Series 7 Exam: Overview and Requirements

• The Series 7 exam, also known as the General Securities Representative Exam, serves as a license to sell a wide array of investment products.
• The Financial Industry Regulatory Authority (FINRA) administers the Series 7 exam.
• Passing the Series 7 exam allows individuals to sell securities like stocks, bonds, mutual funds, and options.

Eligibility and Sponsorship

• Candidates for the Series 7 exam need sponsorship from a FINRA member firm or another applicable self-regulatory organization (SRO).
• The sponsoring firm is responsible for supervising the registered representative’s activities.

Exam Format

• The Series 7 exam has 125 multiple-choice questions.
• There are 10 additional, unscored pretest questions that are randomly distributed throughout the exam.
• Candidates have 3 hours and 45 minutes to finish the exam.
• A score of 72% or higher is required to pass the exam.

Exam Content Outline

• Four main job functions are covered in the Series 7 exam:
• Seeking Business for the Broker-Dealer from New and Existing Customers.
• Opening Accounts After Obtaining and Evaluating the Customer’s Financial Profile and Investment Objectives.
• Providing Customers with Information About Investments, Making Recommendations, Transferring Assets and Maintaining Appropriate Records.
• Obtaining and Verifying Customer’s Purchase and Sales Instructions; Processing Transactions; and Completing Post-Transaction Activities.

Key Topics Covered

• Stocks: Includes common and preferred stock, voting rights, dividends, and market capitalization.
• Bonds: Covers corporate, municipal, and government bonds, including features, risks, and ratings.
• Mutual Funds: Focuses on different types of mutual funds (equity, bond, balanced), investment objectives, and fees.
• Options: Includes options contracts, terminology (calls and puts), strategies (buying, selling, covered, and uncovered), and risks.
• Annuities: Covers fixed and variable annuities.
• Packaged Products: Includes Exchange Traded Funds (ETFs), and Real Estate Investment Trusts (REITs).
• Investment Risks: Focuses on market risk, interest rate risk, inflation risk, credit risk, and liquidity risk.
• Regulations: Includes Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, and Investment Advisers Act of 1940.
• Customer Accounts: Covers account types (cash, margin, retirement), account opening procedures, and suitability requirements.

Options: Basics

• An option is a contract granting the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price (strike price) on or before a set date (expiration date).
• The option seller is obligated to fulfill the contract if the buyer exercises the option.
• A call option provides the buyer the right to buy the underlying asset.
• A put option provides the buyer the right to sell the underlying asset.

Options Terminology

• Premium: The price paid by the buyer to the seller for the option contract.
• Strike Price: The price at which the underlying asset is bought or sold when the option is exercised.
• Expiration Date: The date the option contract expires.
• Intrinsic Value: The profit realized if the option were exercised immediately.
• Time Value: The portion of the premium based on the time remaining until expiration and the underlying asset's volatility.
• In the Money:
  • For a call option: the market price of the underlying asset is above the strike price.
  • For a put option: the market price of the underlying asset is below the strike price.
• At the Money: the market price of the underlying asset equals the strike price.
• Out of the Money:
  • For a call option: the market price of the underlying asset is below the strike price.
  • For a put option: the market price of the underlying asset is above the strike price.

Option Strategies

• Buying a Call:
• Bullish strategy.
• The buyer profits if the price of the underlying asset increases.
• The maximum loss is the premium paid.
• Selling a Call (Naked):
• Bearish strategy or neutral if covered.
• The seller profits if the price of the underlying asset remains below the strike price.
• Unlimited potential loss.
• Buying a Put:
• Bearish strategy.
• The buyer profits if the price of the underlying asset decreases.
• The maximum loss is the premium paid.
• Selling a Put (Naked):
• Bullish or neutral strategy.
• The seller profits if the price of the underlying asset remains above the strike price.
• Substantial potential loss if the price of the underlying asset declines significantly.
• Covered Call:
• The investor owns the underlying asset and sells a call option on it.
• Generates income from the premium received.
• Limits potential profit if the asset price increases significantly.
• Protective Put:
• The investor owns the underlying asset and buys a put option on it.
• Protects against a decline in the value of the underlying asset.
• Limits potential profit by the cost of the put premium.

Option Risks

• Options trading has significant risks.
• Option buyers can lose their entire investment (the premium paid).
• Option sellers face potentially unlimited losses, especially with naked call options.
• Options are complex and not suitable for all investors.

Regulations and Compliance

• Registered representatives must follow FINRA rules and regulations when recommending options to customers.
• Suitability: Recommendations must suit the customer's financial situation, investment objectives, and risk tolerance.
• Disclosure: Customers must receive a current Options Disclosure Document (ODD) explaining options risks and characteristics.
• Record Keeping: Firms must keep records of customer transactions and communications related to options.

Margin Accounts

• Margin accounts enable investors to borrow funds from their broker-dealer to purchase securities, including options.
• Buying options on margin is generally not permitted; however, margin may be required for selling uncovered options.
• FINRA and the broker-dealer set margin requirements.

Taxes

• The tax treatment of options depends on whether the option is exercised, sold, or expires.
• Option buyers who exercise calls add the premium paid to the basis of the underlying asset; those who exercise puts reduce the proceeds from the sale of the underlying asset.
• Option sellers recognize a capital gain or loss when the option expires or is closed out.

Important Considerations

• Options trading requires understanding options strategies, risks, and market dynamics.
• Assessing customer suitability is crucial before recommending options.
• Investors should carefully consider their investment objectives and risk tolerance before options trading.
• Continuous education and training are essential for registered representatives handling options transactions.

The Series 7 exam licenses individuals to sell various investment products like stocks and bonds. Administered by FINRA, it requires sponsorship by a member firm. The exam includes 125 multiple-choice questions, and a score of 72% or higher is needed to pass.