SIE FINRA Exam 555 Questions with Verified Answers
Purpose of securities industry - CORRECT ANSWER matching investors with money
to issuers that need that money to finance
issuer - CORRECT ANSWER legal entity that sells securities in order to finance its
operations (business, governments) ie. us treasury, us gov agencies, foreign
governments, state and local governments, corps, banks
methods issuers use to raise capital - CORRECT ANSWER 1) issue debt securities
(bonds) and 2) issues equity securities (stocks)
debt securities - CORRECT ANSWER publically traded loans = bonds, notes, or debt
instruments. The person loaning money/buying a bond is considered a creditor to
the issuer and the amount they paid for is the principal that the issuer owes them
and also makes interest payments throughout the duration of the loan
-can be issued by banks, corps, etc
equity securities (common vs preferred) - CORRECT ANSWER raise capital by
issuing stock (equity), this time when you buy this, you have ownership in the
company and if the company is profitable then you may be entitled to a portion of
the profits (this is received through dividend distribution). differs from bonds bc
1) typically no maturity date and 2) dividend payments are optional
-only banks/corporations sell these and can do so publically or privately to specific
group of investors
preferred=paid a predetermined dividend (usually received first and higher than
those of common holders, but don't get a vote in company matters)
common=paid a dividend based on company fortunes
broker dealer = brokerage firm (2 capacities) - CORRECT ANSWER 2 capacities
,1) broker= (ABC - agency, broker, commission)engages in agency transactions in
security accounts of others. they match up buys and sells and earn a commission
for their work (like a real estate broker, acting on behalf of customers to make
commission). no risk to firm, they find party willing to take other side of trade
2) dealer= (PDM - principal, dealer, markup/markdown) firms buying and selling
securities for its own accounts. buy securities from clients and hold them in
inventory and allow clients to buy from them. like a car dealer... buys for its
inventory and sells from its inventory and can mark up and down accordingly. acts
as principal and can take other side of the trade, MARK UP OR MARK DOWN
-risk & Inventory
broker-dealer departments/structure of firms (5) - CORRECT ANSWER 1)
investment banking
2) research
3) sales/private client
4) trading
5) operations
broker dealer - Investment banking - CORRECT ANSWER referred to as
underwriters of securities... they provide advise to issuers in who are looking to
issue stocks, bonds, or a combo (structure/arrange security offerings)
also can assist with M&A or restructuring for bankruptcy
broker dealer - research - CORRECT ANSWER analysts!! study market and issuers
to make reccomendations (buy, sell, hold)
broker dealer - sales (stock or bond brokers aka registered representatives RR or
investment advisor representatives IAR) - CORRECT ANSWER financial
professionals who market bonds, stocks, but also packaged products such as
mutual funds to people and institutions
broker dealer - trading - CORRECT ANSWER execute trades for the firm and the
firm's clients and occur in electronic market places NASDAQ or hybrid ones such
as NYSE
broker dealer - operations - CORRECT ANSWER make sure things are up to
standard (paperwork, trades, etc) also generate statements, etc
,info barriers - CORRECT ANSWER barrier where info shouldn't be shared with
other side/other departments (investment banking on one side and research,
sales/private client, trading, ops on the other)
market maker - CORRECT ANSWER **applies to equity not bonds**
when broker dealer decides to display quotes on a trading system indicating they
want to buy and sell at specific prices... required to do so on a REGULAR basis.
stands ready to buy and sell at any given time
-maintain inventory
-these market makers are two sided... indicating a price they are willing to sell at
(ASK/OFFER) and buy at (BID)
-usually a min of 100 shares at those prices=ROUND LOT
odd lot=anything but groups of 100 shares
spread (ask, bid, etc) - CORRECT ANSWER spread=difference between ask and bid
price=profitability of market maker, larger the spread=more MM makes
bid=what firm will buy at/what client sells at
ask=what firm will sell at/what client buys at
-more actively traded securities tend to have more narrow spreads
**markup (sell price/ask)/markdown (buy price/bid) is in addition to the spread
comp for broker dealer, investment advisor, - CORRECT ANSWER 1) broker dealer
receives $ bc of transaction based compensation (broker receives commission)
2) investment advisor charges fees for managing portfolio, usually based on assets
under management
traders --> proprietary trading - CORRECT ANSWER trade for the firm without
setting price markers like a market maker = no quotes entered. simply execute
trades on the quotes made from a market maker
investment advisor vs broker dealer - CORRECT ANSWER broker-dealers earn
commission for executing trades while investment advisors charge fees for
providing advise to their clients (based on % of assets under management AUM)
and are charged whether trades are executed or not
, municipal advisors - CORRECT ANSWER -provides advice to or on behalf of
municipalities (state, city, council) usually the issuer. usually related to municipal
finance offering
-municipal advisor is an entity that advices municipalities on bond offerings
(middle man between municipality itself and broker firm (underwriter potentially)
types of investors (4) - CORRECT ANSWER retail, accredited, institutional, QIB
retail investors - CORRECT ANSWER (any investor that is not an inst. advisor)
regular individuals with regular accounts buying stock and bonds from broker-
dealers with limited assets/income
accredited investors (what are the qualifications) - CORRECT ANSWER these are
people with more assets/income and can assume more risk. These includes
directors, exec officers, firms, and individuals with assets/net worth over 1 mil
(not including prim. residence), or those who make 200k (or 300k with spouse)
each year and have for the lsat two and expect to continue making that much
-can be individuals and inst.
institutional investors - CORRECT ANSWER large investors that pool money to
purchase securities (banks, insurance companies, pension plans, endownments,
hedge funds which are referred to as qualified institutional buyers (QIBS)
-defined by value of assets invested, usually not individuals
QIB (3 qualifiications) - CORRECT ANSWER QIBS=qualified institutional buyers
criteria
--QIB=qualified inst. buyer=entity that must own/invest $100 million of securities
& CANNOT be a natural person
1) certain types of investors qualify (NEVER WILL BE AN INDIVIDUAL): insurance
companies, registered investment advisors or companies, small business
development companies, private/pension plans, certain bank trust funds, corps,
some non-profit, etc
2) must manage over 100 mil of securities unrelated to them
3) must be purchasing for their own account or account of another QIB
Purpose of securities industry - CORRECT ANSWER matching investors with money
to issuers that need that money to finance
issuer - CORRECT ANSWER legal entity that sells securities in order to finance its
operations (business, governments) ie. us treasury, us gov agencies, foreign
governments, state and local governments, corps, banks
methods issuers use to raise capital - CORRECT ANSWER 1) issue debt securities
(bonds) and 2) issues equity securities (stocks)
debt securities - CORRECT ANSWER publically traded loans = bonds, notes, or debt
instruments. The person loaning money/buying a bond is considered a creditor to
the issuer and the amount they paid for is the principal that the issuer owes them
and also makes interest payments throughout the duration of the loan
-can be issued by banks, corps, etc
equity securities (common vs preferred) - CORRECT ANSWER raise capital by
issuing stock (equity), this time when you buy this, you have ownership in the
company and if the company is profitable then you may be entitled to a portion of
the profits (this is received through dividend distribution). differs from bonds bc
1) typically no maturity date and 2) dividend payments are optional
-only banks/corporations sell these and can do so publically or privately to specific
group of investors
preferred=paid a predetermined dividend (usually received first and higher than
those of common holders, but don't get a vote in company matters)
common=paid a dividend based on company fortunes
broker dealer = brokerage firm (2 capacities) - CORRECT ANSWER 2 capacities
,1) broker= (ABC - agency, broker, commission)engages in agency transactions in
security accounts of others. they match up buys and sells and earn a commission
for their work (like a real estate broker, acting on behalf of customers to make
commission). no risk to firm, they find party willing to take other side of trade
2) dealer= (PDM - principal, dealer, markup/markdown) firms buying and selling
securities for its own accounts. buy securities from clients and hold them in
inventory and allow clients to buy from them. like a car dealer... buys for its
inventory and sells from its inventory and can mark up and down accordingly. acts
as principal and can take other side of the trade, MARK UP OR MARK DOWN
-risk & Inventory
broker-dealer departments/structure of firms (5) - CORRECT ANSWER 1)
investment banking
2) research
3) sales/private client
4) trading
5) operations
broker dealer - Investment banking - CORRECT ANSWER referred to as
underwriters of securities... they provide advise to issuers in who are looking to
issue stocks, bonds, or a combo (structure/arrange security offerings)
also can assist with M&A or restructuring for bankruptcy
broker dealer - research - CORRECT ANSWER analysts!! study market and issuers
to make reccomendations (buy, sell, hold)
broker dealer - sales (stock or bond brokers aka registered representatives RR or
investment advisor representatives IAR) - CORRECT ANSWER financial
professionals who market bonds, stocks, but also packaged products such as
mutual funds to people and institutions
broker dealer - trading - CORRECT ANSWER execute trades for the firm and the
firm's clients and occur in electronic market places NASDAQ or hybrid ones such
as NYSE
broker dealer - operations - CORRECT ANSWER make sure things are up to
standard (paperwork, trades, etc) also generate statements, etc
,info barriers - CORRECT ANSWER barrier where info shouldn't be shared with
other side/other departments (investment banking on one side and research,
sales/private client, trading, ops on the other)
market maker - CORRECT ANSWER **applies to equity not bonds**
when broker dealer decides to display quotes on a trading system indicating they
want to buy and sell at specific prices... required to do so on a REGULAR basis.
stands ready to buy and sell at any given time
-maintain inventory
-these market makers are two sided... indicating a price they are willing to sell at
(ASK/OFFER) and buy at (BID)
-usually a min of 100 shares at those prices=ROUND LOT
odd lot=anything but groups of 100 shares
spread (ask, bid, etc) - CORRECT ANSWER spread=difference between ask and bid
price=profitability of market maker, larger the spread=more MM makes
bid=what firm will buy at/what client sells at
ask=what firm will sell at/what client buys at
-more actively traded securities tend to have more narrow spreads
**markup (sell price/ask)/markdown (buy price/bid) is in addition to the spread
comp for broker dealer, investment advisor, - CORRECT ANSWER 1) broker dealer
receives $ bc of transaction based compensation (broker receives commission)
2) investment advisor charges fees for managing portfolio, usually based on assets
under management
traders --> proprietary trading - CORRECT ANSWER trade for the firm without
setting price markers like a market maker = no quotes entered. simply execute
trades on the quotes made from a market maker
investment advisor vs broker dealer - CORRECT ANSWER broker-dealers earn
commission for executing trades while investment advisors charge fees for
providing advise to their clients (based on % of assets under management AUM)
and are charged whether trades are executed or not
, municipal advisors - CORRECT ANSWER -provides advice to or on behalf of
municipalities (state, city, council) usually the issuer. usually related to municipal
finance offering
-municipal advisor is an entity that advices municipalities on bond offerings
(middle man between municipality itself and broker firm (underwriter potentially)
types of investors (4) - CORRECT ANSWER retail, accredited, institutional, QIB
retail investors - CORRECT ANSWER (any investor that is not an inst. advisor)
regular individuals with regular accounts buying stock and bonds from broker-
dealers with limited assets/income
accredited investors (what are the qualifications) - CORRECT ANSWER these are
people with more assets/income and can assume more risk. These includes
directors, exec officers, firms, and individuals with assets/net worth over 1 mil
(not including prim. residence), or those who make 200k (or 300k with spouse)
each year and have for the lsat two and expect to continue making that much
-can be individuals and inst.
institutional investors - CORRECT ANSWER large investors that pool money to
purchase securities (banks, insurance companies, pension plans, endownments,
hedge funds which are referred to as qualified institutional buyers (QIBS)
-defined by value of assets invested, usually not individuals
QIB (3 qualifiications) - CORRECT ANSWER QIBS=qualified institutional buyers
criteria
--QIB=qualified inst. buyer=entity that must own/invest $100 million of securities
& CANNOT be a natural person
1) certain types of investors qualify (NEVER WILL BE AN INDIVIDUAL): insurance
companies, registered investment advisors or companies, small business
development companies, private/pension plans, certain bank trust funds, corps,
some non-profit, etc
2) must manage over 100 mil of securities unrelated to them
3) must be purchasing for their own account or account of another QIB
