SIE Exam Prep
Capital Markets the places and systems where money moves from investors to issuers and
where securities later trade among investors
The Securities Industry Ecosystem: Connects people and organizations that need money with people and
organizations that have money to invest
Issuers seek capital
Broker-dealer often facilitates transactions
Clearing firm completes the back-office mechanics
Transfer agents maintains issuer ownership records
Intermediaries help securities get issued, traded, held, recorded, cleared, and
serviced
Issuer the entity that creates and sells a security to raise capital; corporations issue
stock and bonds; governments and municipalities issue debt securities;
investment companies issue fund shares
the party asking the market for money, in exchange, gives investors an
ownership claim, a debt claim, or another investment interest
Investors provide capital in hopes of receiving income, growth, safety, liquidity, or some
combination of these goals; SIE may describe retail investors, institutional
investors, and accredited investors
Retail Investors → individuals
Institutional Investors → include organizations such as pensions plans, insurance
companies, banks, mutual funds, and investment advisers meaning client money
Accredited Investors → meet financial or sophistication standards that may allow
them to participate in certain private offerings
Broker-Dealer a securities firm that may act as a broker, a dealer, or both
As broker, the firm acts as an agent and matches buyers and sellers for a
commission
As dealer, the firm buys and sells from its own inventory as a principal and earns
a markup, markdown, or spread
Broker = agent, dealer = principal, broker-dealer = combined business type
Investment Advisers in the business of providing securities advice for compensation; usually focus on
advice, portfolio management, financial planning, or asset allocation rather than
executing traders as dealers
Investment Bankers helps issuers raise capital; may advise on the type of security to issue, help
determine offering terms, underwrite the securities, and distribute the new issue
to investors
tied to primary market (helps securities enter the market for the first time or
through later offerings by the issuer)
Traders buy and sell securities; some trade for customers, some for a firm, and some for
institutions
Market Makers stand ready to buy and sell a security by quoting prices, which can add liquidity
to the market
Custodians hold customer assets for safekeeping
Clearing Firms help process trades after execution by comparing trade details, moving
securities, moving cash, and maintaining back-office records
Execution is the moment of the trade; clearing and custody are the operational
support that make sure the buyer receives the securities and the seller receives
the money
, SIE Exam Prep
Transfer Agents maintain records for an issuer, including who owns the issuer's registered
securities; they may cancel and issue certificates, track ownership changes, and
help process corporate actions such as the dividend payments or stock splits
How Money and Securities Move Through the System: 1. An issuer decides it needs capital and works with investment bankers or
underwriters to structure an offering
2. Investors pay money to buy the securities in the primary market
3. After issuance, investors may trade the securities with other investors in the
secondary market through broker-dealers, exchanges, or OTC market
participants
4. Clearing firms, custodians, depositories, and transfer agents help maintain
accurate records and move assets properly
Primary Market new securities are sold by or for the issuer; the issuer raises capital; Ex: IPO,
follow-on offering, new municipal bond issue (new issue equals primary market)
Secondary Market existing securities trade among investors after the initial distribution; the issuer
usually does not receive money from routine secondary-market trades
Existing security trading between investors equals secondary market
Public Offerings an offering made broadly to the investing public; offerings generally require
registration and disclosure so investors receive information about the issuer and
the securities
Let issuers reach a large pool of inventors, but they involve more regulation,
disclosure, and offering process requirements than private placements
Private Placements an offering exempt from full public registration, often sold to a limited group of
investors; may involve accredited investors or institutions and can have resale
restrictions
Exchanges an organized marketplace where listed securities trade under exchange rules;
provide structure, price discovery, listing standards, and trading systems
An exchange is like a formal marketplace, securities listed on an exchange meet
that exchange's listing requirements
OTC Market over-the-counter market, means trading occurs through broker-dealer networks
or quotation systems rather than on a national securities exchange; OTC
securities are generally unlisted, although OTC markets vary greatly in quality,
liquidity, and transparency
Auction Markets a market structure where buyers and sellers compete, and prices are determined
by the interaction of orders; the key idea is competitive bidding and offering
Dealer Markets a market in which dealers buy and sell securities from their own inventories;
rather than simply matching a buyer and seller, the dealer may be the buyer from
one customer and the seller to another
Market Makers dealers that quote prices at which they are willing to buy and sell a security; help
create liquidity, especially in dealer markets; Market makers take inventory risk
because prices may move after they buy or sell
Listed Security meets an exchange's listing requirements and trades on that exchange (does not
mean guaranteed safe)
Unlisted Security does not trade on a national securities exchange and may trade OTC (does not
mean prohibited)
Bid the price at which a dealer is willing to buy
, SIE Exam Prep
Ask/Offer the price at which a dealer is willing to sell; ask is usually higher than the bid
Spread difference between ask price and bid price; narrower spread often suggests
better liquidity, while a wider spread can signal lower liquidity or higher trading
cost
Spread = Ask - Bid
Why Companies Issue Securities to raise money for growth, operations, acquisitions, debt repayment, research,
facilities, or other business needs; governments and municipalities issue debt to
fund public projects and operations
Two Basic Forms of Financing equity financing raises money by selling ownership interests; debt financing
raises money by borrowing from investors
Initial Public Offering the first time a company sells its stock to the public; changes a private company
into a public company with securities that may later trade in the secondary
market
First public sale of common stock → IPO (primary market transactions because
issuer is raising capital)
Follow-On Offering a later sale of additional securities by a company that is already public; issuer
can raise more capital after the IPO by offering additional shares or other
securities
Underwriting Syndicate a group of investment banking firms that work together to distribute a new issue;
a syndicate can spread risk, increase distribution power, and help reach more
investors
Syndicate is tied to new issues; not a government agency and does not
guarantee that investors will profit
Firm Commitment Underwriting the underwriter buys the securities from the issuer and resells them to investors;
the issuer receives the agreed proceeds, while the underwriter takes the risk of
selling the securities to the public
Best Efforts Underwriting means the underwriter acts as an agent and uses its best efforts to sell the
securities, but does not buy the entire issue for its own account
The issuer bears more sale risk than in a firm commitment deal because the
underwriter is not committing to purchase the entire issue
Shelf Registration allows an eligible issuer to register securities and sell them later when market
conditions or financing needs make sense; the securities are metaphorically
placed on a shelf for future issuance
Gives eligible issuers flexibility; does not mean the securities are stored
physically or that investors are guaranteed a profit
Prospectus a disclosure document used in registered offerings; gives investors important
information about the issuer, the securities, risks, use of proceeds, management,
and financial information
Prospectus is about disclosure not approval; regulators may review filings, but
they do not guarantee the investment's quality or say the investment will succeed
Private Offering raises capital without a full public offering; private offerings are often sold to
institutions or accredited investors and may involve limits on advertising, investor
types, resale, or transferability depending on the exemption used
Private offerings may be less liquid and have less public information than
registered public offerings
, SIE Exam Prep
Regulation D provides exemptions from SEC registration for certain private offerings when the
issuer satisfies the required conditions
Strongly associated with private placements and accredited investors; does not
mean unregulated, risk-free, or exempt from anti-fraud standards
Accredited Investors an investor that meets financial or sophistication criteria allowing participation in
certain private offerings; common individual thresholds include net worth over $1
million excluding primary residence, or income over $200,000 individually or
$300,000 with a spouse or spousal equivalent in each of the two prior years with
a reasonable expectation of the same for the current year
Restricted Securities securities acquired in private or unregistered transactions; they often cannot be
freely resold immediately in the public market unless resale conditions or
exemptions are met
High-Yield Distinction restricted does not mean worthless; it mean resale is limited
Economics Matters because securities prices respond to growth, inflation, interest rates, consumer
spending, business conditions, and Federal Reserve actions; stocks and bonds
do not move in isolation from the broader economy
Supply how much of something sellers are willing to provide
Demand how much buyers are willing to purchase
Supply vs. Demand When demand is relative to supply, prices tend to rise
When supply rises relative to demand, prices tend to fall
Securities prices are also affected by supply and demand; more buyers than
sellers can push prices up; more sellers than buyers can push prices down
Business Cycle refers to the recurring pattern of economic expansion and contraction; the cycle
affects company earnings, employment, consumer spending, interest rates, and
investor expectations
4 Stages: expansion, peak, contraction, and trough
4 Stages of Business Cycle: Expansion → period of growing economic activity
Peak → high point before activity slows
Contraction → period of declining economic activity
Trough → the low point before recovery begins
Inflation means a general rise in prices, which reduces purchasing power; can hurt fixed-
income investors because future interest payments may buy less
Deflation means a general decline in prices, which may signal weak demand and
economic stress; can hurt companies if falling prices reduce revenue and profits
Approximated Real Return = Nominal Return - Inflation Rate
Gross Domestic Product measures the value of goods and services produced in an economy over a
period of time; a broad gauge of economic output
Rising GDP often indicates expansion, while falling GDP may signal contraction
or recession risk
GDP = C + I + G + (X - M)
Recession a significant decline in economic activity; common shorthand is two consecutive
quarters of negative GDP growth, but official recession analysis also considers
broader indicators such as employment, income, production, and sales
Capital Markets the places and systems where money moves from investors to issuers and
where securities later trade among investors
The Securities Industry Ecosystem: Connects people and organizations that need money with people and
organizations that have money to invest
Issuers seek capital
Broker-dealer often facilitates transactions
Clearing firm completes the back-office mechanics
Transfer agents maintains issuer ownership records
Intermediaries help securities get issued, traded, held, recorded, cleared, and
serviced
Issuer the entity that creates and sells a security to raise capital; corporations issue
stock and bonds; governments and municipalities issue debt securities;
investment companies issue fund shares
the party asking the market for money, in exchange, gives investors an
ownership claim, a debt claim, or another investment interest
Investors provide capital in hopes of receiving income, growth, safety, liquidity, or some
combination of these goals; SIE may describe retail investors, institutional
investors, and accredited investors
Retail Investors → individuals
Institutional Investors → include organizations such as pensions plans, insurance
companies, banks, mutual funds, and investment advisers meaning client money
Accredited Investors → meet financial or sophistication standards that may allow
them to participate in certain private offerings
Broker-Dealer a securities firm that may act as a broker, a dealer, or both
As broker, the firm acts as an agent and matches buyers and sellers for a
commission
As dealer, the firm buys and sells from its own inventory as a principal and earns
a markup, markdown, or spread
Broker = agent, dealer = principal, broker-dealer = combined business type
Investment Advisers in the business of providing securities advice for compensation; usually focus on
advice, portfolio management, financial planning, or asset allocation rather than
executing traders as dealers
Investment Bankers helps issuers raise capital; may advise on the type of security to issue, help
determine offering terms, underwrite the securities, and distribute the new issue
to investors
tied to primary market (helps securities enter the market for the first time or
through later offerings by the issuer)
Traders buy and sell securities; some trade for customers, some for a firm, and some for
institutions
Market Makers stand ready to buy and sell a security by quoting prices, which can add liquidity
to the market
Custodians hold customer assets for safekeeping
Clearing Firms help process trades after execution by comparing trade details, moving
securities, moving cash, and maintaining back-office records
Execution is the moment of the trade; clearing and custody are the operational
support that make sure the buyer receives the securities and the seller receives
the money
, SIE Exam Prep
Transfer Agents maintain records for an issuer, including who owns the issuer's registered
securities; they may cancel and issue certificates, track ownership changes, and
help process corporate actions such as the dividend payments or stock splits
How Money and Securities Move Through the System: 1. An issuer decides it needs capital and works with investment bankers or
underwriters to structure an offering
2. Investors pay money to buy the securities in the primary market
3. After issuance, investors may trade the securities with other investors in the
secondary market through broker-dealers, exchanges, or OTC market
participants
4. Clearing firms, custodians, depositories, and transfer agents help maintain
accurate records and move assets properly
Primary Market new securities are sold by or for the issuer; the issuer raises capital; Ex: IPO,
follow-on offering, new municipal bond issue (new issue equals primary market)
Secondary Market existing securities trade among investors after the initial distribution; the issuer
usually does not receive money from routine secondary-market trades
Existing security trading between investors equals secondary market
Public Offerings an offering made broadly to the investing public; offerings generally require
registration and disclosure so investors receive information about the issuer and
the securities
Let issuers reach a large pool of inventors, but they involve more regulation,
disclosure, and offering process requirements than private placements
Private Placements an offering exempt from full public registration, often sold to a limited group of
investors; may involve accredited investors or institutions and can have resale
restrictions
Exchanges an organized marketplace where listed securities trade under exchange rules;
provide structure, price discovery, listing standards, and trading systems
An exchange is like a formal marketplace, securities listed on an exchange meet
that exchange's listing requirements
OTC Market over-the-counter market, means trading occurs through broker-dealer networks
or quotation systems rather than on a national securities exchange; OTC
securities are generally unlisted, although OTC markets vary greatly in quality,
liquidity, and transparency
Auction Markets a market structure where buyers and sellers compete, and prices are determined
by the interaction of orders; the key idea is competitive bidding and offering
Dealer Markets a market in which dealers buy and sell securities from their own inventories;
rather than simply matching a buyer and seller, the dealer may be the buyer from
one customer and the seller to another
Market Makers dealers that quote prices at which they are willing to buy and sell a security; help
create liquidity, especially in dealer markets; Market makers take inventory risk
because prices may move after they buy or sell
Listed Security meets an exchange's listing requirements and trades on that exchange (does not
mean guaranteed safe)
Unlisted Security does not trade on a national securities exchange and may trade OTC (does not
mean prohibited)
Bid the price at which a dealer is willing to buy
, SIE Exam Prep
Ask/Offer the price at which a dealer is willing to sell; ask is usually higher than the bid
Spread difference between ask price and bid price; narrower spread often suggests
better liquidity, while a wider spread can signal lower liquidity or higher trading
cost
Spread = Ask - Bid
Why Companies Issue Securities to raise money for growth, operations, acquisitions, debt repayment, research,
facilities, or other business needs; governments and municipalities issue debt to
fund public projects and operations
Two Basic Forms of Financing equity financing raises money by selling ownership interests; debt financing
raises money by borrowing from investors
Initial Public Offering the first time a company sells its stock to the public; changes a private company
into a public company with securities that may later trade in the secondary
market
First public sale of common stock → IPO (primary market transactions because
issuer is raising capital)
Follow-On Offering a later sale of additional securities by a company that is already public; issuer
can raise more capital after the IPO by offering additional shares or other
securities
Underwriting Syndicate a group of investment banking firms that work together to distribute a new issue;
a syndicate can spread risk, increase distribution power, and help reach more
investors
Syndicate is tied to new issues; not a government agency and does not
guarantee that investors will profit
Firm Commitment Underwriting the underwriter buys the securities from the issuer and resells them to investors;
the issuer receives the agreed proceeds, while the underwriter takes the risk of
selling the securities to the public
Best Efforts Underwriting means the underwriter acts as an agent and uses its best efforts to sell the
securities, but does not buy the entire issue for its own account
The issuer bears more sale risk than in a firm commitment deal because the
underwriter is not committing to purchase the entire issue
Shelf Registration allows an eligible issuer to register securities and sell them later when market
conditions or financing needs make sense; the securities are metaphorically
placed on a shelf for future issuance
Gives eligible issuers flexibility; does not mean the securities are stored
physically or that investors are guaranteed a profit
Prospectus a disclosure document used in registered offerings; gives investors important
information about the issuer, the securities, risks, use of proceeds, management,
and financial information
Prospectus is about disclosure not approval; regulators may review filings, but
they do not guarantee the investment's quality or say the investment will succeed
Private Offering raises capital without a full public offering; private offerings are often sold to
institutions or accredited investors and may involve limits on advertising, investor
types, resale, or transferability depending on the exemption used
Private offerings may be less liquid and have less public information than
registered public offerings
, SIE Exam Prep
Regulation D provides exemptions from SEC registration for certain private offerings when the
issuer satisfies the required conditions
Strongly associated with private placements and accredited investors; does not
mean unregulated, risk-free, or exempt from anti-fraud standards
Accredited Investors an investor that meets financial or sophistication criteria allowing participation in
certain private offerings; common individual thresholds include net worth over $1
million excluding primary residence, or income over $200,000 individually or
$300,000 with a spouse or spousal equivalent in each of the two prior years with
a reasonable expectation of the same for the current year
Restricted Securities securities acquired in private or unregistered transactions; they often cannot be
freely resold immediately in the public market unless resale conditions or
exemptions are met
High-Yield Distinction restricted does not mean worthless; it mean resale is limited
Economics Matters because securities prices respond to growth, inflation, interest rates, consumer
spending, business conditions, and Federal Reserve actions; stocks and bonds
do not move in isolation from the broader economy
Supply how much of something sellers are willing to provide
Demand how much buyers are willing to purchase
Supply vs. Demand When demand is relative to supply, prices tend to rise
When supply rises relative to demand, prices tend to fall
Securities prices are also affected by supply and demand; more buyers than
sellers can push prices up; more sellers than buyers can push prices down
Business Cycle refers to the recurring pattern of economic expansion and contraction; the cycle
affects company earnings, employment, consumer spending, interest rates, and
investor expectations
4 Stages: expansion, peak, contraction, and trough
4 Stages of Business Cycle: Expansion → period of growing economic activity
Peak → high point before activity slows
Contraction → period of declining economic activity
Trough → the low point before recovery begins
Inflation means a general rise in prices, which reduces purchasing power; can hurt fixed-
income investors because future interest payments may buy less
Deflation means a general decline in prices, which may signal weak demand and
economic stress; can hurt companies if falling prices reduce revenue and profits
Approximated Real Return = Nominal Return - Inflation Rate
Gross Domestic Product measures the value of goods and services produced in an economy over a
period of time; a broad gauge of economic output
Rising GDP often indicates expansion, while falling GDP may signal contraction
or recession risk
GDP = C + I + G + (X - M)
Recession a significant decline in economic activity; common shorthand is two consecutive
quarters of negative GDP growth, but official recession analysis also considers
broader indicators such as employment, income, production, and sales
