Introduction
Welcome to Appendix B: Glossary of Terms, an essential resource for mastering the terminology necessary for the FINRA Series 7 exam. In this section, we focus on crucial financial terms, such as Margin Call, Market Capitalization, and Municipal Bond. Understanding these concepts is vital for a well-rounded knowledge base that will not only help you succeed in the Series 7 exam but also excel in your future role as a general securities representative.
Body
Margin Call
A Margin Call occurs when a broker demands that an investor deposits additional money or securities into the margin account to maintain the account’s minimum maintenance margin. This typically happens when the account value falls below the broker’s required minimum value due to market conditions. Failure to meet a margin call can result in the broker selling securities from the account to raise the necessary funds.
Visual Representation:
graph LR
A[Account Balance] -- Falls Below --> B[Minimum Maintenance Margin]
B -- Triggers --> C[Margin Call]
C -- Response --> D[Investor Deposits More Funds or Securities]
D -- Maintains --> E[Margin Account Compliance]
Market Capitalization
Market Capitalization is a measure of a company’s total market value. It’s calculated by multiplying the total number of a company’s outstanding shares by the current market price per share. This metric helps investors determine the size of a company, compare it to its peers, and gauge potential risks and opportunities.
$$
\text{Market Capitalization} = \text{Shares Outstanding} \times \text{Current Market Price Per Share}
$$
Municipal Bond
A Municipal Bond is a debt security issued by state, municipal, or county governments to finance capital expenditures. These bonds often offer investors the advantage of tax-exempt interest income, making them an attractive option for those in higher tax brackets. Municipal bonds can be used to fund projects such as building schools, highways, or water treatment facilities.
Conclusion
In summary, understanding key terms such as Margin Call, Market Capitalization, and Municipal Bond is crucial for performing well on the Series 7 exam and in your future career. These terms represent significant aspects of the securities industry and play a vital role in investment decision-making.
Supplementary Materials
- Maintenance Margin: The minimum amount of equity that must be maintained in a margin account.
- Dividend: A portion of a company’s earnings paid to shareholders.
- Bond Yield: The return an investor realizes on a bond.
Additional Resources
Quizzes
To test your understanding of these concepts, take the quiz below:
### What triggers a margin call?
- [x] The account falls below the minimum maintenance margin
- [ ] An increase in the account's value
- [ ] A request from the investor to close the account
- [ ] An increase in the brokerage commission
> **Explanation:** A margin call is triggered when the account value falls below the broker's required minimum margin, requiring the investor to deposit additional funds.
### Market capitalization is calculated by multiplying which of the following?
- [x] Shares outstanding by the current market price per share
- [ ] Net income by total assets
- [ ] Total debt by equity
- [ ] Revenue by cost of goods sold
> **Explanation:** Market capitalization is determined by multiplying the total number of a company's shares outstanding by the current market price per share, reflecting the company's total market value.
### Which of the following is a characteristic of municipal bonds?
- [x] They often offer tax-exempt interest income
- [ ] They are only issued by federal government entities
- [ ] Their interest rates are usually higher than corporate bonds
- [ ] They do not require a credit rating
> **Explanation:** Municipal bonds are known for offering tax-exempt interest income, making them attractive for investors in higher tax brackets.
### When an investor cannot meet a margin call, what action might a broker take?
- [x] Sell securities from the account
- [ ] Increase the account's maintenance margin
- [ ] Reduce the interest rate charged on the account
- [ ] Close the account immediately
> **Explanation:** If an investor cannot meet a margin call, a broker may sell securities from the investor's account to cover the shortfall.
### Which of the following accurately describes a debt security?
- [x] A municipal bond
- [ ] A share of stock
- [x] A corporate bond
- [ ] An equity option
> **Explanation:** Debt securities include instruments like municipal bonds and corporate bonds, representing loans made by investors to issuers.
### What does market capitalization help investors assess?
- [x] The company's size and potential risks
- [ ] The internal rate of return
- [ ] The latest dividend payout
- [ ] The company's bond ratings
> **Explanation:** Market capitalization aids in assessing a company's size, potential risks, and position relative to peers, informing investment decisions.
### Which scenario commonly leads to a margin call?
- [x] A decrease in the account's value below the maintenance margin
- [ ] The payment of dividends in the account
- [x] A rapid decline in stock prices in the account
- [ ] An increase in interest rates for the margin account
> **Explanation:** Margin calls commonly occur when the account value decreases below the maintenance margin, often due to stock price declines.
### Which security is generally backed by the tax authority of a state or local government?
- [x] Municipal bond
- [ ] Corporate bond
- [ ] Government savings bond
- [ ] Preferred stock
> **Explanation:** Municipal bonds are often backed by the taxing authority of the issuing state or local government, providing security to investors.
### True or False: Municipal bonds always offer tax-exempt returns.
- [x] True
- [ ] False
> **Explanation:** Municipal bonds typically offer tax-exempt interest income, particularly at the federal level, making them appealing to investors in high tax brackets.
### Which factor is unlikely to directly influence a company's market capitalization?
- [x] Weather conditions in a competitor's location
- [ ] Changes in the company's stock price
- [ ] Issuance of new shares
- [ ] A merger with another company
> **Explanation:** Market capitalization is directly affected by changes in stock price, share issuance, and mergers, not external conditions like weather.
Final Summary
Mastering essential Series 7 terms like Margin Call, Market Capitalization, and Municipal Bond is critical for passing the exam. Utilize the quizzes to reinforce your understanding and consult the glossary for quick reference. Explore additional resources to expand your knowledge and ensure exam success.