Series 7 Sample Question: Taxation

Series 7 exam candidates scour the web for Series 7 exam sample questions. Let's take a look at the kind of question you might see on your Series 7 exam: Which of the following statements accurately explains an investor's "marginal tax rate"? A. It is the rate applied to qualified dividends and long-term capital gains B. It is the rate of tax paid on the last dollar of income earned C. It is the rate applied to all of the investor's ordinary income for the year D. It is the average rate of taxes paid, calculated by dividing taxes paid by taxable income EXPLANATION: as always, take whatever you are given in the question and use it to eliminate answer choices. Choice A is trying to confuse you--investors might pay 15% or 20% (or even 0%) on qualified dividends and long-term capital gains, but they don't pay their marginal rate. A is eliminated. B looks good, but let's make sure. Choice C doesn't have it right, either--if somebody makes enough money to be pushed into the 33% bracket, that rate only applies to some of his income. C is eliminated. And, Choice D is defining the investor's effective tax rate. Choice B is the answer. An investor who tops out in the 33% bracket also pays 10, 15, 25, and 28% on various swaths of his income. He pays 33% on the "last dollar of income earned."

FINRA Rules on Communications

FINRA is forever tweaking the definitions used for the communications put out by a member firm. A few years ago, I had to put serious effort into explaining how sales literature differed from advertising, and all the special rules on public appearances and independently prepared reprints. Going forward, FINRA only wants to work with three specific categories of communications: correspondence, retail communications, and institutional communications. Of these, only retail communications are subject to prior principal approval and filing copies with FINRA. Correspondence and institutional communications have to be monitored, and principals need to make sure that these communications are not misleading. They just are not subject to the heightened supervision of communications going out to > 25 retail investors. It is a little strange to see FINRA rely so heavily on this arbitrary number 25, but they do. The exact same thing--a seminar handout, for example--is correspondence if delivered to 25 or fewer retail investors but becomes a retail communication if delivered to more than 25. What we used to call advertising and sales literature is now either correspondence or retail communications depending on how large the audience is. FINRA also no longer cares whether the communication goes to an existing customer or a prospect--again, the number 25 is suddenly the determining factor. Pass Your Series 7 Exam

Mini-Options

The CBOE is rolling out some new "mini-options" allowing investors to buy contracts that cover just TEN shares . . . for the really high-per-share-priced stocks including AMZN, APPL, GOOG, SPDR Gold Trust, and the good ole SPDR S&P 500. Ordinary options use a multiplier of 100, of course, but these mini-options use a multiplier of ’10.' The #7 at the end of each stock symbol denotes ‘Mini,' so, the mini-option might look like this: AMZN7 or APPL7. A customer who owns just 40 shares of APPL could now hedge by writing 4 APPL7 mini-options (4 X 10 = 40 shares). Always innovating, this industry. Series 7 Tutoring Available Here

Series 7 Exam Sample Question: Mutual Funds

Don't forget that while the Series 7 exam asks many questions about options and debt securities, it also asks many questions about other topics. And, often these other topics can yield some pretty challenging and tough series 7 exam questions. Like this one:


A summary prospectus for a mutual fund states that the public offering price (POP) is $10.50 with the net asset value (NAV) at $10.00. The document also states that the sales charge is less than 5%. Which of the following could explain this?
a.Sales charges are expressed as a percentage of the net amount invested.
b.The summary prospectus is unaudited and frequently includes estimated figures.
c.Sales charges are expressed as a percentage of the gross amount invested.
d.Some investors may have purchased shares at lower sales loads through quantity discounts.

Explanation: the exam is expert at asking questions in ways you weren't quite expecting. Maybe you've done dozens of questions that simply asked you what the formula for calculating the sales charge percentage is, or maybe you've been running the calculations so many times you forgot to learn what it was you were calculating and why. As always, ask yourself what the question is telling you that allows you to eliminate at least one of the four answer choices. Unfortunately, this question gives you nothing that is obviously wrong at first glance. Maybe the document IS unaudited? Investors DO often purchase shares at a lower sales charge through breakpoints/quantity discounts. And, if you've never encountered the phrase "expressed as a percentage of the net/gross amount invested," you can easily panic and convince yourself there is just NO WAY TO GET A QUESTION LIKE THIS RIGHT.
Sure there is. Look at each answer choice more closely. The fact that SOME investors might have bought at lower sales charge percentages would hardly be a good reason for the mutual fund to quote their a-typical experience, right? Shouldn't this document use the maximum sales charge? Yes, and, even if we thought this might be the explanation, we have to keep thinking until we recall that some investors have all sales charges waived--usually at about $1 million--so Choice D wouldn't work even if we went down that path. Choice B bugs me, too--how about you? I mean, the American Balanced Fund, for example, had assets of around $50 billion last time they reported--would it be so hard for a fund that size to break out a calculator and tell us exactly what the sales charge is? Estimated figures? I think you can eliminate that one. Now, if you're not comfortable with the language used in Choice A and Choice C, you just have to interpret--the gross amount is the total amount one pays--the net amount is what's left after the distributors take out the sales charge. So, even if you weren't sure before the question, you can crunch a few numbers and prove what the answer is. If we take 50 cents divided by the net amount invested, the NAV, the % would be 5%. But, if we--properly--divided the 50 cents by the gross amount invested, the POP, we would get a figure of under 5%. Making Choice ______ the correct answer.
Right?






Answer: c  Need Help with your Series 7?

Updated Series 7 Exam Material

Just a quick word on how we make sure we keep our series 7 exam prep material updated:

1. Pass the 7 ExamCram Online Test Prep questions are updated/improved throughout the year
2. Pass the 7 textbook is updated each year.
3. Pass the 7 DVD set is updated either each year or as-needed.
4. Pass the 7 Audio CD lectures were just updated for 2013

How important is it that you have the most "up to date"  Series 7 material?

Nowhere near as much as most people think, since the exam tends to ask the same old questions for decades--yes, a few details change each year in the industry, but, by and large, the Series 7 does not need to change its questions to any great extent. Covered calls have worked the same way since I've been teaching this stuff--same for bond yields, sell-stops, margin accounts, and probably 96% of what anybody needs to know for the test. Still, folks want to feel they have the most updated materials, so we do what we can, as listed above. Pass Your Series 7

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

Mutual Fund Portfolios

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

Series 7Help

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 . . .

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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:

Series 7 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 growth.  Aggressive 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?

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

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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

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

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

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%.

Calculations on the Series 7 Exam

Don't want to mislead anybody--the Series 7 exam really does not involve lots and lots of heads-down calculations. But, it does include a few. And, when it does, the questions sometimes hit as hard as this one:

ABC pays a dividend of $2 on its common stock. The p/e ratio is currently 17. Therefore, if the dividend payout is 50%, the common stock trades for
A.A price that can not be determined by these facts alone
B.$17
C.$68
D.$34



EXPLANATION: even though panic might set in, you do, in fact, have enough numbers to solve the problem, so A is quickly eliminated. The key here is to define and make sense of "dividend payout of 50%." The dividend is paid out of profits or earnings per share; earnings per share is/are the "e" in the "p/e" ratio. If $2 is half of the Earnings Per Share, the EPS = $4. The "p" or "price" of the stock is 17 times bigger than 4. $68.

Is the Series 7 passing score going up to 72%?

Yes.
It is.
In early November, the required passing score for the Series 7 exam will be 72%.
The outline is also changing, but so far it appears to be just a different way of slicing and dicing the disparate topics thrown together in the hodgepodge called "the Series 7."
Stay tuned and study hard. As always

Felonies and FINRA registration

Get HELP with your SERIES 7 EXAM HERE
A customer recently emailed a question to me that touches on an important testable point: statutory disqualification. Here is the question:

I have been charged with felony forgery in the past year. I received probation and did not inform my firm. When my broker-dealer found out, they updated my U5 and terminated me. Now FINRA is investigating me for failing to update my U4 with the felony forgery information. My criminal information is now on BrokerCheck. Can I realistically get hired in the business again?

RESPONSE:
Forgery is directly related to the securities industry and would be a big problem whether a felony or a misdemeanor. There are bad-boy agents out there who will sell a deferred annuity to an unsuspecting senior citizen, then tell the customer to sell the thing and conceal the nasty surrender charge by forging the client's signature on the paperwork to do the annuity sale or switch. Also, so much sensitive information is provided by clients to registered reps that any crimes of dishonesty are major red flags to FINRA. To follow up by failing to update your U-4 with the negative information also hurts, because, in their eyes, it's another blatant form of dishonesty. Then again, if you cooperate with the investigation, maybe they'll suspend you, which is temporary. A bar is also very likely, unfortunately, and--unfortunately--a bar means "game over" in FINRAspeak. Wish I could be more upbeat about the situation, but it doesn't look good. Still, why not wait to see how the investigation ends up. Talk to an attorney who works in this area. More bad news: your state Administrator is likely to also take action if FINRA alerts them of any disciplinary decisions. Be sure to cooperate with all the regulators and try to get some good advice and/or representation by an attorney, who will want his or her retainer upfront. Be sure to be sitting down when they quote their retainer. Cooperating with FINRA can only help, while refusing to cooperate will keep people out of the business permanently every single time. You might want to go to http://www.finra.org/ and look up the enforcement section and discplinary orders. Read through the recent cases that led to temporary suspensions and permanent bars to get a feel of how things generally turn out. I wish the violation were more of a goof-up than two separate acts of dishonesty. "A member, in the conduct of his business shall observe high standards of commercial honor. . . " is the basic creed of FINRA and all the other self-regulatory organizations. Without trust, the system can't function.

Series 7 Exam Help

Can I reschedule my exam?

Exam candidates often get confused about if and how they can reschedule their exam. Now, if your firm says you can't reschedule, then that's the end of that issue. But, if you have the flexibility to take the test only when you feel ready to pass it, you can definitely reschedule your exam by telephone or through the testing center's website. Why would you reschedule your test? How about because you would rather push it back 1 week yourself than have it pushed back 30 days through a failing grade. Right? While it's nice to "get it all over with," it's a bad call to take the test unprepared and end up failing and having to wait 30 days. It's like speeding to get to an appointment--if you get in a wreck or get a ticket, you won't make the appointment at all. We will have a GoNoGo exam soon for Series 7--check the home page http://www.passthe7.com/ and look for "Am I ready to take my exam?" These scores will give you an idea of your readiness. Or maybe you already know you're not quite ready. If so, you can reschedule without losing your testing fees if you do so by noon two business days before your test. As FINRA just sent to me by email, you can reschedule as follows:

If appointment is scheduled for Monday, cancellation must be made no later than noon on Thursday of the preceding week. If the appointment is scheduled for Tuesday, cancellation must be made no later than noon on Friday of the preceding week. Etc.

In other words, they made it slightly more convenient than in the olden days, when they counted 48 hours before the time of your exam; now it's just by noon two business days before your test, no matter what time it starts.

Kicking the Series 7's Behind

I'm going to let one of our happy Series 7 customers write this blog post. In case you're thinking that passing the Series 7 is "impossible," see what my man Danny has to say below:

Robert;
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.

Danny Williams