SIE Knowledge of Capital Markets
Updated October 27, 2026
Knowledge of Capital Markets is 16% of the SIE. It covers how securities are issued and traded, who the market participants are, and basic economics: the Federal Reserve, business cycles and economic indicators. Here’s a summary, followed by free practice questions.
Primary and secondary markets
- Primary market: where issuers sell new securities to raise money, such as an initial public offering (IPO). Underwriters help bring the issue to market.
- Secondary market: where investors trade existing securities with each other, on exchanges or over the counter. The issuer doesn’t receive money from these trades.
Market participants
| Participant | Role |
|---|---|
| Broker | Acts as an agent for customers and earns a commission |
| Dealer | Trades for its own account as a principal and earns a markup or markdown |
| Market maker | A dealer that stands ready to buy and sell a security, quoting a bid and an ask |
| Underwriter | Helps an issuer sell a new issue |
The Federal Reserve
The Fed sets monetary policy. Its main tools:
- Open market operations: buying government securities adds money to the economy; selling them takes money out.
- The discount rate: the rate the Fed charges banks to borrow.
- Reserve requirements: how much banks must hold in reserve.
Easing (lower rates) tends to stimulate the economy; tightening (higher rates) tends to slow it and fight inflation.
Business cycles and indicators
The business cycle moves through expansion, peak, contraction and trough. GDP measures the economy’s total output. Leading indicators tend to change before the economy does; lagging indicators change after.
Free SIE capital markets practice questions
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In which market does a company sell new shares to investors to raise money?Answer: CNew issues, such as an IPO, are sold in the primary market, and the issuer receives the money. Later trades between investors are in the secondary market.
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A firm buys a security for its own inventory and sells it to a customer with a markup. In this trade, the firm is acting as a:Answer: DA firm trading for its own account is acting as a dealer (principal) and earns a markup or markdown. A broker acts as an agent and earns a commission.
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The Fed buys government securities in the open market. What is the likely effect?Answer: ABuying securities adds money to the banking system, which tends to push interest rates down and stimulate the economy.
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Which is the correct order of the business cycle?Answer: BThe business cycle moves from expansion to a peak, then contraction to a trough, then back to expansion.
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A market maker is:Answer: CMarket makers are dealers that provide liquidity by continuously quoting prices at which they'll buy (bid) and sell (ask).
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Which tool does the Federal Reserve use most often to carry out monetary policy?Answer: DOpen market operations, buying and selling government securities, are the Fed's most frequently used tool. Tax rates are fiscal policy, set by Congress.
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Under the Securities Act of 1933, what is the minimum cooling-off period after a registration statement is filed?Answer: BThe cooling-off period is at least 20 days. During it, no sales can be made, though indications of interest can be taken and a preliminary prospectus can be given out.
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A preliminary prospectus is often called a:Answer: CThe preliminary prospectus is called a red herring because of the red legend on its cover saying the registration isn't yet effective. It doesn't include the final offering price.
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In a firm commitment underwriting, who bears the risk of unsold shares?Answer: DIn a firm commitment, the underwriter buys the whole issue from the issuer and resells it, so it bears the risk of any shares it can't sell. In a best efforts underwriting, the underwriter acts only as an agent.
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A private placement under Regulation D is generally:Answer: ARegulation D provides exemptions from registration for private offerings, which are often sold mainly to accredited investors with limits on non-accredited buyers.
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Rule 144 mainly governs the sale of:Answer: BRule 144 sets the conditions, such as holding periods and volume limits, under which restricted securities and control securities (held by affiliates) can be sold publicly.
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The Federal Reserve raises the discount rate. What is the likely effect?Answer: CA higher discount rate makes borrowing more expensive for banks, which tends to push interest rates up and slow money supply growth.
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An inverted yield curve, where short-term yields are higher than long-term yields, is often seen as a sign of:Answer: DAn inverted yield curve is unusual and has often come before economic slowdowns, as investors expect lower rates ahead.
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Which is generally considered a leading economic indicator?Answer: ABuilding permits tend to change before the overall economy does, so they're a leading indicator. The duration of unemployment and the prime rate are lagging indicators.
Pass the SIE exam on your first try
- All 228 questions across capital markets, products and risks, trading and accounts, and regulation
- An explanation for every answer, with the law or rule behind it
- Unlimited full 75-question practice exams, with each part in its real share