Quotations and 5% Markup Policy – Series 7 Exam

🧾 Quotations and 5% Markup Policy – Series 7 Exam
📘 Understanding Pricing Rules and Fair Dealing for Securities Transactions

On the Series 7 exam, mastering the concepts of quotations and the 5% markup policy is essential. These rules govern how broker-dealers price securities and ensure fairness when executing trades for customers. Here’s a clear and focused summary to help you lock in these concepts for test day.

🎯 1. What Are Quotations?

In the securities market, a quotation is the price at which a broker-dealer is willing to buy or sell a security.

• Bid Price: The highest price a buyer is willing to pay for a security.
• Ask (Offer) Price: The lowest price a seller is willing to accept.

A quotation must be:

📌 Key Point:

• For Series 7, know that retail customers must be given firm quotes when they place orders.
• Subject quotes might appear in certain situations but aren’t firm commitments.

🎯 2. 5% Markup Policy – Overview

The 5% Policy is a guideline, not a hard rule, created by FINRA to ensure that broker-dealers charge customers fair and reasonable prices when buying or selling securities.
It applies to secondary market trades, not primary offerings like IPOs.

🎯 3. How the 5% Policy Works

• The markup is the amount added to the price when selling to a customer.
• The markdown is the amount subtracted from the price when buying from a customer.
• Commission is charged when a broker acts as an agent rather than a dealer.

The goal:
✅ Ensure that the total cost to the customer is fair and reasonable considering the market price.

🎯 4. Factors Considered for Markup Reasonableness

The 5% figure is a starting point. Actual allowable markup can be more or less depending on:

• Type of security (stocks vs. bonds)
• Availability of the security (liquidity)
• Price of the security (lower-priced securities might have higher percentage markups)
• Dollar amount of the transaction (larger trades may warrant smaller percentages)
• Services provided by the broker-dealer
• Expenses involved in executing the transaction
• Market conditions

🎯 5. Examples of Markup/Markdown

📈 Example 1: Markup

• Dealer buys stock at $50.
• Dealer sells to customer at $52.50.
• Markup = $2.50 → 5% markup over $50.

📉 Example 2: Markdown

• Dealer buys stock from customer at $47.50.
• Current market price is $50.
• Markdown = $2.50 → 5% markdown from $50.

⚠️ Important Note:

Markups and markdowns are calculated based on the inside market price (best bid or ask) at the time of the trade.

🎯 6. Common Misconceptions on the Series 7 Exam

🚫 Myth: The 5% policy always limits charges to 5%.
✅ Truth: It’s a guideline — sometimes more or less is reasonable based on circumstances.

🚫 Myth: The 5% rule applies to mutual funds.
✅ Truth: It does not apply to mutual funds or new issues.

🚫 Myth: Only markups are covered.
✅ Truth: Markups, markdowns, and commissions all fall under the 5% policy.

🚀 Conclusion: What to Remember for the Series 7

• Understand what a firm quote and a subject quote are.
• Know the 5% policy applies to secondary market securities transactions, not new issues.
• Recognize factors that influence whether a markup is fair and reasonable.
• The 5% rule is a guideline — context matters!

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Study smart. Know the rules. Pass your Series 7 exam!