Securities Industry Essentials Exam 2023-2024 For Dummies with Online Practice
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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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.

About This Article

This article is from the book:

About the book author:

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.

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