FINRA Series 7 / SIE Exams Securities Industry Essentials (SIE): Regulatory Framework & Market Structure Syllabus

What is the difference between a primary offering and a secondary offering of stock?

In a primary offering, the issuer sells newly created shares and keeps the proceeds. In a secondary offering, existing shareholders sell their shares and receive the proceeds—the issuer raises no new capital.

What is an underwriter's role in the primary market?

An investment bank that helps an issuer bring securities to market—advising on structure/price, performing due diligence, and distributing the securities to investors, typically through a firm-commitment or best-efforts arrangement.

What is the difference between a firm-commitment and a best-efforts underwriting?

In a firm commitment, the underwriter buys the entire issue and assumes the risk of unsold shares. In best efforts, the underwriter acts as agent and only sells what it can, with unsold shares returned to the issuer.

What are the four main types of secondary markets?

(1) First market—exchange trading of listed securities; (2) Second market—OTC trading of unlisted securities; (3) Third market—OTC trading of exchange-listed securities; (4) Fourth market—direct institution-to-institution trading (via ECNs).

What is the difference between an exchange (auction) market and the OTC (negotiated) market?

An exchange is an auction market where buyers and sellers compete via bids and offers in a centralized location (e.g., NYSE). The OTC market is a negotiated, dealer-based, decentralized network where prices are negotiated between parties.

In a quotation, what do 'bid' and 'ask (offer)' mean?

The bid is the highest price a buyer (dealer) will pay to buy a security; the ask/offer is the lowest price a seller (dealer) will accept to sell it. Customers buy at the ask and sell at the bid.

What is the bid-ask spread?

The difference between the ask (offer) price and the bid price. A narrower spread indicates greater liquidity; the spread represents the market maker's profit and a cost to the investor.

What is the difference between a firm quote and a subject quote?

A firm quote is one at which a dealer must trade at least one round lot at the stated price. A subject quote is tentative—subject to confirmation before a trade can be executed.

What is a market order and how is it executed?

An order to buy or sell immediately at the best available current price. It guarantees execution but not price; it is filled as soon as it reaches the market.

What is a limit order?

An order to buy or sell at a specified price or better. A buy limit executes at the limit price or lower; a sell limit executes at the limit price or higher. It guarantees price but not execution.

What is a stop (stop-loss) order?

An order that becomes a market order once the stock trades at or through a specified stop (trigger) price. A sell stop is placed below the market to limit losses; a buy stop is placed above the market.

What is the difference between a stop order and a stop-limit order?

Once triggered, a stop order becomes a market order (execution guaranteed, price not). A stop-limit order becomes a limit order once triggered (price guaranteed, execution not).

Where are buy stop and buy limit orders placed relative to the current market price?

Buy LIMIT orders are placed BELOW the current market (buy cheaper). Buy STOP orders are placed ABOVE the current market. Memory aid: SLoBS = Sell Limits/Buy Stops are placed above the market.

Where are sell stop and sell limit orders placed relative to the current market price?

Sell LIMIT orders are placed ABOVE the current market (sell higher). Sell STOP orders are placed BELOW the current market. Memory aid: BLiSS = Buy Limits/Sell Stops are placed below the market.

What is a Good-Til-Canceled (GTC) order versus a day order?

A day order expires at the end of the trading day if not executed. A GTC (open) order remains active until executed or canceled by the customer (subject to firm/exchange periodic confirmation).

What are Gross Domestic Product (GDP) and its significance as a macroeconomic indicator?

GDP is the total market value of all final goods and services produced within a country in a year. It is the broadest measure of economic output; rising real GDP signals expansion, falling GDP signals contraction.

What distinguishes leading, coincident, and lagging economic indicators?

Leading indicators (e.g., stock prices, building permits, new orders) change before the economy. Coincident indicators (e.g., industrial production, personal income) change with it. Lagging indicators (e.g., unemployment rate, CPI) change after it.

What is the CPI (Consumer Price Index) and what does it measure?

The Consumer Price Index measures the average change in prices paid by consumers for a basket of goods and services over time. It is the primary gauge of inflation and is a lagging indicator.

What is the difference between inflation and deflation?

Inflation is a general rise in prices, eroding purchasing power. Deflation is a general decline in prices, increasing purchasing power but often signaling weak demand and recession risk.

What are the four phases of the business cycle in order?

Expansion (growth, rising GDP/employment), Peak (top of the cycle), Contraction/Recession (declining GDP), and Trough (bottom). The cycle then repeats with recovery into expansion.

What is the technical definition of a recession?

A significant decline in economic activity, commonly defined as two or more consecutive quarters of declining real GDP, typically accompanied by rising unemployment and falling output.

What is a depression in economic terms?

A severe, prolonged recession—generally defined as six or more consecutive quarters (about 18+ months) of declining real GDP, marked by very high unemployment and sharply reduced economic activity.

What is monetary policy and who conducts it?

Monetary policy is the management of the money supply and interest rates to influence the economy, conducted by the Federal Reserve (the central bank), aiming for stable prices and maximum employment.

What are the three main tools of the Federal Reserve's monetary policy?

(1) Open market operations (buying/selling government securities)—the most-used tool; (2) the discount rate (rate charged to banks borrowing from the Fed); (3) reserve requirements (the % of deposits banks must hold).

How does the Fed use open market operations to ease (loosen) monetary policy?

To ease, the Fed BUYS government securities, injecting money into the banking system, increasing the money supply and lowering interest rates to stimulate the economy.

What is the federal funds rate?

The interest rate at which banks lend their excess reserves to one another overnight. It is the most volatile, market-driven short-term rate and a key indicator of monetary policy direction.

What is the discount rate?

The interest rate the Federal Reserve charges member banks that borrow directly from it (at the discount window). Lowering it encourages bank borrowing and lending; raising it tightens credit.

What is fiscal policy and who conducts it?

Fiscal policy is the use of government spending and taxation to influence the economy, conducted by the President and Congress. Increasing spending or cutting taxes stimulates; the reverse contracts the economy.

How do monetary policy and fiscal policy differ in who controls them?

Monetary policy is controlled by the Federal Reserve (money supply and interest rates). Fiscal policy is controlled by Congress and the President (government spending and taxation).

What is the balance of trade, and what causes a trade deficit versus a surplus?

The balance of trade is the difference between a country's exports and imports. A trade deficit occurs when imports exceed exports; a surplus occurs when exports exceed imports.

How does a strengthening U.S. dollar affect U.S. exports and imports?

A stronger dollar makes U.S. goods more expensive abroad (hurting exports) and makes foreign goods cheaper for Americans (boosting imports), tending to widen the trade deficit. A weaker dollar does the opposite.