, buying call options, selling uncovered [naked] put options, and so on. Bearish strategies include selling short individual stocks, buying bearish funds (funds that generally increase in value in a declining market), buying inverse exchange-traded funds, selling uncovered [naked] call options, buying put options, and so on.

Article / Updated 03-24-2021

After all the time, effort, and sacrifice you put into studying, elevating the importance of the Securities Industry Essentials (SIE) exam to an unrealistically high level is easy. Step back for a moment. Keep it in perspective. This situation is not life or death. If you don’t pass the test the first time, the worst thing that happens is that you have to retake it. On the other hand, getting tripped up by some trivial exam traps after you’ve come this far would be a shame. This article lists some common mistakes and gives you some last-minute advice to help you over the last hurdles that stand between you and your first million dollars as a stockbroker. Don't ease up on the studying Perhaps you stop studying because you’re getting good scores on practice exams and your confidence is high. If you’re scoring 80s on exams that you’re seeing for the first time, shoot for 85s. If you’re getting 85s, shoot for 90s. The point is that you should continue to take exams until the day before your scheduled exam day. I firmly believe that every day away from studying ultimately costs you points on your exam that you can’t afford to lose. By the same token, make sure you don’t wait too long before taking the exam. If you have to wait several weeks before you can take the exam, you lose your sense of urgency, and it’s almost impossible to keep up the intense level of preparation needed for many months at a time. If you’re taking a prep course before you schedule your SIE, follow your instructor’s advice as to when you should take the exam. If you’re directing your own course of study, after you’re passing practice exams consistently with 80s or better, take the test as soon as possible. The longer you wait to take the exam, the more likely you are to forget the key points and formulas. If your test date is too far in the future, you also risk falling into the I’ll-study-later trap, where you think you can double your efforts later to make up for any wasted time. Overall, losing your sense of urgency leads to complacency and a lack of motivation, which probably aren’t characteristics broker-dealers are looking for in their employees. Don't assume the question’s intent You glance at the question quickly and incorrectly anticipate what the exam question is really asking you. You pick the wrong answer because you were in such a rush, you didn’t see the word except at the end of the question. What a shame. You don’t want to fail the exam when you really know the material. Read each question carefully and look for tricky words like except, not, and unless. Then read all the answer choices before making your selection. Don't read into the question You’re thinking but what if before you even look at the answer choices. When reviewing questions with students, I constantly get questions like “Yeah, but what if he’s an insider?” or “What if she’s of retirement age?” The bottom line is that you shouldn’t add anything to the question that isn’t there. Don’t be afraid to read the question at face value and select the right answer, even if it occasionally seems too easy. Eliminate answer choices that are too much of a stretch, and remember that when two answer choices are opposites, one of them is most likely correct. Don't become distracted when others finish Now, certainly this won’t come into play if you’re taking the exam at home but there are many other sources of distraction at home. You haven’t even started looking over the questions you marked for review when the woman next to you leaps from her seat, picks up her results (with a little victory dance), and makes a break for the door. Don’t let people who are taking the exam with you psych you out. If others finish ahead of you, perhaps they’re members of Mensa or maybe this is the fifth time they’ve taken the exam — practice makes perfect. They may even be taking a totally different exam. Besides the SIE, the testing centers also offer other securities exams with fewer questions. Keep focused and centered on taking your own exam. The only time you need to be concerned with is your own — whether you’re on track. Dress for comfort You’re trying to calculate the taxable equivalent yield on Mr. Dimwitty’s GO bond, but the pencil keeps slipping out of your sweaty hand. Now, at home, you can certainly set the temperature to your comfort level, however at the test center the temperature may not be ideal. You swear the test center has the heat cranked up to 80 degrees. Hmm. Maybe wearing your warmest wool sweater wasn’t the best idea. Whether taking the test at a testing center or home, dress comfortably. Don’t wear a tie that’s so tight it cuts off the circulation to your brain. You’re under enough stress just taking the exam. If you’re taking the exam at a test center, dress in layers. A T-shirt, a sweatshirt, and a jacket are great insulation against the cold. Another advantage is that you can shed layers of clothing (without ending up sitting in your underwear) if the exam room is too warm. Don't forget to breathe You sit down to take the exam brimming with confidence. All of a sudden, the exam begins and some of the words look like they’re in a foreign language. Your heart starts pounding, and you feel like you’re going to pass out. If stress becomes overwhelming, your breathing can become shallow and ineffective, which only adds to your stress level. Focus yourself before the exam by closing your eyes and taking a few deep breaths. This same process of closing your eyes and breathing deeply is a great way to calm yourself if you become stressed or anxious at any time during the exam. Don't try to work out equations in your head instead of writing them down While taking the exam, your memory starts to cloud and, somehow, the fact that two plus two equals five begins to make sense to you and the only formula you can remember is that there are 12 inches in a foot. Certainly, there aren’t a whole lot of equations you’ll need for the SIE exam (not as much as for the Series 7 exam). However, don’t throw away easy questions — memorize your equations while you’re studying for your SIE exam so you know them cold before you sit down to take the exam. If your nerves are getting the best of you and clouding your memory, jotting down the equations that you want to remember as soon as your exam begins may be helpful (this process is known as a brain dump). When working out the math problems, you have scrap paper to work with (and a basic calculator). Use them. For example, some formulas, such as determining the value of a right (cum rights), require you to find sums and differences before you can divide. Even simple calculations, such as finding averages, can involve quite a few numbers. In problems with multiple parts, it’s easy for you to accidentally skip steps, plug in the wrong numbers from the question, or forget values that you calculated along the way. Writing things out helps you keep things in place without cluttering your short-term memory. Don't spend too much time on one question Although the questions are weighted (a little more points for more difficult questions and less for easy questions), you don’t want to get bogged down on one question. If you spend too much time on one question, you may lose points for many questions you didn’t have time to even look at because you wasted so much time on the one that gave you trouble. If you find yourself taking too long to answer a question, take your best guess, mark it for review, and return to it later. Don't change your answers for the wrong reasons You change an answer just because you already selected that same letter for the preceding three or four questions in a row. Just a touch of paranoia, right? You’ve probably been told from the time you first started primary school not to change your answers. Trust your instincts and go with your original reaction. You have only two good reasons to change your answer: You find that you initially forgot or didn’t see the words not or except and you initially chose the wrong answer because you didn’t see the tricky word. You find that the answer choice you originally selected is not the best answer after all. Don't calculate your final score prematurely You waste valuable time concentrating on the number of questions you think you got wrong instead of focusing on the SIE exam questions you still have to answer. Just read each question carefully, scrutinize the answer choices, and select the best answer. You’ll find out whether you passed right after you complete the exam; it’s not like you need to figure out your possible grade in advance to avoid sleepless nights until you receive your score. If you have additional time, use it to check your answers to the questions you marked for review.

Article / Updated 03-24-2021

For the Securities Industry Essentials (SIE) exam, make sure you have a good handle on bond basics. Review basic bond terminology and some bond characteristics. Remembering bond terminology The SIE exam designers expect you to know general bond terminology. This article reinforces the information you may have already learned from a prep course or study material (or are in the process of learning). This stuff is basic, but the SIE exam does test it: Maturity date: All issued bonds have a stated maturity date (for example, 20 years, 30 years, and so on). The maturity date is the year bondholders get paid back for the loans they made. At maturity, bondholders receive par value (see the next bullet). Because not as many investors are looking to tie up their money for a long period of time, short-term bonds are more liquid (actively traded) than long-term bonds. Par value: Par value is the face value of the bond. Although par value isn’t significant to common stockholders (whose issuers use it solely for bookkeeping purposes), it’s important to bondholders. For SIE exam purposes, you can assume that the par value for each bond is $1,000 unless otherwise stated in the question. Bond prices are quoted as a percentage of par value, often without the percent sign. A bond trading at 100 is trading at 100 percent of $1,000 par. Regardless of whether investors purchase a bond for $850 (85), $1,000 (100), or $1,050 (105), they’ll receive par value plus any interest due at the maturity date of the bond, usually with semi-annual interest payments along the way. Corporate bonds are usually quoted in increments of 1/8 percent (1/8% = 0.00125 or $1.25), so a corporate bond quoted at 99-3/8 (99.375 percent) would be trading at $993.75. Coupon rate: Of course, investors aren’t lending money to issuers for nothing; investors receive interest for providing loans to the issuer. The coupon rate on the bond tells the investors how much annual interest they’ll receive. Although bonds are no longer issued with physical coupons, previously, some bonds required investors to detach dated coupons (bearer bonds and partially registered bonds) from their bonds and turn them in to receive their interest payments. The coupon rate is expressed as a percentage of par value. For example, a bond with a coupon rate of 6 percent would pay annual interest of $60 (6% @@ts $1,000 par value). You can assume that bonds pay interest semiannually unless otherwise stated. So, in this example, the investor would receive $30 every six months. Bondholders receive interest (payment for the use of the money loaned), and stockholders receive dividends. The bond indenture: The indenture (also known as deed of trust or resolution) is the legal agreement between the issuer and its bondholders. It’s printed on or attached to the bond certificate. All indentures contain basic terms: The maturity date The par value The coupon rate (interest rate) and interest payment dates Any collateral securing the bond Any callable or convertible features The bond indenture also includes the name of a trustee. A trustee is an organization that administers a bond issue for an institution. It ensures that the bond issuer meets all the terms and conditions associated with the borrowing. Essentially, the trustee tries to make sure that the issuer does the right thing. Following bond issue and maturity schedules Not only can bond certificates be in different forms, but they can also be scheduled with different types of maturities. Maturity schedules depend on the issuer’s needs. The following list presents an explanation of the types of bond issues and maturity schedules: Term bonds: Term bonds are all issued at the same time and have the same maturity date. For example, if a company issues 20 million dollars’ worth of term bonds, they may all mature in 20 years. Because of the large payment that’s due at maturity, most corporations issuing this type of bond have a sinking fund. Most corporations issue term bonds because they lock in a coupon rate for a long period of time. A corporation creates a sinking fund when it sets aside money over time in order to retire its debt. Investors like to see that a sinking fund is in place because it lowers the likelihood of default (the risk that the issuer can’t pay interest or par value back at maturity). Series bonds: These bonds are issued in successive years but have only one maturity date. Issuers of series bonds pay interest only on the bonds that they’ve issued so far. Construction companies that are building developments in several phases are most likely to issue this type of bond. There are less of these issued than term and serial bonds. Serial bonds: In this type of bond issue, a portion of the outstanding bonds mature at regular intervals (for example, 10 percent of the entire issue matures yearly). Serial bonds are usually issued by corporations and municipalities to fund projects that provide regular income streams. Most municipal (local government) bonds are issued with serial maturity. A serial bond that has more bonds maturing on the final maturity date is called a balloon issue. The SIE exam focuses mainly on term and serial bonds. A typical SIE exam question may ask, “Which of the following types of bonds is most likely to have a sinking fund?” Answer: Term bonds. Secured and unsecured bonds The assets of the issuer may or may not back bonds. For test purposes, assume that bonds backed by collateral (assets that the issuer owns) are considered safer for the investor. Secured bonds, or bonds backed by collateral, involve a pledge from the issuer that a specific asset (for instance, property) will be sold to pay off the outstanding debt in the event of default. Obviously, with all else being equal, secured bonds normally have a lower yield than unsecured bonds. The SIE exam tests your knowledge of several types of secured bonds: Mortgage bonds: These bonds are backed by property that the issuer owns. In the event of default or bankruptcy, the issuer must liquidate the property to pay off the outstanding bonds. Mortgage bonds may be open- or closed-end. With an open-end mortgage bond, the issuer may borrow more money using the same property as collateral. With a closed-end mortgage bond, the issuer cannot borrow more money using the same property as collateral. Equipment trusts: This type of bond is mainly issued by transportation companies and is backed by equipment they own (for instance, airplanes or trucks). If the company defaults on its bonds, it sells the assets backing the bonds to satisfy the debt. Collateral trusts: These bonds are backed by financial assets (stocks and bonds) that the issuer owns. A trustee (a financial institution the issuer hires) holds the assets and sells them to pay off the bonds in the event of default. Guaranteed bonds: Guaranteed bonds are backed by a firm other than the original issuer, usually a parent company. If the issuer defaults, the parent company pays off the bonds. As such, the rating of the bonds is tied to the rating of the guarantor. Unsecured bonds are the opposite of secured bonds: These bonds are not backed by any assets whatsoever, only by the good faith and credit of the issuer. If a reputable company that has been around for a long time issues the bonds, the bonds aren’t considered too risky. If they’re issued by a relatively new company or one with a bad credit rating, hold onto your seat! Again, for SIE exam purposes, assume that unsecured bonds are riskier than secured bonds. Here’s the lineup of unsecured bonds: Debentures: These bonds are backed only by the issuer’s good word and written agreement (the indenture) stating that the issuer will pay the investor interest when due (usually semiannually) and par value at maturity. Income (adjustment) bonds: These bonds are the riskiest of all. The issuer promises to pay par value back at maturity and will make interest payments only if earnings are high enough. Companies in the process of reorganization usually issue these bonds at a deep discount (for example, the bonds sell for $500 and mature at par, or $1,000). For test purposes (and real-world purposes), you shouldn’t recommend these bonds to investors who can’t afford to take a lot of risk. Because secured bonds are considered safer than unsecured bonds, secured bonds normally have lower coupon rates. You can assume that for the SIE, the more risk an investor takes, the more reward he will receive. Remember the saying “more risk equals more reward.” More reward may be in the form of a higher coupon rate or a lower purchase price. Either one — or both — lead to a higher yield for the investor. When comparing short-term versus long-term debt securities, short-term bonds from the same issuer are considered safer because the investor is not tying up his money for as long a period of time. Because of the extra risk long-term bondholders are taking for tying up their money for a longer period of time, long-term bondholders generally (except in rare cases) receive a higher coupon (interest rate) for taking that additional risk.

Article / Updated 07-28-2019

When deciding how to go about your Series 7 exam prepartion, your first mission is to identify the training mode that best suits your needs. If you’re likely to benefit from a structured environment, you may be better off in a classroom setting. A prep course can also give you emotional guidance and support from your instructors and others in your class who are forging through this stressful ordeal with you. On the other hand, if you’re the type of person who can initiate and follow a committed study schedule on your own every day, you may be able to pass the Series 7 exam without a prep course, and you can save the money you would have spent for classes. Back to school: Attending a Series 7 exam prep course People who learn best by listening to an instructor and interacting with other students benefit from attending prep courses. Unfortunately, not all Series 7 exam prep courses and training materials are created equally. Unlike high school or college courses, the content of Series 7 prep courses and the qualifications of the instructors who teach them aren’t regulated by your state’s Department of Education, the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), or any other government agency. Do some research to locate the Series 7 training course that works best for you. The following sections explain some things to consider and questions to ask before enrolling. Take a look at the info you gather and trust your gut. Is the primary function of the prep course to train students to be successful on the Series 7 exam, as it should be? Or do you suspect it’s the brainchild of a broker-dealer who’s looking for extra revenue to supplement her failing stockbroker business? (Run away!) Training school background To find information about a program you’re considering, browse the training school’s website or contact the school’s offices. Find out how many years the training school has been in business and check with the Better Business Bureau or the Department of Consumer Affairs to see whether anyone has filed any complaints. Look for a school that has stayed in business at least five years. This staying power is generally a sign that the school is getting referral business from students who took the course and passed the Series 7. Try to get recommendations from others who took the course. Word of mouth is an essential source of referrals for most businesses, and stockbroker training schools are no different. The stockbroker firm you’re affiliated with (or will be affiliated with) should be able to recommend training schools. Courses offered through a local high school’s continuing education program can be just as effective as those offered through an accredited university or a company that focuses solely on test prep, as long as the right instructors are teaching them. Read on. Qualifications of the course instructor(s) The instructor’s qualifications and teaching style are even more important than the history of the company running the course (see the preceding section). An instructor should be not only knowledgeable but also energetic and entertaining enough to keep you awake during the not-so-exciting (all right, boring) parts. When looking for a course, find out whether the teacher has taken — and passed — the Series 7 exam. If so, the instructor probably knows the kinds of questions you’ll be asked and can help you focus on the relevant exam material. The instructor is also likely to have developed good test-taking skills that she can share with her students. Whether the instructor is a part-timer or full-timer may be important. For example, a full-time instructor who teaches 30 classes a year probably has a better grasp on the material than a part-time instructor who teaches 4 classes a year. By the same token, an instructor who owns the school that offers the course probably has greater interest in the success of the students than someone who’s paid to teach the class by the hour. Use your best judgment. Before you register, ask whether you can monitor a class for an hour or so with the instructor who would be training you. If the company says no, I suggest finding another course because that course provider may have something to hide. While you’re at it, make sure the classroom is comfortable, clean, and conducive to learning. Texts, course content, and extra help To really benefit from a course, you need good resources — in terms of not only the actual training material but also the people in the classroom. These elements affect how the class shapes up and what you actually learn: Training material: Will you have a textbook to study from or just some handouts? The instructor should provide you with textbooks that include sample exams, and a prep course should be loaded with in-class questions for you to work on. The course should also provide you with chapter exams that you can work on at night before the next session (yes, homework is a good thing). Remember, the more questions you see and answer, the better. In-class practice tests: You want a prep course that includes test sessions where the instructor grades your exams, identifies incorrect answers, and reviews the correct answers. Instructor availability: Ask whether the course instructors will be available to answer your questions after the class is over — not only at the end of the day but also during the weeks after you’ve completed the course and are preparing for the Series 7. The practical details The perfect course can’t do you any good if you never show up for class. Here are some issues to consider about the course offering: Days and times: Make sure the class fits your schedule. If getting there on time is too stressful or you can’t attend often enough to justify the expense, you won’t benefit from registering to take the course. Class size: If more than 30 to 35 people are in the class, the instructor may not be able to give you the individual attention you need. Cost: Obviously, cost is a major concern, but it definitely shouldn’t be your only consideration. Choosing a course because it’s the least expensive one you can find may be a costly mistake if the course doesn’t properly prepare you. You end up wasting your time and spending more money to retake the exam. You can expect to pay anywhere from $300 to $600 for a standard Series 7 prep course, including training materials (textbooks and final exams). Quite a few people don’t pass the first time around, so find out whether the school charges a fee for retaking the prep course if you don’t pass the Series 7 exam or even if you feel that you’re not quite ready to take the test. How to select prep material to study on your own If you’re the type of person who can follow a committed study schedule on your own every day, you may be able to pass the Series 7 exam without a prep course. Many different types of study aids are available to help you prepare. No matter what your learning style is, I’m a firm believer in using a textbook as a primary training aid. You can use online courses, online testing programs, CDs, apps, and flash cards as supplements to your textbook, but give your textbook the starring role. By virtue of its portability and ease of use (you don’t have to turn it on, plug it in, or have access to the Internet, and it can never, ever run out of batteries), the textbook is simply the most efficient and effective choice. My personal favorites are the Empire Stockbroker Training Institute’s Series 7 Coursebook and its companion, Series 7 Final Exams. The textbook focuses on the relevant exam topics, is easy to read and understand, and includes plenty of practice questions and detailed explanations. Securities Training Corporation and Kaplan Financial also publish quality Series 7 books. A lot of the better Series 7 course textbooks are available online rather than in bookstores. In addition to Series 7 Exam For Dummies and a textbook, consider investing in one or more of the following popular study aids: Online testing: I’m all for online testing. Certainly, the more exams you take, the better. If the practice exam simulates the real test, it’s even more valuable. With this study aid, you have access 24 hours a day, 7 days a week, and can pace yourself to take the exams at your leisure. Select a program (for example, Empire Stockbroker Training Institute always has the most current, updated simulated exams) with a couple thousand questions or more, along with answers and explanations. Audio CDs: You may still be able to find audio CDs or audio courses to help you prepare for the Series 7. This form of training can be beneficial as a review for people who already have a decent understanding of the course material. You can listen to recorded material while on the go or in your home. Personally, recording your own notes — especially on topics you’re having trouble with — might be a better use of your time. Putting the info in your own words, saying ideas out loud, and listening to the recordings can really help reinforce the concepts. Flash cards: For those who already have a grasp on the subject matter, flash cards are good because you can tuck ’em in your pocket and look at ’em anytime you want. Commercial cards may be confusing and long-winded. You’re better off making cards that focus on the areas that are most problematic for you.