Tag: Series 7 Exam

How to Pass the FINRA Series 7 Exam

What can you do with a Series 7 license? What is the exam like and how should you prepare for it? Solomon answers your top Series 7 questions. Continue reading

What does the Series 7 exam permit me to do?

The Series 7, also known as the General Securities Representative Qualification Exam, was developed by the Financial Industry Regulatory Authority (FINRA) to assess the skills and competency of entry-level registered representatives as general securities representatives. Passing the Series 7 exam qualifies you to solicit, purchase, and/or sell all securities products, including corporate securities, municipal fund securities, options, direct participation programs, investment company products, and variable contracts. As a result of this broad scope, the Series 7 exam is one of the longest and most challenging securities industry exams. The good news, however, is that you will be permitted to perform an impressive range of activities with a Series 7 license. The following are covered activities and products: 

    • Public offerings and/or private placements of corporate securities (stocks and bonds)
    • Rights
    • Warrants
    • Mutual funds
    • Money market funds
    • Unit investment trusts (UITs)
    • Exchange-traded funds (ETFs)
    • Real estate investment trusts (REITs)
    • Options on mortgage-backed securities
    • Government securities
    • Repos and certificates of accrual on government securities
    • Direct participation programs (DPPs)
    • Venture capital
    • Sale of municipal securities
    • Hedge funds
Do I need to take any other securities licensing exams?

In order to be registered as a general securities representative, you must pass two exams: the Series 7 and the FINRA Securities Industry Essentials (SIE) exam. While the Series 7 requires you to be hired and sponsored by a FINRA-member firm, the SIE does not. Therefore, even though you can technically take them in either order, it makes sense to take the introductory-level SIE exam before taking the Series 7 exam.

About the Exam

The Series 7 exam consists of 125 scored and 10 un-scored multiple-choice questions covering the four sections of the FINRA Series 7 content outline. The 10 additional un-scored questions are ones that the exam committee is trying out. These are unidentified and are distributed randomly throughout the exam.

Note: Scores are rounded down to the next lowest whole number (e.g. 71.9% would be a final score of 71% – not a passing score for the Series 7 exam).

Topics Covered on the Exam

The questions on the Series 7 exam cover the main job functions of a general securities representative, as determined by FINRA:

FINRA updates its exam questions regularly to reflect the most current rules and regulations. Solomon recommends that you print out the current version of the FINRA Series 7 Content Outline and use it in conjunction with the Solomon Series 7 Study Guide. The Content Outline is subject to change without notice, so make sure you have the most recent version.

Question Types on the Exam

The Series 7 exam consists of multiple-choice questions, each with four options. You will see these question structures:

Closed Stem Format:

This item type asks a question and gives four possible answers from which to choose.

When interest rates go up, what will happen to the price of typical preferred stock?

    1. It will go up.
    2. It will go down.
    3. It will stay the same.
    4. It is unrelated to interest rates, so it is impossible to tell.
Incomplete Sentence Format:

This kind of question has an incomplete sentence followed by four options that present possible conclusions.

The owner of a house with a market value of $450,000 and an assessed value of $300,000, and with an ad valorem tax of 4 mills would pay a property tax of:

    1. $1,800
    2. $1,200
    3. $12,000
    4. $18,000
“EXCEPT” Format:

This type requires you to recognize the one choice that is an exception among the four answer choices presented.

VRDOs may have their rates automatically reset at any of the following frequencies except:

    1. Daily
    2. Weekly
    3. Monthly
    4. Yearly
Complex Multiple-Choice (“Roman Numeral”) Format:

For this question type, you see a question followed by two or more statements identified by Roman numerals. The four answer choices represent combinations of these statements. You must select the combination that best answers the question.

A Build America Bond may:

    1. Provide a 35% subsidy on the interest as a tax deduction
    2. Reimburse the issuer for 35% of the interest paid to investors
    3. Provide a 35% subsidy on the interest as a tax credit
    4. Provide a 35% subsidy on the interest as an additional interest payment
    1. I or II
    2. I or IV
    3. II and III
    4. III and IV

This format is also used in items that ask you to rank or order a set of items from highest to lowest (or vice versa), or to place a series of events in the proper sequence.

The flow of funds requirement for a municipality with a net revenue pledge usually prioritizes the following funds in which order, going from highest priority to lowest priority?

    1. Debt service fund
    2. Debt service reserve fund
    3. Operations and maintenance fund
    1. I, II, III
    2. III, I, II
    3. II, I, III
    4. III, II, I

Answers: B, B, D, C, B

For an even better idea of the possible question types you might encounter on the Series 7 exam, try Solomon Exam Prep’s free Series 7 Sample Quiz.

Taking the Series 7 Exam

The Series 7 exam can be taken at a Prometric test center or remotely online using Prometric’s ProProctor system. If taking the exam at a test center, you will be given a dry erase pen and whiteboard or a pen and scratch paper, and a basic electronic calculator. You cannot bring notes, paper, or your own calculator. Phones and watches are not permitted either. Due to COVID-19, you are required to wear a mask the whole time you are at the test center. Solomon recommends taking timed practice exams in the Series 7 Exam Simulator while wearing a mask to get used to this added discomfort.

If you’re thinking about taking the test from the comfort of your own home or office with ProProctor, it’s important to be aware of the strict procedures you must follow. See this user guide for complete details. And for a first-hand account of the remote testing experience, read this Solomon blog post.

Test-Taking Tips

Whether you take the exam in person or online, it helps to keep some test-taking strategies in mind. You have an average of slightly more than a minute and a half per question, so don’t spend too long on one question—this may cause you to run out of time and not get to other questions you know. If you don’t know the answer to a question, guess at the answer and “flag” it. You will not be penalized for guessing.

After you have finished all the questions, you can come back to any flagged questions. Not only does this strategy allow you to efficiently answer the ones you know, but it can also help because you might learn something later in the exam that may help you answer an earlier question. Just remember to save enough time to return to the questions you didn’t answer. However, it is not a good idea to simply skip all of the difficult questions with the intention of answering them later. You should make a serious effort to answer each question before moving on to the next one, as your thoughts are often clearer early on in the exam-taking process than they will be later.

How to Study for the Series 7 Exam

Follow Solomon Exam Prep’s proven study system:
    • Read and understand. Read the Solomon Study Guide, carefully. The Series 7 is a knowledge test, not an IQ test. Many students read the Study Guide two or three times before taking the exam. To increase your ability to focus while reading, or as an alternative to reading, listen to the Solomon Series 7 Audiobook, which is a word-for-word reading of the Study Guide.
    • Answer practice questions in the Solomon Exam Simulator. When you’re done with a chapter in the Study Guide, take 4–6 chapter quizzes in the Solomon Series 7 Online Exam Simulator. Use these quizzes to give yourself practice and to find out what you need to study more. Make sure you read and understand the question rationales. When you’re finished reading the entire Study Guide, review your handwritten notes once more. Then, and only then, start taking full practice exams in the Exam Simulator. Aim to pass at least six full practice exams and try to get your Solomon Pass Probability™ score to at least an 80%; when you reach that point, you are probably ready to sit for the Series 7 exam.
Use these effective study strategies:
    • Take handwritten notes. As you read the Study Guide, take handwritten notes and review your notes every day for 10 to 15 minutes. Studies show that the act of taking handwritten notes in your own words and then reviewing them strengthens learning and memory.
    • Make flashcards. Making your own flashcards is another powerful and proven method to reinforce memory and strengthen learning. Solomon also offers digital flashcards for the Series 7 exam.
    • Research. Research anything you do not understand. Curiosity = learning. Students who take responsibility for their own learning by researching anything they do not understand get a deeper understanding of the subject matter and are much more likely to pass.
    • Become the teacher. Studies show that explaining what you are learning greatly increases your understanding of the material. Ask someone in your life to listen and ask questions. If you don’t have anyone, explain it to yourself. Studies show that helps almost as much as explaining to an actual person (see Solomon’s previous blog post to learn more about this strategy!).
Take advantage of Solomon’s supplemental tools and resources:
    • Use all the resources. The Series 7 Resources folder in your Solomon student account has helpful study tools, including several documents that summarize important exam concepts. There are also detailed study schedules that you can print out – or use the online study schedule and check off tasks as you complete them.
    • Watch the Video Lecture. This provides a helpful review of the key concepts in each chapter after reading the Solomon Study Guide. Take notes to help yourself stay focused.
  • Good practices while studying:
    • Take regular breaks. Studies show that if you are studying for an exam, taking regular walks in a park or natural setting significantly improves scores. Walks in urban areas or among people did not improve test scores.
    • Get enough sleep during the period when you are studying. Sleep consolidates learning into memory, studies show. Be good to yourself while you are studying for the Series 7: exercise, eat well, and avoid activities that will hurt your ability to get a good night’s sleep.

You can pass the FINRA Series 7 Exam! It just takes focus and determination. Solomon Exam Prep is here to support you on your path to becoming a general securities representative.

To explore all Solomon Exam Prep’s Series 7 study materials, including product samples, visit the Solomon website here.

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Tips for Answering Basic Series 7 Options Questions

Struggling with options questions on the FINRA Series 7 exam? Here are ten tips to getting basic Series 7 options questions right. Continue reading

Updated July 6, 2022

Options are a frequently tested topic on the FINRA Series 7 exam. While there are some difficult options questions that involve calculations and identifying different types of spreads, there are also several basic-type options questions. Remembering a few essential points will help you get these more basic questions correct on the exam. Let’s go through some options basics that could be tested on the Series 7 exam.

Good to Know Definitions:

Options Contract: A contract that allows the holder to buy or sell 100 shares of an underlying security at a given price by a given date.

Underlying (security) = refers to the security that must be delivered when an options contract is exercised 

Expiration Date: The last day an options contract may be freely exercised before it becomes void. The last day is always the third Friday of the month.

Exercise or Strike Price: The price at which an options holder may buy or sell an underlying security.

Premium: The price paid to an option writer for the right to exercise the option before it expires. 

Breakeven Point: The market price of an underlying stock at which the investor neither makes nor loses money

Premiums and Maximum Potential Gain and Maximum Potential Loss

One options topic that comes up often is maximum potential gain and maximum potential loss for different types of options. A concept related to maximum gain and maximum loss that’s easy to remember is that the premium received is the maximum potential gain for an option seller, while the premium paid is the maximum potential loss for an option buyer.

Why is that? Remember that when an investor opens a position by shorting an option, he takes in the premium from the sale. The best-case scenario for that investor is that the option expires unexercised. If that occurs, the investor doesn’t need to take any further action related to the option; he keeps the premium and doesn’t have to shell out money to anyone else.

Example:

If Tim shorts an ABC call option and receives $500 in premiums, his maximum potential gain is $500. He will achieve this gain if the option expires unexercised. In that case, he simply gets to keep the $500 he received when he shorted the option. The same is true for an investor who shorts a put option: he takes in the premium when the option is sold, and if the option expires unexercised, he gets to keep the premium.

On the other hand, an options buyer’s maximum potential loss is the premium paid, or the cost of the option. An option buyer pays the premium to the option seller to open her long options position. If she holds the option through expiration and it’s never exercised, she won’t receive any money from her option transaction. That means the premium paid represents sunk cost or loss on the investment.

Example:

If Sally purchases an XYZ put option and pays a premium of $600, her maximum potential loss is $600. She’ll realize this loss if the option expires unexercised and she holds it through expiration.

In the Money

Another topic that shows up on the Series 7 exam related to options is whether the option is “in the money.” When it comes to these questions, remember that an option is “in the money” when it’s advantageous for its owner to exercise the option. That means a call option is in the money when its underlying security is trading at a price that exceeds the option’s strike price. In that case, the option holder can exercise the option by purchasing the underlying at the strike price and then selling it at its higher market price.

On the other hand, a put option is in the money when its underlying security is trading at a price below the strike price. In that case, the option holder can purchase the underlying security at the market price and then sell it to the option seller assigned the exercised option at the higher strike price.

Note that the phrase “in the money” applies to a call option whose underlying is above the strike price and a put option whose underlying is below the strike price, even if the question is talking about a short options investor’s investment. That’s because the phrase “in the money” is a FINRA definition that applies to the option itself and not a particular position taken related to the option.

Breakeven Points

Breakeven points are another basic topic you should understand for the exam. The breakeven point is the amount that the underlying security needs to be trading at for both buyer and seller to break even on the investment when the option is exercised.

Example:

If Bobby is long a WTC call option with a $50 strike price and a $5 premium, his breakeven point would be $55 ($50 strike price + $5 premium). This means that when WTC is trading at $55, he could exercise his option by purchasing the underlying shares at $50. He could then sell those shares at the market price of $55. He would net $5 from his purchase and sale. However, since he paid $5 in premiums to buy the option, his $5 gain would be washed out by that $5 payment. Hence, he would breakeven on his investment.

The breakeven point for a put option is the option’s strike price minus its premium. If the underlying is trading at that value and the options holder exercises the option, both buyer and seller would breakeven on their investments.

Example:

If Jane is long an XYZ put option with a strike price of $40 and a premium of $4, her breakeven point would be $36 ($40 strike price – $4 premium). This means than when XYZ is trading at $36, she can purchase the underlying shares at that value and then exercise the option by selling them to the seller assigned her option for the $40 strike price. She would net $4 from her purchase and sale. However, since she paid $4 in premiums to buy the option, her $4 gain would be washed out by that $4 payment. Hence, she would breakeven on her investment.

Trading Options

An investor can exit his options position in one of two ways: he can exercise the option or he can trade the option.

Exercising the option involves either buying underlying shares at the strike price in a call option or selling the underlying shares at the strike price in a put option.

Trading an option involves taking the opposite position to an open position, thereby closing that open position. That means that someone who is long a call option can trade his option by shorting the same call, while an investor who is long a put option can trade his option by shorting the same put. Investors who have an open short options position (i.e., they shorted the option and it has yet to expire) can close out their position by purchasing the same option.

When an investor trades an option, gain or loss is calculated by subtracting the premium paid when going long the option from the premium received when shorting the option. If the difference is positive, the investor has a gain. If the difference is negative, the investor has a loss.

Example:

If Marie is long an END call option for which she paid $1,000 total in premiums and she decides to close out her position by shorting the same option, receiving $1,200 in premiums, she will realize a $200 gain ($1,200 received – $1,000 paid). Once she closes her position, she has no other obligation regarding the option because her short position is entered to close out a previous long position.

Note that traded options settle on the business day after the trade date.

Options Premiums

Knowing a bit about options premiums is also important for the Series 7 exam. Remember the premium is the amount an investor pays to go long an option or receives when shorting an option. An option’s premium is essentially its market price.

The premium is made up of two components: intrinsic value and time value. A premium’s intrinsic value is the amount by which the option is in the money. So for a call option, the intrinsic value is the amount that the underlying security’s price is above the strike price.

For a put option, the intrinsic value is the amount that the underlying security’s price is below the strike price. For instance, the premium for a put option with a strike price of $20 and an underlying security trading at $17 would have $3 in intrinsic value.

It’s also important to note that an option premium’s intrinsic value can never be a negative number. If the option is out of the money, its intrinsic value will be 0. So, for instance, if an ABC call option has a strike price of 50 and ABC is trading at 45, the option premium’s intrinsic value would be 0; it would not be -5.

A premium’s time value is the difference between its total amount and the intrinsic value. So time value = premium – intrinsic value. That means an option with a premium of $10 that is in the money by $6 will have a time value of $4 ($10 premium – $6 intrinsic value = $4 time value). Time value typically decreases the closer an option is to its expiration date.

American vs. European Options

Options can be either American-style or European-style. Equity options are American-style options. This means they can be executed at any point prior to or on their expiration date. The expiration date for monthly equity options is the third Friday of the month in which the option expires.

Non-equity options, such as index options, are often European-style options. This means they can only be executed on the expiration date. It is important to remember, however, that either European- or American-style options can be traded on the secondary market at any time before expiration.

Series 7 exam options questions tips

If you keep these basics in mind, you should be able to answer many of the options questions that show up on the Series 7 exam correctly. Understanding the points described above will also help you have a better understanding of some of the concepts tested by the more difficult options questions that appear on the exam.

If you’re preparing for the Series 7 exam, explore Solomon Exam Prep Series 7 study materials. Solomon offers a Series 7 Study Guide, Exam Simulator, Video Lecture, Audiobook, Flashcards, and Live Web Classes to help you pass.