Series 7 Bad Areas

Lesson 1.1: Marketing New Issues

• Investment Banker Role: Investment bankers underwrite, distribute, and market new issues.

• Red Herring Prospectus: Preliminary prospectus used during the "cooling-off" period before a securities offering is effective.

• Filing with the SEC: Issuers must file a registration statement with the SEC, which includes financial statements, risk factors, and management information.

• Types of Offerings:

  • Public Offering: New issue offered to the public at large.

  • Private Placement: Limited offering to specific investors (e.g., accredited investors).

• Tombstone Advertisement: Used to announce the offering and provide basic details.

Lesson 1.2: Registration Requirements

• Registration Forms:

  • Form S-1: Registration statement for new securities.

  • Form S-3: Short-form registration for companies with adequate reporting history.

• Exemptions:

  • Regulation D: Exempts certain private offerings from registration (e.g., Rule 506(b) and Rule 506(c) for accredited investors).

  • Regulation A: Small offerings up to $50 million within 12 months.

  • Intrastate Offering Exemption: Exemption for offerings within a single state.

• SEC Review: SEC reviews registration but does not approve or disapprove; it only ensures completeness and disclosure.

• Cooling-Off Period: Between filing and effective date; 20 days or longer if the SEC requires amendments.

• Free-Riding: Prohibited practice where an underwriter sells a new issue before it’s priced.

Lesson 5.5: Municipal Securities Marketability

• Factors Affecting Marketability:

  • Credit Rating: Higher-rated bonds are more marketable (e.g., AAA vs. lower ratings).

  • Interest Rates: Bonds with higher interest rates tend to be more marketable.

  • Liquidity: Bonds with a higher secondary market demand are more marketable.

  • Call Features: Callable bonds may be less marketable due to call risk.

• Municipal Bond Risks:

  • Interest Rate Risk: Prices fall as interest rates rise.

  • Credit Risk: Risk of issuer default.

  • Liquidity Risk: Some municipal bonds may not trade frequently.

Lesson 5.1: General Characteristics of Municipal Securities

• Types of Municipal Bonds:

  • General Obligation (GO) Bonds: Backed by the full taxing power of the issuing government.

  • Revenue Bonds: Secured by revenue from a specific project (e.g., toll roads, airports).

• Tax Advantages: Interest income is generally exempt from federal taxes and sometimes state/local taxes.

• Credit Rating: Municipal bonds are rated by agencies (e.g., Moody's, S&P, Fitch). Higher ratings are safer but may offer lower yields.

• Bond Features:

  • Coupon Rate: Fixed interest paid periodically.

  • Maturity: Date when the bond principal is repaid.

  • Call Feature: Issuer can redeem the bond before maturity.

Lesson 8.2: Annuity Purchase and Settlement Options

• Annuity Purchase Options:

  • Single Premium: One-time lump sum investment.

  • Periodic Premium: Ongoing contributions (e.g., monthly, yearly).

• Settlement Options:

  • Life Annuity: Pays income for the annuitant’s lifetime.

  • Period Certain: Pays income for a set number of years, with guaranteed payments.

  • Joint and Survivor: Pays for the lives of two people, typically a couple, with income continuing after one dies.

  • Lump Sum: Full payout of accumulated value.

Lesson 8.3: Valuing a Variable Annuity

• Subaccounts: A variable annuity’s value depends on the performance of its underlying investments (e.g., stock, bonds).

• Net Asset Value (NAV): The value of the annuity is calculated by the NAV of the subaccounts, adjusted for any fees.

• Charges: Variable annuities have administrative fees, mortality and expense risk fees, and investment management fees.

• Death Benefit: Provides a beneficiary with the greater of the initial investment or the current value.

Lesson 8.4: Taxation of Variable Annuities

• Accumulation Phase: Earnings grow tax-deferred until withdrawal.

• Distribution Phase: Withdrawals are taxed as ordinary income.

• Early Withdrawal Penalty: 10% penalty on distributions before age 59½, in addition to income tax.

• Tax-Deferred Growth: Investment gains are not taxed until withdrawn, allowing more growth.

• Exclusion Ratio: Determines how much of each payment is considered taxable income vs. return of principal.

Lesson 8.5: Regulation of Variable Insurance Products

• FINRA and SEC Regulation: Variable insurance products are regulated by both FINRA and the SEC, in addition to state insurance regulators.

• Suitability: Sales of variable insurance products must meet suitability requirements.

• Prospectus Delivery: A prospectus must be delivered to the investor before or during the sale of the product.

• State Regulation: States regulate the sale and solicitation of variable insurance products.

Lesson 9.1: Options Characteristics

• Call Option: The right to buy the underlying asset at a specified price (strike price).

• Put Option: The right to sell the underlying asset at a specified price.

• Expiration Date: The date by which the option must be exercised.

• Premium: The price paid for the option.

• Strike Price: The price at which the underlying asset can be bought or sold.

Lesson 9.2: Valuing Options

• Intrinsic Value: The difference between the strike price and the current price of the underlying asset (for in-the-money options).

• Time Value: The additional value of an option due to the time remaining until expiration.

• Factors Influencing Option Price:

  • Underlying Asset Price

  • Strike Price

  • Time to Expiration

  • Volatility

  • Interest Rates

Lesson 9.3: Basic Options Strategies

• Covered Call: Selling a call option on a stock you own to generate income.

• Protective Put: Buying a put option to protect against a decline in the value of a stock you own.

• Long Call: Buying a call option to profit from an increase in the underlying asset's price.

• Long Put: Buying a put option to profit from a decline in the underlying asset's price.

Lesson 9.4: Hedging With Options

• Hedge Against Price Decline: Buy put options to protect long positions.

• Hedge Against Price Increase: Buy call options to protect short positions.

• Portfolio Insurance: Use options to limit potential losses in a portfolio.

Lesson 9.5: Advanced Options Strategies

• Straddle: Buy both a call and a put option at the same strike price and expiration, anticipating large movement in either direction.

• Strangle: Similar to a straddle, but with different strike prices for the call and put options.

• Butterfly Spread: Combination of bull and bear spreads using three strike prices for a limited risk/reward strategy.

Lesson 9.6: Nonequity Options

• Types of Underlying Assets: Options can be based on commodities, currencies, interest rates, and more.

• Example: A bond option may have the option to buy or sell a bond at a certain price.

Lesson 9.7: Options Taxation

• Tax Treatment of Premiums: Option premiums are treated as capital gains or losses when the option expires or is exercised.

• Short-Term vs. Long-Term: Taxed based on holding period for the underlying asset, not the option itself.

Lesson 9.8: Rules and Regulations of the Options Market Including the Role of the OCC

• OCC: The Options Clearing Corporation ensures the integrity of options trading by guaranteeing exercise and assignment.

• Regulation: The SEC and FINRA regulate options markets, with specific rules for margin, reporting, and trading practices.

Lesson 15.1: Asset Allocation and Modern Portfolio Theory

• Asset Allocation: Dividing investments across asset classes (stocks, bonds, etc.) to optimize risk and return.

• Modern Portfolio Theory (MPT): A theory that aims to create a portfolio that maximizes return for a given level of risk by diversifying across assets.

Lesson 15.2: Fundamental Analysis With Financial Statements

• Balance Sheet: Shows assets, liabilities, and equity.

• Income Statement: Shows revenues, expenses, and profits over a period.

• Cash Flow Statement: Tracks the inflows and outflows of cash, focusing on operating, investing, and financing activities.

Lesson 15.3: Technical Analysis

• Chart Patterns: Identifying trends and reversals through patterns like head and shoulders, support, and resistance.

• Indicators: Use of moving averages, Relative Strength Index (RSI), and other technical indicators to predict price movements.

Lesson 15.4: Investment Costs, Fees, and Tax Considerations

• Expense Ratios: Management fees for mutual funds and ETFs.

• Front-End Load: A sales charge paid when purchasing mutual fund shares.

• Back-End Load: A fee when selling mutual fund shares, typically applied if sold before a certain period.

• Tax-Deferred Accounts: Contributions to accounts like IRAs and 401(k)s grow tax-deferred.

Lesson 16.1: Types of Customer Orders

• Market Order: Buy or sell at the current market price.

• Limit Order: Buy or sell only at a specified price or better.

• Stop Order: Becomes a market order once a certain price is reached.

Lesson 16.2: Quotations

• Bid Price: The price at which a buyer is willing to purchase a security.

• Ask Price: The price at which a seller is willing to sell a security.

• Spread: The difference between the bid and ask price.

Lesson 16.3: Short Sales

• Short Selling: Borrowing and selling securities with the expectation that their price will decline.

• Margin Requirements: Short sellers must maintain a margin account.

Lesson 16.4: Extension of Credit in the Securities Industry

• Reg T: Federal Reserve Regulation governing the extension of credit by brokers and dealers.

• Margin Requirements: The amount of equity a customer must maintain in a margin account.

Lesson 16.5: Rules of the Securities Marketplaces

• Marketplaces: Includes exchanges like the NYSE and over-the-counter (OTC) markets.

• Order Execution: Orders must be executed promptly and fairly under the SEC’s rules.