What is the Series 7 Exam?
The Securities and Exchange Commission requires that individuals who want to enter the securities industry to sell any type of securities must take and pass the Series 7 examination to qualify as a general securities representative. Individuals who are Series 7 licensed are eligible to register with all self-regulatory organizations to trade. The cost of the exam is $250, and it can be taken at any of numerous testing centers across the country on any regular business day. The only prerequisite for the exam is that the exam taker must be sponsored by a financial company who is a member of FINRA or a Self-Regulatory Organization (SRO).
Breakdown of the Exam
The Series 7 consists of 250 multiple choice questions, divided into two sections of 125 questions each, and exam takers are allotted 3 hours per section. The registration qualifies a candidate for the solicitation, purchase, and/or sale of al securities products, including corporate securities, municipal securities, municipal fund securities, options, direct participation programs, investment company products, and variable contracts. The exam covers a broad range of investments including: stocks, bonds, options, limited partnerships, and investment company products (e.g., open- and closed-end funds). A candidate must answer 70% of the questions correctly in order to pass.
The exam typically has the following breakdown with regards to how the questions are categorized:
- Prospecting for and Qualifying Customers:
9 questions, 4% of exam
- Evaluating Customer Needs and Objectives:
4 questions, 2% of exam
- Providing Customers with Investment Information and Making Suitable Recommendations:
123 questions, 48% of exam
- Handling Customer Accounts and Account Records:
27 questions, 11% of exam
- Understanding and Explaining the Securities Markets’ Organization and Participants to Customers:
53 questions, 21% of exam
- Processing Customer Orders and Transactions:
13 questions, 5% of exam
- Monitoring Economic and Financial Events, Performing Customer Portfolio Analysis and Making Suitable Recommendations:
21 questions, 8% of exam
The Series 7 exam topics include:
- Fiduciary Accounts
- Hypothecation
- Roth IRA
- Insider Trading
- Short Selling
- SIPC
- FINRA Code of Procedure
- Discretionary Brokerage Accounts
- Fannie Mae
- Certificates of Deposit
- SEC Act of 1934
- Cyclical Industries
- Short Interest Theory
- 401k Plans
- Foreign Mutual Funds
- New York Stock Exchange
- Combination Privilege
- Stock Split
- Margin Trading
- Benefits of Stock Ownership
- REITs
- Authorized Stock
- Company’s Net worth
- Book Value vs. Market Value
- Stock Certificate
- Warrants
- American Depositary Receipt
- Dividends
Useful Terms to Know for the Series 7 Exam
Exam takers are expected to be familiar with the following terms and definitions prior to taking the Series 7 exam. The definitions presented below have been extracted from Investopedia.
1. Collateralized Mortgage Obligation – CMO:
A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds’ prospectus.
2. Defensive Investment Strategy:
A method of portfolio allocation and management aimed at minimizing the risk of losing principal. Defensive investors place a high percentage of their investable assets in bonds, cash equivalents, and stocks that are less volatile than average.
3. Direct Participation Program – DPP:
A business venture designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. DPPs are generally passive investments that invest in real estate or energy-related ventures.
4. Liquidity Risk:
The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
5. No-Par Value Stock:
Stock that is issued without the specification of a par value indicated in the company’s articles of incorporation or on the stock certificate itself.
6. Options Clearing Corporation – OCC:
A clearing organization that acts as both the issuer and guarantor for option and futures contracts.
7. Repurchase Agreement – Repo:
A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.
For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.
8. Systematic Risk:
The risk inherent to the entire market or entire market segment. Also known as “un-diversifiable risk” or “market risk.”
9. U.S. Treasury:
Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. Mint, Bureau of the Public Debt, and the Alcohol and Tobacco Tax Bureau.
How to sign up to take the Series 7
The Financial Industry Regulatory Authority (FINRA) administers the Series 7 in the United States at Thomson Prometric Testing Centers or Pearson Professional Center. To make a test appointment or to address any questions related to a test appointment with Thompson Prometric Testing Center, exam takers may contact the Thomson center ( 1-800-578-6273) or the Pearson Center (1-866-396-6273).
To register for the exam, exam takers must complete the Form U-4 application. The sponsoring firm should then send the U-4 form along with your fingerprints, to FINRA for processing. Once the information has been processed, a confirmation will be sent to the sponsoring firm.
What Exam Takers are Saying
The Series 7 is considered to be one of the more comprehensive and lengthy exams administered by FINRA, mainly because it is required of anyone who intends to become a licensed stock broker. The pass rate is approximately 65-70%.
In the Series 7, questions regarding options tend to be one of the biggest challenges, according to test takers. This is primarily because these questions make up a large part of the exam (50 questions total, 35 of which deal with options strategies) and many candidates have never been exposed to options contracts and strategies.
In general, purchasing study guides or taking a prep class is the most common approach among those who have passed the Series 7 exam on the first try. While there are a variety of resources available in print and online, the majority of test takers surveyed agree that the best way to ensure first-time passage is to take numerous practice tests and familiarize oneself with the terminology and question types presented in the the exam.
****
Please contact us if you have any questions or would like t0 start a hedge fund. Other related hedge fund law articles include: