Practice questions · Finance & Accounting
FINRA SIE (Securities Industry Essentials): Practice Questions
Original, syllabus-based practice questions for the FINRA SIE exam. Each answer is explained, including why the other options are wrong. Filter by section or difficulty. These are concept checks built around the topics in FINRA's official content outline - not reproductions of FINRA test content.
Answered 0 · Correct 0
-
Which organization is the federal government agency responsible for administering US securities laws?
Correct answer: B. The SEC is the federal government agency that administers the securities laws and oversees the markets. FINRA is a self-regulatory organization for broker-dealers, not a government agency; the MSRB is an SRO that writes rules for the municipal market; SIPC is a nonprofit that protects brokerage customers when a firm fails. -
An investor sells shares to another investor on a stock exchange. In which market does this trade take place?
Correct answer: C. Trades between investors are secondary-market transactions: the issuer receives nothing. The primary market is where an issuer sells new securities and receives the proceeds; 'initial offering market' just describes the primary market; and the third market refers to exchange-listed stocks trading over the counter, not to new issues. -
In which type of underwriting does the investment bank buy the entire new issue from the issuer and resell it, taking on the risk of unsold shares?
Correct answer: A. In a firm commitment the underwriter buys the issue and resells it, so unsold securities are the underwriter's problem. In a best-efforts deal the bank sells as agent and the issuer keeps the risk; all-or-none is a best-efforts variant that cancels unless fully sold; and any pure agency arrangement leaves the risk with the issuer. -
Which document must be provided to buyers of a new registered securities offering to disclose the material facts about the issue?
Correct answer: D. The Securities Act of 1933 requires registered new issues to be sold with a prospectus that discloses the material facts. A research report is analysis, not mandated offering disclosure; a trade confirmation documents an executed transaction after the fact; and a suspicious activity report is a confidential anti-money-laundering filing, unrelated to offerings. -
Which of the following is an example of monetary policy rather than fiscal policy?
Correct answer: A. Monetary policy is the Federal Reserve managing money and credit through tools such as open-market operations, the discount rate and reserve requirements. Tax rates, government spending and the federal budget are fiscal policy, set by Congress and the President - which is why the other three options are all fiscal measures. -
A brokerage firm fails and a customer's securities are missing. Which organization exists to protect the customer in this situation?
Correct answer: C. SIPC protects customers of a failed broker-dealer up to its coverage limits; it never covers ordinary market losses. The FDIC insures bank deposits, not brokerage assets; the Federal Reserve conducts monetary policy and does not reimburse brokerage customers; and the MSRB writes municipal-market rules but pays no customer claims. -
Which market participant is responsible for maintaining the official record of who owns a corporation's securities?
Correct answer: B. The transfer agent keeps the issuer's ownership records and handles the issue, cancellation and transfer of certificates. A market maker quotes two-sided prices in a security; a custodian holds assets in safekeeping for clients but does not keep the issuer's shareholder register; and a syndicate manager runs a new-issue underwriting. -
In a corporate liquidation, which group is paid last?
Correct answer: D. Liquidation priority runs from secured creditors to general unsecured creditors (including debenture holders), then subordinated debentures, then preferred stock, and finally common stock as the residual claim. Secured bondholders therefore rank first among these choices, and both subordinated debt and preferred stock stand ahead of common. -
A corporation misses several dividend payments on its cumulative preferred stock. What must happen before a common dividend can be paid?
Correct answer: A. Cumulative preferred stock accrues skipped dividends as arrears, and all arrears must be cleared before common holders receive anything. Forfeiture describes non-cumulative preferred, not cumulative; shareholders do not vote missed dividends back into existence; and redeeming the issue is never a precondition for paying a common dividend. -
Compared with common stock, preferred stock typically offers which combination of features?
Correct answer: C. Preferred stock pays a stated dividend, ranks ahead of common for dividends and liquidation, and usually carries no vote. The residual claim and voting rights belong to common stock, not preferred; dividend growth is a common-stock feature; and because its dividend is fixed, preferred is sensitive to interest rates, not immune to them. -
What is the usual difference between preemptive rights and warrants?
Correct answer: B. Rights are short-lived privileges for existing shareholders to subscribe below the market price and avoid dilution, while warrants are long-term and issued with an exercise price above the market. The first option reverses the two lifespans; corporations, not governments, issue rights; and neither instrument entitles the holder to dividends. -
An American Depositary Receipt (ADR) primarily lets US investors do what?
Correct answer: D. An ADR is a negotiable receipt for foreign shares held by a depositary bank, letting US investors trade a foreign company in US markets and dollars. ADRs do not remove dividend taxation, have nothing to do with trading Treasuries abroad, and add currency risk rather than insuring against it. -
Market interest rates rise after an investor buys a fixed-rate bond. What typically happens to the bond's market price?
Correct answer: C. Bond prices move inversely to market interest rates: once new bonds pay more, an existing lower-coupon bond only attracts buyers at a discount. A fixed coupon does not fix the price - it is exactly why the price must adjust; prices do not rise with rates; and the 'doubling' relationship has no basis. -
Which statement describes a zero-coupon bond?
Correct answer: A. A zero-coupon bond is sold at a deep discount and returns everything at maturity, when it pays face value; the accretion toward par is the investor's interest. It therefore pays nothing monthly and floats nothing; it does repay principal at maturity; and conversion into stock describes a convertible bond, not a zero. -
What backs the payments on a municipal general obligation (GO) bond?
Correct answer: B. GO bonds are supported by the issuing municipality's full faith, credit and taxing power. Project income backs revenue bonds, which is the classic contrast; pools of home loans back mortgage-backed securities; and the US Treasury stands behind federal debt, not municipal issues. -
Which feature most distinguishes municipal bond interest from corporate bond interest for a US investor?
Correct answer: D. The defining feature of municipal bonds is that their interest is generally exempt from federal income tax - a key reason their stated yields typically sit below comparable corporates, making the 'always higher rate' option backwards. SIPC protects customers of failed broker-dealers and guarantees no interest, and corporate bond interest is fully taxable. -
A corporate bond backed only by the issuer's general creditworthiness, with no specific collateral, is called a:
Correct answer: C. A debenture is unsecured corporate debt backed only by the issuer's promise and general credit. A mortgage bond is secured by real property, an equipment trust certificate by specific equipment such as aircraft or rolling stock, and a 'guaranteed first-lien' bond implies both collateral and a guarantee - the opposite of unsecured. -
Why does a convertible corporate bond usually carry a lower coupon than a comparable non-convertible bond?
Correct answer: A. The embedded right to convert into common stock is valuable, so investors accept a lower coupon in exchange for the upside. No government guarantee attaches to corporate convertibles; their prices fluctuate with both interest rates and the underlying stock; and no regulation caps the coupon on convertible debt. -
Commercial paper is best described as:
Correct answer: D. Commercial paper is a short-term, unsecured promissory note that corporations issue at a discount to cover near-term funding needs, making it a money-market instrument. It is neither long-term nor secured, it is debt rather than dividend-paying equity, and municipalities issue tax-backed notes, not commercial paper. -
How is the price determined when an investor buys shares of an open-end mutual fund?
Correct answer: B. Open-end funds use forward pricing: an order is filled at the next NAV computed after it arrives, plus any applicable sales charge. Open-end shares do not trade in exchange auctions, prices are never negotiated with the manager, and filling orders at the prior day's NAV would be backward pricing, which is prohibited. -
Shares of a closed-end fund trade at prices that:
Correct answer: A. A closed-end fund has a fixed pool of shares that trade on an exchange, so market supply and demand set the price at a premium or discount to NAV. Trading exactly at NAV describes open-end fund redemption, not exchange trading; the offering price does not bind later trades; and no quarterly par reset exists. -
Which feature distinguishes an exchange-traded fund (ETF) from a traditional open-end mutual fund?
Correct answer: C. ETF shares list on an exchange and trade intraday at market prices like a stock, while open-end mutual fund orders wait for the next NAV. Most ETFs hold stocks or bonds; ordinary investors sell ETF shares on the exchange rather than redeeming with the sponsor; and no fund carries government insurance against market losses. -
A unit investment trust (UIT) is best described as:
Correct answer: D. A UIT assembles a fixed portfolio, does no active management, and self-liquidates at its stated termination date. Active management is precisely what a UIT lacks, so the hedge-fund option fails; a UIT is an investment company, not a bank deposit; and income riders belong to annuity contracts, not trusts. -
Why is a variable annuity treated as a security while a fixed annuity generally is not?
Correct answer: B. A variable annuity's value rides on separate-account investments, so the investor bears the investment risk - the defining trait of a security, which is why it is sold by prospectus. Insurance companies, not banks, issue both types; it is variable (not fixed) annuities that face SEC registration; and variable annuities certainly can lose value. -
What does the buyer of a call option obtain?
Correct answer: A. A call buyer pays a premium for the right - never the obligation - to buy the underlying stock at the strike price, and can lose at most that premium. The obligation to sell on assignment belongs to the call writer; the right to sell at the strike belongs to a put buyer; and options carry no claim to dividends. -
Which option position carries theoretically unlimited risk?
Correct answer: C. A naked call writer may have to buy stock at any market price to deliver at the strike, and since a stock's rise has no ceiling, the potential loss is unlimited. Option buyers - whether of puts or calls - can lose only the premium paid, and a covered writer already owns the shares needed for delivery, capping the exposure. -
Which type of investment risk cannot be eliminated through diversification?
Correct answer: B. Systematic (market) risk moves all securities at once - recessions, rate shocks, broad sell-offs - so spreading money across issuers cannot remove it. Company-specific business risk, a single issuer's default risk and key-person risk are all unsystematic exposures, which is exactly what diversification is able to dilute. -
What does an investor give up by choosing a market order instead of a limit order?
Correct answer: D. A market order buys execution certainty at whatever the best available price turns out to be, so the investor gives up price control - which is what a limit order provides, at the cost of possible non-execution. Execution certainty is gained rather than lost, and neither market access nor order size depends on the order type. -
An investor with a long stock position wants to limit losses if the price falls sharply. Which order type is designed for this?
Correct answer: A. A sell stop sits below the market and, once the stop price is touched, becomes a market order to sell - the standard way to cap losses on a long position. Buy limits are placed below the market and would add shares anyway; buying more stock increases the exposure; and immediate-or-cancel is a time qualifier, not protection. -
Why is selling a stock short considered to have unlimited risk?
Correct answer: C. A short seller sells borrowed shares and must eventually buy them back, and because a stock's price can rise without limit, the repurchase cost - and thus the loss - is unbounded. Dividends are owed only while the position is open, margin interest is a cost rather than the source of unlimited risk, and voting rights are beside the point. -
Under the regular-way settlement cycle for most US stock trades, when does settlement occur?
Correct answer: D. Regular-way settlement for most stock and corporate bond trades is T+1: securities and money change hands one business day after the trade date. Execution and settlement are separate events, the five-day cycle is long obsolete, and no month-end batch settlement exists for regular-way trades. -
Which regulator sets the initial margin requirement that determines how much of a securities purchase a customer may borrow from a broker-dealer?
Correct answer: B. Regulation T is a Federal Reserve Board rule, so the Fed sets the initial margin requirement for securities purchases in margin accounts. State insurance commissioners oversee insurance products, SIPC protects customers of failed firms rather than setting credit terms, and the Treasury issues federal debt. -
A customer instructs a registered representative to buy a specific stock in a set quantity but lets the representative choose the moment and the price. Does this require written discretionary authorization?
Correct answer: A. When the customer names the asset, the action and the amount, leaving only time and price to the representative, the order is not discretionary and needs no written authorization. Discretion begins when the representative chooses which security, whether to trade or how much - that is what demands prior written authority. Oral orders are routine, and discretion rules protect retail accounts above all. -
When opening a new brokerage account, what are firms required to do under customer identification program (CIP) rules?
Correct answer: C. CIP rules, part of the anti-money-laundering framework, require firms to collect identifying information - name, date of birth, address, identification number - and verify the customer's identity. Firms are prohibited from guaranteeing accounts against losses, options approval is a separate suitability decision, and no rule requires notifying an employer. -
Under Regulation Best Interest, what standard applies when a broker-dealer recommends a securities transaction to a retail customer?
Correct answer: B. Regulation Best Interest requires broker-dealers recommending to retail customers to act in the customer's best interest at the time of the recommendation, without putting the firm's interest ahead - implemented through disclosure, care, conflict and compliance obligations. Firm profitability is no defence, no rule mandates the cheapest product, and the standard exists precisely for retail, not institutional, customers. -
In the money-laundering cycle, which stage involves moving funds through chains of transactions to obscure their origin?
Correct answer: D. Layering is the middle stage: funds already in the system are wired, converted and shuffled through transactions to hide the trail. Placement is the initial entry of illicit cash, integration is the final return of funds looking legitimate, and structuring - splitting deposits to dodge reporting thresholds - is a technique and a red flag, not one of the three stages. -
A customer repeatedly deposits cash in amounts just below the currency-reporting threshold to avoid the filing requirement. What is this practice called?
Correct answer: A. Deliberately breaking cash transactions into sub-threshold amounts to evade currency reporting is structuring - itself a violation and a classic trigger for a suspicious activity report. Arbitrage is the lawful exploitation of price differences, rehypothecation is a firm's reuse of pledged collateral, and rebalancing is ordinary portfolio maintenance. -
A registered representative trades a customer's account excessively, mainly to generate commissions. This prohibited practice is called:
Correct answer: B. Churning is excessive trading in light of the customer's objectives and resources, done to generate commissions. Interpositioning is inserting a needless third party between customer and market, free riding is buying securities and selling them without ever paying, and marking the open is manipulation of prices at the start of trading. -
Trading securities on the basis of material, nonpublic information is prohibited and is known as:
Correct answer: C. Insider trading is trading on material, nonpublic information - or tipping it to others - and it violates the antifraud provisions of the securities laws. Front running exploits knowledge of a pending customer order rather than issuer information, day trading is a legal (if risky) style, and selling away means doing private securities deals outside the firm. -
Moments before entering a customer's large buy order, a trader buys the same stock for the firm's own account, expecting the customer's order to push the price up. This is an example of:
Correct answer: D. Trading for the firm's or representative's own benefit ahead of a known customer order is front running, a prohibited abuse of order information. Genuine market making quotes two-sided prices without exploiting customer orders, hedging reduces an existing exposure, and a wash sale fakes activity or harvests losses through offsetting trades. -
Entering a series of buy orders in the final minutes of trading to push a stock's closing price higher is best described as:
Correct answer: B. Painting a higher closing price with late-session orders is marking the close, a manipulation because it creates a false picture of price and demand. Dollar-cost averaging is periodic investing on a schedule, window dressing refers to managers adjusting reported holdings rather than printing prices, and a stop-loss order protects a position instead of pushing the market. -
Which federal law requires new securities offerings to be registered and sold with a prospectus?
Correct answer: A. The Securities Act of 1933 governs the primary market: non-exempt new issues must be registered with the SEC and sold with a prospectus disclosing material facts. The 1934 act regulates the secondary market and its participants, the Advisers Act covers those paid to give investment advice, and the Bank Secrecy Act is anti-money-laundering law. -
Which act created the Securities and Exchange Commission and governs trading in the secondary market?
Correct answer: C. The Securities Exchange Act of 1934 created the SEC and regulates the aftermarket - exchanges, broker-dealers, manipulation and insider trading. The 1933 act covers the issuance of new securities instead, the Investment Company Act governs pooled vehicles such as mutual funds, and the Trust Indenture Act deals with bond indentures. -
An individual joining a FINRA member firm applies for securities registration using which form?
Correct answer: D. Form U4 is the uniform application for securities registration, filed through the member firm and disclosing employment and disciplinary history, with fingerprinting. Form U5 is the termination notice filed when a registered person leaves, Form ADV registers investment advisers, and Form 10-K is an issuer's annual report. -
After passing the SIE but before joining a member firm, what securities business may a person conduct?
Correct answer: B. The SIE has no registration category, so passing it alone registers nothing and permits no securities business - its role is as a co-requisite for representative-level exams taken after joining a member firm. Taking customer orders and selling mutual funds both require registration, and charging for advice triggers investment-adviser rules on top.
Practice questions FAQ
- Are these real SIE exam questions?
- No. These are original study questions written to test understanding. They are not real exam questions, exam dumps, or copied from any provider.
- How should I use these practice questions?
- Answer each one, read the explanation (including why the wrong options are wrong), and use the per-domain score below to focus your revision on weak areas. Revisit before exam day.
- How many questions should I do before the exam?
- Enough to score consistently across every domain, alongside full-length practice from official or reputable providers. Understanding why each answer is right matters more than raw volume.
- What score means I am ready?
- A good signal is consistently scoring around 80% or higher across all domains on questions you have not seen before, and being able to explain why the wrong options are wrong.
- Should I use exam dumps?
- No. Dumps (real or leaked questions) breach provider policy, can void your certification, and do not build the understanding the exam actually tests.