The Series 7 is the must-pass exam for aspiring securities professionals, and Series 7 Exam For Dummies, 5^th Edition is the study tool you need to help you earn that coveted certification. It’s filled with tips and strategies for success! And with six online practice tests and brand new chapter quizzes, you’ll find plenty of opportunities to test your knowledge.

Steven M. Rice is a partner and instructor at Empire Stockbroker Training Institute, one of the country’s leading schools for securities industry training. Rice is the author of Securities Industry Essentials Exam For Dummies.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 2

Beyond the Book 2

Where to Go from Here 3

Part 1: Gearing Up for the Series 7 Exam 5

Chapter 1: Introducing the Series 7 Exam 7

What Is the Series 7 Exam, Anyway? 7

Profiling the Series 7 Exam-Taker 8

One’s Not Enough: Tackling the Series 63 or Series 66 8

Series 63: Uniform Securities Agent State Law Exam 9

Series 66: Uniform Combined State Law Exam 9

Securing Sponsorship and Signing Up 9

Filling out an application to enroll 9

It’s a date! Scheduling your exam 10

Planning ahead for special accommodations 10

Just in case: Cancelling as an option 11

Taking a Peek at the Tested Topics 12

Understanding the Exam Format and Other Exam Details 14

Exam basics 14

Ten additional trial questions 14

The computerized format and features 14

Exhibits 15

Receiving and Evaluating Your Score 16

You passed! Now what? 16

So you need a do-over: Retaking the exam 16

Chapter 2: Preparing for the Series 7 Exam 19

Courses and Training Materials: Determining the Best Way to Study 19

Back to school: Attending a prep course 20

Selecting prep material to study on your own 21

Managing Your Study Time Wisely 23

Blocking out some time to study 23

It’s a plan: Getting into a study routine 23

Give it a rest: Taking short breaks 24

Staying focused from day to day 25

Devoting time to practice tests 25

Avoiding study groups 26

Staying in shape 26

Exploring Study Strategies 26

Developing Solid Test-Taking Skills 27

Read the question carefully 27

Look for phrases that lead to the topic tested 27

Work with what you have 27

Don’t obsess; mark for review 28

Keep track of time 28

Master the process of elimination 29

Maintain your concentration 29

Think carefully before changing your answers 29

Use the scrap paper wisely 29

Knowing When You’re Ready 30

Chapter 3: Examining and Mastering Question Types 31

Familiarizing Yourself with Question Formats 31

Working with the straight shooters: The straightforward types 32

Encountering quirky questions with qualifiers 33

Roman hell: Complex multiple choice 34

Looking at exhibits: Series 7 diagram questions 36

Shredding the Questions: Tips and Tricks 38

Focusing on key information 39

Answer me this: Picking the correct answer 39

Don’t make the same mistake twice 42

Chapter 4: Surviving Test Day 43

Composing Yourself the Day Before 43

Making the Most of the Morning 44

Arriving on the Scene 44

Taking advantage of one last chance to cram 45

Signing in 45

Getting seated 45

Taking the Exam 45

Getting the Results: Drum Roll Please 46

Part 2: Mastering Basic Security Investments 47

Chapter 5: Underwriting Securities 49

Bringing New Issues to the Market 49

Starting out: What the issuer does 49

Role call: Introducing the team players 53

Agreement among underwriters 54

Selling group agreement 55

Stabilizing bids 55

Who gets what: Distributing the profits 55

Agreeing to sell your share: Western versus Eastern accounts 56

Getting the skinny on the issue and issuer: The prospectus 57

Reviewing Exemptions 59

Exempt securities 59

Exempt transactions 60

Testing Your Knowledge 62

Answers and Explanations 65

Chapter 6: Corporate Ownership: Equity Securities 67

Beginning with the Basics: Common Stock 67

Understanding a stockholder’s voting rights 68

Categorizing shares corporations can sell 69

Considering the par value of common stock 70

Sharing corporate profits through dividends 70

Penny stocks 72

Getting Preferential Treatment: Preferred Stock 73

Considering characteristics of preferred stock 73

Getting familiar with types of preferred stock 74

Securities with a Twist 76

Opening national borders: ADRs 76

Rights: The right to buy new shares at a discount 77

Warrants: The right to buy stock at a fixed price 78

Testing Your Knowledge 78

Answers and Explanations 81

Chapter 7: Debt Securities: Corporate and U.S. Government Loans 83

Tackling Bond Terms, Types, and Traits 83

Remembering bond terminology 83

Comparing secured and unsecured bonds 85

Additional bond types 86

Making Basic Bond Price and Yield Calculations 87

Finding bond yields 88

Using seesaw calculations for price and yields 89

Calculating accrued interest 90

Determining the Best Investment: Comparing Bonds 92

Considering bond credit ratings 92

Contrasting callable and put bonds 93

Popping the top on convertible bonds 94

Exploring U.S. Government Securities 96

Understanding the types and characteristics of U.S. government securities 97

Agency securities 98

In the tranches: Delving into packaged mortgages (CMOs) 99

CMO communications 101

Backed by debt: Collateralized debt obligations (CDOs) 102

Playing It Safe: Short-Term Loans or Money Market Instruments 102

Structured Products 103

Testing Your Knowledge 104

Answers and Explanations 107

Chapter 8: Municipal Bonds: Local Government Securities 109

General Obligation Bonds: Backing Bonds with Taxes 109

General characteristics of GOs 110

Analyzing GO bonds 110

Revenue Bonds: Raising Money for Utilities and Such 113

General characteristics of revenue bonds 114

Analyzing revenue bonds 114

The Primary Market: Bringing New Municipal Bonds to Market 116

Escrow requirements 118

Call features 118

Examining Other Types of Municipal Bonds on the Test 119

Municipal bond diversity of maturities 120

Specific types of municipal securities 121

Taxable municipal bonds 122

Don’t Forget Municipal Notes! 122

Municipal Fund Securities 124

Section 529 plans 124

ABLE accounts 125

Local government investment pools 125

Municipal fund securities advertisements 125

Understanding the Taxes on Municipal Bonds 126

Comparing municipal and corporate bonds equally 126

Scot-free! Taking a look at triple tax-free municipal bonds 127

Pricing of municipal securities and other mathematical calculations 127

Following Municipal Bond Rules 128

Confirmations 129

Advertising and record keeping 129

Commissions 129

“G” even more rules 130

Gathering More Municipal Bond Info 132

The bond resolution (indenture) 132

Legal opinion 132

Official statement 133

The Bond Buyer 133

Additional info 134

Testing Your Knowledge 135

Answers and Explanations 138

Part 3: Delving Deeper into Security Investments 141

Chapter 9: Borrowing Money and Securities: The Long and Short of Margin Accounts 143

Getting the Paperwork Out of the Way 144

Introducing Long and Short Margin Accounts 144

Playing by the Federal Reserve Board’s Rules 145

Regulation T 145

Margin call 146

Opening a Margin Account: The Initial Requirements 146

Starting long accounts 147

Opening short accounts 148

Calculating Debit and Equity in Long Margin Accounts 148

Long market value 148

 Minus debit balance 148

 Equals equity 149

Putting it all together 149

Making Short Work of Calculations in Short Margin Accounts 150

Short market value 150

 Plus equity 150

 Equals the credit balance 150

Putting the equation together 151

Let the Good Times Roll: Handling Excess Equity 152

SMAs for long margin accounts 152

Loan value 154

SMAs for short margin accounts 154

Playing it SMA/RT: Using buying and shorting power for good 155

Buying power for pattern day trading accounts 156

Looking at Limits When the Market Goes the Wrong Way 156

Checking out restricted accounts 156

Keeping up with minimum maintenance 158

Testing Your Knowledge 160

Answers and Explanations 163

Chapter 10: Delivering Diversification with Packaged Securities 167

Diversifying through Management Investment Companies 168

Comparing open- and closed-end funds 168

Keeping your customer’s investment objectives in mind 171

Dealing with discounts and methods of investing 174

Figuring the sales charge and public offering price of open-end funds 177

Considering Other Investment Company Options 179

Face-amount certificate companies 179

Unit investment trusts (UITs) 179

Exchange-Traded Funds (ETFs) 180

Reducing Real Estate Risk with REITs 180

Adding Annuities to a Portfolio 181

Looking at fixed annuities 182

Checking out variable annuities 182

Putting money into (and receiving money from) annuities 183

Exploring Variable Life and Variable Universal Life Insurance 185

Variable life 185

Variable universal life 185

1035 tax-free exchange 186

Investment Company Rules 186

Investment company sales literature 186

Advertisements by an investment company (section 10) 187

Investment company rankings in retail communication 187

Even more rules 188

Testing Your Knowledge 189

Answers and Explanations 191

Chapter 11: Working with Direct Participation Programs 193

Searching for Identity: What DPPs Are (and Aren’t) 193

The DPP Characters: General and Limited Partners 194

Pushing through Partnership Paperwork 195

Partnership agreement 195

Certificate of limited partnership 195

Subscription agreement 196

Types of DPP Offerings 197

Private placements 197

Public offerings 197

Passive Income and Losses: Looking at Taxes on Partnerships 197

Evaluating Direct Participation Programs 198

Types of Partnerships 198

Real-estate partnership info 198

Equipment leasing 200

Oil and gas 200

Testing Your Knowledge 202

Answers and Explanations 204

Chapter 12: Options: The Right to Buy or Sell at a Fixed Price 205

Brushing Up on Option Basics 206

Reading an option 206

Looking at call options: The right to buy 207

Checking out put options: The right to sell 207

Getting your money back: Options in-, at-, or out-of-the-money 208

Paying the premium: The cost of an option 209

Incorporating Standard Option Math 211

Buying or selling call options 211

Buying or selling put options 214

Trading options: Opening and closing transactions 216

Mastering Complex Option Calculations 218

Long straddles and combinations 218

Short straddles and combinations 220

Break-even points for straddles and combinations 222

Spreads 222

Got it covered: Stock/option contracts 226

Off the charts: Multiple option contracts 228

Spending time on LEAPS: Long-term options 231

Dividends and splits, more or less 231

Nonequity Options 233

Index options 233

Yield-based options 234

Foreign currency options 235

Gaining Additional Option Info 235

Clearing through the OCC 235

Getting the go-ahead: Registered options principal 235

That’s ODD: Options risk disclosure document 236

Special statement for uncovered option writers 236

OAA: Options account agreement 236

Last trade, last exercise, and expiration of an option 237

Exercise and assignment 237

Margin on options 238

Taxes on options 239

Some additional option rules 240

Testing Your Knowledge 242

Answers and Explanations 248

Part 4: Taking Care of Your Customers and Playing by the Rules 253

Chapter 13: Portfolio and Securities Analysis 255

Knowing Your Customer: Portfolio Analysis 255

Investment objectives 256

Factors that influence your customer’s investment profile 257

Asset allocation 258

Modern portfolio theory 259

Capital Asset Pricing Model (CAPM) 259

Strategizing with portfolio management policies 260

Knowing Your Securities and Markets: Securities Analysis 261

Regarding risk 261

Mitigating risk with diversification 262

Fundamental analysis 263

Technical analysis 269

Showing the work: Research reports 271

Testing Your Knowledge 272

Answers and Explanations 275

Chapter 14: Going to Market: Orders and Trades 277

Shopping at Primary and Secondary Markets 277

Buying new in the primary market 277

Buying used in the secondary market 278

Making the Trade 278

Auctioning securities at securities exchanges 278

Negotiating trades over-the-counter 279

Understanding the Role of a Broker-Dealer 281

Firm versus subject quotes 282

Traders 282

Receiving Orders from Customers 283

Recommending OTC equity securities 283

Talking about order types 283

Handling limit and stop orders 285

Factoring in order features 286

Designated Market Maker and the Super Display Book (SDBK) 288

Adjusting orders for dividends and splits 290

Trade reporting systems 291

Regulation NMS (National Market System) 292

Trading halts: NYSE Rule 80B 292

Testing Your Knowledge 293

Answers and Explanations 295

Chapter 15: Making Sure the IRS Gets Its Share 297

Everything in Its Place: Checking Out Tax and Income Categories 297

Touring the tax categories 298

Looking at types of income 298

Noting Taxes on Investments 298

Interest income 299

Alternative minimum tax 299

Dividends 299

At the sale: Capital gains and losses 300

Return of capital 304

Cost basis adjustments on bonds: Accretion and amortization 304

Presenting Gift and Estate Tax Rules 307

Gift taxes 307

Estate taxes 308

Exploring Retirement Plans 308

Tax-qualified plans 308

Employee Retirement Income Security Act (ERISA) 309

Non-qualified plans 311

IRA types and contribution limits 311

Transfers and rollovers 313

Coverdell Education Savings Accounts 314

Testing Your Knowledge 314

Answers and Explanations 317

Chapter 16: No Fooling Around: Rules and Regulations 319

The Market Watchdogs: Securities Regulatory Organizations 319

The Securities and Exchange Commission 319

Self-regulatory organizations 320

Following Protocol When Opening Accounts 321

Filing the facts on the new account form 321

Closing customer accounts 323

Selecting the appropriate type of account 323

Account registration types 325

Standards and required approvals of public communications 329

Financial exploitation of specified adults 330

Regulation S-P 331

Reporting requirements 331

Trading by the Book When the Account Is Open 332

Filling out an order ticket 332

Checking your calendar: Payment and settlement dates 334

Confirming a trade 335

Meeting the requirements for good delivery 336

Following up with account statements 339

Keeping your dividend dates straight 339

Handling complaints 341

Transferring accounts 342

Committing Other Important Rules to Memory 343

The Telephone Act of 1991 343

The 5 percent markup policy 343

Other violations 344

Regulation FD 345

Record-keeping 346

Negotiable instruments drawn from a customer’s account 347

Disclosure of control relationships 347

Customer protection rule 347

Networking arrangements 347

Uniform Practice Code (UPC) 348

Supervision 348

Testing Your Knowledge 348

Answers and Explanations 353

Part 5: A Couple Practice Exams 355

Chapter 17: Practice Exam 1 357

Practice Exam 1 Answer Sheet 359

Chapter 18: Answers and Explanations to Practice Exam 1 377

Making the Grade 394

Answer Key for Practice Exam 1 395

Chapter 19: Practice Exam 2 397

Practice Exam Part 2 Answer Sheet 399

Chapter 20: Answers and Explanations to Practice Exam 2 417

Knowing the Score 432

Answer Key for Practice Exam 2 433

Part 6: The Part of Tens 435

Chapter 21: Ten Series 7 Exam Traps to Avoid 437

Easing Up on the Studying 437

Assuming the Question’s Intent 438

Reading into the Question 438

Becoming Distracted When Others Finish 438

Not Dressing for Comfort 438

Forgetting to Breathe 439

Trying to Work Out Equations in Your Head Instead of Writing Them Down 439

Spending Too Much Time on One Question 439

Changing Your Answers for the Wrong Reasons 440

Calculating Your Final Score Prematurely 440

Chapter 22: Ten Ways to Start Your Career Off Right 441

Win at the Numbers Game 441

Be an Apprentice 442

Do Your Homework 442

Treat the Minnow like a Whale 442

Smile When You Dial 442

When a Security Falls, Don’t Be a Stranger 442

Put In the Hours 443

Broaden Your Horizons 443

Pay Yourself First 443

Set Some Goals: The Brass Ring 444

Appendix: Important Figures and Formulas 445

Index 447