Top Ten Concepts on the Series 7 Exam

Check out the top ten concepts you will see on the Series 7 exam! Continue reading

10. Taxation

If you get an excited feeling in your stomach about halfway through April, and you gladly offer to help your friends do their taxes, then the taxation section of the Series 7 might be easy for you. For the rest of us, it can be difficult to keep track of all the specific concepts that it’s necessary to know, including:

• Taxation of dividends, interest, and capital gains
• Realized versus unrealized capital gains
• Wash sales
• Cost basis of inherited shares and gifted shares
• Annual gift tax
• Taxation of mutual funds, annuities, and retirement accounts

But, as with everything else on the Series 7 exam, just because it’s not easy doesn’t mean you can’t do it. If you put in the time, you will learn these concepts, and the tax questions on the test won’t come as a surprise.

And once you have passed the exam, you will use your understanding of taxation to make the most suitable recommendations for your clients. So what’s not to love about studying taxation?

For a sample Series 7 taxation question, click here.

9. Securities Regulations

If you’re pursuing a job in the securities industry, you need to know the relevant securities regulations, or else you’re going to get yourself into trouble—with your boss, with your clients, and with the law. So it’s no coincidence that securities regulations feature prominently on the Series 7 exam.

Securities regulations are easier to understand if you keep in mind that, in some way, they’re all designed to protect the little guy: the investor.

Take, for instance, the Securities Act of 1933 and the Securities Exchange Act of 1934. They were passed into law shortly after the stock market crash of 1929, and they were designed to help protect investors and prevent another crash.

The 1933 Act, also known as the Paper Act, requires issuers to disclose material information to investors to help them make well-informed investment decisions. The 1934 Act, also known as the People Act, regulates the secondary market and provides rules that help protect investors who are trading securities.

So when you are reading about rules, keep asking yourself, “How does this help the investor?” Then learning these rules will be a snap!

For a sample Series 7 securities regulations question, click here.

8. Equity Securities

Equity comes down to one thing—ownership. Equity securities are a way of owning a piece of a company and participating in that company’s gains. And the gains are potentially unlimited!

There are many kinds of equity securities, and you’ll need to be familiar with all of them for the Series 7 exam. They include:

• Common stock
• Preferred stock
• Warrants
• Rights
• American depository receipts (ADRs)
• REITs

Then you’ll need to learn the rights of stockholders, the settlement cycle associated with equity securities, the rules and regulations regarding dividends, and much more.

If that list seems overwhelming, look on the bright side. More equity securities means more variety for your future customers, which means you can help them invest in the equity securities that are most suitable for them. It’s a win-win.

For a sample Series 7 equity securities question, click here.

7. Mutual Funds and Annuities

Two of the most important investments you will learn about while studying for the Series 7 are mutual funds and annuities.

A mutual fund is a portfolio of securities that is managed, actively or passively, by an investment adviser. Investors can buy shares of the portfolio and participate in any gains that the fund makes. Because mutual funds invest in a portfolio of securities, investors are protected from the risk of an individual company failing. This kind of protection is called diversification, which is a concept you will want to know for the exam.

There are several different kinds of mutual funds, each of which will be suitable for different investors:

• Equity funds (including growth, income, growth & income, value, blend, international, and sector mutual funds)
• Balanced funds
• Bond funds
• Money market funds

Additionally, different mutual funds sell different kinds of shares, the most common of which are A shares, B shares, and C shares.

Sound like a lot to remember? That’s because it is. That’s why it’s good to start studying early.

Annuities are another important investment that you will need to understand for the Series 7 exam. Annuities are investment vehicles meant to provide steady income to the investor after retirement.

An annuity is a contract between an investor and an insurance company, and it works like this: the investor gives a sum of money to the insurance company, and the insurance company pays it back at a predetermined future date. There are a few different ways to purchase an annuity:

• Single premium deferred annuity—you pay all your money up front and receive payments in the future
• Periodic payment deferred annuity—you make payments over a period of time and receive payments in the future
• Immediate annuity—you pay all your money up front and immediately begin to receive payments

You’ll also need to know the difference between fixed and variable annuities and the accumulation and annuitization phases, not to mention the different kind of payouts:

• Life income
• Life with period certain
• Joint life with last survivor

Mutual funds and annuities comprise a formidable amount of material, but don’t get overwhelmed. With help from Solomon, you can do this!

For a sample Series 7 annuities question, click here.

6. Accounts

Although your weird Uncle Fred might believe that the best place to keep cash is under the mattress, securities, for the most part, stay in an account. Setting up and maintaining those accounts is one of the important functions of a broker-dealer.

So it should come as no surprise that there are many kinds of accounts, and for the Series 7 exam you need to be familiar with all of them, including:

• Individual accounts
• Joint accounts
• Institutional accounts
• Prime brokerage accounts
• Transfer on death (TOD) accounts
• Partnership accounts

Once a customer has an account, who gets to buy and sell securities in it? In other words, who has trading authority? And is the trading authority limited or full? You’ll need to know the difference to pass the Series 7.

Does the customer want to allow her financial advisor to trade in the account? If so, she will need a discretionary account.

Will the customer pay for all her securities in cash? This is known as a cash account.

Or will she pay for part of the security up front and take a loan from the broker-dealer for the remainder? This is known as a margin account.

If the customer wants a margin account, she will need to sign a margin agreement, and she will also need to provide cash or securities to secure the loans.

Is your head spinning yet? Well, hold on tight because we’re only halfway through our top ten list!

For a sample Series 7 accounts question, click here.

5. FINRA Conduct Rules

As far as we know, most people who work in the securities industry are human. (This, of course, excludes noted extraterrestrial Warren Buffet.) And like all humans, they’re likely to be tempted to do the wrong thing sometimes.

That’s why FINRA has an extensive list of rules that govern the conduct of people who work in the securities industry. The rules make it clear how individuals are expected to act, and they help to ensure that investors won’t be tricked into losing all their money.

While these rules are great for investors, they can create some difficulties for people studying for the Series 7 exam. It’s a lot to remember! The rules cover things like:

• Communications with the public
• Required disclosures
• Conducting business with the public
• Prohibited activities

And the prohibited activities you will need to know about include:

• Insider trading
• Selling away
• Churning
• Front running
• Interpositioning
• And many more!

So while we know that you would never break any of the rules, you still have to memorize them for the test. But it’s worth it: after you get your Series 7 license, you will feel like the Ruler of the Rules.

For a sample Series 7 conduct rules question, click here.

4. Debt Securities

Sometimes the company credit card isn’t enough, so corporations will raise money by issuing debt securities. The most important debt security that you will need to know about for the Series 7 exam is the bond.

When an investor buys a bond, it’s like getting an IOU from the issuer. The issuer promises to pay back the principal at a future date, usually with some interest payments along the way.

But before you make the mistake of thinking that learning about bonds is easy, keep in mind that you will have to know how a bond’s credit rating relates to its coupon rate, how its market value relates to its yield, and what kinds of investors are the best fit for different types of bonds.

And there are nearly as many types of bonds as there are colors in a paint store. The list includes:

• Mortgage bonds
• Equipment trust certificates
• Collateral trust bonds
• Debentures
• Subordinated debentures
• Convertible debentures
• Junk bonds

That’s not to mention zero coupon bonds, which don’t make interest payments along the way but are still taxed on “phantom interest.” Spooky.

But you know what’s not spooky? This sample Series 7 debt securities question.

3. Municipal Securities

Municipal securities are bonds, notes, and other types of securities issued by states, cities, counties and other municipal entities to fund their operations. Like the good kids at school, they’re not as heavily regulated as other securities. But that doesn’t mean they’re not regulated at all. You’ll need to be familiar with the MSRB, which makes the rules (lots of them!) for the municipal securities industry.

And speaking of the MSRB, there is a host of other municipal security acronyms you’ll need to know before you’re ready to take the Series 7 exam, including:

• COPs
• BABs
• OIDs
• TANs
• RANs
• TRANs
• GANs
• BANs
• VRDOs
• NIC
• TIC
• EMMA

And that’s not all. You’ll need to be able to answer questions about general obligation bonds and revenue bonds and how municipal issuers pay them off.

Municipal securities making you feel insecure? That’s why we recommend 100 hours of study time for the Series 7 exam.

For a sample Series 7 municipal securities question, click here.

2. Suitability

If you were making dinner plans with your vegan friend, you wouldn’t recommend a barbecue joint. (At least not if you wanted to stay friends.)

Similarly, as a registered representative of a broker-dealer, you don’t want to recommend an unsuitable investment to a client.

According to the FINRA suitability rule, a firm must conduct a suitability analysis when opening a customer account, and then must meet three obligations when recommending investments:

• Reasonable basis obligation
• Customer-specific obligation
• Quantitative suitability obligation

You will want to understand all three of these obligations in depth in order to be prepared for the Series 7 exam, which will ask you many, many questions about suitability.

Part of determining the suitability of an investment is examining the potential risks associated with the investment. For the exam, you’ll need to be familiar with a litany of risks, including:

• Systematic risk
• Unsystematic risk
• Credit risk
• Interest rate risk
• Purchasing power risk
• Call risk
• Liquidity risk
• Political risk
• Currency risk

You’ll need to understand which of these risks are acceptable for different investors given their risk tolerance.

Paying attention to suitability is required, but it’s also just good business. Recommending suitable investments will ensure that your clients trust you and stick with you for a long time.

For a sample Series 7 suitability question, click here.

1. Options

There’s a reason that Chinese buffets are so popular—people love options.

Options are also popular in the securities industry, and you are likely to see a number of questions about them on the Series 7 exam.

When you buy an option, you’re buying the right to either buy or sell a particular security at an agreed-upon price before an agreed-upon expiration date. But it’s important to remember that you are not obligated to buy or sell the security. You can let the option expire unused if you want—that’s why it’s called an option, after all.

You even have options for options—American-style options, European-style options, call options, put options; you can go long an option, you can go short an option; your option can be in the money, at the money, or out of the money; and if you’re selling (also known as writing) an option, you can write a covered option or a naked option (which has nothing to do with clothes and everything to do with risk).

So maybe studying options is less fun than going to a Chinese buffet, but you can bet that once you’ve mastered the fundamentals, you’ll be hungry for more.

For a sample Series 7 options question, click here.

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