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Posted by Barb Gavitt, ITP, SILA-F ● June 9, 2022

The Ultimate Guide to the Series 7 Exam

Person using tablet to study for securities exam-1

The Series 7 exam is an extension of the information learned with the Securities Industry Essentials (SIE) exam. The SIE introduces and defines security products, covers minimal taxation, and introduces some basic industry regulations. The Series 7 then requires you to apply that product knowledge to specific customer situations. In order to do this, you must have a greater knowledge of customer suitability, as well as the applicable regulations and tax ramifications associated with each recommended product or strategy. In this article, we will discuss the structure of the Series 7 exam, highlight 4 highly tested topics in the Series 7 exam, and provide examples of questions you may encounter.

How is the Series 7 exam structured?

The Series 7 exam consists of 135 multiple-choice questions, of which 125 questions are scorable. The 10 additional questions are “pretest” questions that are randomly distributed throughout the exam and do not count for or against your score. Once these questions have sufficient statistics to be considered valid questions, they will be added to the testing provider’s pool of scored questions. As a test taker, you will never know which questions are pretest and must answer all questions to complete the exam, so you should treat every question as if it counts. 

You will have 3 hours and 45 minutes to complete the exam and must correctly answer 72% (90 questions) of the 125 scorable questions to pass

The Series 7 exam, like other FINRA exams, is presented in a bell curve. Exams presented in this manner should start with easier questions, move to more challenging questions, and end with easier ones. However, we recommend you not go into the exam with any expectations concerning question difficulty. This is because it can be discouraging to encounter a question that you consider difficult when you were expecting an “easy” question. Answer each question to the best of your ability, and don’t let a supposed order of difficulty dictate your overall confidence. Remember: if you have prepared for the exam properly, it won’t matter when the difficult concepts appear.

To pass the Series 7 exam, you must demonstrate that you have the knowledge needed to perform the four main job functions of a general securities representative. The Series 7 exam structure and breakdown is as follows:

Major Job Functions Number of Questions Percentage of Questions
1. Seeks business for the broker-dealer from customers and potential customers 9 7%
2. Opens accounts after obtaining and evaluation customers' financial profile and investment objective 11 9%
3. Provides customers with information about investments, makes recommendations, transfers assets, and maintains appropriate records 91 73%
4. Obtains and verifies customers' purchase and sales instructions and agreements; processes, completes, and confirmed transactions 14 11%
Total  125 100%

View the Series 7 Examination Content Outline

What topics should I focus on when studying for the Series 7 exam?

When it comes to studying for the Series 7, there are specific topics that are highly testable. The table above shows that 73% of the exam is based on product knowledge, suitable recommendations, tax consequences, and regulations. Within this area, we have identified 4 topics that students should be sure to focus on: 

  1. Making suitable recommendations
  2. Margin
  3. Options
  4. Taxation

1. Making Suitable Recommendations 

The exam will present scenarios and then require you to choose an appropriate investment product or strategy. These scenarios may not provide all the details you feel are necessary to properly answer the question. Do not make assumptions or read anything into the scenarios; you will have to choose the best answer based solely on the information you are given. 

When you encounter a suitability question, it is important to gain a basic understanding of several factors before choosing an answer. These factors include: 

  • Investment objective
  • Time horizon
  • Risk tolerance
  • Other customer information

The questions will often provide this information. It will be up to you to find it. It can be helpful to identify answer choices that are definitely not suitable and then eliminate those answers. 

Let’s look at a sample question:

A registered representative is meeting with a client that plans on retiring within 2 years. The client has built a substantial retirement portfolio and is now concerned with protecting their portfolio from market losses while creating a portfolio that will be their main source of monthly income throughout retirement. Which of the following may be a suitable recommendation for the client’s portfolio?

A. 30% aggressive growth, 20% international stock, 10% high-yield bonds, 40% blue-chip stocks
B. 40% high-yield bonds, 30% blue-chip stocks, 30% ETFs
C. 10% large-cap growth stock, 50% GNMA fund, 20% investment-grade bonds, 20% money market fund
D. 50% GNMA fund, 50% money market fund


We know the investor is looking for protection against the market and income through retirement. We don’t know how old the client is, but they could be in retirement for 20 years or more. When answering these types of questions, it is important to remember proper diversification and asset allocation. Choices A and B will give the customer too much exposure to market loss. At the same time, income may not last through retirement or keep pace with inflation if there is not at least a small portion invested in growth. In this case, it would normally be some type of conservative growth, such as large-cap stock. Since choice D does not have any portion invested in stock, the investor might outlive their assets or might not be able to sustain an appropriate amount of income throughout retirement. That leaves choice C, which is the correct answer as it is a suitable recommendation. With this choice, the investor will have a small portion in growth stock, a greater portion in income generating investments, and a small portion in cash or cash equivalents. The investor will have something in each of the asset classes.

2. Margin

The Series 7 exam places an emphasis on knowing and understanding the functions of different types of customer accounts. Cash, margin, and option accounts are the major account types. Margin accounts present new and unique characteristics to master. One of those characteristics is the special memorandum account (SMA). This is a line of credit that can be created within margin accounts. In a long margin account, SMA creates buying power. 

The video below provides an overview of SMA.

HubSpot Video

 

3. Options

The SIE introduces options and option trading. The Series 7 takes that introduction and expands upon the concepts. You will traditionally see 8-10 questions that cover option strategies, suitability, and taxation. You may be asked to provide the breakeven point, maximum gain, and maximum loss associated with a given option scenario. The first step in finding these answers is to determine all of the credits and debits in the presented scenario. You should begin by setting up a T-chart. In some scenarios, it may even be necessary to set up more than one T-chart. 

The video below walks you through how to create and use T-charts.

HubSpot Video

 

4. Taxation

The Series 7 exam expects you to understand the tax implications associated with any recommendation. Taxation varies depending on product and account type, and this can make the overall concept quite challenging. Though licensed securities individuals cannot give tax advice to clients or potential clients, they do need to make suitable recommendations. Disclosing and explaining the tax ramifications of different products and account types is a crucial aspect of making a suitable recommendation. 

The video below details the tax treatment of options.

HubSpot Video

 

How many math questions are on the Series 7 exam?

There are typically less than 10 math questions on the exam, but they will likely be detailed and require multiple steps. A math question may also incorporate suitability. For example, a question may require you to first determine the conversion ratio, then calculate parity, and finally determine whether an investor will convert, sell, or hold. Here’s an example of a multiple-step math question you could see on the Series 7 exam:

An investor purchased a 5% ZYX Corporation convertible bond at par with a conversion price of $20. The bond is callable at 102. The call protection period has ended and the bonds have 15 years remaining until maturity. The current market price of ZYX common stock is $22.14 and the current market price of the bond is $990. Interest rates for new issues of similar credit quality are 5.9%. Which of the following is most suitable for the investor?

A. The investor should allow the bonds to be called by the issuer
B. The investor should convert the bond and sell the common stock
C. The investor should hold the bonds until maturity
D. The investor should immediately sell their bonds at the market


There is a lot to consider to answer this question. The investor will want to take whichever action will yield the best results. The question only provides you with the conversion price, so your first step should be to determine the conversion ratio

The formula for determining conversion ratio is: Par ÷ Conversion Price = Conversion Ratio.

So, using the details from the question, we will divide 1,000 by $20 to get 50. (1,000 ÷ $20 = 50)

Next, you need to determine the parity price to determine if conversion would be profitable at a given time. The question has provided you with both the current market price of the common stock and the bond. To find the parity price of the common stock, divide the current bond market price by the conversion ratio. ($990 ÷ 50 = $19.80) 

Now you need to consider the investor's options. Interest rates are rising, which means the issuer is not likely to call in the outstanding bonds, eliminating answer choice A. Additionally, rising interest rates will force the bond price to continue to fall in the secondary market. If the investor sells the bond at the current market price, they will receive $990. Knowing parity is $19.80 and the current market price of the common stock is $22.14, converting would give them a common stock position worth $1,107 ($22.14 x 50). Since $1,107 is greater than $990, and therefore more profitable, this tells us to convert. The correct answer choice is B.

How can I start studying for the Series 7 exam?

A.D. Banker offers a Series 7 online course that includes videos, practice exams, audio, activities, key facts, and can be supplemented with flashcards, study manuals, and web classes. 

We recommend you spend 80-100 hours studying for your exam. Additionally, we recommend you spend most of your time reading the content. This strategy leads to comprehension, as opposed to memorization. Practice tests should be used as assessment tools to gauge your understanding; they should not be your exclusive way of learning the material. 

Our guide to passing your licensing exam on your first attempt provides more information on how to best utilize our online course – check it out, and then get started today!

Topics: Securities, Series 7, SIE, Study Tips, FINRA, Series 66

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