Tuesday, December 29, 2009
A. sell 10 ORCL Jul calls
B. buy 10 ORCL Jul puts
C. sell 10 ORCL Jul puts
D. buy 10 ORCL Jul calls
EXPLANATION: Always sell options if the market is supposed to go "sideways" or "remain unchanged." That way, you get the premium now, and then the option expires. Don't sell puts if you own stock--if the stock goes to zero, you lose 100% on the stock, then you have the OBLIGATION TO BUY the stock for the strike price . . . even though it's worthless. Sell covered calls in this situation. Joey owns 1,000 shares, so he can cover 10 call options.
Friday, December 18, 2009
financial interest; and failed to provide a fair and balanced assessment, referring only to the company’s upside without any disclosure of the risks."
Friday, December 4, 2009
Take a look at the article from the Bond Buyer at the link posted below. You may struggle a bit with some jargon, but you will almost certainly come away with a better understanding of municipal bonds after reading this:
You will see why a credit analyst looks at competing facilities, such as a free highway, when analyzing the credit quality of a tollway bond. You will see that qualifying for tax-exempt status is something to be approached creatively. Since "PABs" would normally not be tax-exempt, the politicians figured out a way to create a separate entity to issue the bonds and thereby make the interest tax-exempt. And you'll see references to the three major credit ratings agencies.
I'll let you take it from here--feel free to post questions if you have them.
Wednesday, December 2, 2009
According to the story, Jay C. Nolan was released on a $100,000 bond on allegations that he defrauded individuals who invested in a hedge fund that he managed. Hedge funds are not a big component of the Series 7, but they are testable. Remember that investors need to be accredited to buy into a hedge fund and that hedge funds employ higher risk trading strategies as well as being very difficult to liquidate. They are organized as limited partnerships (DPPs), as we notice by the name of Mr. Nolan's fund, "Lodge Diversified Fund LP," where the "LP" stands for limited partnership. Actually "LP" could also be said to stand for "losing plenty" or "lying phoney," but we'll stick to the traditional reading here.
What happened? Apparently, when the losses began to pile up, the hedge fund manager simply could not admit it to himself or to investors. Allegedly, he sent out account statements revealing that the fund was currently worth $6.3 million, but when an investor did some checking with other sources, he learned that the actual value was only $170,000.
Oopsie! That's more than a typo, isn't it? I'm not sure how large or scary the investor is, but according to the story, Mr. Nolan spilled his guts immediately and admitted he had been sending out bogus account statements.
So now what? First, there will be the massive legal bills paid to Mr. Nolan's attorneys, who will do their best to keep him out of jail or keep his sentence as short as possible. Maybe they'll take it to an embarrassing criminal trial in which angry investors take the witness stand one-by-one and call him every name in the book that the judge will allow. Or, maybe they'll accept a plea bargain in exchange for a shorter sentence. There will also be the civil cases in which investors try to sue to recover some of their money. And, the SEC and/or the State of Illinois will try to make sure he never works in the investment industry again.
Do a google search on "Lodge Diversified Fund LP" and see what you can find. And please remember that sending bogus account statements through the US Mail and by email equals criminal violations known as "mail and wire fraud." When you sit for your Series 63 or 66 you'll learn about "custody" issues in the sense that regulators don't like investment advisers to have control over client assets but prefer that the assets are held by a custodial broker-dealer, who sends account statements to investors with no motiviation to fudge the numbers. Letting your investment adviser tell you what your investment is currently worth is a recipe for fraud and disaster.
Sunday, November 22, 2009
All of the following would cause NAV for an open-end fund to increase except
A. stocks in the portfolio increase in value
B. stocks in the portfolio pay a dividend
C. investors buy new shares in unexpectedly large quantities
D. bonds in the portfolio make interest payments
EXPLANATION: if you owned stocks and bonds in a brokerage account, the account value would rise whenever the value of the stocks and bonds went up, or whenever they put money into your account via dividend and interest payments. If you multiplied the size of your portfolio by a bazillion and cut it up into shares, the same thing would happen to the mutual owners of your mutual fund. So "A", "B", and "D", all do make the NAV rise. Choice C has nothing to do with NAV--supply and demand does not apply here. At 4 PM or so each day the fund is revalued based on what we just mentioned--THEN, they let buyers in based on that NAV, and they pay sellers out the NAV. But it's all proportional and all done at the same price.
Wednesday, November 18, 2009
In any case, starting in a few days, any agents or principals who get in trouble with FINRA will have the violation sitting in broker check indefinitely. That way, if they try to switch to, say, the insurance business, customers will be able to look them up at broker check and see that maybe they aren't the sort of people investors should trust with a $1.5 million annuity purchase.
Go ahead and check out the actual press release at the link below. And, more important, stay out of trouble once you get your securities license.
Monday, November 16, 2009
The Series 66 exam is changing. The old 80/20 split between regulatory concerns and investing concerns is changing to 50/50. The test is adding questions on derivatives (options, futures, forwards), hedge funds, statistics (mean, median, mode), annuities, insurance, retirement plans, Efficient Market Theory, and a handful of other exciting topics.
Will the test be easier or harder starting in January?
Nobody knows, but nobody has ever seen these tests get any easier. The regulators feel that they protect investors by flunking a certain percentage of test takers, and we will never convince them otherwise.
To help you get the Series 66 off your plate before all the changes occur, I have created a 50% off coupon code to be used on any purchase at http://www.passthe66.com/. The coupon code is: 66now. Be sure to hit the APPLY button to get the discount.
Friday, November 13, 2009
Nothing could be further from the truth. As you'll see from the link below, the Series 7 material that you're studying about municipal securities is unfolding right across the street from my office. Across the street sits an old brick industrial building that was almost converted into lofts, condos, and townhomes except that the real estate market--as you may have heard--sort of went south before they could sell any of the units. I watched a few work crews install hundreds of windows and sandblast the original wooden beams, but this project never even got off the ground after that. The developers borrowed $15 million with nothing to show for it, and the lenders have sued to foreclose on the property.
A very familiar story playing out across America, isn't it?
What does this have to do with municipal securities? As you'll see from the article at the link below, the local park district now wants to purchase that huge former industrial campus with our tax dollars and use it for office space and recreational facilities. They'll have to borrow a ton of cash to buy the property now in foreclosure, and they'll do so only if we taxpayers vote "yes" in February to let them issue these municipal bonds backed by an increase in our property taxes. If the majority determines that tax payers should pay a few hundred bucks more a year in property taxes in order to expand the park system, the bonds will be issued. If the majority votes "no," the issue will die temporarily, until the politicians can think of another plan. It's kind of shocking to see how the village played their hand on this one. The village dragged out the development of the "Roos building" painfully by requiring all kinds of variances and rejecting round after round of architectural changes . . . by the time the developers got the village council to approve the project, the real estate market had completely turned south and--oopsie--no interested buyers at this time.
Now that the building is in foreclosure, that same local government steps in to buy it at a discount. Then again, this is basically Chicago here. I mean, you can see the Sears Tower by stepping outside and looking to your right. But it seems like some pretty strong-armed tactics for a village government to take just the same.
In any case, if you'd like to see how the same Series 7 material you're studying is unfolding right outside my office window, click on the link below:
Thursday, November 12, 2009
A. ask price, plus a commission
B. public offering price, plus a commission
C. public offering price, plus a reasonable markup
D. public offering price
What the above question is pointing out is that a primary offering of securities has one price called the "public offering price," or "POP." Built into that POP is the compensation to the underwriters and selling agents. This is true whether we're talking about municipal securities, corporate securities, mutual funds, or variable annuities. When securities are traded among investors in the secondary market, broker-dealers step in between and either make commissions or markups-markdowns. But when they act as underwriters on the primary market, their compensation is built into the POP.
Friday, November 6, 2009
On the other hand, the individual referenced in the link I'll post below is done. Game over. Forced early retirement. As you'll see, when a broker-dealer is called in for investment banking work, they end up knowing information no one else has, information that can move the price of the company's stock up or down with near certainty. So, investment bankers are fiduciaries who have to keep the information confidential. Don't spread the news, and--for crying out loud--don't try to buy shares of the company's stock so you can dump it when the news becomes public. Tempting, sure. But it's a criminal violation. It leaves you open to all kinds of civil suits. And--as you'll see--it tends to end a registered representative's career permanently.
See what I'm talking about here:
Tuesday, November 3, 2009
I just passed the Series 7 yesterday (Nov 2nd) and I wanted to thank you for your assistance. I've been sitting in on your free Friday webinars and they have been extremely helpful. Perhaps they were the key to me getting a 93% on the test!Your willingness to share your expertise and personal passion for this material is very uplifting, during a period of time when we (the test takers) are stressing out. You bring a level of reality to the material and your practical examples based on your real life experiences is very helpful. Keep it up, I'm off to the 66 now and will continue on the calls, I do enjoy them.
- 250 questions (plus 10 experimental)
- 6 hours with a required "half-time" break
- a calculator is provided--bring your photo ID only
- you must be sponsored by a broker-dealer to take the test
- to get a securities salesperson (agent) license from your state, you must also take the 63 or the 66 exam in virtually all states
Now let's dispel a few urban legends regarding the Series 7
- there is no limit to the number of times you can take the test
- however: you must wait 30 days to re-test after the first failed attempt, 30 days to re-test after the second failed attempt, then 6 months after every failed attempt going forward
- the test does not adapt to anything you're doing on the computer
- no one has the "actual Series 7 questions"
How do people perform on this exam?
- on any given day, ~ 66% of those taking the test pass it
- any company claiming to have a "90% pass rate or higher" is pulling a number out of thin air. how could anyone consistently beat the national average by 25+ points, especially when all other vendors have access to each others' materials? there are no secrets in the test prep industry
- the average score is about 73% on the test
- no one has results broken down by "first attempt," "second attempt," etc.
For more information on the Series 7 exam itself, go to YouTube and type in "Series 7 exam" or "What is a Series 7?" and click on our video clip.
Friday, October 30, 2009
I'll let you take it from here:
Tuesday, October 27, 2009
Turns out, that is exactly right, no matter how strange it seems. But what really struck me is how difficult it is to get that all from the orginal bureaucratic, legalistic version. This is how the IRS explains what I just wrote above (From Publication 550) :
Original issue discount. Original issue discount (OID) on tax-exempt state or local government bonds is treated as tax-exempt interest. If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of the OID to figure gain or loss.
Discounted tax-exempt obligations. OID on tax-exempt obligations is generally not taxable. However, when you dispose of a tax-exempt obligation you must accrue OID on the obligation to determine its adjusted basis. The accrued OID is added to the basis of the obligation to determine your gain or loss.
Market discount. Market discount on a tax-exempt bond is not tax-exempt. If you bought the bond after April 30, 1993, you can choose to accrue the market discount over the period you own the bond and include it in your income currently, as taxable interest. If you do not make that choice, or if you bought the bond before May 1, 1993, any gain from market discount is taxable.
I guess what also struck me was how much I enjoyed reading Publication 550 and how much I, apparently, need to find myself a hobby.
Friday, October 23, 2009
Not a chance. The only way to make money on a covered call is to have the stock price remain near your purchase price--and, gee, isn't that sort of what all stock investors would like? If you buy the stock at $50 and sell a Nov 55 call @2, you're okay as long as the stock stays at $48 or higher, but never goes above $55. If the stock drops below $48, you lose just like any other owner of that stock. But--and here is why I absolutely hate covered calls--unlike any other owner of that stock, should the stock go way up, you make none of the upside above $55. None of it. So, you're still exposed to the downside by nearly as much as any other owner--it's just the premium that separates you--but you also sold away your upside for $2 a share, capping it at $7 per share, no matter how high the stock goes.
Of course, it's not likely that a stock will drop to zero that fast, but if the $50 stock drops $10, $20, maybe $30 per share, your days of writing covered calls on it are over. As I mentioned, the strike prices can't be $20 or $30 below your purchase price if you want to make a profit. Right? Could you place a sell-stop below the purchase price? Not really--if that stock is sold automatically, the call you wrote is suddenly naked.
Anyway, next time you hear somebody on the radio or the Internet trying to convince you that covered calls = investment nirvana, factor in some of what I just wrote. And, if you can follow what I just wrote, that's a good sign that you can understand even the toughest options questions.
Thursday, October 22, 2009
Which of the following represent(s) an accurate statement?
A. Municipal bonds are traded on a highly liquid secondary market
B. Some municipal bonds pay interest that is non-tax-exempt at the federal level
C. Municipal bonds are exempt from registration requirements
D. All choices listed
First, municipal securities are not highly liquid; in fact, many are illiquid. The school district in which I live recently raised $2,000,000 by selling municipal securities. That means if the bonds were par value of $1,000, there were only 2,000 bonds issued. If the bonds were $5,000 par value, there are only 400 bonds in the entire issue. There is no way that thing could have a liquid secondary market. Secondly, most but not all municipal bonds pay tax-exempt interest. I have an official statement from the City of New York here on my desk. One issue is for $9.2 billion and is described as tax-exempt by the bond counsel. The other issue is for a mere $80 million and is not tax-exempt. Perhaps if I were more curious about the Internal Revenue Code I would track down why the second issue is not tax-exempt, but I'm not, so I won't. But I can now eliminate Choice A and Choice B and, therefore, Choice D has to go, as well.
Leaving me with my answer: C
Monday, October 12, 2009
Hard. Really hard.
Seriously. This exam is not just trying to flunk you--it's trying to harass and humiliate you. On any given day, 2/3 of all test-takers fail the Series 7 exam. Obviously, FINRA likes it that way. And, why wouldn't they? The more times people have to take and re-take the exam, the more testing fees they generate.
Okay, so it's a hard test. You already knew that--the question is, what's the best way to study for it?
I recommend that you study 5 days a week for a total of about 20 hours, and that you do this for about 8 weeks in a row. At a minimum.
So, after you buy the Pass the 7 full package plus DVD (http://www.passthe7.com/), I recommend that you watch the DVD lesson that corresponds to each Pass the 7 book chapter first. Then, I would read the book chapter. Then, I would watch the DVD lesson again. Then, I would do all the practice questions on that chapter. And, yes, that would take me a lot of time, but I would really know something about that chapter before I moved on to the next one. Also, it's very easy to pop in a DVD and hit the Play button--after a few minutes of that, you'll be awake enough to put in an hour or so of hard, concentrated reading. Watching the DVD lesson once again will be a nice cool-down after reading, and then applying what you've studied to the practice questions will kick it all up a notch and leave you with that satisfied post-study buzz that will allow you to get some sleep. Face it, you have to sleep the two or three months that you study for your Series 7. And eat. And live your life like a normal person. If you go into the testing center looking and feeling like a zombie, you have statistically no chance of passing.
Once you've gotten through the book and done all the questions by-topic, it's time to take some final exams, which you'll probably do for the last week or two before your exam. Make sure you aren't memorizing answers, because whatever you study will not look exactly like the exam, no matter how hard the company markets their "expertise," or "results." We have some "Go No Go" exams that we can send a link to, so send an email. We'll also talk more about studying for the exam, trying to keep it as concise as possible.
Sunday, October 11, 2009
So, please enjoy:
An annuitant chooses life with a 10-year period certain. If the annuitant lives 12 years, what happens?
A. the beneficiary receives two years of payments
B. the annuity pays out for just 10 years
C. the annuity pays out for 12 years
D. annuity units are converted back to accumulation units
EXPLANTION: with a 10-year "period certain" the annuity company will pay for at least 10 years but will also pay as long as the annuitant lives. Whichever turns out to be longer--that's how long they end up paying, either to the annuitant or the beneficiary after the annuitant dies.
Wednesday, October 7, 2009
Which of the following could reduce the amount that an individual may contribute to a Traditional IRA?
A. Roth IRA contributions made for the year
B. High income level
C. Participation in an employer-sponsored plan
D. All of the choices listed
EXPLANATION: if you were going too fast, you might have been tricked by this one. The other choices only affect how much can be deducted from the contribution, but anyone with earned income can contribute to their Traditional IRA.
Tuesday, October 6, 2009
One of your investors has both long and short stock positions in her margin account. Today, if the value of the long positions increases by $4,000 and the value of her short positions increases by $2,000, the combined equity will
A. increase by $6,000
B. increase by $2,000
C. decrease by $2,000
D. decrease by $6,000
EXPLANATION: remember that you want the value of a short position to drop. It’s nice that the long position advanced $4,000, but that was reduced by the $2,000 advance in the short position’s value
Saturday, October 3, 2009
I saw a question like the one below on the software my firm gave me--I think it's an internal product somebody higher up put together. I don't think there's a right answer. Can you help?
Here is the qestion:
An investor purchases 300 shares ABC @50 and writes 3 ABC Aug 55 calls @1.50. His maximum loss is . . .
I chose "unlimited" because of the short call position--what am I missing?
If the investor only wrote the three ABC Aug 55 calls, his risk would be unlimited, but this investor already bought the 300 shares he is obligated to sell and deliver for $55 a share. Therefore, he no longer worries about the stock rising; in fact, that would be his maximum gain. If the stock rises, he can make $5 per share plus the premium . . . maximum. His maximum loss is now pointing downward--he owns the stock. If it drops from $50 to zero, all he got to offset that was $1.50 per share. His maximum loss, then, is still $48.50 per share, times 300 shares.
That's why they say that covered calls provide "partial protection." The premium income is a nice way to "increase yield" or "increase overall return" on the stock, but it does very little to protect against a big drop. The best way to protect a long stock position, remember, is to buy a put. Having the right to sell your stock at a set price in case it drops is much better than having to sell your stock at a set price only if it goes up. I'm going to leave you with that thought--enjoy.
Tuesday, September 29, 2009
Why is this answer 5 business days? I thought it was T+3 . . .?
An investor who buys 500 shares of common stock at $25 per share in a regular way transaction is required to deposit the money by
A. Trade Date
B. Settlement date
C. Trade Date plus 3 business days
D. Trade Date plus 5 business days
RESPONSE: broker-dealers must settle at T + 3. If they want to pay for their customer's trade and let the customer slide, they can only let him slide for 2 more business days; after that, they'd have to request an extension. So remember for a test question that firms settle at T + 3, but customers have 2 more business days to pay . . . if the firm wants to be that nice. We could say that customers must pay "5 business days after the trade," or "2 business days after regular-way settlement." It's imperative that we have at least two ways to say everything in this business in order to keep the customer totally confused.
Saturday, September 26, 2009
Can you provide a timeline which explains why the record date is several weeks after the dividend is declared. I have been assuming the date the dividend was declared was when it was paid as well, therefore am confusing the ex dividend date.
The concept of the declaration, ex-, record, and payable date is almost certain to appear in one or two questions on your Series 7 exam. While options can be difficult, this topic is the equivalent of a two-inch putt in golf. Yes, you could miss it, but no you aren't going to let yourself. I don't care how tricky the question appears, understand that you will never miss an easy question involving the ex- or the record date.
First, the dividend has to be declared/announced by the Board of Directors. That's the declaration date. In the announcement, we discover the payable date, which is the date the dividend checks will be cut and delivered to shareholders. Only if you're a shareholder of record on the record date will you receive the dividend.
That's really the concept right there. If Abbott Labs declares a dividend of $1.00 per share, they announce when it's payable, and they announce the deadline for being an owner of the stock--if you want that dividend.
This is where T + 3 settlement enters in. You don't really own a stock until your purchase has settled/cleared between your broker-dealer and the broker-dealer whose customer sold you the stock. That takes three business days. Once the transaction clears/settles, you are recognized as the owner, but not until. So, if you bought the stock three business days before the record date, you would be recognized as the owner on that date and would, therefore, get the dividend when they pull up the big list of shareholders. However, if you bought the stock just two business days before the record date, you would not be the official owner of the stock in time. So, the seller gets the dividend, not you.
This day, two business days before the record date, is called the ex-dividend date because buyers won't get the dividend. Therefore, they won't pay for it either. If the dividend is $1, the share price drops by $1. Cash is an asset, remember, so if the company is paying out cash, the stock is worth that much less. And that's why it's a violation to hustle a customer into buying just to get this dividend--that's called "selling dividends." It's fraudulent in that it implies something false--the investor could just skip the dividend, buy the stock for that much less, and avoid the taxation on the dividend.
So, actually, these are simple concepts--it's just that they are woven together into a fabric of many, many concepts. You have to know what settlement means, and remember that it's T + 3 for "regular-way settlement." You have to remember that the board of directors declares a dividend, and how the dividend would affect an investor. The Series 7 is some pretty sophisticated stuff. But on any given day 2/3 of all test takers pass it.
Knowing the concepts for real--rather than pretending you've studied--is the only way to be in the happy 2/3 rather than the deflated 1/3 who have to come back in 30 days for another grueling day at the exam center.
If you can find an audience who'll listen, see if you can explain what I just told you about the ex-date, record date, etc. to a friend or loved one. If you can do that, then you know for sure you have a handle on it. On the other hand, if you just want to keep taking the same practice questions over and over again--the easy ones that give you that warm, happy glow inside--on the ex-date or record date, good luck with that. The questions on the Series 7 will look much different the ones you've taken 15 times now.
Thursday, September 24, 2009
Luckily, it appears to be in a cooperative mood.
If it advances another $5-6 a share, I'll place a sell-stop slightly below the then-current market price. That means if the stock sits still or rises, I hold. But, if it drops, I fold.
Wish me luck. And, if I ever take another margin loan, somebody please shoot me.
Friday, September 11, 2009
"The findings also stated that, in order to comply with Regulation D, the firm was required to have a substantive and preexisting relationship with each investor prior to the time that, acting through its representatives, it offered the company’s investment to prospective investors. The findings also included that the firm used the means of interstate commerce to offer and effect these transactions, engaging in a general solicitation with respect to the offering and, therefore, participated in the sale of unregistered securities."
Oops. Remember that to escape the registration requirement on the offering of securities, the SEC insists that the private placement is actually, you know, private. If you want to solicit a bunch of people, you're doing a public offering and must, therefore, register the stock, deal with the cooling off period, etc.
Tuesday, September 8, 2009
The inside market is:
A. highest bid, lowest ask from the market maker quoting the largest position
B. highest bid, highest ask from all market makers
C. highest bid, lowest ask from all market makers
D. lowest bid, highest ask from all market makers
EXPLANATION: when a customer places a market order to buy or sell stock, he is willing to pay the best available price ASAP to get the stock or sell it. The best prices for the customer would be the highest bid--if he's selling and the lowest ask/offer price--if he's buying.
Monday, September 7, 2009
A. working capital
B. current liabilities
C. net worth
D. total assets
EXPLANATION: think through a tough question like this logically. Ask yourself what happens when a company sells stock in an IPO. They take in cash, right? Cash is a current asset, which is part of working capital and, by definition, part of total assets. Choices A and D are eliminated. Net worth is usually called "stockholders' equity," but you have to be flexible to pass the Series 7. Since the par value of the stock is listed under "net worth/stockholders' equity", as well as the "paid-in surplus," reflecting the price of the stock in the IPO, you have to eliminate choice C-net worth.
If that approach doesn't work for you, ask yourself where the "liability" comes into play--is the company borrowing money? No. Even if they issued a bond, that would be a long-term liability, so you can safely go with choice B.
Friday, September 4, 2009
I am so glad I never did anything crazy like try and open my own broker-dealer. OMG, it would be a never-ending stream of fines and sanctions due to my decided lack of record-keeping skills. In any case, sanctions and fines often have little to do with malice or greed--it's just really hard to stay on top of all the details that need to be attended to in this industry.
Friday, August 21, 2009
It did, and it was.
Well, I suffered the usual seller's remorse and started to worry that the stock would eventually rise without me. So, I placed a buy-stop on 100 FMBI at $10. As you know, that meant that if the stock rose to $10 or higher, it would be purchased.
It did, and it was.
This being a margin account, $1,000 of stock (plus a $9.99 commission) was purchased and placed on my tab, a tab which is now $4,557.78.
Hmm. I should probably place a sell-stop on HSP right now. That way if it plummets, I won't lose my best chance to pay off most of this silly margin loan.
I don't know. Every sell-stop I enter seems to be sold a few days later, at--by definition--a lower market price.
Oh well. Nobody forced me into this loan, and it isn't like I owe Tony Soprano. The interest rate is right around prime, and is tax deductible, unlike the juice I would have to pay to Mr. Soprano. I'll survive. I just want to win this one, even though I know how quickly I could end up losing.
Thursday, August 20, 2009
Not sure where that assumption comes from, but economic indicators never all point one way or the other. Maybe new claims for unemployment drop, while the number of people on unemployment rises a little bit--happens all the time. As I see in one of the news items today: The Labor Department said the number of people collecting long-term unemployment benefits edged up 2,000 to 6.24 million in the week ended August 8. However, the four-week moving average declined 2,500 to 6.27 million.
That's how tricky economic data can be--even though the number of people on unemployment ticked upward, the 4-week moving average declined. Moving averages, remember, help to show a trend as opposed to over-representing what happened just yesterday or just last week.
So, if you're wondering why it sometimes seems that nobody really knows where the economy is right now or where it's headed, there is a very good reason for that--nobody does.
Sunday, August 16, 2009
On the Series 7 exam you will see several questions about the registration of representatives and principals of a broker-dealer. One question might ask what happens when a registered representative volunteers or is called into active military duty. If he or she is away from the firm more than two years, does the license expire? Does he have to take continuing education courses in some cave in Afghanistan? Does she lose all the commissions she could have made on her "book of business"?
Not surprisingly, FINRA and the SEC are extremely accomodating when a registered rep or principal is called away from the firm to serve Uncle Sam. Here are the basic facts:
- license is placed on "inactive status"
- continuing education requirements waived
- dues, assessments waived
- two-year expiration period does not apply - exam might refer to this as "tolling"
- can earn commissions, usually by splitting them with another rep who will service the book of business
- the "inactive" rep can not perform any of the duties of a registered rep while on inactive status
You could see a question about a "sole proprietor" called into active military duty. If so, tell the test that the same bullet points above would apply.
Friday, August 14, 2009
Also, I see a broker and her firm being sanctioned for talking people into taking out home equity loans in order to buy variable life insurance. This action is probably just the tip of the iceberg; I know of at least one firm who trains their new rep's to do exactly that--or did when the housing market made such loans readily available. See the full announcement at:
Today's Friday Free Broadcast covers industry rules and regulations. Sometimes I think every Friday should cover that topic.
Tuesday, August 11, 2009
Friday, July 31, 2009
As usual, I'm visiting the FINRA website on a Friday morning looking for recent regulatory actions. This morning I see an action against a couple of large firms concerning the fact that an IPO for a closed-end fund has a built-in sales charge (like any IPO) and, therefore, customers should not be advised to buy them during the offering and then dump them in the short-term. If you click on the link below you'll see how FINRA deals with such matters--they fine people, put them in the penalty box, and name names and reveal CRD numbers. In other words, it's a good idea to stay out of trouble. Check out the disciplinary action below. Once again you'll see how "real world" this Series 7 information actually is:
Friday, July 24, 2009
As at most businesses, we should probably put down the time the order was received by the customer, and the department that places the trade can then record the time the trade was executed and the price.
The firm would probably require some more information on the trade ticket, but this is a regulatory exam, so know the minimum that is required on a trade ticket. Know that a principal must review each one by the end of the day and approve/reject each order. And, finanally, know that trade tickets are kept for three years, two years in a readily accessible location.
Wednesday, July 22, 2009
Your investor informs you that his market sentiment is currently "bullish-neutral." If the investor is not risk averse, you would most likely recommend that he
A. write call options
B. purchase call options
C. write put options
D. purchase put options
EXPLANATION: when you see "bullish" in the question, you can pretty well eliminate "A" and "D," which are bearish strategies. There is nothing "neutral" about purchasing a call option--you purchase a call only because you think the stock is going up in a hurry. If you write a put, you make money if the stock rises (bullish) or stays the same (neutral), which is why the answer is to write put options.
Saturday, July 18, 2009
07/09/2009 15:57:52 Sold 50 EQR @ 19.51 $965.48
07/10/2009 02:10:48 ORDINARY DIVIDEND (EQR) $36.19
If the stock was already sold on July 9th, why would I receive a dividend on July 10th? And, for extra credit, why is it an "ordinary" dividend?
On the other hand, what if Hospira (HSP) drops from here? Then, I move on to Plan B, which is to take a loss, throw some cash money on the table and walk away from this crazy idea of borrowing money backed up with stock as "collateral."
On another note, the 200 shares of FMBI that I inherited a few years ago were triggered and sold at $5.99 when my sell-stop was activated. But, now that the big banks are reporting positive earnings, little bank holding companies like this one are starting to rise again. Unwilling to jump in just now, I placed a buy-stop-limit order for 100 shares FMBI, with an activation price of $10 and a limit price of $10.50. What if the stock drops from here? I'll be glad I never bought it. But if it rises to $10 or more, I'll end up with 100 shares.
Again, the idea that "this Series 7 stuff has nothing to do with the real world" is crazy. I'm using sell-stops, buy-stop-limits, and margin loans in my daily life. And pretty soon so will many of you.
Careful out there.
Friday, July 17, 2009
Enjoy the real-world view and remember the most testable points about SIPC, including--but not limited to:
- Protects customer assets at failed broker-dealers
- Covers $500,000 per "customer" of which no more than $100,000 "cash" is covered
- An industry-funded, non-profit insurance provider
- Does not cover commodities, only securities
Monday, July 13, 2009
If explaining the concept of interest rates to an investing client, you would likely describe the concept in which of the following ways?
A. the real interest rate is the rate earned after taxes
B. the real interest rate is the rate earned adjusted for risk (i.e. beta, standard deviation)
C. the real interest rate is established by the Federal Reserve Board at regular policy meetings
D. the real interest rate is the rate earned above CPI
EXPLANATION: keep it real--if you earn 5% on your preferred stock when prices are rising 6%, you are losing ground; your real interest rate is negative. Inflation is measured by CPI; the real interest rate is only the amount you earn above inflation.
Saturday, July 4, 2009
I'm not sure that UITs will make much of an appearance on the Series 7, but they're on the outline, and, therefore, you could easily see one or two questions. As always, you have to know just enough information about a vast array of topics to pass the Series 7 exam.
Wednesday, July 1, 2009
Except, since I owe the broker-dealer for the money I borrowed, guess how that "cash" was applied? Yep--they used it to pay down my debit balance, which is now $3,528.76.
My 90 shares of Hospira (HSP) are worth $3,425.40, so maybe it's time to think about selling them and paying off the margin balance?
Should I place a sell-limit a few dollars above the current price? Or, should I try to set a floor below the current price with a sell-stop order, selling only if the stock drops from here?
Or, should I just watch the market every day and place a market order if I have to? Who knows? The Series 7 doesn't tackle important questions like that--they just expect you to know the basic terminology and be able to follow a blog post like this one.
Saturday, June 27, 2009
Or, you might just want to slog through annoying practice questions, like this:
If your investor sells 1,000 ABC short @37, makes the required Reg T deposit, and then sees that ABC is trading for $18, what is true of the equity in the account?
A. the equity is unchanged
B. the equity is below the minimum maintenance requirement
C. the equity has decreased by $19,000
D. the equity in the account is $37,500
EXPLANATION: whenever someone sells stock short, he wants the stock price to drop. Since ABC does drop, you know that A and B can't be right. The equity has certainly changed even if you aren't sure how. And, since the stock went the correct direction, the equity is improved not "below the minimum maintenance requirement." Do this type of work before you start calculating--knock things off your plate as soon as possible. Now, really, you could eliminate "C," since the equity has increased, and then to check your work do this . . . add the $37,000 the investor receives on the sale plus 1/2 that amount ($18,500), which is the cash he puts down. His Credit - $55,500. Just subtract the current market value of $18,000 from that, and you get the correct answer of $37,500. The opening credit on a short sale is "half again as much" as the short sale. Subtract the market value of the stock from that, and you've figured the "investor's" equity.
Thursday, June 25, 2009
Wednesday, June 17, 2009
A customer in a new margin account purchases 100 XYZ @38 and makes the required Reg T deposit. If XYZ rises to $52 a share, the equity in this long margin account will be
EXPLANATION: this is a very tough question. First, if you simply take 1/2 of $3,800, you will get the question wrong. But, if you're lucky enough to remember that the minimum maintenance is $2,000, you could easily mess up by writing $2,000 as the Debit Balance. Remember that if the customer deposits $2,000 on a $3,800 position, the Debit Balance is only $1,800. So, when the stock rises to $5,200, the equity is the difference of $3,400.
For now, let's do a question on margin accounts:
An investor purchased 1,000 shares of XYZ @50 in a new margin account, making the required Reg T deposit. If XYZ rises to $75 per share, the investor's buying power will be equal to:
EXPLANATION: the investor has a Debit Balance of $25,000 after putting down $25,000 cash money. When the stock value rises to $75,000, the equity rises to $50,000. Now--carefully--what is the Reg T requirement on $75,000? Only $37,500. So, there is $12,500 of excess equity or SMA. The customer can borrow $12,500; his buying power is twice that amount, or $25,000.
Thursday, June 11, 2009
I'm delighted to inform you that I pass the 63. You material were key to my success. Let me know if you can use my referral. Now, I can keep my job with this difficult economy. Thank you for everything. Now, I want you to get me through the series 7 and 66 within the next 8 months if possible.
I just want to drop you a note and thank you for all that you have done for me. I sat for the Series 7 last Thursday and passed!I took the exam 3 years ago and really didn't know how to take the test.Everything in your book, cds, and quiz set make this very easy. I felt very comfortable, in fact I felt that you had me so prepared that when I finished I hit the button to see if I passed or failed and I did not even look up at the screen. I walked out and asked the proctor what my score was!!!!!!!!!!!!I have told numerous people around the country to look up your website.P.S. I will miss your Friday broadcasts!
Tuesday, June 2, 2009
No idea. Luckily, the exam doesn't expect you to know something like that. The exam just wants you to have an idea what earnings and P/E ratios might be, which stocks are generally more volatile and which are generally more stable, that sort of thing. Being able to relate some of this exam material to the real world will give you a big edge when studying, so I encourage you to look up some of your favorite companies and look for testable points. Glance at the income statement, click on the "overview," and have yourself as much fun as I'm currently having at 4:55 AM on a cold, dreary morning in early June.
Tuesday, May 26, 2009
Interestingly, after I requested the check, I got good news from my publisher, First Books, who was kindly sending me a royalty check larger than I anticipated. I also sold 80 shares of NTRS and that check for $4,000 is now on its way, so I'm only partying at this point in the name of helping my customers and blog readers--I no longer even need the five grand. Either way, remember that the $4,000 was a withdrawal of funds after a sale of stock--I made sure they waited until the T + 3 settlement date so they wouldn't think I was taking another hit off that metaphorical crack pipe known as SMA. It's just my cash--please send it to me. And, they did, with no fees, no postage charges, and no questions asked. Remember that cash in a customer's account does earn the broker-dealer interest, but that cash amount is owed to the customer upon request and must be paid out promptly. Of course, with a margin loan against SMA, nobody has to cajole the broker-dealer--they can't wait to start charging me interest on that loan with the same enthusiasm that VISA apparently has for those little pretend "checks" they keep sending me, three to a page.
Remember, I "plan" to sell 90 shares of HSP after they rise at least $10 a share. If so, I'll pay back the $5,000 loan and likely never hit that pipe again. But, how often do a gambler's "plans" pan out? Not very often, so, as they say on the Mythbusters--please do not try this at home.
To establish an account under the Uniform Gifts to Minors Act, the custodian must be a:
B. a registered investment adviser
C. an immediate family member of the beneficiary
D. a person who has reached the state's age of majority
EXPLANATION: the custodian simply needs to be an adult (not a minor). He/she does not need to be related to the beneficiary and does not need to be a professional investor. If you open an UGMA account for your niece, you can manage the investments yourself for the benefit of the minor child. And, the beneficiary does not need to be a relative; perhaps the neighbor boy you hire to cut your grass would enjoy a surprise upon his 18th or, perhaps, 21st birthday . . .?
Wednesday, May 20, 2009
When we borrow against "SMA" we pay in the neighborhood of the prime rate, and, believe it or not, margin interest is tax deductible, meaning you can use it to offset/reduce any dividends or bond interest you receive in that account. So, it's a pretty decent line of credit to tap in an emergency. At least that's what I'm telling myself now that I just tapped it for $5,000. Long story short, I split up with a woman a few months ago and badly underestimated all the costs associated with the unwinding of that particular merger. I now sit here with $500 in checking, $251.11 in savings, and no car after buying a house in Texas that she will rent and eventually buy from me. In other words, I have two mortgages starting in July and almost no cash. You're derned tootin' I hit that line of credit called "SMA" yesterday. Took about 30 seconds to send TD Ameritrade an electronic request for $5,000. And, if the stock market cooperates, I should be able to borrow another $5,000 or more in a few months. Like every other gambling junkie who puts it all on number 21, I'm telling myself that Hospira is going to rise $10 a share, and I'll be able to sell 1/2 my shares to pay back the $5,000. Of course, you know how these "plans" tend to pan out, but for right now, I am really looking forward to receiving the $5,000. It might be intersting to track the progress of this potentially bone-headed decision; in fact, let's plan on it.
Tuesday, May 19, 2009
Your customer purchased shares of XYZ for $40 last year. Currently, with the stock trading for $65, your customer is concerned that the stock could drop sharply from its current price, although long-term, she wants to hold this investment if possible. You would recommend that she place
A. a market order to sell
B. a buy-stop order @66
C. a sell-stop order @67
D. a sell-stop order @64
EXPLANATION: the customer does not need to buy any more stock, so you can eliminate choice B. You can eliminate choice A since the customer thinks the stock may be worth holding long-term. A sell-stop order at $67 would be executed as soon as the stock traded at $67 or lower--since the stock is already there, the order would effectively be a market order to sell that might even cost the customer more $ to place than a market order to sell. Choice C, then, can be eliminated, leaving you with the right answer, D.
Wednesday, May 13, 2009
D. None of these choices
EXPLANATION: don't jump to conclusions! Sometimes test questions try to mislead you. You're supposed to start thinking about the annual gift tax exclusion amount, which was $12,000 for 2008 and is $13,000 for 2009. That only has to do with gift taxes. If you give someone more than $13,000 this year, you pay gift taxes on the excess above $13,000, which has absolutely nothing to do with this question. There is no such thing as a "maximum gift" for an UGMA account.
Saturday, May 9, 2009
A. 10-year convertible bond
B. 10-year non-convertible bond
C. 15-year subordinated debenture
D. 15-year collateral trust certificate
EXPLANATION: bonds with longer terms pay higher interest rates to investors, just as you would expect to pay a higher rate on a 30-year vs. a 15-year mortgage. So, you can eliminate choice A and B. Now that you're left with two 15-year bonds, ask yourself which one is more secure? Choice D has collateral behind it (a portfolio of securities). So, eliminate D, and you're left with C. Subordinated debenture holders are the lowest creditors in the pecking order.
Wednesday, May 6, 2009
Moody's was brought up in one of the harder-hitting questions posed by shareholders. Somebody wanted to know why Berkshire didn't use its influence over Moody's after purchasing the company. Not sure if the Series 7 cares, but the fact is that Moody's and S & P are paid by the issuers of the bonds to assign credit ratings. Talk about a conflict of interest, right? If you're being paid by GE to assign a credit score that determines GE's cost of borrowing, might you not be just a little bit kind in your ratings? But Buffett said that conflicts didn't cause the housing bubble, and that he and Charlie don't micromanage their investee companies like that. Then Charlie pointed out that Moody's had just downgraded Berkshire Hathaway's Aaa credit rating, so "maybe that shows a little bit of independence" he said, with a shrug of cool sarcasm that got a big laugh from the massive crowd.
When asked about the derivatives markets that seized up, Warren pointed out that unregulated trading markets involving vast sums are dangerous--there is a reason that the Fed mandates 3-day settlements and 50% collateral in margin accounts. See, those funky mortgage-based derivatives that nearly wiped out Wall Street completely were trading in unregulated markets where settlement dates were vague, and the "contra parties" to the contracts could just hem and haw until finally it became apparent that the contracts were no good.
I certainly did not expect to hear about Reg T and 3-day settlements at this meeting, but there were many cool surprises like that. Not to mention, the $15 box of See's candies turned out to be frighteningly good. Warning: don't open a box of See's candy if you're on a strict diet. Good thing I run so many miles a week.
Thursday, April 30, 2009
So that stuff you're learning about insider trading is, like, important. Luckily for us, the recent SEC insider trading enforcement action provides the perfect example of how insider trading works and why you've seen questions about "firewalls" or "Chinese Walls" that are supposed to separate a broker-dealer's investment banking division from the trading division. Notice how the individual at the link below knew about upcoming deals and then both passed out and traded upon this knowledge.
Can't do that--it's like shooting fish in a barrel, and the SEC wants to maintain a fair and orderly market for securities so that people don't just walk away and refuse to provide capital to companies and governments issuing securities on the primary market. I have nothing to add here--just read the news story at the link below, or click the title, which is always a URL, as well.
Monday, April 27, 2009
Friday, I'll be doing the Friday Free Broadcast (on Taxation) from my luxury hotel room then trying to figure out what the heck to do in the Lincoln-Omaha area for the rest of a Friday. Knowing me, I'll be blogging, writing practice questions, or otherwise engaging in geeky pursuits.
Saturday is the shareholder meeting, and my two B shares (BRK.B) get me into the event. Luckily, this year a panel of journalists will ask a question after each shareholder question is posed. In previous years, the shareholder questions have gotten so far off track, it reminds me of a Series 7 class being run by a lazy instructor who sneaked a few cold ones at lunch on a Friday. With any luck, this year we'll get to talk about the holding company known as Berkshire-Hathaway and any investment wisdom that Warren and Charlie care to impart.
So, yes, I'm excited about the week ahead, which, by definition, makes me a nerd. That's okay. It's spring in the Midwest, I own two whole shares of Berkshire-Hathaway, and I get to write about my little roadtrip to an appreciative audience. Things could be worse.
I promise I'll only write about topics related to the exam, but that should not be hard. From the cumulative or statutory voting used at the meeting, to the income statement and balance sheet, to the EPS and P/E ratio, there will be plenty of test-related informaton to impart from the road. If you really want to dig in, read the annual shareholder report at:
Be well and study hard. See you in Omaha, if you happen to, like, live there.
Sunday, April 26, 2009
If your customer purchases a corporate bond whose face amount exceeds the market price, which of the following statements is inaccurate?
A. the bond's yield to maturity will exceed its current yield
B. the bond's curent yield will exceed its nominal yield
C. the bond's nominal yield will exceed its yield to maturity
D. all choices listed
EXPLANATION: first, the way this question is worded is intentionally deceptive. You see the word "exceeds," and you automatically read it as if the market price exceeds the par value. No--just the opposite. The phrase describes a discount bond. I bet 40% of all test-takers would miss that right off the bat and, therefore, continue down a path of doom. Second, the question exploits the inherently intimidating relationship between bond prices and bond yields. Third, by asking which statement is in-accurate, the test question takes it all up to an even higher, nastier level. What should you do? I recommend smiling and taking a deep breath, realizing that anyone who chooses to write tricky Series 7 questions as a career path can't be all that damned smart--this question can be figured out with patience and confidence. As always, attack a problem step-by-step. Step one--what the heck are you being asked? The question is saying, in its deceptive way, that a bond was purchased at a discount. Step two, what does that mean? It means that all yields will rise above the yield printed on the bond (nominal yield), and they go up in this order: current yield, yield to maturity, yield to call. Once you have that visual, you just start eliminating wrong answers. Unfortunately, if the statement is true, you have to eliminate it. Oy! Okay, the first statement is true--YTM will be higher than current yield, so A is eliminated. The next statement is true--current yield will be higher than nominal yield--so B is eliminated. Now, many test-takers get a false sense of rhythm and confidence. They feel a "flow" building and get too lazy to really read Answer Choice C, assuming that all three statements are probably false because, well because they're done thinking about this damned question.
No way. I learned from my years of throwing elbows on the basketball court that you have to hustle right through the final buzzer. You snooze for one second, and your man can get by you and win the game. When my opponent is some weasle like the Series 7, I am just not willing to let him shuck-and-jive his way past me for a cheap point. So, is Choice C true or false? Is the YTM lower than the nominal yield? No, so we eliminate it, right? Only if we want to lose--remember, we're still looking for the in-accurate statement. C is in-accurate and, therefore, it is the correct answer.
Don't get discouraged--not all Series 7 questions are this hard. In fact, if they were, few would pass it. Approximately 67% of all test-takers pass the Series 7 on any given day, so there is no way that all the questions could hit this hard. However, a certain percentage do hit this hard. Therefore, if you can get in shape to handle even the hard-hitting questions like the one we just looked at, you will pass with flying colors. Remember that the bond see-saw is fundamental on the Series 7, providing some of the trickiest questions of all. If you need extra help send me an email.