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Five questions you’ll need to know the answer to if you want to pass the Series 7


If you want to score a high-paying job selling or trading securities in the U.S., you’ll need more than just a good resume. You’ll also need to pass a six-hour, 260-question exam commonly known as the Series 7, or the General Securities Representative Exam (GSRE).

The test covers everything you’ll need to know to be a broker, from fairly simple procedural concepts to complex rules surrounding compliance and risk. Passing the Series 7 is particularly critical because you’ll already need to be employed by a FINRA member firm, and you can’t do your job without a license. Failing is an easy way to get fired before ever really getting started.

While each exam has different questions, all cover the same general principles. Below are five questions you may see in some iteration, along with the correct answers and an explanation from Brian Marks, managing director at Knopman Financial Training, a New York-based FINRA licensing exam preparation firm. How would you do?

1. Question: In the context of explaining the differences between Exchange Traded Funds (ETFs) and mutual funds, what would be an accurate statement?

Correct Answer: ETFs can trade intraday, but mutual funds only trade once per day.

Explanation: ETFs and mutual funds are similar in that they both consist of a portfolio of securities which are managed (either actively or passively) by an investment adviser. The key difference lies in their trading characteristics. ETFs can be bought and sold throughout the day, similar to common stock. Mutual funds, on the other hand, are generally bought and sold once per day, after the close of trading. The price of each mutual fund share is the net asset value plus a sales charge. Some funds will calculate the NAV multiple times per day, but a daily calculation is most common.

2. Question: What is the purpose of warrants, and under what circumstances are they generally issued?

Correct Answer: Warrants allow investors to purchase common stock at a specific price and are generally issued with another security.

Explanation: Warrants are similar to call options in that they allow an investor to purchase common stock at a specific price for a certain period of time, generally long term. They are sold attached to preferred stock or a bond. The primary intent is to make the debt or preferred stock offering more attractive. Warrants can also trade as independent securities after issuance.

3. Question: When considering an investment in a security quoted on the OTC Bulletin Board (OTCBB), what are the key distinguishing features an investor should know as compared to exchange listed stocks?

Correct Answer: Liquidity risk, business risk and company size.

Explanation: OTCBB equities are stocks that are not listed on an exchange, either because they were delisted (e.g. bankruptcy), do not meet the stringent listing criteria of the NYSE or Nasdaq, or choose not to be listed. In many cases, but not all, OTCBB equities tend to be highly illiquid stocks. Also, the companies are usually considerably smaller than exchange listed companies, leading to greater risk of failure under adverse economic conditions.

4. Question: The SEC has recently implemented more stringent guidance regarding verification of identity, identity theft and potential red flags. What are the most common forms of identification used to verify a customer and which forms of identification are generally suspicious?

Correct Answer: Best Forms: Driver’s License or Passport (preferably both). Worst forms: Driver’s License number or Passport number without the actual documents, birth certificate.

Explanation: FINRA regulations permit broker dealers to decide which forms of ID are acceptable for identity verification. Picture IDs such as a driver’s license or passport are always preferred. Least preferable are document numbers without a document or a picture-less document, such as a birth certificate. FINRA does not explicitly prohibit acceptance of these articles, but firms must closely supervise accounts opened with non-traditional identification information.

5. Question: Jim is a client of yours who has researched Section 529 College Savings Plans in detail. He would like to begin saving immediately for his daughter’s education. He sees no downside to these plans. As Jim’s registered rep, it would be most prudent to advise him of which of the following risks regarding Section 529 plans?

Correct Answer: Penalties for non-educational use and limited liquidity.

Explanation: College Savings Plans are popular investments because of their high contribution limits and tax-free growth. However, the funds cannot be used prior to college and any use for non-educational purposes will be subject to taxes and a 10% penalty. Therefore, investors should plan to invest only those funds that will be applied towards education.

Knopman Financial Training is a FINRA Licensing Exam preparation firm. Knopman offers Live, Virtual, On-Demand and Mobile App training programs.

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