Series 7 Exam Vocabulary You Must Know

🧾 Series 7 Exam Vocabulary You Must Know
📘 Key Terms and Definitions for the Series 7 Exam

The Series 7 exam is filled with specialized financial terminology that you’ll need to understand in order to succeed. Here’s a comprehensive list of key terms you must know, along with their definitions, to help you pass the Series 7 exam.

🎯 1. Common Stock

• Definition: A type of equity security that represents ownership in a corporation. Common stockholders are entitled to vote at shareholder meetings and receive dividends (if declared).
• Key Point: Common stockholders are last in line to receive any remaining assets in case of liquidation.

🎯 2. Preferred Stock

• Definition: A type of equity security that gives holders priority over common stockholders in receiving dividends and in the event of liquidation.
• Key Point: Preferred stock typically has a fixed dividend, which is paid before common stock dividends.

🎯 3. Bond

• Definition: A debt security issued by a corporation, municipality, or government that requires the issuer to pay periodic interest payments and return the principal at maturity.
• Key Point: Bonds can be traded on the secondary market and are generally rated based on their credit quality.

🎯 4. Yield

• Definition: The income return on an investment, usually expressed as an annual percentage. For bonds, it’s calculated as the interest income divided by the bond’s current market price.
• Key Point: There are several types of yield, including current yield, yield to maturity (YTM), and yield to call (YTC).

🎯 5. Market Order

• Definition: An order to buy or sell a security immediately at the current market price.
• Key Point: A market order guarantees the execution but not the price at which it will be filled.

🎯 6. Limit Order

• Definition: An order to buy or sell a security at a specific price or better.
• Key Point: Limit orders are not guaranteed to execute unless the security reaches the specified price.

🎯 7. Stop Order (Stop-Loss Order)

• Definition: An order to buy or sell a security when its price reaches a specified level, typically used to limit losses.
• Key Point: Once the stop price is reached, the stop order becomes a market order.

🎯 8. Short Selling

• Definition: The practice of selling securities that you do not own, borrowing them from a broker to sell with the intention of buying them back at a lower price.
• Key Point: Short selling is used to profit from an anticipated decline in the price of a security.

🎯 9. Margin

• Definition: The use of borrowed funds to purchase securities, with the investor’s own capital acting as collateral.
• Key Point: Regulation T sets the initial margin requirement at 50%, and maintenance margin typically is 25% of the total market value.

🎯 10. Dividend

• Definition: A distribution of a company’s earnings to its shareholders, typically paid in cash or additional shares of stock.
• Key Point: Dividends are paid out of a company’s retained earnings and are generally taxable to the shareholder.

🎯 11. Underwriting

• Definition: The process by which an investment bank or broker-dealer guarantees the sale of securities by purchasing them from the issuer and reselling them to the public.
• Key Point: The underwriting spread is the difference between what the underwriter pays the issuer and the price at which they sell the securities to investors.

🎯 12. SEC (Securities and Exchange Commission)

• Definition: A federal agency responsible for regulating the securities industry and protecting investors.
• Key Point: The SEC oversees the registration of securities, the disclosure of financial information, and the activities of market participants.

🎯 13. FINRA (Financial Industry Regulatory Authority)

• Definition: A self-regulatory organization (SRO) that governs the activities of broker-dealers and registered representatives.
• Key Point: FINRA sets rules and standards for conduct in the securities industry, enforces compliance, and resolves disputes between investors and firms.

🎯 14. Types of Orders

• Buy Orders:
  • Market Order: Buys at the best available price.
  • Limit Order: Buys at a specific price or better.
• Sell Orders:
  • Market Order: Sells at the best available price.
  • Limit Order: Sells at a specific price or better.

🎯 15. Call and Put Options

• Call Option: Gives the holder the right (but not the obligation) to buy an asset at a predetermined price within a specific time frame.
• Put Option: Gives the holder the right (but not the obligation) to sell an asset at a predetermined price within a specific time frame.

🎯 16. Callable Bonds

• Definition: Bonds that can be redeemed by the issuer before maturity at a specified call price.
• Key Point: Issuers typically call bonds when interest rates drop, allowing them to refinance at a lower rate.

🎯 17. Bond Ratings

• Definition: A letter grade assigned to bonds by credit rating agencies (like S&P or Moody’s) to indicate their creditworthiness.
• Key Point: Investment-grade bonds are rated BBB or higher, while bonds rated below BBB are considered junk bonds.

🎯 18. Asset-Backed Securities (ABS)

• Definition: Securities backed by a pool of assets, such as loans, credit card debt, or mortgages.
• Key Point: ABS allows investors to purchase securities backed by specific cash flows from the underlying assets.

🎯 19. Risk and Return

• Definition: The trade-off between the risk of an investment and the potential return. Generally, higher-risk investments offer the potential for higher returns.
• Key Point: Diversification can help reduce risk while balancing potential returns.

🎯 20. Suitability

• Definition: The obligation of financial professionals to recommend investments that are appropriate for their clients based on their investment objectives, risk tolerance, and financial situation.
• Key Point: Failing to recommend suitable investments could result in regulatory action or client lawsuits.

🚀 Conclusion: Mastering Series 7 Vocabulary

Familiarizing yourself with the Series 7 exam vocabulary is crucial to your success. By understanding these key terms and their definitions, you will be better prepared to tackle the questions related to securities products, trading, market structure, and regulations that are covered in the exam.

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