Series 7 Technical Terms Section Expanded

🧾 Series 7 Exam – Technical Terms Section Expanded
📘 Understanding Key Terms for Success on the Series 7 Exam

The Series 7 exam is comprehensive, covering a wide range of topics related to securities and financial products. One critical area that candidates must understand is the technical terms that will appear on the exam. These terms are essential for grasping key concepts and performing well on the test. Here’s an expanded list of technical terms that you should be familiar with in preparation for the Series 7 exam.

🎯 1. Common Terms in Securities and Investments

Stock

• Definition: A type of equity security that represents ownership in a corporation.
• Types:
  • Common Stock: Shares with voting rights and dividends.
  • Preferred Stock: Shares with a fixed dividend but typically no voting rights.

Bond

• Definition: A debt security issued by corporations, municipalities, or governments to raise capital.
• Key Concepts:
  • Coupon Rate: The interest rate paid by the bond issuer to bondholders.
  • Maturity Date: The date when the bond principal is repaid.

Mutual Fund

• Definition: A pooled investment vehicle that invests in a diversified portfolio of stocks, bonds, or other securities.
• Types:
  • Equity Funds: Invest in stocks.
  • Bond Funds: Invest in bonds.

ETF (Exchange-Traded Fund)

• Definition: An investment fund that trades on stock exchanges, similar to stocks. It holds assets like stocks, commodities, or bonds.
• Key Feature: ETFs are designed to track a specific index, such as the S&P 500.

🎯 2. Key Regulatory and Ethical Terms

FINRA (Financial Industry Regulatory Authority)

• Definition: A self-regulatory organization (SRO) responsible for overseeing broker-dealers and registered representatives in the securities industry.
• Role: Ensures that securities firms adhere to ethical standards and regulatory compliance.

SEC (Securities and Exchange Commission)

• Definition: A U.S. government agency that regulates the securities industry, enforces securities laws, and protects investors.
• Role: Oversees public offerings, market operations, and disclosure requirements.

Fiduciary Duty

• Definition: The legal obligation of a financial advisor to act in the best interest of their clients.
• Key Concept: A fiduciary must put their client’s needs ahead of their own, especially in investment recommendations.

🎯 3. Trading and Market Terms

Market Order

• Definition: An order to buy or sell a security immediately at the best available price in the market.
• Key Concept: Market orders prioritize speed of execution over price.

Limit Order

• Definition: An order to buy or sell a security at a specific price or better.
• Key Concept: Limit orders are used to control the price of an execution but may not be executed if the price is not met.

Stop Order (Stop-Loss Order)

• Definition: An order placed to buy or sell a security once its price reaches a specified level, designed to limit losses.
• Key Concept: When the security’s price hits the stop price, the order becomes a market order.

🎯 4. Risk and Return Terms

Risk Tolerance

• Definition: The degree of risk an investor is willing to take with their investments, which varies based on personal factors like age, financial goals, and investment experience.
• Key Concept: A high-risk tolerance means the investor is willing to accept more volatility for potential higher returns.

Capital Gains

• Definition: The profit from the sale of a security when its selling price is higher than the purchase price.
• Key Concept: Capital gains are taxable income and are subject to capital gains tax rates.

Dividend

• Definition: A portion of a company’s earnings distributed to shareholders, typically in cash or additional shares.
• Key Concept: Dividends are typically paid by preferred stocks and some common stocks.

Yield

• Definition: The income return on an investment, such as interest or dividends, expressed as a percentage of the investment’s current market price.
• Types:
  • Dividend Yield: Annual dividends divided by the stock price.
  • Bond Yield: Annual interest divided by the bond’s price.

🎯 5. Investment Strategies and Products

Asset Allocation

• Definition: The process of distributing investments across various asset classes (stocks, bonds, real estate, etc.) to reduce risk and achieve a balanced portfolio.
• Key Concept: Diversification is a key element of asset allocation, aimed at spreading risk across different investments.

Covered Call

• Definition: An options strategy in which an investor holds a long position in a security and sells call options on that same security.
• Key Concept: Used to generate income through premiums while holding the underlying asset.

Short Selling

• Definition: A trading strategy where an investor borrows shares to sell them, hoping to buy them back at a lower price for a profit.
• Key Concept: Short selling is risky because losses can be unlimited if the price of the security increases.

Margin Account

• Definition: A brokerage account that allows investors to borrow funds from a broker to purchase securities.
• Key Concept: Investors must meet maintenance margin requirements and may be subject to margin calls if the value of their account falls.

🎯 6. Important Terms for Exam Preparation

Suitability

• Definition: The requirement that financial professionals recommend investments that align with the client’s risk tolerance, financial goals, and investment profile.
• Key Concept: A suitable investment meets the client’s needs, not the professional’s.

Underwriting

• Definition: The process in which an investment bank or underwriter guarantees the purchase of securities from the issuer and resells them to the public.
• Key Concept: Initial Public Offerings (IPOs) typically involve underwriting services.

Prospectus

• Definition: A legal document required by the SEC that provides detailed information about a security being offered for sale to investors.
• Key Concept: A prospectus includes the company’s financials, risk factors, and investment strategies.

🚀 Conclusion: Mastering the Technical Terms for Success

Mastering technical terms is crucial for success on the Series 7 exam. Understanding the vocabulary used in the securities industry will help you make sense of exam questions and apply the knowledge correctly. Be sure to review these terms regularly and focus on how they fit within the broader context of securities regulations and investment products.

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