Introduction
Welcome to Appendix B: Glossary of Terms, a crucial resource for anyone preparing for the FINRA Series 7 exam. In this section, we will delve into some fundamental terms that frequently appear throughout the exam and in the financial industry. Understanding these concepts will provide a solid foundation for your studies and help you perform successfully on test day.
Body
Preferred Stock
Preferred stock represents a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a fixed dividend, unlike common stock, which can fluctuate. Additionally, in the event of liquidation, preferred stockholders are paid before common stockholders. However, preferred stocks usually do not carry voting rights.
Key Features of Preferred Stock:
- Fixed dividends, which can make it similar to a bond.
- Priority over common stock in the event of a company’s liquidation.
- Often convertible into common stock under certain conditions.
Mermaid diagram illustrating the hierarchy:
graph LR
A[Liquidation Process]
B[Bondholders]
C[Preferred Stockholders]
D[Common Stockholders]
A --> B --> C --> D
Prospectus
A prospectus is a formal legal document required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. It contains important information such as the company’s financial statements, executive biographies, details of the securities being offered, and risk factors.
Why is a Prospectus Important?
- Helps investors make informed decisions by detailing an offering’s financial elements and associated risks.
- Protects investors by ensuring that all relevant financial information is disclosed.
Put Option
A put option is a financial contract that gives its holder the right, but not the obligation, to sell a specified amount of an underlying security at a predetermined price within a specified time frame. Investors often buy put options to hedge against potential declines in a stock or index.
Characteristics of Put Options:
- Protects against declining prices as it allows selling at a predetermined price.
- The maximum gain is limited to the strike price minus the premium paid.
- Useful in bearish market conditions.
Conclusion
Understanding these fundamental terms is vital as they form the bedrock of more complex topics covered in the Series 7 exam. Familiarity with preferred stock, prospectuses, and put options will enable you to navigate the financial markets more effectively and increase your chances of passing the exam.
Supplementary Materials
Glossary
- Preferred Stock: Stock with fixed dividends and priority in liquidation.
- Prospectus: SEC-required document detailing investment offerings.
- Put Option: Option to sell at a set price before expiration.
Additional Resources
Quizzes
Test your knowledge with these practice questions and explanations:
### What type of stock often receives fixed dividends and has priority in liquidation?
- [x] Preferred Stock
- [ ] Common Stock
- [ ] Junior Stock
- [ ] Convertible Bond
> **Explanation:** Preferred stockholders have a fixed dividend priority over common stockholders in the event of liquidation.
### Which document provides detailed investment information required by the SEC?
- [x] Prospectus
- [ ] White Paper
- [ ] Financial Statement
- [ ] Annual Report
> **Explanation:** A prospectus is a legal document that provides all relevant details of an investment offering.
### The put option provides the right to:
- [x] Sell a security at a specific price
- [ ] Buy a security at market price
- [ ] Trade stock for bonds
- [ ] Exchange two different securities
> **Explanation:** A put option grants the holder the right to sell at a predetermined price, beneficial in declining markets.
### What advantage do preferred stocks typically have over common stocks?
- [x] Fixed dividends
- [ ] Higher growth potential
- [ ] Voting rights
- [ ] Unlimited profitability
> **Explanation:** Preferred stocks often come with fixed dividends, making them more stable than common stocks.
### Which of the following is not a characteristic of a prospectus?
- [ ] Risk disclosure
- [x] Guaranteed returns
- [ ] Financial statements
- [ ] Executive information
> **Explanation:** A prospectus cannot guarantee returns; it can only provide detailed information.
### Why might an investor purchase a put option?
- [x] To hedge against a stock decline
- [ ] To lock in current interest rates
- [x] To speculate on increasing prices
- [ ] To invest in government bonds
> **Explanation:** Put options protect against declining prices by allowing sales at a predetermined strike price.
### A prospectus contains which type of information?
- [x] Risk factors
- [ ] Corporate bylaws
- [x] Executive biographies
- [ ] SEC voting results
> **Explanation:** Prospectuses include risk factors and executive bios, aiding investor decisions.
### Which stock type is less likely to have voting rights?
- [x] Preferred Stock
- [ ] Common Stock
- [ ] Voting Stock
- [ ] Treasury Stock
> **Explanation:** Preferred stock generally does not grant voting rights, unlike common stock.
### True or False: A prospectus is required for a mutual fund offering.
- [x] True
- [ ] False
> **Explanation:** The SEC requires a prospectus to ensure investors receive necessary information to make informed decisions.
### Which option type benefits a holder in a bearish market?
- [x] Put Option
- [ ] Call Option
> **Explanation:** Put options provide protection in falling markets by allowing sales at a fixed price.
Final Summary
This appendix on glossary terms is a starting point for mastering the foundational concepts needed for the Series 7 exam. The included quizzes offer valuable practice, reinforcing the terms’ practical understanding and their applications in the exam’s context.