The Securities Industry Essentials (SIE) Exam is a foundational test for prospective securities industry professionals. A thorough understanding of key industry terms is essential for success. This glossary provides clear definitions and explanations of pertinent vocabulary and acronyms to assist in this preparation.
Detailed Explanations
Common Stock: Represents ownership in a corporation, giving investors voting rights and potential dividends.
- Example: John purchased common stock in XYZ Corporation, granting him voting power on corporate policies.
Preferred Stock: A class of ownership in a corporation with higher claims on assets and earnings than common stock, typically without voting rights.
- Example: Unlike common stockholders, preferred stockholders receive dividend payments before dividends can be issued to common stockholders.
Bond: A fixed income instrument representing a loan made by an investor to a borrower (typically corporate or governmental).
- Example: Sarah invested in government bonds, lending money to the state in exchange for periodic interest payments.
Visual Aids
Here is a diagram illustrating the relationship between different types of securities:
graph LR
A[Common Securities] --> B(Common Stock)
A --> C(Preferred Stock)
C --> D[Preferred Stockholder Priority]
B --> E[Common Stockholder Voting Rights]
A --> F(Bonds)
F --> G[Fixed Income]
Summary Points
- Common Stock and Preferred Stock are both equity securities but differ in terms of voting rights and dividend payments.
- Bonds are debt securities providing regular interest payments to investors but do not confer ownership rights.
Glossary
- Common Stock: Equity interest with voting rights.
- Preferred Stock: Equity interest prioritized in dividend payments, typically without voting rights.
- Bond: Loan to a corporation or government, offering regular interest payments.
- Dividend: Payment made by a corporation to its shareholders, usually in the form of cash or additional stock.
- Securities: Financial instruments that represent some form of financial value.
Additional Resources
For further study, consider the following:
- Books: “Investments” by Bodie, Kane, and Marcus.
- Online Courses: Coursera and Khan Academy offer foundational finance courses.
- Websites: Visit FINRA’s official website for regulatory updates and educational materials.
### Which of the following is a debt security?
- [ ] Common Stock
- [ ] Preferred Stock
- [x] Bond
- [ ] Convertible Security
> **Explanation:** A bond is a debt security, representing a loan made by an investor to a borrower.
### Common stockholders typically have which of the following rights?
- [x] Voting Rights
- [ ] Guaranteed Dividend Payments
- [ ] Priority in the event of liquidation
- [ ] Convertible options
> **Explanation:** Common stockholders typically have voting rights on company matters, unlike preferred stockholders who may not.
### What distinguishes preferred stock from common stock?
- [ ] Voting rights
- [x] Priority in dividend payments
- [ ] Higher risk
- [ ] Lower market volatility
> **Explanation:** Preferred stockholders receive dividends before common stockholders, giving them priority in profit distribution.
### A bondholder is considered a(n) _____ of the corporation.
- [x] Creditor
- [ ] Owner
- [ ] Investor
- [ ] Shareholder
> **Explanation:** As a creditor, a bondholder is lending money to the issuer, unlike shareholders who own a part of the entity.
### What is typically true about common stock?
- [x] Offers voting rights
- [ ] Guaranteed dividends
- [x] Greater growth potential
- [ ] Secured by company assets
> **Explanation:** Common stock typically provides voting rights and the potential for capital appreciation, though without guaranteed dividends.
### Which security generally has a fixed interest payment schedule?
- [x] Bond
- [ ] Common Stock
- [ ] Preferred Stock
- [ ] Derivative
> **Explanation:** Bonds generally provide fixed interest payments to investors over their term.
### Preferred stock is more likely than common stock to:
- [x] Pay regular dividends
- [ ] Offer voting rights
- [x] Be considered an equity instrument
- [ ] Have high growth potential
> **Explanation:** Preferred stock often pays regular dividends and, like common stock, it is an equity instrument.
### Which term best describes ownership in a corporation?
- [x] Equity
- [ ] Debt
- [ ] Liability
- [ ] Security
> **Explanation:** Equity refers to the ownership interest held by shareholders in a corporation.
### True or False: All bondholders share equal rights with shareholders.
- [ ] True
- [x] False
> **Explanation:** Bondholders are creditors and do not have ownership rights or voting rights like shareholders.
### True or False: Preferred stockholders have voting rights similar to common stockholders.
- [ ] True
- [x] False
> **Explanation:** Preferred stockholders generally do not have voting rights, which are typically reserved for common stockholders.