SIE Exam Vocabulary You Must Know

🧾 SIE Exam Vocabulary You Must Know
📘 Key Terms and Definitions for the SIE Exam

The Securities Industry Essentials (SIE) exam tests your basic understanding of the securities industry, and one important aspect of passing the exam is having a solid grasp of key financial terms. Here’s a list of essential vocabulary you must know to succeed on the SIE exam:

🎯 1. Securities

• Definition: A financial instrument that represents ownership (equity securities) or a creditor relationship (debt securities) with an entity.
• Examples: Stocks, bonds, mutual funds, options.

🎯 2. Broker-Dealer

• Definition: A firm or individual engaged in buying and selling securities on behalf of clients or for their own account.
• Types:
  • Broker: Acts as an intermediary, executing buy and sell orders for clients.
  • Dealer: Trades securities for their own account, profiting from the spread.

🎯 3. Market Maker

• Definition: A firm or individual that stands ready to buy or sell a particular security at publicly quoted prices. Market makers ensure liquidity in the market.
• Function: They quote both buy and sell prices for a security, making it easier for investors to buy or sell.

🎯 4. Underwriting

• Definition: The process by which an investment bank or other financial institution assumes the risk of selling a new issue of securities. The underwriter guarantees the sale of the securities by purchasing them from the issuer and then selling them to investors.
• Types:
  • Firm commitment: The underwriter guarantees the sale of all securities.
  • Best efforts: The underwriter sells as many securities as possible but doesn’t guarantee the full sale.

🎯 5. Primary Market vs. Secondary Market

• Primary Market: The market where new securities are issued and sold for the first time. Examples: Initial Public Offerings (IPOs).
• Secondary Market: The market where previously issued securities are bought and sold among investors. Examples: Stock exchanges like the NYSE and NASDAQ.

🎯 6. Mutual Fund

• Definition: An investment vehicle that pools money from many investors to purchase a diversified portfolio of securities.
• Key Terms:
  • Net Asset Value (NAV): The total value of the mutual fund’s assets minus liabilities, divided by the number of shares outstanding.
  • Open-end fund: The fund’s shares can be bought or sold at any time at the NAV price.
  • Closed-end fund: Shares are bought and sold on the market at prices that may differ from NAV.

🎯 7. Diversification

• Definition: A risk management strategy that involves spreading investments across various asset classes (stocks, bonds, real estate, etc.) to reduce risk.
• Goal: To minimize the impact of any single investment’s poor performance on the overall portfolio.

🎯 8. Blue-Chip Stock

• Definition: Stocks of large, established, and financially stable companies that have a history of reliable performance and dividend payments.
• Example: Apple, Microsoft, Coca-Cola.

🎯 9. Dividends

• Definition: A portion of a company’s earnings paid to shareholders, typically on a quarterly basis.
• Types:
  • Cash dividends: A direct payment to shareholders.
  • Stock dividends: Additional shares given to shareholders instead of cash.

🎯 10. Yield

• Definition: The income generated by an investment, typically expressed as a percentage of the investment’s current price.
• Types:
  • Current Yield: The annual interest or dividend income divided by the current market price of the security.
  • Yield to Maturity (YTM): The total return anticipated on a bond if held until maturity, considering both interest payments and capital gains/losses.

🎯 11. Debt Securities

• Definition: Securities that represent a loan made by the investor to the issuer (typically a corporation or government).
• Examples: Bonds, debentures, and notes.
• Key Terms:
  • Coupon Rate: The interest rate paid on a bond.
  • Maturity: The date when the bond’s principal amount is due to be paid back.

🎯 12. Equity Securities

• Definition: Securities that represent ownership in a corporation, such as stocks.
• Types:
  • Common stock: Represents ownership and provides voting rights.
  • Preferred stock: Provides a fixed dividend but does not offer voting rights.

🎯 13. Risk

• Definition: The possibility of losing part or all of an investment’s value.
• Types:
  • Systematic risk: Risk that affects the entire market (e.g., economic recessions, interest rates).
  • Unsystematic risk: Risk specific to a company or industry (e.g., management changes, competition).

🎯 14. Margin

• Definition: The practice of borrowing money from a broker to purchase securities, allowing investors to buy more than they could with cash alone.
• Key Terms:
  • Initial margin: The minimum amount of equity required to open a margin account.
  • Maintenance margin: The minimum equity required to maintain an existing margin position.

🎯 15. Short Selling

• Definition: The practice of borrowing securities to sell them in anticipation of a price drop. If the price falls, the investor can buy the securities back at a lower price and return them to the lender, pocketing the difference.
• Risk: Short selling involves the potential for unlimited losses if the price of the security rises instead of falling.

🎯 16. Market Orders vs. Limit Orders

• Market Order: An order to buy or sell a security at the current market price, which is executed immediately.
• Limit Order: An order to buy or sell a security at a specific price or better. The order is executed only when the price reaches the specified level.

🎯 17. Suitability

• Definition: The requirement that a securities professional recommends investments that are appropriate for a client’s financial situation, objectives, and risk tolerance.
• Regulation: This is a key component of the FINRA rules and helps ensure that investors are not sold products that do not meet their needs.

🎯 18. Fiduciary

• Definition: A person or institution that acts on behalf of another with the utmost good faith, trust, and loyalty. A fiduciary is legally obligated to act in the best interest of the client.
• Example: An investment adviser is considered a fiduciary.

🚀 Conclusion

Mastering these key terms is crucial for success on the SIE exam. The exam will test your understanding of these basic concepts, and knowing the definitions and how they apply to real-world situations will help you excel.

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