Provides Information About Investments

The largest Series 7 section (about 36%). You must explain what the product is and what can go wrong.

Equities

Common stock is ownership. You vote and you may get dividends, but you are last in line in a bankruptcy. Preferred stock usually pays a fixed dividend and stands ahead of common, but it typically has no vote. Rights are short-term chances for existing owners to buy new shares cheaply. Warrants are longer-term calls issued by the company.

Debt

A bond is a loan. The issuer pays interest and returns par at maturity. Prices fall when market rates rise (the teeter-totter). Treasuries have virtually no credit risk. Municipals are often federally tax-exempt. Corporates pay more yield for more credit risk. Convertible bonds can turn into stock.

Options

A call is the right to buy. A put is the right to sell. Buyers have limited loss (the premium) and writers have large or unlimited loss if they are naked. One contract is 100 shares. Expiration, strike, and premium are the three numbers to keep straight.

Packaged products

Mutual funds, ETFs, UITs, and variable contracts appear here too. ETFs trade all day; open-end funds price at the 4 p.m. NAV. Know sales charges, 12b-1 fees, and the prospectus.

DPPs and alternatives

Direct participation programs (limited partnerships) pass tax results to the partners. They are often illiquid. REITs own property or mortgages and must pay out most taxable income. Hedge-fund-like products are not for a typical retail account.

Risk vocabulary

Name the risk: market, credit, interest-rate, inflation, liquidity, call, reinvestment, political, currency. A long municipal bond in a rising-rate world has interest-rate risk even if the coupon never bounced a check.