Series 7 Exam
General Securities Representative Qualification Examination.
Getting Started: Your Series 7 Journey
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FINRA Series 7 — key terms, tricks & tips
Everything from the course in one searchable place: 395 entries. Use it to review before a practice test or look up a word you forgot.
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Scored Questions
Questions that count towards your final exam score.
Getting Started: Your Series 7 Journey
Unscored Questions
Experimental questions that do not affect your score.
Getting Started: Your Series 7 Journey
Passing Score
The minimum percentage required to pass the exam (72%).
Getting Started: Your Series 7 Journey
FINRA
Financial Industry Regulatory Authority, administers the exam.
Getting Started: Your Series 7 Journey
General Securities Rep
A professional licensed to trade most types of securities.
Getting Started: Your Series 7 Journey
Series 7 Exam Structure & Scoring
72 to pass, 125 total. Think '7' for 'Series 7', '2' for 'two-five' (125).
Getting Started: Your Series 7 Journey
Series 7 Exam Structure & Scoring
The exam is 125 questions, 115 of which are scored. You need 72% to pass. Remember these numbers exactly.
Getting Started: Your Series 7 Journey
Series 7 Exam Structure & Scoring
Spending too much time on a single difficult question, forgetting about the time limit.
Getting Started: Your Series 7 Journey
Series 7 Exam Structure & Scoring
Not attempting every question; there's no penalty for guessing.
Getting Started: Your Series 7 Journey
Series 7 Exam Structure & Scoring
Panicking over a few obscure questions, not realizing they might be unscored.
Getting Started: Your Series 7 Journey
Active Learning
Engaging with material through summarizing, teaching, or problem-solving.
Getting Started: Your Series 7 Journey
Passive Review
Learning by simply reading or re-reading material without active engagement.
Getting Started: Your Series 7 Journey
Spaced Repetition
Reviewing information at increasing intervals to enhance long-term memory.
Getting Started: Your Series 7 Journey
Active Recall
Testing yourself on learned material without referring to notes or answers.
Getting Started: Your Series 7 Journey
Mock Exam
A full-length practice test taken under timed, exam-like conditions.
Getting Started: Your Series 7 Journey
Pomodoro Technique
Time management method using focused work intervals and short breaks.
Getting Started: Your Series 7 Journey
Burnout
Physical or mental collapse caused by overwork or stress.
Getting Started: Your Series 7 Journey
Effective Study Strategies & Time Management
To remember the key steps for effective studying, think of P.L.A.N.: Plan, Learn Actively, Analyze, and Nurture yourself!
Getting Started: Your Series 7 Journey
Effective Study Strategies & Time Management
The exam often tests your ability to apply knowledge, not just recall it. Focus on understanding 'why' concepts work, not just 'what' they are. Look for questions that describe a scenario and ask for the best course of action.
Getting Started: Your Series 7 Journey
Effective Study Strategies & Time Management
Only reading the textbook without actively engaging with the material.
Getting Started: Your Series 7 Journey
Effective Study Strategies & Time Management
Cramming all studying into the last few days before the exam.
Getting Started: Your Series 7 Journey
Effective Study Strategies & Time Management
Skipping practice questions or not thoroughly reviewing incorrect answers.
Getting Started: Your Series 7 Journey
Retail Communication
Written communication to >25 retail investors in 30 days.
Module 1: Building Client Relationships
Institutional Communication
Written communication distributed only to institutional investors.
Module 1: Building Client Relationships
Correspondence
Written communication to <=25 retail investors in 30 days.
Module 1: Building Client Relationships
Principal Approval
Pre-use review and endorsement by a qualified supervisor.
Module 1: Building Client Relationships
Institutional Investor
Entity with $50M+ assets, banks, insurance, registered funds.
Module 1: Building Client Relationships
Retail Investor
Any person who is not an institutional investor.
Module 1: Building Client Relationships
Fair and Balanced
Communication standard; no misleading or exaggerated claims.
Module 1: Building Client Relationships
FINRA Communication Rules: Retail vs. Institutional
R.I.C. for Retail, Institutional, Correspondence. Remember 'R'etail needs 'R'eview (pre-approval), 'I'nstitutional is 'I'nternal review, 'C'orrespondence is 'C'asual (post-review).
Module 1: Building Client Relationships
FINRA Communication Rules: Retail vs. Institutional
The exam frequently tests the numerical thresholds: 25 retail investors in 30 days for retail communication/correspondence. Also, know the definition of an institutional investor, especially the $50 million asset threshold.
Module 1: Building Client Relationships
FINRA Communication Rules: Retail vs. Institutional
Confusing the 25-person threshold for retail communication with the definition of an institutional investor.
Module 1: Building Client Relationships
FINRA Communication Rules: Retail vs. Institutional
Assuming all communications, regardless of audience, require pre-use principal approval.
Module 1: Building Client Relationships
FINRA Communication Rules: Retail vs. Institutional
Failing to retain records of all communications, even those not requiring pre-use approval.
Module 1: Building Client Relationships
Do Not Call (DNC) Registry
A list of phone numbers consumers can register to avoid telemarketing calls.
Module 1: Building Client Relationships
National DNC Registry
Federal list managed by the FTC; firms must check every 31 days.
Module 1: Building Client Relationships
Internal DNC List
Firm-specific list of individuals who requested not to be called.
Module 1: Building Client Relationships
Existing Business Relationship (EBR)
Allows calls to clients within 18 months of transaction or 3 months of inquiry.
Module 1: Building Client Relationships
Telemarketing
Initiating calls to consumers to sell goods or services.
Module 1: Building Client Relationships
Call Time Restrictions
Telemarketing calls generally permitted 8 AM to 9 PM local time.
Module 1: Building Client Relationships
Opt-out Mechanism
Method for consumers to request removal from calling lists.
Module 1: Building Client Relationships
Telemarketing & Do Not Call Rules
DNC: Don't Neglect Compliance! Check the National list monthly, and your internal list always. Call only within the Designated Normal Calling hours (8 AM - 9 PM)!
Module 1: Building Client Relationships
Telemarketing & Do Not Call Rules
The exam often tests the frequency of checking the National DNC Registry (every 31 days) and the duration of the Existing Business Relationship (EBR) exemption (18 months from last transaction/application, 3 months from inquiry). Also, remember that an internal DNC request always overrides an EBR.
Module 1: Building Client Relationships
Telemarketing & Do Not Call Rules
Assuming an Existing Business Relationship (EBR) means you can call indefinitely, ignoring client requests.
Module 1: Building Client Relationships
Telemarketing & Do Not Call Rules
Forgetting to check both the National AND internal Do Not Call lists before making calls.
Module 1: Building Client Relationships
Telemarketing & Do Not Call Rules
Making calls outside the permitted hours (8 AM - 9 PM local time).
Module 1: Building Client Relationships
Prospecting
Identifying potential clients for financial services.
Module 1: Building Client Relationships
Lead Generation
Creating interest in financial products or services.
Module 1: Building Client Relationships
Referral
A lead provided by an existing, satisfied client.
Module 1: Building Client Relationships
Cold Calling
Initiating unsolicited phone contact with potential clients.
Module 1: Building Client Relationships
Lead Qualification
Assessing if a potential client is suitable for services.
Module 1: Building Client Relationships
Networking
Building relationships to find potential clients.
Module 1: Building Client Relationships
Target Market
The specific group of clients a firm aims to serve.
Module 1: Building Client Relationships
Prospecting Strategies & Lead Generation
To 'PROSPECT' for gold, you need a good 'LEAD'. Remember: P-R-O-S-P-E-C-T = Prioritize Referrals, Organize Sources, Qualify Every Call, Target Right clients.
Module 1: Building Client Relationships
Prospecting Strategies & Lead Generation
The exam often tests the *quality* of leads. Remember, referrals are generally considered the highest quality leads due to established trust. Also, be aware of the 'Do Not Call' registry rules for telemarketing.
Module 1: Building Client Relationships
Prospecting Strategies & Lead Generation
Failing to qualify leads, leading to wasted time on unsuitable prospects.
Module 1: Building Client Relationships
Prospecting Strategies & Lead Generation
Ignoring ethical guidelines and 'Do Not Call' rules, which can result in FINRA violations.
Module 1: Building Client Relationships
Prospecting Strategies & Lead Generation
Relying on only one prospecting method instead of diversifying your approach.
Module 1: Building Client Relationships
Churning
Excessive trading in a client's account to generate commissions.
Module 1: Building Client Relationships
Market Manipulation
Actions to artificially influence security prices or market behavior.
Module 1: Building Client Relationships
Pump and Dump
Inflating stock price with false info, then selling shares.
Module 1: Building Client Relationships
Selling Away
Selling securities not approved by the employing broker-dealer.
Module 1: Building Client Relationships
Misrepresentation
Providing false or misleading information to clients.
Module 1: Building Client Relationships
Conflict of Interest
Personal interests influencing professional recommendations.
Module 1: Building Client Relationships
Spoofing
Placing orders with no intent to execute to mislead market.
Module 1: Building Client Relationships
Fiduciary Duty
Legal obligation to act in client's best interest.
Module 1: Building Client Relationships
Ethical Conduct & Prohibited Practices
Imagine a 'CHURN'ing butter machine that's 'PUMP'ing out false rumors, causing a 'SPOOF'y stock price to 'SELL AWAY' your ethics. This helps remember Churning, Pump and Dump, Spoofing, and Selling Away.
Module 1: Building Client Relationships
Ethical Conduct & Prohibited Practices
Memorize that FINRA's Rules of Conduct require members to observe high standards of commercial honor and just and equitable principles of trade. Know the difference between churning, selling away, and market manipulation.
Module 1: Building Client Relationships
Ethical Conduct & Prohibited Practices
Confusing a simple error with intentional fraud; fraud requires intent to deceive.
Module 1: Building Client Relationships
Ethical Conduct & Prohibited Practices
Believing that as long as a practice isn't explicitly forbidden, it's allowed; ethical principles often go beyond specific rules.
Module 1: Building Client Relationships
Ethical Conduct & Prohibited Practices
Underestimating the severity of penalties for ethical breaches; they can be career-ending.
Module 1: Building Client Relationships
Individual Account
Owned by one person, controlled solely by that person.
Module 2: Account Opening & Client Profiling
Joint Tenants with Right of Survivorship (JTWROS)
Joint account where assets pass to surviving owner(s) upon death.
Module 2: Account Opening & Client Profiling
Tenants in Common (TIC)
Joint account where deceased owner's share passes to their estate.
Module 2: Account Opening & Client Profiling
Corporate Resolution
Document authorizing specific individuals to act on behalf of a corporation.
Module 2: Account Opening & Client Profiling
Partnership Agreement
Document outlining partners' rights, responsibilities, and decision-making.
Module 2: Account Opening & Client Profiling
Trust Account
Assets managed by a trustee for a beneficiary, governed by a trust agreement.
Module 2: Account Opening & Client Profiling
Grantor
Person who creates and funds a trust.
Module 2: Account Opening & Client Profiling
Trustee
Person or entity managing trust assets for beneficiaries.
Module 2: Account Opening & Client Profiling
Types of Investment Accounts
JTWROS: 'Just Two With Right Of Survivorship' – they get it all. TIC: 'Tenants In Common' – their share goes to their heirs.
Module 2: Account Opening & Client Profiling
Types of Investment Accounts
Memorize the key difference: JTWROS avoids probate, TIC does not. For corporate accounts, a corporate resolution is always required; for partnerships, a partnership agreement.
Module 2: Account Opening & Client Profiling
Types of Investment Accounts
Confusing JTWROS with TIC regarding survivorship rights and probate.
Module 2: Account Opening & Client Profiling
Types of Investment Accounts
Failing to obtain the correct authorizing documents (e.g., corporate resolution) for entity accounts.
Module 2: Account Opening & Client Profiling
Types of Investment Accounts
Not understanding the roles of grantor, trustee, and beneficiary in a trust account.
Module 2: Account Opening & Client Profiling
Know Your Customer (KYC)
Rule requiring firms to know essential facts about clients.
Module 2: Account Opening & Client Profiling
Suitability Rule
FINRA Rule 2111, requiring recommendations to fit client profiles.
Module 2: Account Opening & Client Profiling
Investment Objective
Client's financial goals (e.g., growth, income, preservation).
Module 2: Account Opening & Client Profiling
Risk Tolerance
Client's willingness and ability to take investment risk.
Module 2: Account Opening & Client Profiling
Reasonable-Basis Suitability
Recommendation is suitable for at least some investors.
Module 2: Account Opening & Client Profiling
Customer-Specific Suitability
Recommendation is suitable for a particular customer.
Module 2: Account Opening & Client Profiling
Quantitative Suitability
Series of transactions are not excessive for a customer.
Module 2: Account Opening & Client Profiling
Know Your Customer (KYC) & Suitability Information
To remember the three suitability obligations: R-C-Q (Really Cool Questions). Reasonable-basis, Customer-specific, Quantitative.
Module 2: Account Opening & Client Profiling
Know Your Customer (KYC) & Suitability Information
The exam often tests the three suitability obligations: reasonable-basis, customer-specific, and quantitative. Memorize what each entails. Also, know the key pieces of information required for a customer's investment profile.
Module 2: Account Opening & Client Profiling
Know Your Customer (KYC) & Suitability Information
Recommending investments based solely on a product's past performance without considering the client's profile.
Module 2: Account Opening & Client Profiling
Know Your Customer (KYC) & Suitability Information
Failing to update a client's profile after a significant life event, leading to outdated and potentially unsuitable recommendations.
Module 2: Account Opening & Client Profiling
Know Your Customer (KYC) & Suitability Information
Confusing reasonable-basis suitability (product-focused) with customer-specific suitability (client-focused).
Module 2: Account Opening & Client Profiling
Margin Account
Allows borrowing money from broker to buy securities.
Module 2: Account Opening & Client Profiling
Margin Agreement
Contract detailing terms for borrowing money from broker.
Module 2: Account Opening & Client Profiling
Hypothecation
Pledging securities as collateral for a loan.
Module 2: Account Opening & Client Profiling
Rehypothecation
Broker-dealer lending out client's marginable securities.
Module 2: Account Opening & Client Profiling
Loan Consent Form
Optional agreement allowing broker to rehypothecate securities.
Module 2: Account Opening & Client Profiling
Margin Risk Disclosure
Statement outlining risks of trading on margin (FINRA Rule 2264).
Module 2: Account Opening & Client Profiling
Breakeven (Long Margin)
Stock price where profit/loss is zero, typically purchase price.
Module 2: Account Opening & Client Profiling
Credit Agreement
Part of margin agreement detailing loan terms and interest.
Module 2: Account Opening & Client Profiling
Margin Account Agreements & Risk Disclosure
H.Y.P.E. for Margin: Hypothecation, Your Pledge, Permission to Sell, Explains Risks.
Module 2: Account Opening & Client Profiling
Margin Account Agreements & Risk Disclosure
Remember, the Margin Risk Disclosure Statement must be provided PRIOR to or at the time of opening a margin account, and ANNUALLY thereafter. This is a common exam point.
Module 2: Account Opening & Client Profiling
Margin Account Agreements & Risk Disclosure
Confusing hypothecation (client pledges) with rehypothecation (firm lends out).
Module 2: Account Opening & Client Profiling
Margin Account Agreements & Risk Disclosure
Believing the Loan Consent Form is mandatory for a margin account (it's optional).
Module 2: Account Opening & Client Profiling
Margin Account Agreements & Risk Disclosure
Forgetting that the Margin Risk Disclosure Statement is required both at opening and annually.
Module 2: Account Opening & Client Profiling
Trusted Contact Person
Individual designated by customer whom broker-dealer may contact.
Module 2: Account Opening & Client Profiling
Financial Exploitation
Illegal or improper use of a vulnerable adult's funds/assets.
Module 2: Account Opening & Client Profiling
Temporary Hold
Firm's ability to halt disbursements if exploitation is suspected.
Module 2: Account Opening & Client Profiling
Customer Identification Program (CIP)
Program to verify identity of new customers to combat crime.
Module 2: Account Opening & Client Profiling
USA PATRIOT Act
Legislation requiring CIP to deter terrorism and money laundering.
Module 2: Account Opening & Client Profiling
Bank Secrecy Act (BSA)
Requires financial institutions to assist government agencies in detecting money laundering.
Module 2: Account Opening & Client Profiling
Taxpayer Identification Number (TIN)
Unique number (e.g., SSN, EIN) used for tax purposes.
Module 2: Account Opening & Client Profiling
Residential Address
Physical street address required for CIP, not a P.O. Box.
Module 2: Account Opening & Client Profiling
Trusted Contacts & Customer Identification Program (CIP)
CIP: Can I Please? C-ollect info, I-dentify, P-revent crime. Trusted Contact: Tell CAREFULLY. C-onfirm info, A-ddress exploitation, R-esolve ambiguities, E-nsure safety, F-inancial protection, U-nderstand client, L-imit access, L-egal compliance, Y-ield protection.
Module 2: Account Opening & Client Profiling
Trusted Contacts & Customer Identification Program (CIP)
Memorize that a trusted contact is NOT mandatory for account opening, but firms must make a 'reasonable effort' to obtain one. For CIP, remember the four key pieces of information required for individuals: name, date of birth, residential address, and taxpayer identification number (SSN).
Module 2: Account Opening & Client Profiling
Trusted Contacts & Customer Identification Program (CIP)
Believing that a trusted contact can make trading decisions for the account; their role is purely informational and protective.
Module 2: Account Opening & Client Profiling
Trusted Contacts & Customer Identification Program (CIP)
Confusing a P.O. Box with a residential address for CIP purposes; a physical address is always required.
Module 2: Account Opening & Client Profiling
Trusted Contacts & Customer Identification Program (CIP)
Thinking that obtaining a trusted contact is mandatory for the customer to open an account; it's a firm's 'reasonable effort' requirement, not a customer obligation.
Module 2: Account Opening & Client Profiling
Common Stock
Represents ownership, voting rights, residual claim on assets.
Module 3: Equities & Debt Securities
Preferred Stock
Hybrid security, fixed dividends, priority over common stock.
Module 3: Equities & Debt Securities
Voting Rights
Ability of common stockholders to influence corporate decisions.
Module 3: Equities & Debt Securities
Preemptive Rights
Allows existing shareholders to maintain proportionate ownership.
Module 3: Equities & Debt Securities
Cumulative Preferred
Requires all skipped dividends to be paid before common.
Module 3: Equities & Debt Securities
Convertible Preferred
Allows conversion into a fixed number of common shares.
Module 3: Equities & Debt Securities
Callable Preferred
Issuer can repurchase shares at a set price.
Module 3: Equities & Debt Securities
Dividend
Distribution of a portion of company earnings to shareholders.
Module 3: Equities & Debt Securities
Common & Preferred Stock Characteristics
P for Preferred, P for Priority. C for Common, C for Control (voting).
Module 3: Equities & Debt Securities
Common & Preferred Stock Characteristics
Memorize that common stockholders have voting rights and a residual claim, while preferred stockholders have no voting rights but a priority claim to dividends and assets. Cumulative preferred stock is a common exam topic.
Module 3: Equities & Debt Securities
Common & Preferred Stock Characteristics
Confusing the priority of claims in liquidation (creditors always come before equity).
Module 3: Equities & Debt Securities
Common & Preferred Stock Characteristics
Assuming preferred stock always has voting rights.
Module 3: Equities & Debt Securities
Common & Preferred Stock Characteristics
Forgetting that preferred dividends, while fixed, are not guaranteed like bond interest.
Module 3: Equities & Debt Securities
Bond
A debt security representing a loan from investor to issuer.
Module 3: Equities & Debt Securities
Par Value
The face value of a bond, typically $1,000, repaid at maturity.
Module 3: Equities & Debt Securities
Coupon Rate
The annual interest rate paid by the bond issuer.
Module 3: Equities & Debt Securities
Maturity Date
The date when the bond's principal is repaid to the investor.
Module 3: Equities & Debt Securities
Interest Rate Risk
Risk that rising rates will decrease existing bond prices.
Module 3: Equities & Debt Securities
Default Risk
Risk that the bond issuer will fail to make payments.
Module 3: Equities & Debt Securities
Municipal Bond
Bonds issued by state/local governments, often tax-exempt.
Module 3: Equities & Debt Securities
Call Feature
Allows the issuer to redeem a bond before its maturity date.
Module 3: Equities & Debt Securities
Bonds: Types, Features & Risk Factors
To remember bond risks, think 'CRITICAL': Credit, Reinvestment, Interest Rate, Time (Maturity), Inflation, Call, Liquidity.
Module 3: Equities & Debt Securities
Bonds: Types, Features & Risk Factors
The exam frequently tests the relationship between interest rates and bond prices: when interest rates rise, existing bond prices fall, and vice versa. Remember that longer maturities and lower coupons make bonds more sensitive to interest rate changes. Also, know the tax status of different bond types, especially municipal bonds.
Module 3: Equities & Debt Securities
Bonds: Types, Features & Risk Factors
Confusing current yield with yield to maturity; current yield only considers annual income and current market price, not capital gains/losses to maturity.
Module 3: Equities & Debt Securities
Bonds: Types, Features & Risk Factors
Underestimating the impact of interest rate changes on long-term bonds; longer maturities mean greater price volatility.
Module 3: Equities & Debt Securities
Bonds: Types, Features & Risk Factors
Forgetting that municipal bond interest is typically federally tax-exempt, which is a key benefit for certain investors.
Module 3: Equities & Debt Securities
Current Yield
Annual income divided by current market price.
Module 3: Equities & Debt Securities
Yield to Maturity (YTM)
Total return if a bond is held until its maturity date.
Module 3: Equities & Debt Securities
Yield to Call (YTC)
Total return if a callable bond is called prior to maturity.
Module 3: Equities & Debt Securities
Call Provision
Allows issuer to redeem a bond before its maturity date.
Module 3: Equities & Debt Securities
Yield to Worst
The lower of a bond's YTM or YTC.
Module 3: Equities & Debt Securities
Yield Calculations: Current, YTM, YTC
P-D-C: Premium-Discount-Coupon. If a bond is at a Premium, Coupon > Current Yield > YTM. If a bond is at a Discount, Coupon < Current Yield < YTM. For Par, they're all Equal!
Module 3: Equities & Debt Securities
Yield Calculations: Current, YTM, YTC
The exam frequently tests the relationship between bond price, coupon rate, current yield, and YTM. Memorize the order for bonds trading at par, discount, and premium. For callable bonds, understand when YTC is higher or lower than YTM and the concept of 'yield to worst.'
Module 3: Equities & Debt Securities
Yield Calculations: Current, YTM, YTC
Confusing current yield with coupon rate; current yield uses market price, coupon rate uses par value.
Module 3: Equities & Debt Securities
Yield Calculations: Current, YTM, YTC
Forgetting that YTM and YTC account for capital gains/losses, while current yield does not.
Module 3: Equities & Debt Securities
Yield Calculations: Current, YTM, YTC
Not considering 'yield to worst' when evaluating callable bonds for clients.
Module 3: Equities & Debt Securities
Suitability
Investment recommendations must match client's profile.
Module 3: Equities & Debt Securities
FINRA Rule 2111
Regulatory rule governing suitability requirements for recommendations.
Module 3: Equities & Debt Securities
Investment Objectives
Client's financial goals (e.g., growth, income, preservation).
Module 3: Equities & Debt Securities
Overconcentration
Too much of a portfolio in one security or sector.
Module 3: Equities & Debt Securities
Suitability of Equity & Debt Investments
S-U-I-T: **S**ituation (financial), **U**nderstanding (of risk), **I**nvestment goals, **T**ime horizon. Always consider these four when making recommendations!
Module 3: Equities & Debt Securities
Suitability of Equity & Debt Investments
The exam often presents client scenarios and asks you to identify the most suitable or unsuitable investment. Keywords like 'capital preservation,' 'income,' 'aggressive growth,' 'short-term,' 'long-term,' and 'risk tolerance' are crucial. Memorize that FINRA Rule 2111 is the primary suitability rule.
Module 3: Equities & Debt Securities
Suitability of Equity & Debt Investments
Recommending high-risk investments to a client with a low risk tolerance, even if they express a desire for high returns.
Module 3: Equities & Debt Securities
Suitability of Equity & Debt Investments
Failing to update a client's profile regularly, leading to recommendations based on outdated information.
Module 3: Equities & Debt Securities
Suitability of Equity & Debt Investments
Focusing solely on the potential return of an investment without adequately assessing its risks relative to the client's profile.
Module 3: Equities & Debt Securities
General Obligation (GO) Bond
Backed by issuer's full faith and taxing power.
Module 4: Municipal Securities & Investment Companies
Revenue Bond
Backed by revenue from a specific project.
Module 4: Municipal Securities & Investment Companies
Tax-Equivalent Yield (TEY)
Yield a taxable bond needs to match a muni bond's after-tax return.
Module 4: Municipal Securities & Investment Companies
Triple Tax-Exempt
Interest exempt from federal, state, and local taxes.
Module 4: Municipal Securities & Investment Companies
Call Risk
Issuer redeems bonds early, often at lower rates.
Module 4: Municipal Securities & Investment Companies
Municipal Bonds: Types, Taxation & Analysis
GO for Government, Revenue for Project. GO bonds are backed by the government's general funds; Revenue bonds rely on a specific project's revenue.
Module 4: Municipal Securities & Investment Companies
Municipal Bonds: Types, Taxation & Analysis
The Series 7 exam frequently tests the tax treatment of municipal bonds. Remember that interest is generally federal tax-exempt, but capital gains are always taxable. Also, know the tax-equivalent yield formula: Municipal Yield / (1 - Tax Bracket).
Module 4: Municipal Securities & Investment Companies
Municipal Bonds: Types, Taxation & Analysis
Assuming all municipal bond interest is triple tax-exempt; it depends on the investor's residency and bond's origin.
Module 4: Municipal Securities & Investment Companies
Municipal Bonds: Types, Taxation & Analysis
Confusing tax-exempt interest with tax-exempt capital gains; capital gains are always taxable.
Module 4: Municipal Securities & Investment Companies
Municipal Bonds: Types, Taxation & Analysis
Not considering the Alternative Minimum Tax (AMT) for certain private activity bonds.
Module 4: Municipal Securities & Investment Companies
Mutual Fund
Open-end investment company, priced at NAV daily.
Module 4: Municipal Securities & Investment Companies
Net Asset Value (NAV)
Fund's assets minus liabilities, divided by shares outstanding.
Module 4: Municipal Securities & Investment Companies
Exchange Traded Fund (ETF)
Investment company that trades on exchanges like stocks.
Module 4: Municipal Securities & Investment Companies
Front-End Load
Sales charge paid when purchasing mutual fund shares.
Module 4: Municipal Securities & Investment Companies
Contingent Deferred Sales Charge (CDSC)
Sales charge paid upon redemption of mutual fund shares.
Module 4: Municipal Securities & Investment Companies
12b-1 Fees
Annual fees for marketing and distribution of fund shares.
Module 4: Municipal Securities & Investment Companies
Covered Call
Strategy: owning stock and selling a call option.
Module 4: Municipal Securities & Investment Companies
Breakeven
Price where no profit or loss occurs.
Module 4: Municipal Securities & Investment Companies
Mutual Funds & ETFs: Open-End Investment Companies
NAV = 'No After-hours Value' – you only get one price per day, after the market closes!
Module 4: Municipal Securities & Investment Companies
Mutual Funds & ETFs: Open-End Investment Companies
For mutual funds, remember that the NAV is calculated at the end of the trading day, and all purchases/redemptions occur at that day's NAV. ETFs trade throughout the day like stocks, with prices determined by supply and demand.
Module 4: Municipal Securities & Investment Companies
Mutual Funds & ETFs: Open-End Investment Companies
Confusing mutual fund trading (once daily at NAV) with ETF trading (intraday on exchanges).
Module 4: Municipal Securities & Investment Companies
Mutual Funds & ETFs: Open-End Investment Companies
Incorrectly calculating the breakeven for a covered call, forgetting to subtract the premium.
Module 4: Municipal Securities & Investment Companies
Mutual Funds & ETFs: Open-End Investment Companies
Mixing up the fee structures of different mutual fund share classes (A, B, C).
Module 4: Municipal Securities & Investment Companies
Closed-End Fund
Investment company with fixed shares, traded on exchanges.
Module 4: Municipal Securities & Investment Companies
Unit Investment Trust (UIT)
Fixed portfolio, unmanaged, redeemable units, set termination date.
Module 4: Municipal Securities & Investment Companies
Premium/Discount
Closed-end fund market price above/below NAV.
Module 4: Municipal Securities & Investment Companies
Secondary Market
Where existing securities are traded between investors.
Module 4: Municipal Securities & Investment Companies
Redeemable Units
UIT units that can be sold back to the trust at NAV.
Module 4: Municipal Securities & Investment Companies
Closed-End Funds & Unit Investment Trusts (UITs)
To remember the difference: 'Closed-End' means 'Closed to new shares, but Open to trading on an Exchange.' 'UIT' means 'Unmanaged, fixed, and Terminating.'
Module 4: Municipal Securities & Investment Companies
Closed-End Funds & Unit Investment Trusts (UITs)
The Series 7 exam frequently tests the differences in trading mechanisms and management styles. Remember: Closed-end funds trade on exchanges (like stocks) and are actively managed. UITs are unmanaged, have a fixed portfolio, and are redeemable with the trust at NAV.
Module 4: Municipal Securities & Investment Companies
Closed-End Funds & Unit Investment Trusts (UITs)
Confusing the trading mechanism: Closed-end funds trade on exchanges; UITs are redeemed with the trust.
Module 4: Municipal Securities & Investment Companies
Closed-End Funds & Unit Investment Trusts (UITs)
Assuming closed-end funds always trade at NAV; they often trade at a discount or premium.
Module 4: Municipal Securities & Investment Companies
Closed-End Funds & Unit Investment Trusts (UITs)
Believing UITs are actively managed; their portfolios are fixed and unmanaged.
Module 4: Municipal Securities & Investment Companies
Tax-exempt interest
Interest income not subject to federal, state, or local taxes.
Module 4: Municipal Securities & Investment Companies
Expense ratio
Annual fee charged by funds as a percentage of assets.
Module 4: Municipal Securities & Investment Companies
Load
Sales charge on mutual fund shares.
Module 4: Municipal Securities & Investment Companies
Intraday liquidity
Ability to buy/sell throughout the trading day.
Module 4: Municipal Securities & Investment Companies
Fixed portfolio
Investment portfolio that does not change after creation.
Module 4: Municipal Securities & Investment Companies
Suitability of Muni Bonds & Investment Companies
T.I.R.E.D. for suitability: Tax status, Income needs, Risk tolerance, Existing investments, Desired time horizon.
Module 4: Municipal Securities & Investment Companies
Suitability of Muni Bonds & Investment Companies
For municipal bonds, remember to always consider the investor's state of residence. If a bond is issued in the investor's home state, it may offer federal, state, AND local tax exemption (triple tax-exempt), making it more attractive than an out-of-state bond that only offers federal tax exemption. This is a common exam point.
Module 4: Municipal Securities & Investment Companies
Suitability of Muni Bonds & Investment Companies
Recommending municipal bonds to clients in low tax brackets who would benefit more from higher-yielding taxable bonds.
Module 4: Municipal Securities & Investment Companies
Suitability of Muni Bonds & Investment Companies
Suggesting aggressive growth funds or leveraged ETFs to conservative investors with short time horizons.
Module 4: Municipal Securities & Investment Companies
Suitability of Muni Bonds & Investment Companies
Failing to consider all relevant client information (e.g., existing investments, other income sources) before making a recommendation.
Module 4: Municipal Securities & Investment Companies
Option
Contract granting right, not obligation, to buy/sell asset.
Module 5: Options Strategies & Variable Products
Call Option
Right to buy underlying asset at strike price.
Module 5: Options Strategies & Variable Products
Put Option
Right to sell underlying asset at strike price.
Module 5: Options Strategies & Variable Products
Strike Price
Predetermined price for asset in an option contract.
Module 5: Options Strategies & Variable Products
Premium
Price paid by option buyer to option seller.
Module 5: Options Strategies & Variable Products
Expiration Date
Last day an option can be exercised.
Module 5: Options Strategies & Variable Products
Writer/Seller
Party obligated to fulfill option contract.
Module 5: Options Strategies & Variable Products
In-the-Money
Option with intrinsic value; profitable to exercise.
Module 5: Options Strategies & Variable Products
Options Basics: Calls, Puts, Premiums, Expiration
Remember 'CALL' for 'CAn't Lose' (as a buyer, max loss is premium) and 'PUT' for 'Protection' (as a buyer, it protects against drops).
Module 5: Options Strategies & Variable Products
Options Basics: Calls, Puts, Premiums, Expiration
Memorize the core distinction: 'Calls Up, Puts Down.' A call buyer wants the stock price to go UP; a put buyer wants the stock price to go DOWN. The exam often tests this basic directional expectation.
Module 5: Options Strategies & Variable Products
Options Basics: Calls, Puts, Premiums, Expiration
Confusing the rights and obligations of buyers and sellers for calls versus puts.
Module 5: Options Strategies & Variable Products
Options Basics: Calls, Puts, Premiums, Expiration
Forgetting that the premium is the maximum loss for a buyer and maximum gain for a seller.
Module 5: Options Strategies & Variable Products
Options Basics: Calls, Puts, Premiums, Expiration
Assuming all options can be exercised at any time (American vs. European style).
Module 5: Options Strategies & Variable Products
Spread
Simultaneously buying and selling options of the same class.
Module 5: Options Strategies & Variable Products
Straddle
Simultaneously buying/selling a call and a put with same strike/exp.
Module 5: Options Strategies & Variable Products
Debit Spread
An options spread where a net premium is paid.
Module 5: Options Strategies & Variable Products
Credit Spread
An options spread where a net premium is received.
Module 5: Options Strategies & Variable Products
Bull Spread
An options strategy designed to profit from an upward price movement.
Module 5: Options Strategies & Variable Products
Bear Spread
An options strategy designed to profit from a downward price movement.
Module 5: Options Strategies & Variable Products
Options Strategies: Spreads, Straddles, Covered Calls
To remember the breakeven for a covered call: 'Stock Cost MINUS Premium = BREAKEVE-N!'
Module 5: Options Strategies & Variable Products
Options Strategies: Spreads, Straddles, Covered Calls
The exam often asks you to identify the market outlook for a given strategy (e.g., bullish, bearish, neutral, volatile). Memorize the outlook for covered calls (neutral to moderately bullish), long straddles (volatile), and short straddles (neutral/stable). For spreads, remember that debit spreads are typically directional, while credit spreads are often income-generating on a neutral outlook.
Module 5: Options Strategies & Variable Products
Options Strategies: Spreads, Straddles, Covered Calls
Confusing the market outlook for a long straddle (expecting volatility) with a short straddle (expecting stability).
Module 5: Options Strategies & Variable Products
Options Strategies: Spreads, Straddles, Covered Calls
Incorrectly calculating breakeven points for spreads, especially forgetting to add/subtract the net premium.
Module 5: Options Strategies & Variable Products
Options Strategies: Spreads, Straddles, Covered Calls
Underestimating the unlimited risk of a naked (uncovered) short call or short put, which these strategies aim to mitigate.
Module 5: Options Strategies & Variable Products
Breakeven Point
Price at which an option position results in no profit or loss.
Module 5: Options Strategies & Variable Products
Maximum Gain
The highest possible profit from an options position.
Module 5: Options Strategies & Variable Products
Maximum Loss
The greatest possible loss from an options position.
Module 5: Options Strategies & Variable Products
Long Call
Buying a call option; profit from rising stock price.
Module 5: Options Strategies & Variable Products
Long Put
Buying a put option; profit from falling stock price.
Module 5: Options Strategies & Variable Products
Short Call
Selling a call option; profit from stable or falling stock price.
Module 5: Options Strategies & Variable Products
Short Put
Selling a put option; profit from stable or rising stock price.
Module 5: Options Strategies & Variable Products
Options Breakeven & Max Gain/Loss
CALL UP (Strike + Premium), PUT DOWN (Strike - Premium). Remember 'UP' for adding premium to calls, 'DOWN' for subtracting premium from puts.
Module 5: Options Strategies & Variable Products
Options Breakeven & Max Gain/Loss
Memorize the four basic breakeven formulas: Long Call (Strike + Premium), Short Call (Strike + Premium), Long Put (Strike - Premium), Short Put (Strike - Premium). The exam frequently tests these directly.
Module 5: Options Strategies & Variable Products
Options Breakeven & Max Gain/Loss
Confusing adding vs. subtracting premium for calls and puts.
Module 5: Options Strategies & Variable Products
Options Breakeven & Max Gain/Loss
Forgetting to multiply premium by 100 shares per contract for total cost/gain/loss.
Module 5: Options Strategies & Variable Products
Options Breakeven & Max Gain/Loss
Mixing up unlimited vs. limited max gain/loss for long vs. short positions.
Module 5: Options Strategies & Variable Products
Variable Annuity
Retirement product with tax-deferred growth, value tied to sub-accounts.
Module 5: Options Strategies & Variable Products
Variable Life Insurance
Permanent life insurance with cash value/death benefit tied to sub-accounts.
Module 5: Options Strategies & Variable Products
Sub-Accounts
Investment options (like mutual funds) within variable products.
Module 5: Options Strategies & Variable Products
Accumulation Phase
Period where contributions grow tax-deferred in an annuity.
Module 5: Options Strategies & Variable Products
Annuitization Phase
Period where annuity value is converted to periodic income payments.
Module 5: Options Strategies & Variable Products
Surrender Charge
Fee for withdrawing money from an annuity during the surrender period.
Module 5: Options Strategies & Variable Products
Mortality & Expense (M&E) Charges
Fees in variable products covering insurance costs and guarantees.
Module 5: Options Strategies & Variable Products
Variable Annuities & Variable Life Insurance
V for Variable, V for Volatile! Remember that 'variable' means the value can go up AND down, unlike fixed products.
Module 5: Options Strategies & Variable Products
Variable Annuities & Variable Life Insurance
The exam often tests the dual regulation of variable products: they are securities (SEC/FINRA) and insurance (state insurance departments). Look for questions asking about required licenses (Series 6/7 AND state insurance license) or required documents (prospectus).
Module 5: Options Strategies & Variable Products
Variable Annuities & Variable Life Insurance
Confusing variable products with fixed products: Variable products have investment risk; fixed products offer guarantees.
Module 5: Options Strategies & Variable Products
Variable Annuities & Variable Life Insurance
Underestimating the importance of suitability: These products are not for everyone, especially those seeking short-term or guaranteed returns.
Module 5: Options Strategies & Variable Products
Variable Annuities & Variable Life Insurance
Forgetting the dual regulation: Variable products are both securities and insurance, requiring specific licenses and disclosures from both realms.
Module 5: Options Strategies & Variable Products
Direct Participation Program (DPP)
Investment passing income, gains, losses directly to investors.
Module 6: DPPs, REITs, Risk & Taxation
Limited Partnership
Partnership with general (unlimited liability) and limited (limited liability) partners.
Module 6: DPPs, REITs, Risk & Taxation
General Partner (GP)
Manages a limited partnership, has unlimited liability.
Module 6: DPPs, REITs, Risk & Taxation
Limited Partner (LP)
Passive investor in a limited partnership, liability limited to investment.
Module 6: DPPs, REITs, Risk & Taxation
Real Estate Investment Trust (REIT)
Company owning/operating income-producing real estate; trades like stock.
Module 6: DPPs, REITs, Risk & Taxation
Equity REIT (eREIT)
Owns and operates physical properties, generating rental income.
Module 6: DPPs, REITs, Risk & Taxation
Mortgage REIT (mREIT)
Invests in mortgages and mortgage-backed securities, earning interest.
Module 6: DPPs, REITs, Risk & Taxation
Passive Loss
Loss from a passive activity (like a DPP) that can only offset passive income.
Module 6: DPPs, REITs, Risk & Taxation
Direct Participation Programs (DPPs) & REITs
DPP = Direct Pass-through Profits (and losses). REIT = Real Estate Income Trust.
Module 6: DPPs, REITs, Risk & Taxation
Direct Participation Programs (DPPs) & REITs
Memorize that DPPs pass through income and losses, avoiding corporate tax, and are typically illiquid. REITs avoid corporate tax if they distribute 90% of income, trade on exchanges (liquid), and dividends are generally taxed as ordinary income.
Module 6: DPPs, REITs, Risk & Taxation
Direct Participation Programs (DPPs) & REITs
Confusing the tax treatment: DPPs pass through all tax consequences; REITs avoid corporate tax if they distribute 90% of income.
Module 6: DPPs, REITs, Risk & Taxation
Direct Participation Programs (DPPs) & REITs
Overlooking illiquidity: DPPs are generally illiquid, while most REITs are publicly traded and liquid.
Module 6: DPPs, REITs, Risk & Taxation
Direct Participation Programs (DPPs) & REITs
Misunderstanding liability: General Partners in DPPs have unlimited liability; Limited Partners and REIT shareholders have limited liability.
Module 6: DPPs, REITs, Risk & Taxation
Market Risk
Risk of overall market decline, affecting all investments.
Module 6: DPPs, REITs, Risk & Taxation
Systematic Risk
Another name for market risk; cannot be diversified away.
Module 6: DPPs, REITs, Risk & Taxation
Reinvestment Risk
Risk of reinvesting principal at lower rates.
Module 6: DPPs, REITs, Risk & Taxation
Liquidity Risk
Risk of inability to sell an asset quickly at fair price.
Module 6: DPPs, REITs, Risk & Taxation
Illiquid Asset
An asset difficult to sell quickly without a price concession.
Module 6: DPPs, REITs, Risk & Taxation
Types of Investment Risk: Market, Interest Rate, Liquidity
MIL: Market, Interest Rate, Liquidity. Remember MIL as in 'Military risks' – these are the big ones you can't avoid!
Module 6: DPPs, REITs, Risk & Taxation
Types of Investment Risk: Market, Interest Rate, Liquidity
The exam often presents scenarios and asks you to identify the primary risk involved. For interest rate risk, look for keywords like 'bonds,' 'interest rates rise/fall,' or 'reinvestment.' For liquidity risk, look for 'DPPs,' 'real estate,' 'private placements,' or 'difficulty selling.' Market risk is broader, often tied to 'economic downturn' or 'stock market crash.'
Module 6: DPPs, REITs, Risk & Taxation
Types of Investment Risk: Market, Interest Rate, Liquidity
Confusing systematic (market) risk with unsystematic (specific) risk. Systematic risk affects everyone; unsystematic risk affects only a specific company or industry and can be diversified away.
Module 6: DPPs, REITs, Risk & Taxation
Types of Investment Risk: Market, Interest Rate, Liquidity
Underestimating the impact of interest rate changes on long-term, low-coupon bonds. These are the most sensitive.
Module 6: DPPs, REITs, Risk & Taxation
Types of Investment Risk: Market, Interest Rate, Liquidity
Failing to adequately explain liquidity constraints to clients, leading to potential future complaints or issues.
Module 6: DPPs, REITs, Risk & Taxation
Ordinary Income
Income taxed at an individual's marginal tax rate.
Module 6: DPPs, REITs, Risk & Taxation
Capital Gain/Loss
Profit or loss from selling an asset.
Module 6: DPPs, REITs, Risk & Taxation
Short-Term Capital Gain
Gain from assets held 1 year or less, taxed as ordinary income.
Module 6: DPPs, REITs, Risk & Taxation
Long-Term Capital Gain
Gain from assets held over 1 year, taxed at preferential rates.
Module 6: DPPs, REITs, Risk & Taxation
Qualified Dividend
Dividend eligible for lower long-term capital gains tax rates.
Module 6: DPPs, REITs, Risk & Taxation
Tax-Deferred
Earnings grow without current taxation until withdrawal.
Module 6: DPPs, REITs, Risk & Taxation
Tax-Exempt
Income not subject to federal, state, or local taxes.
Module 6: DPPs, REITs, Risk & Taxation
Depreciation Recapture
Tax on accumulated depreciation when an asset is sold.
Module 6: DPPs, REITs, Risk & Taxation
Tax Treatment of Various Investments
Think 'OLD' for how income is taxed: Ordinary, Long-term, Deferred. Ordinary is highest, Long-term is lower, Deferred is later!
Module 6: DPPs, REITs, Risk & Taxation
Tax Treatment of Various Investments
Remember that interest from municipal bonds is federal tax-exempt, and often state and local tax-exempt if the bondholder is a resident of the issuing state. This 'triple tax-exempt' status is a key selling point for municipal bonds.
Module 6: DPPs, REITs, Risk & Taxation
Tax Treatment of Various Investments
Confusing short-term and long-term capital gains tax rates.
Module 6: DPPs, REITs, Risk & Taxation
Tax Treatment of Various Investments
Forgetting that REIT dividends are generally taxed as ordinary income, not qualified dividends.
Module 6: DPPs, REITs, Risk & Taxation
Tax Treatment of Various Investments
Not considering the tax-equivalent yield when comparing taxable and tax-exempt bonds.
Module 6: DPPs, REITs, Risk & Taxation
Diversification
Spreading investments to reduce unsystematic risk.
Module 6: DPPs, REITs, Risk & Taxation
Asset Allocation
Dividing portfolio among asset classes (stocks, bonds, cash).
Module 6: DPPs, REITs, Risk & Taxation
Rebalancing
Adjusting portfolio to maintain target asset allocation.
Module 6: DPPs, REITs, Risk & Taxation
Regulation Best Interest (Reg BI)
Requires acting in client's best interest, mitigating conflicts.
Module 6: DPPs, REITs, Risk & Taxation
Overall Suitability & Portfolio Construction
S.O.R.T. for Suitability: **S**ituation (financial), **O**bjectives, **R**isk Tolerance, **T**ime Horizon. Remember these four pillars!
Module 6: DPPs, REITs, Risk & Taxation