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

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