Free FINRA SIE Practice Test

20 SIE practice questions with answers

The complete questions, correct answers, and explanations for this free practice set are rendered below for study and search access. Start the interactive test above when you are ready to answer a fresh set one at a time.

1. Capital MarketsQuestion 1

   Which federal agency has primary responsibility for enforcing the federal securities laws and regulating the securities industry?

   1. A

      Option A: Federal Deposit Insurance Corporation (FDIC)

   2. B

      Option B: Financial Industry Regulatory Authority (FINRA)

   3. C

      Option C: Federal Reserve Board (FRB)

   4. D

      Option D: Securities and Exchange Commission (SEC)

      Correct answer

   Explanation

   The SEC was created by the Securities Exchange Act of 1934 and has primary responsibility for enforcing federal securities laws, regulating the securities industry, and protecting investors. FINRA is a self-regulatory organization (SRO) that operates under SEC oversight, not a government agency. The FRB oversees monetary policy, and the FDIC insures bank deposits.

2. Capital MarketsQuestion 2

   FINRA is best described as which of the following?

   1. A

      Option A: A state securities regulator

   2. B

      Option B: A federal government agency

   3. C

      Option C: A self-regulatory organization (SRO)

      Correct answer
   4. D

      Option D: A division of the U.S. Treasury

   Explanation

   FINRA is the largest self-regulatory organization (SRO) for broker-dealers in the United States. It is a non-governmental organization authorized by Congress to regulate the securities industry under SEC oversight. FINRA writes and enforces rules governing broker-dealer conduct and administers qualification exams such as the SIE.

3. Capital MarketsQuestion 3

   The Municipal Securities Rulemaking Board (MSRB) writes rules for which of the following?

   1. A

      Option A: Federal government bond dealers

   2. B

      Option B: Equity market makers

   3. C

      Option C: Municipal securities dealers and municipal advisors

      Correct answer
   4. D

      Option D: Corporate bond dealers only

   Explanation

   The MSRB writes rules governing municipal securities dealers, municipal advisors, and banks that deal in municipal securities. However, the MSRB does not have enforcement authority. FINRA enforces MSRB rules for broker-dealers, while banking regulators enforce them for banks. The MSRB was created by the Securities Acts Amendments of 1975.

4. Products and RisksQuestion 4

   When interest rates rise, bond prices generally:

   1. A

      Option A: Fall due to the inverse relationship between interest rates and bond prices

      Correct answer
   2. B

      Option B: Rise for government bonds but fall for corporate bonds

   3. C

      Option C: Rise as well

   4. D

      Option D: Remain unchanged

   Explanation

   Bond prices and interest rates have an inverse relationship. When interest rates rise, newly issued bonds offer higher coupon rates, making existing bonds with lower coupons less attractive. To compete, the market price of existing bonds must fall until their yield matches the new higher rates. This relationship applies to all types of bonds.

5. Products and RisksQuestion 5

   Which of the following rights is typically associated with common stock ownership?

   1. A

      Option A: Voting rights on corporate matters

      Correct answer
   2. B

      Option B: Guaranteed fixed dividend payments

   3. C

      Option C: Guaranteed return of principal

   4. D

      Option D: Priority claim in bankruptcy over bondholders

   Explanation

   Common stockholders typically have voting rights on matters such as electing the board of directors and approving major corporate actions. Common stock does not guarantee dividends or return of principal, and common stockholders are last in line during bankruptcy.

6. Products and RisksQuestion 6

   In the event of a corporate liquidation, which of the following has the LAST claim on assets?

   1. A

      Option A: Unsecured creditors

   2. B

      Option B: Common stockholders

      Correct answer
   3. C

      Option C: Secured bondholders

   4. D

      Option D: Preferred stockholders

   Explanation

   In liquidation, the order of priority is: secured creditors, unsecured creditors, subordinated debt holders, preferred stockholders, and finally common stockholders. Common stockholders have the residual claim and are paid last, if anything remains.

7. Products and RisksQuestion 7

   A company issues cumulative preferred stock paying a $4 annual dividend. If the company missed dividends for 2 years and now wants to pay common stock dividends, how much must it pay preferred shareholders first per share?

   1. A

      Option A: $4

   2. B

      Option B: $8

   3. C

      Option C: $12

      Correct answer
   4. D

      Option D: $16

   Explanation

   Cumulative preferred stock requires all missed (arrears) dividends to be paid before common stockholders can receive any dividend. Two years of missed dividends ($4 x 2 = $8) plus the current year dividend ($4) totals $12 per share that must be paid to preferred shareholders first.

8. Products and RisksQuestion 8

   Which type of preferred stock allows the issuer to buy back shares at a predetermined price after a specified date?

   1. A

      Option A: Callable preferred

      Correct answer
   2. B

      Option B: Cumulative preferred

   3. C

      Option C: Participating preferred

   4. D

      Option D: Convertible preferred

   Explanation

   Callable (or redeemable) preferred stock gives the issuing corporation the right to repurchase the shares at a predetermined call price after a specified date. This feature benefits the issuer, especially when interest rates decline, as they can retire higher-dividend shares.

9. Products and RisksQuestion 9

   An investor holds convertible preferred stock with a conversion ratio of 5:1. If the preferred stock is trading at $110 and the common stock is trading at $20, what is the parity price of the preferred stock?

   1. A

      Option A: $22

   2. B

      Option B: $100

      Correct answer
   3. C

      Option C: $110

   4. D

      Option D: $550

   Explanation

   The parity price of the preferred stock is calculated by multiplying the common stock price by the conversion ratio: $20 x 5 = $100. Since the preferred is trading at $110, which is above parity ($100), there is a premium of $10 over the conversion value.

10. Products and RisksQuestion 10

    Participating preferred stockholders are entitled to:

    1. A

       Option A: Priority over bondholders in liquidation

    2. B

       Option B: Additional dividends beyond the stated rate if the company is highly profitable

       Correct answer
    3. C

       Option C: A guaranteed minimum return on investment

    4. D

       Option D: Voting rights equal to common stockholders

    Explanation

    Participating preferred stock allows holders to receive their stated dividend plus additional dividends if the company earnings exceed a certain level. This feature gives preferred holders a chance to participate in the company's extraordinary profits alongside common stockholders.

11. Products and RisksQuestion 11

    What is the primary advantage of limited liability for common stockholders?

    1. A

       Option A: Stockholders' personal assets cannot be seized to satisfy corporate debts

       Correct answer
    2. B

       Option B: Stockholders are guaranteed to receive dividends

    3. C

       Option C: Stockholders have unlimited upside potential on their investment

    4. D

       Option D: Stockholders can never lose money on their investment

    Explanation

    Limited liability means that a common stockholder's maximum loss is limited to their original investment in the stock. Their personal assets (house, savings, etc.) cannot be used to pay off the corporation's debts or obligations. They can still lose their entire investment if the stock goes to zero.

12. Products and RisksQuestion 12

    An American Depositary Receipt (ADR) represents:

    1. A

       Option A: A receipt for U.S. Treasury securities held in trust

    2. B

       Option B: Shares of a U.S. company traded on foreign exchanges

    3. C

       Option C: A certificate of deposit issued by an American bank

    4. D

       Option D: Shares of a foreign company held by a U.S. depositary bank

       Correct answer

    Explanation

    ADRs are negotiable certificates issued by a U.S. depositary bank representing a specified number of shares of a foreign company. They allow U.S. investors to invest in foreign companies without dealing with foreign exchanges, currencies, or settlement processes directly.

13. Trading and AccountsQuestion 13

    A company declares a cash dividend. Which of the following dates determines who is entitled to receive the dividend?

    1. A

       Option A: Settlement date

    2. B

       Option B: Declaration date

    3. C

       Option C: Record date

       Correct answer
    4. D

       Option D: Payment date

    Explanation

    The record date is the date on which an investor must be registered as a shareholder on the company's books to be entitled to the dividend. Under T+1, the ex-dividend date is generally the same day as the record date, or the preceding business day when the record date is a non-delivery date.

14. Trading and AccountsQuestion 14

    A 2-for-1 stock split on a stock trading at $80 would result in:

    1. A

       Option A: The same number of shares at $40 each

    2. B

       Option B: Half as many shares at $160 each

    3. C

       Option C: Twice as many shares at $80 each

    4. D

       Option D: Twice as many shares at $40 each

       Correct answer

    Explanation

    In a 2-for-1 stock split, the number of outstanding shares doubles while the price per share is halved. An investor holding 100 shares at $80 would now hold 200 shares at $40. The total market value remains the same ($8,000 in both cases). Stock splits are designed to make shares more accessible to investors.

15. Trading and AccountsQuestion 15

    When a company issues a 10% stock dividend, an investor holding 200 shares at $50 per share will have:

    1. A

       Option A: 200 shares at $55 per share

    2. B

       Option B: 210 shares at $50 per share

    3. C

       Option C: 220 shares at $50 per share

    4. D

       Option D: 220 shares at approximately $45.45 per share

       Correct answer

    Explanation

    A 10% stock dividend adds 10% more shares (200 x 10% = 20 new shares = 220 total shares). The total value remains the same ($10,000), so the new price per share is $10,000 / 220 = approximately $45.45. Stock dividends increase the number of shares but reduce the price proportionally, keeping the total value unchanged.

16. Trading and AccountsQuestion 16

    An investor owns 500 shares of a company whose board declares a reverse stock split of 1-for-5. After the split, the investor will own:

    1. A

       Option A: 2,500 shares at a lower price

    2. B

       Option B: 500 shares at the same price

    3. C

       Option C: 50 shares at a higher price

    4. D

       Option D: 100 shares at a higher price

       Correct answer

    Explanation

    In a 1-for-5 reverse stock split, every 5 shares are consolidated into 1 share. So 500 shares / 5 = 100 shares. The price per share increases proportionally (by 5x) to maintain the same total market value. Reverse splits are often used by companies to raise their stock price above exchange minimum listing requirements.

17. Trading and AccountsQuestion 17

    An investor owns 100 shares of XYZ at $50. XYZ declares a 5:4 stock split. After the split, the investor has:

    1. A

       Option A: 100 shares at $40

    2. B

       Option B: 125 shares at $50

    3. C

       Option C: 125 shares at $40

       Correct answer
    4. D

       Option D: 80 shares at $62.50

    Explanation

    In a 5:4 stock split, for every 4 shares an investor owns, they receive 5 shares. So 100 shares x (5/4) = 125 shares. The price adjusts proportionally: $50 x (4/5) = $40. The total value remains $5,000 (125 x $40 = 100 x $50). This is a forward split that increases shares and reduces the per-share price.

18. Trading and AccountsQuestion 18

    A customer places an order to buy 100 shares of XYZ at the current market price. What type of order is this?

    1. A

       Option A: Limit order

    2. B

       Option B: Market order

       Correct answer
    3. C

       Option C: Stop order

    4. D

       Option D: Stop-limit order

    Explanation

    A market order is an order to buy or sell a security immediately at the best available current price. Because no price is specified, it guarantees execution but not the price. This is the most basic and common order type.

19. Regulatory FrameworkQuestion 19

    A registered representative at a FINRA member firm discovers a colleague engaging in insider trading. Under FINRA rules, the representative should:

    1. A

       Option A: Wait until the next compliance audit to mention it

    2. B

       Option B: Report the activity to compliance or a supervisor

       Correct answer
    3. C

       Option C: Ignore it since it is not their responsibility

    4. D

       Option D: Confront the colleague directly and demand they stop

    Explanation

    A registered representative who discovers suspected insider trading should promptly escalate it to compliance or a supervisor under the firm's written supervisory procedures (WSPs). The WSPs govern how the firm handles the report.

20. Regulatory FrameworkQuestion 20

    Which of the following individuals is considered a "registered person" under FINRA rules?

    1. A

       Option A: An associated person who has passed a qualifying exam and is registered with FINRA

       Correct answer
    2. B

       Option B: A software developer who maintains the firm's trading platform

    3. C

       Option C: An attorney who provides legal advice to a broker-dealer

    4. D

       Option D: A receptionist at a broker-dealer who greets clients

    Explanation

    A registered person is an associated person of a broker-dealer who has passed a qualifying examination (such as the SIE and a representative-level exam) and is registered with FINRA. Receptionists, attorneys, and IT staff are typically not registered unless they perform functions requiring registration.