Free SIE Knowledge Questions and Answers — Questions and Answers
Question 1: FINRA's Rule 3220 was created primarily to:
- control rival corporations' securities exchanges.
- forbid non-monetary remuneration.
- forbid presents and gratuities from one business to another. (Correct answer)
- control company expenditures.
Correct answer: forbid presents and gratuities from one business to another.
FINRA Rule 3220, also known as the Gifts and Gratuities Rule, was established to prevent undue influence and maintain fair business practices within the securities industry. It primarily forbids member firms or their associated persons from giving gifts or gratuities exceeding $100 per year to employees of other firms if the gift is related to the business of the recipient's employer. This rule aims to ensure that business decisions are made objectively, free from the sway of excessive gifts.
Question 2: Which answer accurately sums up a margin account?
- Traders need to understand the minimum balance requirements.
- Brokerage costs are not payable by investors.
- Brokers lend money to investors, who use it for trading. (Correct answer)
- Investors make their stock portfolios more resilient.
Correct answer: Brokers lend money to investors, who use it for trading.
A margin account is a brokerage account that allows an investor to borrow money from their broker-dealer to purchase securities. The securities bought with the borrowed funds serve as collateral for the loan. This leverage can amplify returns but also increases potential losses, as investors are still responsible for repaying the loan plus interest, regardless of the investment's performance.
Question 3: Which of the following factors largely affects an option contract's price?
- The linked stock's share price (Correct answer)
- If it's a put or a call
- The date of the strike
- The price at which strikes
Correct answer: The linked stock's share price
The price of an option contract is primarily determined by the price of its underlying asset, which is typically a stock. As the underlying stock's price moves, the intrinsic value of the option changes, directly impacting its premium. Other factors like time to expiration, volatility, and interest rates also play a role, but the linked stock's share price is the most fundamental determinant.
Question 4: Which of these describes an Exchange-traded fund's (ETF) drawback?
- Has to release holdings every day
- better tax efficiency compared to alternative investments, such as mutual funds
- Expenses of trading versus stocks (Correct answer)
- exchanged via the public market
Correct answer: Expenses of trading versus stocks
While Exchange-Traded Funds (ETFs) offer many advantages like diversification and often lower expense ratios than mutual funds, they do have a drawback related to trading costs. Unlike mutual funds, which are typically bought and sold once a day at their net asset value, ETFs are traded on exchanges throughout the day like individual stocks. This means that each purchase or sale of an ETF incurs trading expenses, such as commissions or bid-ask spreads, which can add up for frequent traders.
Question 5: The following are some of the main reasons why investors engage in passive ETF investing:
- make quick profits by trading aggressively and then holding onto stocks for a while till their value rises and then trading them.
- make quick profits on large purchases of shares made at a discount to the S&P Index.
- have longer-term gains and save more money than you would from alternative trading methods' higher fees. (Correct answer)
- have greater returns over an extended period of time, notwithstanding additional costs associated with alternative trading methods.
Correct answer: have longer-term gains and save more money than you would from alternative trading methods' higher fees.
Investors engage in passive ETF investing primarily to achieve longer-term gains by tracking a market index rather than actively trying to outperform it. This strategy typically involves lower trading activity and, consequently, lower management fees compared to actively managed funds or frequent trading methods. The goal is to benefit from market growth over time while minimizing costs, which often leads to better net returns in the long run.
Question 6: Which of the above scenarios demonstrates an unsystematic risk?
- Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock. (Correct answer)
- Oil businesses are impacted by the war in Ukraine, which lowers the value of their shares.
- The COVID-19 outbreak drives down stock prices by forcing many businesses to close.
- Stock values fall after a hurricane significantly affects the majority of the east coast.
Correct answer: Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock.
Unsystematic risk, also known as specific risk or diversifiable risk, is unique to a particular company or industry. It can be mitigated through diversification of investments. The scenario where American Airlines' stock value drops due to poor demand and route cancellations is an example of unsystematic risk because it specifically affects that company, rather than the entire market or a broad sector.
Question 7: Which of the following describes the risk of losing money on an investment as a result of changes in the economy?
- Risk to equity
- Risk of the market (Correct answer)
- Risk of currency fluctuations
- Risk of interest rates
Correct answer: Risk of the market
The risk of losing money on an investment as a result of changes in the overall economy is known as market risk, also referred to as systematic risk. This type of risk affects all investments in the market to some degree and cannot be eliminated through diversification. Factors like recessions, political instability, or changes in interest rates are examples of economic shifts that contribute to market risk.
Question 8: What is the name of a stock order that won't be filled unless a stock hits or drops below a specific market price?
- Order cancellation
- Put an end to the order
- Order of market
- Limitation of order (Correct answer)
Correct answer: Limitation of order
A limit order is a type of stock order that specifies a maximum price an investor is willing to pay to buy a security or a minimum price they are willing to accept to sell a security. This means the order will only be filled if the stock reaches or drops below the specified buy limit price, or reaches or rises above the specified sell limit price. It provides price control but does not guarantee execution.
Question 9: An organization makes $100,000 a year, but it also spends $75,000. The corporation has 10,000 issued shares and owes $7,000 to preferred shareholders. Regarding the value of each share, which of the following assertions is true?
- To enhance the value of the stock held by shareholders, the corporation ought to issue an additional 10,000 shares.
- Each share will be worth $2.20.
- 10% of the company's stock is owned by investors, whose shares are worth at least $5,000.
- The par value of non-preferred stockholders' shares will be $1.80. (Correct answer)
Correct answer: The par value of non-preferred stockholders' shares will be $1.80.
To determine the value available to non-preferred (common) shareholders, first calculate the company's net income by subtracting expenses from revenue: $100,000 - $75,000 = $25,000. Next, subtract the preferred dividends from the net income, as preferred shareholders are paid first: $25,000 - $7,000 = $18,000. Finally, divide this amount by the number of issued common shares (10,000) to find the earnings per common share, which is $18,000 / 10,000 = $1.80.
Question 10: JCB Company owns 5000 shares of issued stock in addition to 1000 shares of treasury stock. The right amount of common stock is represented by which of the following?
- 4000 (Correct answer)
- 6000
- 1000
- 5000
Correct answer: 4000
The amount of common stock outstanding refers to the shares currently held by investors, which are the shares that have been issued minus any shares the company has repurchased and holds as treasury stock. In this scenario, JCB Company has 5,000 shares of issued stock and 1,000 shares of treasury stock. Therefore, the number of outstanding common shares is 5,000 - 1,000 = 4,000 shares.
Question 11: FINRA would compel an investment manager to report on every activity listed below, with the exception of:
- For a misdemeanor shoplifting charge, a firm employee is taken into custody.
- An employee of the company donates $2,000 to a local political campaign.
- An employee of the company works for another financial institution, but they choose not to reveal this.
- A misdemeanor DUI offense results in the arrest of a firm employee. (Correct answer)
Correct answer: A misdemeanor DUI offense results in the arrest of a firm employee.
FINRA requires firms to report certain events to maintain regulatory oversight and protect investors. Misdemeanor charges involving theft (like shoplifting) and undisclosed outside business activities (working for another financial institution without disclosure) are typically reportable as they relate to an individual's integrity or potential conflicts of interest. While a misdemeanor DUI offense is a serious matter, a mere *arrest* for a misdemeanor DUI may not always trigger an immediate, direct reporting requirement by the firm to FINRA, unlike a formal charge or conviction for certain offenses, or violations of firm policy like undisclosed outside business activities. Personal political donations, unless tied to 'pay-to-play' rules or firm funds, are generally not reportable.
Free SIE Knowledge Questions and Answers
FINRA's Rule 3220 was created primarily to: