FINRA SIE — Securities Industry Essentials — All Questions

An investor wants to buy XYZ stock, currently trading at $52, but is only willing to pay $50 or less per share. Which order type best fits this goal?

• a.A market order to buy at once
• b.A buy limit order at $50✓
• c.A sell stop order at $50
• d.A buy stop order at $50

A buy limit order sets the maximum price the buyer is willing to pay, so it executes only at $50 or lower. A market order would fill immediately near $52. A buy stop is a trigger order placed above the market, not a price ceiling.

In a quoted market, the bid-ask spread represents which of the following?

• a.The daily change between the stock's opening price and its final closing price on the listing exchange
• b.The difference between the highest price a buyer will pay and the lowest price a seller will accept✓
• c.The dividend yield of the security, computed as the annual dividend divided by the current market price
• d.The commission that the broker charges the customer for executing an order in the security

The spread is the gap between the highest bid (best buying price) and the lowest ask/offer (best selling price). A narrow spread generally signals a liquid, actively traded security, while a wide spread suggests lower liquidity.

An investor bought a stock at $30 and it now trades at $45. She wants to limit her downside by triggering a sale if the price falls to $40. Which order should she enter?

• a.A market order at $40
• b.A sell stop order at $40✓
• c.A sell limit order at $40
• d.A buy limit order at $40

A sell stop order placed below the current market becomes a market order to sell once the stock trades at or through the $40 stop price, protecting accumulated gains. A sell limit at $40 would execute only at $40 or higher and would not protect against a decline.

Under current regular-way settlement for corporate stocks, when does settlement occur relative to the trade date?

• a.One business day after the trade (T+1)✓
• b.Same day as the trade (T+0)
• c.Three business days after the trade (T+3)
• d.Two business days after the trade (T+2)

Regular-way settlement for equities, corporate bonds, and municipal securities is T+1, meaning one business day after the trade date. The industry moved from T+2 to T+1 to reduce counterparty risk and speed the exchange of cash and securities.

A broker-dealer fills a customer's buy order by selling shares out of its own inventory and adds a markup to the price. In what capacity did the firm act?

• a.As an agent (broker) earning a commission
• b.As a principal (dealer)✓
• c.As a syndicate underwriter
• d.As the issuer's transfer agent

When a firm fills a customer order out of its own inventory and charges a markup or markdown, it acts as a principal, or dealer. An agent (broker) instead arranges the trade between the customer and a third party and earns a commission, which is not what happened here because the firm itself was the seller. A syndicate underwriter distributes new issues for an issuer, not an inventory trade with a customer, and an issuer's transfer agent only records changes in ownership.Securities Exchange Act of 1934

When a company sells newly issued shares to the public for the first time and receives the proceeds, this transaction takes place in which market?

• a.The fourth market
• b.The third market
• c.The primary market✓
• d.The secondary market

The primary market is where issuers raise capital by selling new securities directly to investors, as in an IPO; the proceeds go to the issuer. The secondary market is where investors trade already-issued securities among themselves, with proceeds going to the selling investor.

A stock closed at $40 the day before its ex-dividend date, and the company declared a $1 cash dividend. All else equal, what is the expected opening price on the ex-dividend date?

• a.$41
• b.$39✓
• c.$38
• d.$40

On the ex-dividend date, a buyer is not entitled to the upcoming dividend, so the market typically reduces the stock's opening price by the dividend amount. A $40 stock paying a $1 dividend is expected to open around $39, all else equal.

Which organization acts as the central counterparty that nets and guarantees the settlement of most U.S. broker-to-broker equity trades?

• a.The National Securities Clearing Corporation (NSCC)✓
• b.The Municipal Securities Rulemaking Board (MSRB)
• c.The Securities and Exchange Commission (SEC)
• d.The Federal Reserve's Fedwire funds service

The NSCC, a subsidiary of the DTCC, provides central clearing, multilateral netting, and settlement guarantees for equity trades between broker-dealers. The SEC is a regulator, not a clearing house, and the Federal Reserve handles the banking payment system.Securities Exchange Act of 1934

An investor wants his order executed immediately and is not concerned about getting a specific price. Which order type should he use?

• a.A limit order
• b.A market order✓
• c.An all-or-none order
• d.A stop order

A market order is executed promptly at the best available price, prioritizing speed and certainty of execution over price. A limit order prioritizes price and may not execute at all if the limit is not met.

An investor sells stock short. Under what condition does the position become profitable?

• a.When the stock's price falls✓
• b.When the company pays a dividend
• c.When the stock's price rises
• d.When the stock splits

A short seller borrows shares and sells them, hoping to buy them back later at a lower price. The position profits when the stock's price falls; if the price rises, the short seller faces a loss that is theoretically unlimited.Securities Exchange Act of 1934

A company sets Wednesday as its dividend record date. Under T+1 regular-way settlement, what is the last day an investor can buy the stock regular way and still be entitled to the dividend?

• a.Tuesday✓
• b.Wednesday (the record date)
• c.Thursday
• d.Monday

To be a holder of record on Wednesday, the trade must settle by Wednesday. Under T+1, a purchase made on Tuesday settles Wednesday, so Tuesday is the last day to buy and receive the dividend; Wednesday is the ex-dividend date.

A stop-limit order combines the features of which two order types?

• a.A market order and an all-or-none order
• b.A stop order and a limit order✓
• c.A limit order and a fill-or-kill order
• d.Two separate market orders

A stop-limit order uses a stop price to trigger the order and a limit price to cap the execution price once triggered. This gives price protection that a plain stop order lacks, but it risks non-execution if the market moves past the limit.

What is the primary function of a market maker in the secondary market?

• a.To audit and certify the annual financial statements of the issuers whose shares trade there
• b.To provide liquidity by continuously quoting both bid and ask prices and standing ready to buy or sell✓
• c.To set the short-term interest rate policy of the Federal Reserve at each quarterly meeting
• d.To review and approve securities registration statements filed with the SEC before an IPO

A market maker (a dealer) commits capital to continuously quote firm bid and ask prices, standing ready to buy at the bid and sell at the ask. This adds liquidity and helps ensure that investors can trade even when there is no immediate counterparty.Securities Exchange Act of 1934

A firm receives a customer order, locates another party in the market to take the other side, and charges a commission for arranging the trade. In what capacity did the firm act, and what did it charge?

• a.As a principal, charging a markup
• b.As an agent, charging a commission✓
• c.As a dealer, charging a markdown
• d.As an underwriter, charging a spread

By arranging a trade between the customer and a third party without using its own inventory, the firm acts as an agent (broker) and is compensated with a commission. Markups and markdowns apply only when a firm acts as a principal from its own account.Securities Exchange Act of 1934

An investor owns 100 shares of a stock trading at $80 when the company declares a 2-for-1 forward stock split. After the split, what does the investor own?

• a.200 shares worth $80 each
• b.100 shares worth $40 each
• c.200 shares worth $40 each✓
• d.50 shares worth $160 each

In a 2-for-1 forward split, share count doubles and price halves, leaving total market value unchanged. The investor now holds 200 shares at about $40 each, for the same $8,000 total value.

Which statement best describes the over-the-counter (OTC) market?

• a.It is a decentralized network of dealers who negotiate trades electronically or by phone✓
• b.It is a physical trading floor where an auction takes place
• c.It is where listed securities are matched by a designated market maker on an exchange floor
• d.It handles only the initial sale of new securities

The OTC market has no central physical location; it is a dealer-driven, negotiated market connected electronically and by telephone. Exchanges, by contrast, are centralized auction markets where buyers and sellers compete through posted bids and offers.Securities Exchange Act of 1934

An investor needs the proceeds from a stock sale available the same day the trade is executed. Which settlement type should be specified?

• a.Regular-way settlement
• b.Seller's option settlement
• c.Cash settlement✓
• d.When-issued settlement

A cash (same-day) settlement requires delivery of securities and payment on the trade date itself, making the funds available immediately. Regular-way settlement for equities is T+1, one business day after the trade.

An investor is short 100 shares of a stock at $30 and wants to limit potential losses if the price rises. Which order should be placed?

• a.A sell limit order above $30
• b.A sell stop order below $30
• c.A buy limit order below $30
• d.A buy stop order above $30✓

A buy stop order placed above the current price triggers a buy-to-cover once the stock rises to the stop, capping the short seller's loss. Because a short position loses money as the price rises, a buy stop is the standard protective order.

Which entity serves as the central securities depository that holds securities in electronic (book-entry) form and facilitates their transfer between members?

• a.The Financial Industry Regulatory Authority (FINRA)
• b.The Depository Trust Company (DTC)✓
• c.The Securities Investor Protection Corporation (SIPC)
• d.The Options Clearing Corporation (OCC)

The DTC, a subsidiary of the DTCC, immobilizes securities in book-entry form and enables ownership to be transferred by electronic bookkeeping rather than physical certificate delivery. The OCC clears options, and SIPC provides limited customer account protection.Securities Exchange Act of 1934

An investor owns stock trading at $25 and is willing to sell only if she can get $28 or more per share. Which order should she enter?

• a.A sell limit order at $28✓
• b.A sell stop order at $28
• c.A market order to sell at once
• d.A buy limit order at $28

A sell limit order sets the minimum acceptable price, executing only at $28 or higher. A sell stop at $28 is a trigger, not a price floor: once touched it becomes a market order that can fill below $28, so it does not guarantee her price. A market order sells immediately at the current $25, and a buy limit is the wrong side of the trade.

A company with shares trading at $2 declares a 1-for-10 reverse stock split. What happens to an investor holding 1,000 shares?

• a.The investor holds 100 shares worth about $20 each✓
• b.The investor holds 1,000 shares worth about $20 each
• c.The investor holds 10,000 shares worth about $0.20 each
• d.The investor holds 100 shares worth about $2 each

A 1-for-10 reverse split reduces share count tenfold and multiplies the price tenfold, leaving total value unchanged. The 1,000 shares become 100 shares priced near $20, still worth about $2,000. Reverse splits are often used to raise a low share price.

Compared with a stock that has a wide bid-ask spread, a stock with a very narrow spread most likely indicates:

• a.An upcoming dividend payment
• b.Higher liquidity and active trading✓
• c.Lower liquidity and infrequent trading
• d.A pending stock split

A narrow spread typically reflects high liquidity, tight competition among market makers, and heavy trading volume. A wide spread is more common in thinly traded, less liquid securities where the cost of trading is higher.

In the sequence of dividend dates, which date is when the board of directors formally announces that a dividend will be paid?

• a.The dividend payable date
• b.The declaration date✓
• c.The ex-dividend date
• d.The dividend record date

The declaration date is when the board announces the dividend and sets the record and payable dates. The ex-dividend date determines who is entitled, the record date identifies shareholders of record, and the payable date is when the dividend is actually paid.

Which of the following best distinguishes a securities exchange from the OTC market?

• a.An exchange has no market makers under SEC Rule 15c3-5, while every OTC trade needs a dealer
• b.An exchange operates unregulated, while only the OTC market answers to FINRA rules
• c.An exchange lists only bonds, while the OTC market trades only common stocks and ETFs
• d.An exchange is a centralized auction market, while the OTC market is a decentralized negotiated market✓

An exchange operates as a centralized auction market where competing bids and offers meet, whereas the OTC market is a decentralized, dealer-negotiated market. Both are regulated, and both trade a range of securities.Securities Exchange Act of 1934

Under T+1 regular-way settlement, how does the ex-dividend date relate to the record date?

• a.The ex-dividend date is one business day after the record date
• b.The ex-dividend date is two business days before the record date
• c.The ex-dividend date is one week before the record date
• d.The ex-dividend date is the same day as the record date✓

Because regular-way trades now settle in one business day (T+1), a purchase made on the record date would not settle until the next day, too late to be a holder of record. As a result, the ex-dividend date now falls on the same day as the record date.

When a retail customer places a market order to buy stock from a dealer, at which price will the customer generally buy?

• a.At the bid price
• b.At the previous day's closing price
• c.At the ask (offer) price✓
• d.At the midpoint of the spread

A customer buys at the dealer's ask (offer) and sells at the dealer's bid. The dealer, conversely, buys at the bid and sells at the ask, earning the spread as compensation for providing liquidity.

What happens to a standard stop order once the market reaches the stop price?

• a.It becomes a market order and is executed at the next available price✓
• b.It is held until the end of the trading day and then executed at the close
• c.It becomes a limit order that may be filled only at the stop price
• d.It is automatically canceled unless the investor renews it

A plain stop order is a trigger: once the stock trades at or through the stop price, the order becomes a market order and executes at the best available price. This guarantees execution but not a specific price, so it may fill worse than the stop in a fast market.

An investment bank purchases an entire new issue of stock from a corporation and resells it to the public. In this primary-market role, the investment bank is acting as a:

• a.Registrar
• b.Custodian
• c.Transfer agent
• d.Underwriter✓

An underwriter helps an issuer bring new securities to market, often buying the issue and reselling it to investors in the primary market. Transfer agents and registrars handle recordkeeping, while custodians safeguard assets.

An investor who is 'long' 200 shares of a stock has which market position and outlook?

• a.Owns the shares but profits only if the price falls
• b.Owns the shares and profits if the price rises (bullish)✓
• c.Has no economic exposure to the stock
• d.Has borrowed and sold the shares and profits if the price falls (bearish)

Being long means owning the security; the investor benefits when the price rises and is considered bullish. Being short means having sold borrowed shares, profiting when the price falls (bearish).

Which statement about the risk of a short stock position is correct?

• a.There is no risk once the shares are borrowed, because the lender absorbs any price rise
• b.The maximum loss equals the total dividends the short seller must pay to the stock lender
• c.The maximum loss is limited to the amount of margin the investor deposited when selling short
• d.The potential loss is theoretically unlimited because the stock price can rise without limit✓

A short seller must eventually buy back the shares. Because a stock's price can rise indefinitely, the potential loss on a short sale is theoretically unlimited, unlike a long position, where the most an investor can lose is the amount invested.Securities Exchange Act of 1934

An investor buys 100 shares of common stock regular way on a Thursday, with no intervening holidays. On what day does the trade settle?

• a.Thursday (same day)
• b.The following Monday
• c.Saturday
• d.Friday✓

Regular-way equity settlement is T+1, so a Thursday trade settles on Friday, the next business day. Weekends and holidays are excluded when counting settlement days.

Under the Securities Exchange Act of 1934, what is the key difference between a 'broker' and a 'dealer'?

• a.A broker may transact only in the primary market, while a dealer may transact only in the secondary market
• b.A broker effects transactions for the accounts of others; a dealer buys and sells for its own account✓
• c.A broker may only sell bonds to customers, while a dealer may only sell equity securities
• d.A broker need not register with the SEC, while a dealer must register as a principal firm

The 1934 Act defines a broker as a person effecting securities transactions for the account of others (agency), while a dealer buys and sells securities for its own account (principal). Many firms are 'broker-dealers' because they act in both capacities at different times.Securities Exchange Act of 1934

Which dividend-related date is the day the corporation actually distributes the dividend to eligible shareholders?

• a.The declaration date
• b.The record date
• c.The payable date✓
• d.The ex-dividend date

The payable date is when the company actually pays the dividend to shareholders who were on record as of the record date. It comes after the declaration, ex-dividend, and record dates in the dividend timeline.

Which of the following is a primary risk of using a limit order instead of a market order?

• a.The order guarantees a fill, with the price set by the market
• b.The order must be canceled at the end of every trading day
• c.The order may never be executed if the limit price is not reached✓
• d.The order executes one tick worse than the prevailing quote

A limit order controls the execution price but does not guarantee a fill; if the market never reaches the limit, the order goes unexecuted. A market order, by contrast, guarantees execution but not a specific price.

An investor buys 100 shares of a public company from another investor through an exchange. This transaction takes place in the:

• a.Primary market
• b.Third market only
• c.Fourth market only
• d.Secondary market✓

Trading of already-issued securities among investors occurs in the secondary market, where the issuer receives no proceeds. The primary market involves the original sale of new securities by the issuer to raise capital.

A customer's trade confirmation shows a commission charge rather than a markup. This indicates the firm executed the trade in what capacity?

• a.As a dealer making a market
• b.As an underwriter in a new issue
• c.As an agent for the customer✓
• d.As a principal from inventory

A commission is charged only when a firm acts as an agent (broker), arranging a trade between the customer and a third party. When a firm acts as a principal (dealer) trading from its own inventory, it charges a markup or markdown instead.Securities Exchange Act of 1934

A stock is trading on a 'when-issued' (WI) basis. What does this indicate?

• a.The security has been delisted from all exchanges and now trades only by private appointment
• b.The security may only be sold short and cannot be purchased until it settles
• c.The security pays no dividends because its issuer has suspended them indefinitely
• d.The security has been authorized but not yet issued, so trades are conditional on issuance✓

When-issued trading occurs for securities that have been authorized but not yet formally issued, such as shares from a stock split or a new municipal issue. Trades are made on a conditional basis and settle once the securities are actually issued.

On the NYSE, which participant is assigned to a particular stock to maintain a fair and orderly market and provide liquidity when natural buyers or sellers are absent?

• a.A designated market maker (specialist)✓
• b.The lead underwriter managing the syndicate
• c.The registrar that audits the share count
• d.The transfer agent that reissues certificates

A designated market maker (historically called a specialist) is responsible for maintaining a fair and orderly market in assigned securities, quoting bids and offers and committing capital when needed. Transfer agents and registrars perform recordkeeping functions, not trading.Securities Exchange Act of 1934

A stock trades at $100. An investor places a sell stop order at $92 and a separate sell limit order at $110. Which describes the intended strategy?

• a.The $92 stop protects gains on the upside while the $110 limit protects against downside loss
• b.Neither order may be entered while the other is open, since they conflict
• c.The stop limits downside loss at around $92 while the limit takes profit at $110 or higher✓
• d.Both orders execute immediately at the $100 market price, doubling the sale

The sell stop at $92 (below the market) triggers a sale to limit losses if the stock falls, while the sell limit at $110 (above the market) sells to capture profit if the stock rises. Together they bracket the position with downside protection and an upside target.

The NSCC and the DTC are both subsidiaries of which parent organization?

• a.The Depository Trust & Clearing Corporation (DTCC)✓
• b.The Securities and Exchange Commission (SEC)
• c.The New York Stock Exchange (NYSE Group)
• d.The Board of Governors of the Federal Reserve System

The DTCC is the holding company that owns both the NSCC (which clears and nets trades) and the DTC (which holds securities in book-entry form and settles transfers). Together they provide the core post-trade clearing and settlement infrastructure for U.S. securities.

A dealer quotes a stock at $20.00 bid and $20.10 ask. If the dealer buys from one customer and sells to another at these quotes, what is the dealer's gross profit per share?

• a.$40.10, the sum of the bid and ask
• b.$0.10, the spread between the bid and ask✓
• c.$20.10, the full ask price
• d.$0.00, because dealers do not profit from quotes

The dealer buys at the $20.00 bid and sells at the $20.10 ask, earning the $0.10 spread per share as compensation for providing liquidity. The spread, not a separate commission, is how a principal dealer is typically paid.

In equity trading, a standard 'round lot' of common stock is generally how many shares?

• a.1,000 shares
• b.10 shares
• c.1 share
• d.100 shares✓

A round lot for most common stocks is 100 shares, the standard trading unit. An order for fewer than 100 shares is an odd lot, and an order such as 250 shares is a mixed lot (a round lot plus an odd lot).

A stock is trading at $48. An investor believes that if it breaks above $52 it will continue climbing, and wants to buy automatically at that point. Which order accomplishes this?

• a.A sell stop order at $52
• b.A buy limit order at $52
• c.A buy stop order at $52✓
• d.A sell limit order at $52

A buy stop order placed above the current market ($52, above $48) triggers a purchase once the stock trades at or through $52, letting the investor enter on upside momentum. A buy limit at $52 would instead try to buy at $52 or lower and would fill immediately below the market.

Which self-regulatory organization is chiefly responsible for regulating broker-dealers and the over-the-counter securities market in the United States?

• a.The Board of Governors of the Federal Reserve System
• b.The Securities and Exchange Commission (SEC)
• c.The Depository Trust & Clearing Corporation
• d.The Financial Industry Regulatory Authority (FINRA)✓

FINRA is the self-regulatory organization that oversees broker-dealers and much of the OTC market, writing conduct rules and enforcing them under SEC oversight. The SEC is the federal government regulator, not an SRO, and the Federal Reserve handles monetary policy and banking.Securities Exchange Act of 1934

How does a stock dividend differ from a cash dividend for a shareholder?

• a.A stock dividend can only be paid by bond issuers to their registered bondholders of record on the payable date
• b.A stock dividend reduces the number of shares owned and raises the cost basis per share
• c.A stock dividend pays additional shares and lowers the cost basis per share, while a cash dividend pays money✓
• d.A stock dividend is taxed as ordinary income in the year received, while a cash dividend is tax-free

A stock dividend distributes additional shares rather than cash; the shareholder owns more shares, and the cost basis per share is reduced so total basis stays roughly the same. A cash dividend distributes money to shareholders.

A dealer quotes stock XYZ at $15.20 - $15.35. At what price would a customer's market order to sell be executed?

• a.$15.20, the bid price✓
• b.$15.275, the midpoint
• c.$15.35, the ask price
• d.$30.55, the sum of the quotes

A customer sells at the dealer's bid, which is the lower quote of $15.20, and buys at the dealer's ask of $15.35. The dealer captures the $0.15 spread as compensation.

Which statement about a forward stock split is TRUE?

• a.It is paid in cash to shareholders out of the company's retained earnings
• b.It increases the total market value of an investor's holding immediately on the ex-split date
• c.It reduces the number of shares an investor owns while raising the price per share
• d.It increases the number of shares outstanding and proportionally lowers the price per share✓

A forward split increases shares outstanding and proportionally reduces the price per share, so the total market value of a holding is unchanged immediately after the split. It is not a cash payment, and it increases, not decreases, the number of shares held.

An investor enters a limit order and specifies that it should remain in effect until it executes or is canceled, even across multiple trading days. This is known as what type of order?

• a.A good-till-canceled (GTC) order✓
• b.A day order, expiring at the close
• c.A fill-or-kill (FOK) order
• d.An immediate-or-cancel (IOC) order

A good-till-canceled (GTC) order stays active across multiple trading sessions until it is executed or the investor cancels it. A day order, by contrast, expires at the end of the trading day if it is not filled.

Before executing a short sale, what must a broker-dealer generally do with respect to the shares being sold?

• a.Obtain the issuer's written consent to the short sale
• b.Wait for an uptick in the stock before entering the order
• c.Mark the order 'long' once the customer agrees to cover
• d.Locate shares that can be borrowed for delivery✓

Under Regulation SHO Rule 203(b)(1), a firm may not accept or effect a short sale unless it has borrowed the security, has a bona fide arrangement to borrow it, or has reasonable grounds to believe it can be borrowed so that it can be delivered when due, and it must document that 'locate'. The issuer's consent is not part of the rule. There is no general uptick requirement for short sales; the alternative uptick rule (Rule 201) applies only to a covered stock that has fallen 10% or more from the prior close. Because the seller does not own the shares, the order must be marked 'short', not 'long', whatever the customer plans to do later.17 CFR 242.203(b)(1) (Regulation SHO)

During a company's initial public offering, an investor pays $18 per share for newly issued stock. Who receives the $18 per share?

• a.The investors who owned the shares before the offering
• b.The transfer agent that registers the new shareholders
• c.The national exchange that lists the shares for trading
• d.The issuing company (less underwriting compensation)✓

In a primary-market transaction such as an IPO, the proceeds go to the issuing company, which is raising capital, minus the underwriters' compensation. In secondary-market trades, by contrast, the proceeds flow to the selling investor, not the issuer.