Steven M. Rice is a partner in Empire Stockbroker Training Institute, one of the country’s leading schools for securities industry training. He is also an instructor at Empire, and his upbeat training style, entertaining sense of humor, and extensive knowledge are highly regarded by his students. Rice also is the author of Series 7 For Dummies.

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 Corequisite 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 10

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 11

Planning for special accommodations 11

Just in case: Canceling as an option 13

Taking a Peek at the Tested Topics 13

Understanding the Exam Format and Other Exam Details 14

Reviewing the exam basics 14

Practicing on ten additional trial questions 15

Mastering the computerized format and features 15

Viewing exhibits 16

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 23

Blocking out some time to study 23

It’s a plan: Getting into a study routine 24

Give it a rest: Taking short breaks 24

Staying focused from day to day 25

Devoting time to practice tests 25

Avoiding study groups 26

Staying in shape 26

Exploring Study Strategies 26

Developing Solid Test-Taking Skills 27

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 28

Keep track of time 28

Master the process of elimination 29

Maintain your concentration 29

Think carefully before changing your answers 29

Use the scrap paper wisely 29

Knowing When You’re Ready 30

Chapter 3: Examining and Mastering Question Types 31

Familiarizing Yourself with Question Formats 31

Working with the straight shooters: The straightforward questions 32

Encountering quirky questions with qualifiers 33

Roman hell: Complex multiple-choice questions 34

Looking at exhibits: Diagram questions 36

Shredding the Questions: Tips and Tricks 37

Focusing on key information 37

Answer me this: Picking the correct answer 38

Don’t make the same mistake twice 40

Chapter 4: Surviving Test Day 41

Composing Yourself the Day Before 41

Making the Most of the Morning 43

Arriving on the Scene 43

Taking advantage of one last chance to cram 43

Signing in 43

Getting seated 44

Tackling the SIE 44

Revealing Your Results: Drumroll, Please 45

Part 2: Mastering Basic Security Investments 47

Chapter 5: Securities Underwriting: The Process and the Team Players 49

Bringing New Issues to the Market 49

Starting out: What the issuer does 49

Calling the roll: Introducing the team players 53

Getting the skinny on the issue and issuer: The prospectus 54

Counting the securities along the way 55

Getting Up to Speed on the Types of Securities Offerings 55

Reviewing Exemptions 56

Exempt securities 56

Exempt transactions 57

Testing Your Knowledge 59

Practice questions 59

Answers and explanations 62

Chapter 6: Equity Securities: Corporate Ownership 63

Beginning with the Basics: Common Stock 63

Understanding a stockholder’s voting rights 64

Categorizing shares corporations can sell 66

Establishing the par value of common stock 66

Considering corporate actions 67

Splitting common stock 68

Sharing corporate profits through dividends 69

Getting Preferential Treatment: Preferred Stock 71

Considering characteristics of preferred stock 71

Getting familiar with types of preferred stock 72

Securities with a Twist 74

Opening national borders: ADRs 74

Rights: The right to buy new shares at a discount 74

Warrants: The right to buy stock at a fixed price 75

Testing Your Knowledge 75

Practice questions 75

Answers and explanations 78

Chapter 7: Debt Securities: Corporate and U.S Government Loans 81

Tackling Bond Terms, Types, and Traits 81

Remembering bond terminology 82

Following bond issue and maturity schedules 83

Comparing secured and unsecured bonds 84

Making Basic Bond Price and Yield Calculations 85

Nominal yield (coupon rate) 86

Current yield 86

Yield to maturity (basis) 86

Yield to call 87

Yield to worst 87

Total return 87

Basis point 87

Determining the Best Investment: Comparing Bonds 88

Considering bond credit ratings 88

Contrasting callable and put bonds 89

Popping the top on convertible bonds 90

Exploring U.S Government Securities 91

Understanding the types of U.S government securities 91

Looking at agency securities 92

Playing It Safe: Short-Term Loans or Money Market Instruments 93

Testing Your Knowledge 94

Practice questions 94

Answers and explanations 97

Chapter 8: Municipal Bonds: Local Government Securities 99

General Obligation Bonds: Backing Bonds with Taxes 99

General characteristics of GOs 100

Analyzing GO bonds 100

Revenue Bonds: Raising Money for Utilities and Such 101

General characteristics of revenue bonds 102

Analyzing revenue bonds 102

The Primary Market: Bringing New Municipal Bonds to Market 103

Allocation of orders 104

Definitions for new issues 104

Examining Other Types of Municipal Bonds on the Test 105

Taxing BABs: Taxable Municipal Bonds 106

Municipal Notes: Securing Short-Term Financing 106

Taking a Closer Look at Municipal Fund Securities 107

Section 529 savings plans 107

ABLE accounts 108

LGIPs 108

Understanding the Taxes on Municipal Bonds 109

Comparing municipal and corporate bonds equally 109

Scot-free! Taking a look at triple tax-free municipal bonds 110

Following Municipal Bond Rules 110

Confirmations 110

Advertising and record keeping 111

Gifts 111

Commissions 112

Gathering Municipal Bond Info 112

The bond resolution (indenture) 112

Legal opinion 112

Official statement 113

“G” That’s a Whole Lot of Rules 113

Testing Your Knowledge 116

Practice questions 116

Answers and explanations 119

Part 3: Delving Deeper: Security Investments with a Twist 121

Chapter 9: Delivering Diversification with Packaged Securities 123

Looking at Investment Company Registration 123

Diversifying through Management Investment Companies 124

Comparing open- and closed-end funds 124

Keeping your customer’s investment objectives in mind 126

Dealing with discounts 128

Figuring the sales charge and public offering price of open-end funds 130

Considering Other Investment Company Options 132

Face-amount certificate companies 132

Unit investment trusts 132

Exchange-traded products 133

Investment company rules 17a-6 and 17a-7 134

Adding Annuities to a Portfolio 134

Looking at fixed annuities 134

Focusing on variable annuities 135

Putting money into (and receiving money from) annuities 135

Understanding the Investment Component of Variable Life Insurance Products 137

Testing Your Knowledge 137

Practice questions 138

Answers and explanations 141

Chapter 10: Working with Direct Participation Programs and REITs 143

Searching for Identity: What DPPs Are (And Aren’t) 144

The DPP Characters: General and Limited Partners 144

Pushing through Partnership Paperwork 145

Partnership agreement 145

Certificate of limited partnership 146

Subscription agreement 146

Passive Income and Losses: Looking at Taxes on Partnerships 146

Evaluating DPPs 147

Checking Out Types of Partnerships 147

Building on real-estate partnership info 147

Gearing up with equipment leasing 148

Strengthening your grasp on oil and gas 149

Reducing Real-estate Risk with REITs 150

Testing Your Knowledge 151

Practice questions 152

Answers and explanations 154

Chapter 11: Options: Understanding the Basics of Puts and Calls 155

Brushing Up on Option Basics 155

Reading an option 156

Looking at call options: The right to buy 157

Checking out put options: The right to sell 157

Getting your money back: Options in-, at-, or out-of-the-money 157

Paying the premium: The cost of an option 159

Incorporating Standard Option Math 160

Calls same: Buying or selling call options 161

Puts switch: Buying or selling put options 163

Trading options: Opening and closing transactions 166

Gaining Additional Option Insight 168

Clearing through the OCC 168

That’s ODD: Options risk disclosure document 168

Getting the go-ahead: Registered options principal 168

Options account agreement 168

Order ticket 169

Last trade, last exercise, and expiration of an option 169

Exercise and assignment 169

Additional definitions 170

Some additional option rules 171

Testing Your Knowledge 172

Practice questions 173

Answers and explanations 176

Part 4: Playing Nicely: Serving Your Customers and Following the Rules 179

Chapter 12: Customer Accounts: Doing the Right Thing 181

Following Protocol When Opening Accounts 181

Filing the facts on the new account form 181

Gathering other important customer info 183

Word on the street: Offering numbered accounts 184

Selecting the Appropriate Type of Account 184

Single and joint accounts 184

Trust accounts 185

Discretionary accounts 186

Corporate accounts 186

Institutional accounts 187

Partnership accounts 187

Cash or margin account 187

Working with Margin Accounts 188

Disclosures and agreements: Getting margin paperwork out of the way 188

Introducing long and short margin accounts 189

Regulation T: Following the Fed’s rules for purchasing margin accounts 189

Making margin call 190

Opening a margin account: The initial requirements 190

Obeying the Telephone Act of 1991 191

Testing Your Knowledge 192

Practice questions 192

Answers and explanations 195

Chapter 13: Securities Analysis: Doing a Little Market Research 197

Getting to Know Your Securities and Markets: Securities Analysis Basics 197

Regarding systematic and nonsystematic risk 198

Mitigating risk 199

Deciding what to buy: Fundamental analysis 201

Deciding when to buy: Technical analysis 203

Following the Green: Money Supply and Monetary Policy 205

Influencing the money supply 206

Opening the Federal Reserve Board’s toolbox 207

Reading Economic Indicators 208

Leading indicators 208

Coincident (coincidental) indicators 209

Lagging indicators 209

GDP and GNP: Measuring goods and services 209

How Economic Factors Affect Securities 210

Cyclical 210

Defensive 210

Growth 210

Your Principal Economic Theory Primer 210

Testing Your Knowledge 211

Practice questions 211

Answers and explanations 214

Chapter 14: Securities Markets: Taking Orders and Executing Trades 217

Shopping at Primary and Secondary Markets 217

Buying new in the primary market 218

Buying used in the secondary market 218

Making the Trade 218

Auctioning securities at securities exchanges 218

Negotiating trades over the counter 219

Understanding the Role of a Broker–Dealer 220

An introducing broker 220

A clearing (carrying) broker 221

A prime broker 221

Receiving and Executing Customer Orders 221

Reviewing basic order types 221

Factoring in order features 223

Following customers’ orders or using your discretion 224

It Takes All Kinds: Recognizing Different Types of Investors 226

Retail investors 226

Accredited investors 226

Institutional investors 226

Testing Your Knowledge 227

Practice questions 227

Answers and explanations 230

Chapter 15: Making Sure the IRS Gets Its Share 231

Everything in Its Place: Checking Out Tax and Income Categories 231

Touring the tax categories 231

Looking at types of income 232

Noting Taxes on Investments 232

Interest income 232

Dividends 233

At the sale: Capital gains and losses 234

Exploring Retirement Plan Tax Advantages 236

Qualified versus nonqualified plans 236

IRA types and contribution limits 237

401(k) and 403(b) 238

Testing Your Knowledge 239

Practice questions 239

Answers and explanations 242

Chapter 16: Rules and Regulations: No Fooling Around 243

Meeting the Market Watchdogs: Securities Regulatory Organizations 243

The Securities and Exchange Commission 244

Self-regulatory organizations 245

State regulators 245

Department of the Treasury/IRS 246

FINRA Registration and Reporting Requirements 246

Filling out the U4 form 246

Missing the mark: Grounds for disqualification 247

Handing over your fingerprints 248

Continuing education 248

Leaving your firm: Resignation and termination 249

Skipping a step: Who’s exempt from FINRA registration 249

Adhering to reporting requirements 249

Trading by the Book When the Account Is Open 250

Filling out an order ticket 251

Checking your calendar: Payment and settlement dates 253

Safeguarding investor info: Regulation S-P 254

Confirming a trade 254

Acting in your customers’ best interest 255

Borrowing from or lending to 256

Following up with account statements 257

Keeping your dividend dates straight 257

Handling complaints 259

Disseminating info: Appropriate communications 260

Keeping clear records 260

Committing Other Important Rules to Memory 261

Sticking to the 5 percent markup policy 261

Avoiding violations 263

Following the money: Anti-money-laundering rules 265

Complying with AML rules 266

Working with public info: Following insider trading rules 267

The Investor’s Bankruptcy Shield: FDIC and SIPC Coverage 268

Holding a customer’s mail 268

Business continuity plans and emergency contact information 269

Testing Your Knowledge 269

Practice questions 270

Answers and explanations 276

Part 5: Putting Your Knowledge to Good Use: Practice Exams 279

Chapter 17: Bring It On: Practice Exam 1 281

Chapter 18: Answers and Explanations to Practice Exam 1 295

Making the Grade 304

Answer Key for Practice Exam 1 304

Chapter 19: Nothing But Net: Practice Exam 2 305

Chapter 20: Answers and Explanations to Practice Exam 2 321

Knowing the Score 330

Answer Key for Practice Exam 2 331

Part 6: The Part of Tens 333

Chapter 21: Ten SIE Exam Traps to Avoid 335

Easing Up on the Studying 335

Assuming the Question’s Intent 336

Reading into the Question 336

Becoming Distracted When Others Finish 336

Not Dressing for Comfort 337

Forgetting to Breathe 337

Trying to Work Out Equations in Your Head Instead of Writing Them Down 337

Spending Too Much Time on One Question 338

Changing Your Answers for the Wrong Reasons 338

Calculating Your Final Score Prematurely 338

Chapter 22: Ten Ways to Start Your Career Off Right 339

Win at the Numbers Game 339

Be an Apprentice 340

Do Your Homework 340

Treat the Minnow Like a Whale 340

Smile When You Dial 340

When a Security Falls, Don’t Be a Stranger 340

Put In the Hours 341

Broaden Your Horizons 341

Pay Yourself First 341

Set Some Goals: The Brass Ring 342

Index 343

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