FINRA Series 7 – General Securities Representative Exam — Questions and Answers

Question 1: What is the 'PEG ratio' and how is it used?

Projected Earnings Growth ratio, forecasting future earnings
Price Equity Growth ratio, comparing price to book value growth
Price-Earnings-Gap ratio, measuring the spread between growth and value stocks
Price-to-Earnings-to-Growth ratio, used to value a stock relative to its earnings growth rate (Correct answer)

Correct answer: Price-to-Earnings-to-Growth ratio, used to value a stock relative to its earnings growth rate

The PEG ratio divides the P/E ratio by the earnings growth rate, with a PEG below 1 often suggesting a stock may be undervalued relative to its growth prospects.

Question 2: What is a 'bear market'?

A market with no trading volume
A prolonged period of falling prices (Correct answer)
A market rising over 20%
A market closed for holidays

Correct answer: A prolonged period of falling prices

A bear market is a sustained decline in prices, typically 20% or more.

Question 3: What is the secondary market?

Where companies file IPOs
Where the government auctions new bonds
Where investors trade previously issued securities among themselves (Correct answer)
Where banks set deposit rates

Correct answer: Where investors trade previously issued securities among themselves

In the secondary market, existing securities are traded between investors without the issuing company receiving proceeds.

Question 4: What is the investment return when you purchase a stock today for 125 and sell it at 145 a year from now?

20%
15%
18%
16% (Correct answer)

Correct answer: 16%

To calculate the investment return, you use the formula: (Selling Price - Purchase Price) / Purchase Price * 100. In this scenario, the calculation is (145 - 125) / 125 * 100. This simplifies to 20 / 125 * 100, which equals 0.16 * 100, resulting in a 16% investment return.

Question 5: Which type of order tends to provide liquidity rather than consume it?

A market order
A stop-loss triggered at market
A limit order resting in the book (Correct answer)
A fill-or-kill market order

Correct answer: A limit order resting in the book

Resting limit orders add depth to the order book, supplying liquidity for others.

Question 6: What is a 'stop-loss order' used for in trading?

To prevent brokers from charging excessive fees
To pause a trading account during volatility
To stop all trading activity at end of day
To automatically sell a security when it drops to a specified price to limit losses (Correct answer)

Correct answer: To automatically sell a security when it drops to a specified price to limit losses

A stop-loss order automatically triggers a sale when a stock reaches a predetermined price, protecting traders from further losses.

Question 7: What is Value at Risk (VaR)?

A statistical measure estimating the potential loss of a portfolio over a defined time period at a given confidence level (Correct answer)
The ratio of a stock's price to its intrinsic value
The average annual return of a security adjusted for inflation
The maximum possible loss on a portfolio over any time period

Correct answer: A statistical measure estimating the potential loss of a portfolio over a defined time period at a given confidence level

VaR estimates the maximum loss a portfolio could face over a specific time period with a given level of statistical confidence (e.g., 95% or 99%).

Question 8: Which measure most directly reflects the cost of immediately trading a stock?

Price-to-earnings ratio
Dividend payout ratio
Bid-ask spread (Correct answer)
Beta coefficient

Correct answer: Bid-ask spread

A narrower bid-ask spread signals lower transaction cost and greater liquidity.

Question 9: What is 'rebalancing' a portfolio?

Moving all assets to higher-performing investments
Replacing underperforming fund managers
Balancing between growth and dividend stocks equally
Periodically adjusting portfolio holdings back to target allocations as market movements cause drift (Correct answer)

Correct answer: Periodically adjusting portfolio holdings back to target allocations as market movements cause drift

Rebalancing restores a portfolio to its target asset allocation by buying or selling holdings that have grown or shrunk beyond desired proportions due to market movements.

Question 10: What is 'short selling' in the stock market?

Selling stocks within 24 hours of purchase
Selling a small portion of your portfolio
Selling stocks you own at a loss
Borrowing shares to sell them, then repurchasing at a lower price for profit (Correct answer)

Correct answer: Borrowing shares to sell them, then repurchasing at a lower price for profit

Short selling involves borrowing shares from a broker, selling them at the current price, and buying them back later at a lower price to profit from the decline.

Question 11: What is the role of an 'investment banker' in relation to stocks?

Helping companies raise capital through IPOs and secondary offerings while advising on mergers and acquisitions (Correct answer)
Providing bank customers with stock recommendations
Operating the bank's internal stock trading desk
Managing retail client stock portfolios for a bank

Correct answer: Helping companies raise capital through IPOs and secondary offerings while advising on mergers and acquisitions

Investment bankers help corporations and governments raise equity and debt capital, underwrite securities offerings, and advise on strategic transactions like mergers and acquisitions.

Question 12: What is a 'trailing stop' order?

An order placed after the market closes
An order that follows market trends automatically
A stop order that resets daily
A stop order that adjusts upward as a stock price rises, locking in gains (Correct answer)

Correct answer: A stop order that adjusts upward as a stock price rises, locking in gains

A trailing stop sets a stop-loss at a percentage or dollar amount below the market price and automatically moves up as the price rises, protecting gains.

Question 13: What is an 'accredited investor' under SEC rules?

A licensed investment adviser registered with the SEC
Any investor who has passed the Series 7 examination
An investor meeting specific income or net worth thresholds, qualifying for access to certain private investments (Correct answer)
An investor who has completed an SEC-approved education program

Correct answer: An investor meeting specific income or net worth thresholds, qualifying for access to certain private investments

An accredited investor generally must have income exceeding $200,000 annually (or $300,000 jointly) or a net worth over $1 million, qualifying them for unregistered private investments.

Question 14: Capital gains on a stock are realized when?

The stock is added to an index
You sell the stock for more than you paid (Correct answer)
The company pays a dividend
The market opens

Correct answer: You sell the stock for more than you paid

A capital gain is realized when you sell an asset for more than its purchase price.

Question 15: What does it mean when a stock's liquidity suddenly increases dramatically?

It indicates that many sellers desire to sell their shares.
It indicates that many consumers desire to purchase.
There is something that has traders and investors interested. (Correct answer)

Correct answer: There is something that has traders and investors interested.

A sudden and dramatic increase in a stock's liquidity, often reflected by a surge in trading volume, indicates heightened interest from both buyers and sellers. This increased activity usually stems from significant news, events, or speculation surrounding the company, attracting more market participants and making the stock easier to trade.

Question 16: What does 'beta' measure in stock analysis?

A stock's price volatility relative to the overall market (Correct answer)
The probability of a stock declining in value
The balance between equity and debt financing
The second phase of a company's growth cycle

Correct answer: A stock's price volatility relative to the overall market

Beta measures how much a stock's price moves relative to the market; a beta of 1 means it moves with the market, above 1 means more volatile, below 1 means less volatile.

Question 17: What is a 'contrarian' investment strategy?

Following the majority of market trends
Investing against prevailing market sentiment (Correct answer)
Using only technical analysis
Investing exclusively in foreign markets

Correct answer: Investing against prevailing market sentiment

Contrarian investors go against prevailing market sentiment, buying when others are selling and selling when others are buying.

Question 18: What does SEC stand for in U.S. financial regulation?

Securities Enforcement Corporation
Stock Exchange Council
Securities and Exchange Commission (Correct answer)
State Economic Committee

Correct answer: Securities and Exchange Commission

The Securities and Exchange Commission is the U.S. agency that regulates securities markets and protects investors.

Question 19: What is 'swing trading' in stock markets?

Rotating between sectors annually
Holding positions for days to weeks to capture short-term price moves (Correct answer)
Trading only on market open and close
Trading only dividend-paying stocks

Correct answer: Holding positions for days to weeks to capture short-term price moves

Swing trading involves holding positions for days to weeks to profit from expected price swings using technical and fundamental analysis.

Question 20: What is the purpose of stress testing in risk management?

To measure how quickly a portfolio manager can rebalance holdings
To evaluate how well traders perform under deadline pressure
To simulate extreme market conditions to assess a portfolio's potential losses (Correct answer)
To test the speed and accuracy of trade execution systems

Correct answer: To simulate extreme market conditions to assess a portfolio's potential losses

Stress testing models how a portfolio would perform under severe hypothetical scenarios (e.g., a market crash or interest rate spike) to identify vulnerabilities.

Question 21: What does "Holding period" mean in terms of the investment

Investment term beginning on a T+2 basis
The holding duration reflects the investment's current value.
None of the above
The length of time you've held the investment (Correct answer)

Correct answer: The length of time you've held the investment

The 'holding period' in investment refers to the total length of time an investor owns a particular asset or security. It begins on the date of purchase and concludes on the date of sale. This duration is crucial for calculating investment returns, determining capital gains or losses, and assessing tax implications.

Question 22: What is 'anti-money laundering' (AML) compliance in securities?

Rules prohibiting foreign investors from trading US securities
Regulations requiring financial firms to detect and report suspicious activities that may involve money laundering (Correct answer)
Compliance requirements for mutual fund advertising
A law preventing broker-dealers from charging excessive commissions

Correct answer: Regulations requiring financial firms to detect and report suspicious activities that may involve money laundering

AML compliance requires securities firms to implement programs to detect suspicious activities, maintain records, and report transactions that may involve money laundering or terrorist financing.

Question 23: What is a 'covered call' options strategy?

Buying call options without owning the underlying stock
Calling your broker to cover margin requirements
Selling call options on stock you already own to generate income (Correct answer)
Covering losses with offsetting call purchases

Correct answer: Selling call options on stock you already own to generate income

A covered call involves selling call options on shares you already own, generating premium income while potentially capping upside gains.

Question 24: What is a 'prospectus' in securities regulation?

A document listing all exchange-traded funds
A regulatory filing for stock buyback programs
A formal legal document providing details about an investment offering to prospective investors (Correct answer)
A broker's annual performance report

Correct answer: A formal legal document providing details about an investment offering to prospective investors

A prospectus is a legally required document that provides material information about an investment offering, including financial statements, risks, and use of proceeds.

Question 25: What is the Series 7 exam and who must pass it?

The General Securities Representative Exam required for broker-dealers to sell most types of securities (Correct answer)
An advanced options trading certification for experienced traders
An SEC-administered exam for portfolio managers at mutual funds
A regulatory examination for hedge fund managers

Correct answer: The General Securities Representative Exam required for broker-dealers to sell most types of securities

The Series 7, administered by FINRA, licenses broker-dealer representatives to sell a wide range of securities including stocks, bonds, mutual funds, and options to the public.

Question 26: What is the main purpose of a limit order?

To buy or sell only at a specified price or better (Correct answer)
To borrow shares for shorting
To cancel all open orders
To execute instantly at any price

Correct answer: To buy or sell only at a specified price or better

A limit order executes only at the set price or a more favorable one.

Question 27: To calculate _____, the capital gain is subtracted from the return to investors.

Constant spot rate payment
Constant forward rate payment
Constant future rate payment
Periodic dividend payments (Correct answer)

Correct answer: Periodic dividend payments

Periodic dividend payments are the distributions of a company's earnings to its shareholders, typically made on a regular schedule. To calculate these payments when given the total return to investors and the capital gain, you subtract the capital gain from the total return. This is because the total return on an investment is comprised of both capital gains (from price appreciation) and income (such as dividends).

Question 28: What is the role of a 'transfer agent' in the stock market?

A company appointed by a corporation to maintain records of shareholders and manage dividend payments and share issuances (Correct answer)
An agent who transfers clients between brokerage firms
A broker who facilitates transfers of large block trades
A FINRA representative who transfers securities licenses between states

Correct answer: A company appointed by a corporation to maintain records of shareholders and manage dividend payments and share issuances

Transfer agents keep records of who owns a company's stocks and bonds, process certificates, handle dividend payments, and manage corporate actions like stock splits and mergers.

Question 29: What is diversification in investing?

Putting all money in one stock
Borrowing to buy more shares
Selling all holdings at once
Spreading investments across assets to reduce risk (Correct answer)

Correct answer: Spreading investments across assets to reduce risk

Diversification reduces risk by spreading investments across different assets so losses in one are offset by others.

Question 30: Average daily trading volume is used as a proxy for what?

A stock's liquidity (Correct answer)
A stock's dividend safety
A stock's book value
A company's profit margin

Correct answer: A stock's liquidity

Higher daily volume generally indicates it is easier to trade the stock without large price moves.

Question 31: What is the NASDAQ known for?

Being a physical trading floor only
Setting U.S. interest rates
Being an electronic exchange heavy with technology stocks (Correct answer)
Trading only government bonds

Correct answer: Being an electronic exchange heavy with technology stocks

The NASDAQ is an electronic exchange known for listing many technology and growth companies.

FINRA Series 7 – General Securities Representative Exam

The FINRA Series 7 exam qualifies candidates as General Securities Representatives, testing knowledge required to sell corporate and municipal securities, investment company securities, variable annuities, options, and government securities. Passing this exam is the primary licensing requirement for stockbrokers and most securities industry jobs.

135

Questions

225 min

Time Limit

72%

To Pass

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