Tuesday, November 27, 2012

Who Has the Best Series 7 Sample Questions?

There are SO many urban legends connected to the Series 7 it makes my head hurt sometimes. One of the most popular is that some vendors have "actual test questions" in their possession. This is absurd on its face because even if Company XYZ had those questions, all other vendors would simply order the materials and eliminate any advantage--also the national pass rate would rise to about, oh, 100%, right?. One would also have to be unaware of a current FINRA lawsuit trying to punish and stop a vendor in this industry from taking exams for the purpose of memorizing test questions. Finally, one would have to assume that the Series 7 wants you to memorize endless factoids and simply spit back the most current/updated version of those facts.
Another shaky assumption is that since the exam is hard, the best questions are the "really hard ones," right?
IDK--what does a "hard question" look like? Is it really hard to read? Does it have 5 or 6 negative words in it? If so--that company has no idea what your test looks like. Are the questions 500 words long? Same deal. The actual Series 7 exam will expect  you to know your vocabulary terms very well, but it will go much further than that--you will be forced to figure out the right answer more often than not. The questions will usually seem unfamiliar on first read; your job is to take the facts and eliminate the wrong answer choices. Some of your questions will be lay-ups, but most will force you to think creatively and on-your-feet. If you can do that and get 3 of every 4 questions right, you will be done with this ordeal. If not, you'll have to try again in 30 days or so.
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Series 7 Sample Suitability Question


As you've heard, the Series 7 has many questions concerning suitable recommendations to investors . . . like this one:

One of your customers is in her early 50's. She is concerned about losing purchasing power once she retires from teaching in 10 years, with a modest defined benefit pension. The money she has to invest is an inheritance from a favorite aunt. She has no need to liquidate the investment until she retires, and she may wait several years after that. You would most likely recommend which of the following investment vehicles?
A. deferred indexed annuity
B. deferred variable annuity
C. long-term bond mutual fund
D. immediate fixed annuity

EXPLANATION: first, PLEASE stop doing the Sesame-Street-inspired one-of-these-things-is-not-like-the-other thing. I made Choice C different from the other three, but it's still wrong. Why? Bonds don't protect purchasing power. Fixed annuities also do not protect purchasing power, so we can eliminate Choice D. At this point, the answer seems obvious, doesn't it? She needs the upside of the stock market that the variable annuity offers.  The indexed annuity is all about the guaranteed minimum rate of return--the annuitant does not get the upside on the S&P 500. Not really. So, eliminate Choice A, and we're done here.

ANSWER: b

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Wednesday, November 14, 2012

A Few Words on Taxation

Now that the elections are over, let's clear up some confusion over taxation. First, how do wealthy people like Mitt Romney get by with paying just 13.7% income tax? In our current cynical climate, many assume he must be getting some sort of seedy political favors from his friends in Washington, DC, but the truth is much less interesting. Fact is, people that wealthy can live on dividends and long-term capital gains (trading profits). For close to a decade now those income sources are taxed at just 15%, regardless of one's income bracket. I just had a spirited phone discussion with a buddy last night, and it took a few tries to convince him that a lower tax on dividends makes perfect sense. Like most people, he thought companies pay dividends as kind of a pass-through to their owners. No, no, no--dividends come from "net income AFTER tax." Starbucks paid $674 million of income tax as a corporation last year. AFTER that, they were left with net income of $1.385 billion. So, the profits of the company have been taxed at this point. If the board of directors wants to pass out 72 cents-per-share of that after-tax profit to the shareholders/owners, why should the owners get taxed at all? I don't think they should, but the Republicans were only able to convince the Democrats to lower the tax rate to 15% back when George W was in office. Of course, to get that benefit, you have to own the dividend-paying stock in a taxable account. If it's in your IRA or 401(k), nothing here applies to you. But, what the heck would a Mitt Romney need with an IRA? Defer $6,000 a year? Why? And, he'd have to have earned income to make an IRA contribution--his income is mostly from dividends and capital gains. Then, with huge charitable contributions, he can bring the rate down from 15%, as he did. He paid a huge amount of taxes, but the percentage was 13.7%.
The rest of us live mostly on earned income; therefore, our income is taxed at various tax rates. At the same time the dividend and long-term capital gains rates dropped to 15%, Congress put the following tax brackets into place: 10%, 15%, 25%, 28%, 33%, 35%. Most recently, everybody's first $8,500 of income was taxed at just 10%. Then, the next so-much was taxed at 15%, and so on. If you made, say, $400,000 after all deductions, you would pay tax at all six of those tax rates--the last $21,000 or so would be taxed at 35%. Unfortunately, unless Congress passes new legislation, those tax brackets are going to revert to where they were about a decade ago. The 10% bracket goes away--ouch--and the 35% bracket becomes 39.6%, with about a 3-point jump in all the other brackets.
Wow. Yes, the tax code is always in play, but right now it is about as uncertain as it's ever been. People who will retire in 10 years now have to factor in that they may retire in a higher tax bracket--that diminishes the benefit of deferring their income in a retirement account. They might want to use a taxable account, but if the lower tax rates on dividends and capital gains are taken away or reduced, that might not be so attractive either. Would we be shocked if Congress reduced or eliminated the tax break on municipal bond interest? Yes, but it could still happen. And that would do some nasty things: it would cause the price of municipal bonds to plummet, which would push their yield up astronomically, thereby increasing the borrowing costs of states, cities, school districts, etc. through the roof. Would politicians at the federal level pass off so much of a burden to the states? If it helps them get re-elected, I think they would do just about anything, don't you?
Notice how even a brief discussion of a few aspects of taxation can get very detailed. It's no wonder that political activists prefer to steer the debate towards meaningless phrases like "a tax on job creators" or "paying your fair share." They'd probably lose their audience real quick if they got down to substance. You, unfortunately, do have to know the basics of this blog post when you sit down to take your Series 7 Exam. Exam Help

Saturday, October 27, 2012

Equity Indexed Annuities: the industry perspective

Let's look at what appears to be a good, fair-and-balanced look at equity indexed annuities from the perspective of the industry: http://www.annuityadvantage.com/equityindexed.htm

FINRA Enforces MSRB rules on David Lerner Associates

If you think that what you study for your exam has "nothing to do with the real world," please check out this story: http://www.bondbuyer.com/issues/121_204/david-lerner-associates-million-fines-restitution-excessive-markups-1045154-1.html?ET=bondbuyer%3Ae6391%3A1836724a%3A&st=email&utm_source=editorial&utm_medium=email&utm_campaign=BB_Top_10_Emailed_102612

Excessive mark-ups will lead to trouble . . . eventually. Ignoring suitability concerns . . . same deal.

Oh well. David Lerner--the guy--will apparently be in the market for some Pass the 7 materials eventually. And, fortuitously, we will have our Pass the 24 materials ready by the time he needs to re-qualify by passing that one as well. Series7SampleQuestions

Wednesday, October 24, 2012

Mutual Fund Portfolios

Let's take a somewhat detailed look at a mutual fund's balance sheet and income statement:
video
Series 7Help

Tuesday, October 23, 2012

What IS a Series 7?

Maybe you're wondering what a Series 7 is, what it's used for, and why you might or might not want to go there. Click on the video below if you're curious . . .


Wednesday, October 17, 2012

Series 7 Exam Sample Suitability Question

Here's a practice question similar to what you might see at the Series 7 Exam testing center:


Your customer has $60,000 that she would like to invest for her son's education. Her son is 9 and so far has shown little interest in academics. The customer wants tax-deferred growth but does not want her son to be able to use the money if he chooses not to go to college. Your customer should invest in or through a
A. UTMA account
B. Coverdell Education Savings Account
C. 529 Plan
D. Mutual Fund

Not sure? Click the video below to see a step-by-step explanation:

video




Series 7 Help?

Sample Suitability Question for Series 7, Annuities

Even though many Series 7 candidates will not get their Life & Health licenses, expect your exam to ask a few questions about insurance-based products. Not just variable annuities, but fixed/equity-indexed annuities, and not just variable life insurance, but also perhaps a little bit about whole life and term life insurance. To make sure you know the basics of annuities, let's do a sample suitability question:

Your customer is ready to retire next month. She wants to receive a monthly check for as long as she lives, but she is not impressed with the low rates of return on the fixed annuity illustration you walked her through last week. She has concerns about purchasing power and has a moderate risk tolerance; therefore, she would most likely be interested in which of the following?
A. deferred variable annuity
B. immediate variable annuity
C. deferred indexed annuity
D. immediate fixed annuity

EXPLANATION: as always, what can we eliminate? The phrase "ready to retire next month" eliminates choices A and C--deferral periods are perhaps 10 years long; this person wants  payments immediately. Now, while I would prefer the immediate FIXED product; this individual clearly wants the VARIABLE annuity so she can be partly invested in stocks. Right? The answer is B here, no doubt about it. Get Series 7 Practice Questions Here

Monday, October 15, 2012

Series 7 Sample Question - Suitability

Our Pass the 7 ExamCram Online Test Prep now has a quiz called "Suitability of Customer Recommendations." It is up to 35 questions, and I hope to double that number ASAP. For now, let's do a practice question that forces the test taker to show the test he or she knows the different types of mutual funds. Here goes:

Your customer is a 66-year-old recently retired school teacher living on a defined benefit pension. Her monthly check from the teacher's retirement system covers her expenses, but she also remembers the rampant inflation of the 1970's and is afraid her pension income won't keep up with rising prices. She also foresees some major home repairs in the future, none of which is critical for probably 5 - 7 years. Which of the following funds seems LEAST suitable given her needs?
A.equity income fund
B.bond fund
C.balanced fund
D.large cap value fund 

Don't assume that "66-year-old retired teacher" is code for "pick something really conservative." No, this investor already has something really conservative--a defined benefit pension check coming every month for as long as she lives. Her income piece is pretty well covered, but she worries about inflation and needs to build up some capital to be used for home repairs 5-7 years out. That means she has to be in the stock market. It also means she can' afford to be super aggressive, not over a 5-7-year time horizon. An aggressive growth investor would need a 10-year-plus time horizon because when it's time to put a new roof on the house, it's just not acceptable for the investor to sell when her investment is temporarily down 40%. And that scenario is quite common in the world of aggressive growth stocks and mutual funds. On the other hand, this question doesn't present any aggressive investments, so at first it's hard to see how any of them would be less than suitable. But, if we hold fast to the idea that she needs to be in the stock market to protect her purchasing power, possibly receive a higher income stream down the line, and build up some capital for a 5-7-year goal, we see that only one of these choices does not provide access to the stock market. By definition, a bond fund is not about the stock market, right? An equity income fund is mostly about stocks and about finding issuers that pay ever-rising dividends. A balanced fund always has a large % in the stock market, and always in a well-diversified, conservative allocation. A large cap value fund is comprised of large companies that are currently trading on the cheap--meaning, high dividend yields a-plenty. So, again, the one that is not in the stock market is LEAST suitable--the bond fund, ANSWER B. Practice Questions Online

Wednesday, October 10, 2012

What does FINRA say about suitability?

For a deeper understanding of your new suitability requirements (after passing your exam, of course, and getting registered) please check out what FINRA has to say about the topic at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p123701.pdf

For example, aren't we all kind of curious to know the answer to this question?


Would a firm violate the suitability rule if it makes recommendations to customers
for whom it has not obtained all of the customer-specific information listed in FINRA
Rule 2111?

Studying for Series 7?

Tuesday, October 9, 2012

Risk Tolerance


So, an investor might have the primary objective of growth/capital appreciation. He may also have a time horizon of 20 years. However, if he doesn’t have the risk tolerance required of the stock market, we have to keep him out of stocks. Remember that risk tolerance has to do with not only the financial resources, but also the psychological ability to sustain wide fluctuations in market value, as well as the occasional loss of principal that makes investing so much fun in the first place. The terms “risk-averse,” “conservative,” and “low risk tolerance” all mean the same thing—these investors will not tolerate big market drops. They invest in safe, boring things like fixed annuities, US Treasuries, and investment-grade bonds. In order to invest in sector funds or emerging market funds the investor needs a high risk tolerance. Moderate risk tolerance would likely match up with balanced funds, equity income funds, and conservative bond funds.
Putting the three together (investment objectives, time horizon, risk tolerance), then, if we know the investor in the question seeks growth, we then have to know his time horizon and risk tolerance. If he’s a 32-year-old in an IRA account, his time horizon is long-term. Unless he has a low risk tolerance you would almost have to recommend growth funds. If the investor is 60 years old and living on a pension income, she might need to invest in common stock to protect her purchasing power. If so, her time horizon is long, but maybe her risk tolerance is lower than the 32-year-old's. So, we’d probably find a conservative stock fund—not a small cap growth or “international discovery” fund—maybe a growth & income or equity income fund. If another investor seeks income primarily, we need to know her time horizon and risk tolerance. We don’t buy bonds that mature beyond her anticipated holding period. If she has a 10-year time horizon, we need bonds that mature in 10 years or sooner. Her risk tolerance will tell us if we can maximize her income with high-yield bonds, or if we should instead be smart and buy investment-grade bond funds. If she needs tax-exempt income, clearly, we put some of her money into municipal bond funds. For capital preservation nothing beats US Treasury securities. GNMA securities are also very safe. Money market mutual funds are safe—though not guaranteed by the US Government or anyone else—but they pay low yields. Money market mutual funds are for people who not only want to preserve capital but also make frequent withdrawals from the account. See, even though your money is safer in a 30-year Treasury bond than in a money market mutual fund, the big difference is that the market price of your T-bond fluctuates (rates up, price down), while the money market mutual fund stays at  $1 per share.
Seriously. So if liquidity is a major concern, the money market mutual fund is actually better than T-bonds, T-notes, and even T-bills, all of which have to be sold at whatever price. With the money market mutual fund, you can write checks, and the fund company will redeem the right number of shares to cover it.
Total liquidity. And totally boring, just as many investors like it.Suitability Questions for Series 7

Time Horizon

. . . Once we've determined the investor's investment objectives, it's time to talk about her time horizon. In general the longer the time horizon the more volatility the investor can withstand. If you have a three-year time horizon, you need to stay almost completely out of the stock market and invest instead in high-quality bonds with short terms to maturity. If you’re in for the long haul, on the other hand, who cares what happens this year? It’s what happens over a 20- or 30-year period that matters. With dividends reinvested, the S&P 500 has historically gained about 10% annually on average, which means your money would double approximately every 7 years. Sure, the index can drop 30% one year and 20% the next, but we’re not keeping score every year—it’s where we go over the long haul that counts. A good way to see the real-world application of risk as it relates to time horizon would be to pull out the prospectus for a growth fund and see if you can spot any two- or three-year periods where the bar charts are pointing the wrong way—then compare those horrible short-term periods to the 10-year return, which is probably decent no matter which growth fund you’re looking at. That’s why the prospectus will remind folks that they “may lose money by investing in the fund” and that “the likelihood of loss is greater the shorter the holding period.”
Younger investors saving for retirement have a long time horizon, so they can withstand more ups and downs along the road. On the other hand, when you’re 69 years old, you probably need some income and maybe not so much volatility in your investing life. So the farther from retirement she is, the more likely she’ll be buying stock. The closer she gets to retirement, the less stock she needs and the more bonds/income investments she should be buying. In fact, you may have noticed that many mutual fund companies are taking all of the work out of retirement planning for investors, and offering target funds. Here, the investor picks a mutual fund with a target date close to her own retirement date. If she’s currently in her mid 40s, maybe she picks the Target 2030 Fund. If she’s in her mid 50s, maybe it’s the Target 2020 Fund. For the Target 2030, we’d see that the fund is invested more in the stock market and less in the bond market than the Target 2020 fund. In other words, the fund automatically changes the allocation from mostly stock to mostly bonds as we get closer and closer to the target date.Series 7 Exam Help

Big 3: Objectives, Time Horizon, and Risk Tolerance

When presented with a suitability question on the Series 7 Exam, try to think as you will once you get your license. First, what are the goals of the investor? What are her investment objectives? Investment objectives include: capital preservation, income, growth & income, growth, and speculation. If the individual is in his 30’s and is setting up a retirement account, he probably needs growth to build up his net worth before reaching retirement age. If he’s already in retirement, he probably needs income. He might need income almost exclusively, or, to protect his purchasing power, he might also need growth. And, as you might expect, this is where growth & income funds come in very handy. But, any blue chip stock that pays regular dividends would fit that bill, also. Or, even a bond that is convertible—that would be income plus potential growth. This test—you’ll see—likes to make you think way outside the box. Some firms separate growth from aggressive growthAggressive growth investments include international funds, sector funds (healthcare, telecommunications, financial services, etc.) and emerging market funds (China, India, Brazil, etc.). For speculation, there are options and futures, and most investors should limit their exposure to these derivatives to maybe 5-15% of their portfolio.Some folks are already rich, and they wisely just want to preserve their capital (capital preservation). We won’t tell them about buying US Treasury securities all on their own, without commissions. Instead, we’ll put them into a US Treasury mutual fund. Even though the fund is not guaranteed, the securities the fund owns are.Need Help Passing the 7?

Monday, October 8, 2012

What Does the Series 7 Mean by Suitability?

When the Series 7 Exam asks 70 questions on "suitability," what does that actually mean? Well, as you would assume, it covers recommendations to customers that you will make through short-story questions. But, the suitability questions also expect you to know about economic factors, industry news sources, and product features/benefits/risks/costs. This is from the Series 7 Exam outline:

TASKS:
T4.1 Obtains information regarding current domestic and global market events, economic/financial news, industry sectors, and the status of markets and securities from various appropriate sources to assess how this information may impact the markets, issuers and customers’ accounts
T4.2 Communicates relevant market, investment and research data to customers
T4.3 Makes suitable investment recommendations
T4.4 Provides appropriate disclosures concerning products, risks, services, costs and fees
T4.5 Provides customers with information on investment strategies and explains how the risks and rewards of a particular investment or strategy relate to the customer’s financial needs and investment objectives

Help with Series 7 Exam

video

Thursday, October 4, 2012

Suitability of Options on Series 7 Exam

Series 7 exam questions on options do not always involve calculations or numbers of any kind. To me, the most challenging and relevant options questions on the Series 7 exam are the ones that ask for a recommendation. If the customer has purchased the stock and now feels it may "move sideways," how can he generate additional income?
He can sell a covered call. Now, don't assume your question will use the word "sideways," as if that is some scientific term. It will let you know in some subtle, roundabout way that the stock is expected to go, like, nowhere, so why not collect call premiums rather than just sit around doing nothing?
If an investor expects the stock to sit perfectly still over the next few weeks or months, his maximum, gutsy play would be to write a straddle. I mean, if the stock really goes nowhere, both the writer of a call and the writer of a put would profit; therefore, why not be BOTH the writer of a call and the writer of a put with the same strike price? On the other hand, one only buys a straddle if he feels the stock will surely move big-time in either direction. Buyers of options need MOVEMENT, so if the question implies that the individual feels the stock might not move, that person is a SELLER of options. If you BUY an option, the stock always has to move, and by more than the premium you just paid to get in. This is true of buying single calls and puts, buying straddles, and establishing debit spreads--all are BUYERS, all need movement from the underlying instrument. If you think the market might sit still or work against the buyer, you sell calls and puts, sell straddles, or establish credit spreads. Suitability Questions in ExamCram Online

Wednesday, October 3, 2012

Suitability of Annuities on Series 7 Exam

If you're trying to make a recommendation concerning annuities in a Series 7 exam question, carefully read the facts to determine the following. First, does this investor want a safe, guaranteed rate of return backed by an insurance company's claims paying ability, or do they seek purchasing power protection/growth? If the former--they need a fixed or indexed annuity. If the latter, they're leaning toward a variable annuity--IF they can handle the risks of the stock and bond markets.
Now, when do they need the money to start coming out of the account? If they're at retirement age now, they need the money immediately--they want an immediate fixed, immediate indexed, or immediate variable annuity. If retirement is a long way off, and they won't have to touch this money for 10 years or more--they want a deferred fixed, deferred indexed, or deferred variable annuity.
Those are really the only big considerations. Do you want an insurance product or a securities product? Fixed and indexed annuities are insurance products. They buy a lot of sleep but don't provide much return. Variable annuities offer more upside and purchasing power protection, but the money is not really safe here. Then, when do you want to start taking withdrawals? Now--immediate annuity. Later--deferred annuity. Suitability Questions in ExamCram Online

Friday, September 28, 2012

Suitability and the Series 7 Exam

Hmmmmmmmm. . . . 
Registered representatives primarily make suitable recommendations to clients based on all kinds of factors: age, objectives, risk-tolerance, time horizon, personal values, tax situation, existence of retirement accounts, etc. So, rather than hitting you with a massive number of municipal securities and options questions, your exam is now expected to focus much more on suitability of customer recommendations. If your client has a son who is so far a so-so student, what if she wants to fund his education with a tax-deferred account, making sure he only gets the money if he actually goes to a 4-year college--which vehicle should she use: mutual fund, Coverdell Education Savings Account, 529 Plan, or UTMA? That is the kind of question (529 Plan, btw) you will likely see on the exam now. Has nothing to do with securities or economic factors at all--just asks you what are the features of these vehicles/accounts. You will also be expected to recommend various mutual fund options within a 529 Plan. When the child is very young, most people will invest in equity funds.When the child is 10 or so, probably time for a balanced fund. At age 16, with college a few years off, maybe 40% balanced fund, 40% short-term bonds, and 20% money market. Once college commences, maybe it's 50% short-term bonds and 50% money market.Notice how none of this is scientific, nor could it be verified by any particular document. If there were industry standards for suitability, we would find that all Target Retirement Funds have the same allocations and re-balance them at the same time. Nothing could be further from the truth.
What are you supposed to do, then? I recommend doing the quiz in Pass the 7 ExamCram called "Suitability of Customer Recommendations." Also, bone up on these topics from whatever textbook or questions you have: taxation, annuities, retirement plans, investment companies, economic factors. Get Pass the 7 ExamCram Online Test Prep

Monday, September 24, 2012

CRD, U4, U5 Reporting

If you click the following link, you will see how important all this U4, U5, BrokerCheck/CRD stuff actually is: http://www.finra.org/Newsroom/NewsReleases/2012/P177007.

We're not picking on this member firm. We're just using the headline from the FINRA website to illustrate how important it is for registered reps to promptly update their U4 information, especially when the information is embarrassing (see other post "felonies and finra registration").

Full disclosure is the foundation for our securities markets. The public needs to know about the individuals in the industry who have disciplinary problems, or have paid out arbitration awards/settlements based on their bad behavior. If a member firm and its associated persons deprive the regulators and the public of this information, investors are clearly harmed. And FINRA clearly will respond. Series7 - Need Help?

Saturday, July 7, 2012

What's the deal with this Facebook IPO?

The media white noise surrounding Facebook's IPO can lead to confusion, but, really, the issues are simple. And, they relate to your exam in many ways. First, what IS an "IPO"? Think of a successful company in your area--what if they wanted to be in 25 cities, needed storefronts, delivery vans, manufacturing equipment, what have you? What they need is "capital," and they raise it from high-risk investors interested in buying a percentage of the company's bottom line through something called "common stock." In my little DVD materials, I mention in passing that "after reading the prospectus, the investors like the risk/reward characteristics of the company enough to buy the stock." Well, that's what should happen--in this case, it didn't. If the folks who got suckered into buying the Facebook IPO had spent an hour or two on a Sunday morning reading the prospectus, they would have noted some curious things. Like, first, even though an IPO is designed to raise much-needed capital for expanding businesses, Facebook didn't really need any capital. Their balance sheet was very strong already. Not that the company was actually getting most of the money anyway--more than HALF of the shares "investors" bought in the IPO were being sold by existing shareholders, the early investors cashing in on their American Dream (good for them, btw). So, the IPO was really just a way to cash in on the Facebook brandname for a handful of early investors, who knew that when a stock is priced at a P/E ratio of OVER ONE HUNDRED, it's probably time to sell. And, sell, they did. The buyers of that stock are already down more than 25% on their "investment," and they can yammer on and on about how their holding is now a "buy-and-hold position," but that's total BS. That stock is going to drop another 50% from where it's at imho, and then folks can sit on it for generations without ever seeing a gain. Some people have the mistaken impression that a great brand name = a great company = a great stock. Not. Facebook's growth is slowing massively and can not support a P/E of over 100. If that P/E drops to, say, 25 . . .well, just be glad you didn't buy in.

Thursday, June 21, 2012

What the heck is a Unit Investment Trust?

We're all familiar with open-end mutual funds because they've been marketed quite successfully by household names including Fidelity, Vanguard, Janus, and American Funds. With UITs or "Unit Investment Trusts," few people seem to be familiar. I like to think of it this way--eventually, I'm going to want to devote a serious percentage of my investment capital to fixed-income. I don't need the ultra-safety (and low yields) of US Treasuries, and since most of my investing is still done in a retirement account, I shun municipal bonds, as well. I need corporate bonds, but I can't buy the things outright without devoting say $100,000 per issue. And, I don't want to be exposed to just two or three issuers. So, I need a portfolio. I don't necessarily need an investment adviser trading that portfolio, however. If I don't want to pay management fees and don't necessarily believe that an actively managed portfolio of bonds will outperform an un-managed portfolio, I buy a unit investment trust as opposed to an open- or closed-end mutual fund. I figure the trustee will oversee/supervise the portfolio and only charge minimal fees to administer the trust. The rest of the income gets paid pro rata to us unit holders, and we can redeem our units for whatever they happen to be worth at the time. Many UITs are a portfolio of preferred stock, and that might be even more to my liking. Hold these in the taxable account and enjoy qualified dividends plus a well-diversified portfolio of fixed-income securities I'm too lazy to buy or manage myself. More Help

Saturday, May 12, 2012

A billion here, a billion there

JP Morgan posts a loss of $2 billion? Where is a "net loss" recorded? On the company's income statement or statement of earnings. Note that internally these are often called Profit & Loss statements, and $2 billion is a pretty big loss, even for a behemoth bank like this bad boy. How does it affect the value of the company's stock? Immediately, and not in a good way. To stretch a bit and build some links between the test world and real world, check out http://money.cnn.com/2012/05/11/markets/jpmorgan-faq/

Get HELP with your SERIES 7 EXAM HERE.

Friday, March 9, 2012

Insider Trading, SEC goes after bottling company executive

The Securities Exchange Act of 1934 prohibits fraud and manipulation in the stock markets. One way the markets are manipulated is through insider trading. To many folks, this violation might seem like a victimless crime, but the federal government has long held that the financial markets affect the banking system, the economic stability of the nation, even the amount of taxes collected by the Treasury and, therefore, they must be protected against abuses. Insider trading is fraudulent. That might not sound right at first, but think about it--the handful of people with confidential information have an unfair advantage over all shareholders and other investors. They are considered fiduciaries to the shareholders, who must put the shareholders' needs first. Since that can't happen if the information is used to make a secret illegal trade, the person possessing the information has to abstain from passing around or using it.
But, humans being humans--and usually men being men--some people will sign non-disclosure agreements with their employer's attorneys and ignore emails from said attorneys warning them not to trade in the stock until further notice, all for an illegal profit of 80-some thousand bucks. So, if you know your employer is about to make a huge acquisition valued internally at some $800 million, and the announcement will maybe push up the company's stock price 30%, is it tempting to buy shares in your wife's account ahead of the announcement? Sure. Could you get by with it? The guy in the link below probably thought he could. Now, he knows better. He'll never be an executive at ANY public company if the SEC has their way. He'll give all the money he made back plus interest. And, he'll pay a financial penalty that will seem big even to a wealthy executive. Check it out--this will help you understand a few test questions a little better.
And maybe keep you out of court rooms and prison cells.


http://www.sec.gov/news/press/2012/2012-40.htm?utm_source=twitterfeed&utm_medium=twitter

Thursday, February 16, 2012

Series 7 Practice Questions

Is it possible to pass your Series 7 exam without reading a textbook? Of course. Is it probable? Of course not. A well organized and written textbook will contain the many details you'll need to be familiar with and introduce you to all the vocabulary terms the test will expect you to know.

But, really, the key to passing the Series 7 exam is to take and learn from a good set of practice questions. I don't mean that you should simply bang out questions and track your score. I mean, you need to use the practice questions to learn the material. For example, our Pass the 7 ExamCram Online Test Prep provides a helpful rationale to each question so that you can LEARN as you improve your testing skills. Take notes on these rationale. Try to imagine the many variations that could be written on this question.

First time I took the Series 65 I did nothing but practice questions--I simply popped in the CD (hey, it was the early 2000's), expected to miss the questions first time through, then took notes based on the rationale. Of course, I was already a Series 7 and 63 instructor, so that was a perfectly fine way for me to study. For most people, the process should probably involve reading the textbook chapter-by-chapter. After each chapter, take the associated quizzes in ExamCram and--again--take notes based on the rationale. If you have the DVD set, watch the corresponding sessions now, and you will be amazed at how well you suddenly know options, bond yields, DPPs, what have you. Once you've read the book and done the section quizzes, move onto the practice finals, trying to get at least a 75%.

Wednesday, February 8, 2012

A Crazy Idea, Right?

There is a house about a block away that used to go for 250K but right now can be had for just $50,000. I almost bought the thing recently for the Pass the Test offices. But, turns out, the village government says no--it's a residence, not a commercial property. At first I was disappointed, but the more I think about the opportunity, the more I question the very premise of this investment. I mean, even if I wanted to just buy the place and rent it out to some tenants for a few years before selling it--is there really any merit to this investment, even at 1/5 its recent market value? We've gotten so used to thinking of real estate investing as "smart" that we seldom question the merits at all. So, let's think outside the box a bit. Rather than buying $50,000 worth of real estate outright, let's say I bought $50,000 of Real Estate Investment Trusts (REITs) instead. Sound crazy? Kind of, but let's make sure. As with the rental property, I'm going to use as much leverage as possible. So I put down $25,000; TD Ameritrade fronts me the other $25,000, and--bang--I own $50,000 worth of investment property tied to real estate. Like the rental property, I now owe interest on the amount I borrowed, and, the margin interest is higher than what I would pay on the rental property . . . but not as much as one might think. Since the rental house would be an investment property, I'd be lucky to borrow the money at 6.5%. The current rate of interest I'm paying on my margin account is about 8.5%. Yeah, but mortgage interest is tax-deductible, you say. Uh-huh; so is margin interest. Okay, you say, but I'd be "cash-flow-positive" on the rental house, to the tune of about $400 a month. Well, let's assume that no repairs are required for the first several years--the best-case scenario. After factoring in the mortgage and the fix-ups required just to get the place livable, I'm going to yield about $4,800 in rental income on a property that cost $50,000 to buy and $20,000 to fix up. I'm into this property for $70,000 and my best-case-scenario is a yield of about 6.8%. With the REITs, I can buy a diversified portfolio exposed to office buildings, shopping centers, apartments, etc., and, getting a yield of 6.8% is not going to be a problem with real estate investment trusts. Not to mention, the chance of a suspended dividend is no greater than the chance of a deadbeat tenant, and I don't have to make expensive repairs to my REIT portfolio, ever. So, the REITs seem to match up well in terms of the income piece--just as dependable if not more, and no chance of any repairs wiping out the cash flow. What about the capital appreciation side--which investment is likely to appreciate more over time? Nobody knows, but why would I be a better real estate investor on one non-diversified holding compared to, say, a dozen different real estate investment trusts with the biggest talent in the business managing office buildings, shopping centers, and apartment buildings from coast to coast? Here in Chicago I see Sam Zell out and about occasionally--you're telling me I'm better off buying a fixer-upper in Forest Park than buying shares of Equity Residential (EQR) and coming along for the ride that Sam and his team of real estate professionals are already offering me?
I'm not a CPA or a CFP, and I do need to analyze the interest-rate spread between mortgage and margin interest. But even if I have to pay 2 points more on the margin versus the mortgage interest, I'm thinking I'd probably make a bigger capital gain over time on the REITs and would probably enjoy an equivalent income stream year after year . . . all without ever having to run credit checks, interview tenants, or replace water heaters after they've blown and flooded $5,000 of brand-new carpeting. So, yes, it does seem like kind of a crazy idea. Which is why I plan to stay where it's safe--in the stock market.

Monday, January 9, 2012

Tutor for Series 7


Looking for a little help passing the Series 7 exam, especially now that the passing score has been bumped to 72%, or FIVE MORE CORRECT ANSWERS?
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Click the title to this post for more help.