Frequently Encountered SIE Exam Roadblocks and Solutions

The Securities Industry Essentials (SIE) examination is designed to assess a candidate’s knowledge of the fundamentals of the securities industry. Its content is focused on products and their risks, the process of raising capital, the structure of securities markets, and the role of various regulatory agencies.

Even though this exam focuses on the basics, there are still challenges candidates need to learn how to overcome to be successful on exam day. Below are some of the most common challenges encountered by candidates preparing for the SIE exam and advice about overcoming them.

SIE Roadblock #1: Taking Practice Tests

We strongly recommend candidates complete the 75-question SIE Practice Test provided by FINRA. Spending the time to review the practice test will pay dividends by exposing SIE exam candidates to a test created by the same writers who author the real exam.

Remember, FINRA exams are written by committee and, unlike other standardized tests such as the SAT, the language and sentence structure may vary between individual questions. Some questions may contain legal jargon contained within various FINRA rules, while others may employ more of a conversational tone. The point of taking FINRA’s SIE Practice Test is to gain exposure to several different writing styles and “spins” on topics before taking your actual test.

SIE Roadblock #2: Specialized Language and Acronyms

The SIE exam is, above all, a reading comprehension exercise. There are very few math computations on the test. Exam writers expect candidates to be comfortable with the specialized language of finance, and common acronyms.

For example, here are some acronyms candidates should learn when preparing for the SIE exam:

• FINRA: Financial Industry Regulatory Authority

• SEC: Securities and Exchange Commission

• NYSE: New York Stock Exchange

• NASDAQ: National Association of Securities Dealers Automated Quotations

• OTC: Over-the-Counter

• IPO: Initial Public Offering

• ETF: Exchange-Traded Fund

• CD: Certificate of Deposit

• IRA: Individual Retirement Account

• 401(k): Retirement Savings Plan

• MSOS: Municipal Securities

To learn more specialized language and commonly used acronyms, candidates are strongly encouraged to review the glossary at the back of the Kaplan License Exam Manual (LEM).

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SIE Roadblock #3: One Word May Have Several Meanings

As you begin preparing for the SIE exam, you’ll notice some words have multiple meanings or can be interpreted differently based on context. Some examples are:

• Principal

• Covered

Understanding the Multiple Meanings of “Principal” on the SIE Exam

When the word principle is used on the SIE exam it could refer to:

• a bond’s face value,

• a person in a managerial position at a brokerage firm, or

• the capacity of a firm on a given trade.

Understanding the Multiple Meanings of "Covered" in Options Trading

Below are three different examples of how the word covered could be used on the SIE exam.

1. Covered as Ownership of Underlying Asset

• Call Writer: Covered by owning a long stock position. (Long position offsets obligation to sell.)

• Put Writer: Covered by a short stock position. (Short position offsets obligation to buy.)

2. Covered as Slang for a Protected or Hedged Position

• Put Option: Covers a long position by locking in a minimum sales price.

• Call Option: Covers a short position by locking in a maximum purchase price.

3. Covered as Closing Out an Options Position

• Closing Sale: Covers (closes out) a buyer's existing open long option position.

• Closing Purchase: Covers (closes out) a writer's existing open short option position.

SIE Roadblock #4: Multiple Terms Used to Reference the Same Concept

Another reading comprehension strategy candidates should practice is applying multiple terms to reference the same concept. Some examples of terms that can be used to reference the same concept are:

• Options writers: These individuals are the ones who write or create the options contract, obligating themselves to fulfill the terms of the contract if the buyer exercises their right.

• Options sellers: This is another term for options writers. They are the ones selling the contract to the buyer.

• Going short a contract and option: This phrase indicates taking a position where profit is made if the price of the underlying asset decreases. In options trading, selling an option is considered a "short" position.

In essence, all three terms describe the party who takes on the obligation in an options contract in exchange for the premium paid by the buyer.

Conversely options owners, options buyers, and going long a contract reference the same ideas. Remember, the SIE exam is written by a committee, and the writers may employ their own favored terminology.

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SIE Roadblock #5: Learning SIE Math Formulas

Remember, the SIE exam focuses on reading comprehension. Candidates can expect very few calculations on their exam. Many candidates report only seeing one or two calculation items. Here are the three formulas that are the most likely to be tested on the SIE exam:

• % Sales Charge (load) for a Mutual Fund Purchase = (POP – NAV)/POP

• Current Yield = Annual Interest Payment/Bond Price

• Dividend Yield = Annual Dividend*/Stock Price

Remember to multiply the quarterly dividend provided in the question by 4.

SIE Roadblock #6: Applying Concepts

Candidates can expect that approximately 25% of their exam questions will move beyond mere definitions and tie together various concepts and/or address suitability issues with a given product. Here are a few scenarios where it’s necessary to combine various concepts to address an issue.

Example #1: The Influence of FRB Policy

Candidates should be familiar with FRM tools and the concepts of FRB tightening (raising rates) and loosening (lowering rates). The exam could employ slang terminology in this area. Tightening becomes the FRB being hawkish, and loosening is referenced as the FRB being dovish.

If the FRB is hawkish, investors should shorten their maturities. Why?

Candidates must combine three facts to get the right answer.

1. Hawkish means rising rates.

2. Rising rates translate into lower future bond prices based on the inverse relationship between yield and price.

3. Short-term bonds will be hurt less by rising rates due to their lesser relative price volatility when compared to long-term issues. Remember, maturity magnifies the price move.

Dovish is the opposite expectation and implies potentially lower future interest rates and higher future bond prices. If this is the expectation, bond investors should lengthen maturities to take advantage of the anticipated upward positive price movement in bonds.

Example 2: Selecting the Correct Bond

A second example of the extension beyond definitions could be the exam writer providing a brief description of the client and then asking a question about the appropriate debt security recommendation. There will be hints in the question such as the person’s age, job, income, risk tolerance, investment horizon, and so on.

To get these questions correct, you need to have a firm grasp of the relative safety profile and tax status of each debt instrument. For example:

• High earners should be steered toward municipals because of the tax-free status of these issues’ coupons.

• Safety seekers should consider treasuries due to these issues’ default-free status.

• Middle-of-the-road investors (middle-aged, average incomes) might be best served with an investment in a high-grade corporate bond issue.

If you encounter an investor who appears to want equity exposure as well, go with the convertible corporate bond since this will provide indirect appreciation potential. If the question leads with a client’s near-immediate need for funds, choose the shortest maturity conservative investment.

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