TheorySeries 7
Practice Test
Study for the FINRA Series 7 exam: original questions on equities, bonds, options, municipal and packaged products, trading, margin and the rules you must know.
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Series 7 exam — full Q&A walkthrough
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30 free Series 7 questions
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Series 7
FINRA Rule 3120 states what is meant by a supervisory control system. Which of the following phrases most accurately describes it?
Correct — D. According to FINRA Rule 3120, a supervisory control system is made up of policies and procedures designed to check and confirm that written supervision procedures governing day-to-day operations are effective. Where gaps are found, existing procedures are amended or additional procedures are developed to close the gaps. -
Series 7
Which of the following is NOT a reason for the Registered Options Principal (ROP) to decline an account application?
Correct — D. The ROP needs to be certain that a customer is financially stable enough to assume certain investment risk. Having a misdemeanor does not significantly affect a customer's source of wealth or source of income. However, if the customer had a criminal record with a larger and more related incident, for example a violation of SEC insider trading laws, then this should certainly be considered in the approval decision. -
Series 7
Which tax is NOT flat rate?
Correct — C. Gift tax is a progressive tax. Excise tax, gasoline tax, and general income tax are all level percentage taxes. -
Series 7
Which of the following is not a requirement for an employee of one broker-dealer opening an account with another broker-dealer?
Correct — D. Mandated by FINRA Rule 3210 for brokerage accounts, and supported by MSRB Rule G-28 for accounts dealing in municipal securities: Duplicate mutual fund company statements are not a requirement for an employee of one broker-dealer opening an account with another broker-dealer, whereas duplicate brokerage account statements and confirms must be sent to the employee’s broker-dealer upon request. Also, the employee’s broker-dealer must approve of the account before it is opened. -
Series 7
Individuals applying for registration must meet the association’s requirements in all but which of the following areas?
Correct — D. Individuals applying for registration must meet the association’s requirements in training, competence, experience, and character. Anyone who fails to meet the association’s requirements in any of these areas may not become registered. . -
Series 7
Two investors, John and Samantha, sign a contract to trade $100 for 10 shares of Company XYZ. Which of the following documents is produced in response to this specific event?
Correct — A. The trade agreement is the formal contract that is created after a buyer and seller agree to a price for the purchase of a specified security. The other documents are related to other events either before or after this specific step in the trade process. -
Series 7
Why is inventory valuation used?
Correct — A. Inventory valuation allows a company to provide a monetary value for items that they have in their inventory. This information permits a company to properly evaluate expenses and revenues on their financial statements so that they can make sound business decisions. -
Series 7
The Financial Industry Regulatory Authority is
Correct — C. FINRA is a non-profit organization supported by the investment industry to regulate the activities of the investment industry. All member organizations are required to follow the rules promulgated by FINRA. The investment industry is self-regulating itself through FINRA to provide more confidence to customers investing their funds through member organizations in stock markets and other investment vehicles. -
Series 7
Which of the following properties invest in mere land, not purchasing buildings or intending to build on the land?
Correct — D. Raw land partnerships invest in mere land, not purchasing buildings or intending to build on the land. Their aim is to make money on capital gains as the value of the land increases. These are the riskiest form of real-estate DPP.<br/><br/>Raw land partnerships invest in mere land, not purchasing buildings or intending to build on the land. Their aim is to make money on capital gains as the value of the land increases. These are the riskiest form of real-estate DPP. -
Series 7
The price of a nation’s currency in terms of another currency is which of the following?
Correct — C. The exchange rate is the price of a nation’s currency in terms of another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency. -
Series 7
An individual liquidated 300 shares of Ford common at $10 in which he had a cost basis of $20 with no additional gains or losses for the year on December 30th. He bought 300 shares of Ford at $11 on January 10th because of his long-term bullish belief in Ford. What is his year-end loss of $3,000?
Correct — C. According to the 30-day wash sale rule, a sale at a loss, though typically allowed to be included on a taxpayer's year-end computation of net gains or losses for that year, will be disallowed from current deductibility if the investor buys the same security or one substantially identical to it within 30 days after, or 30 days before the date of the sale that generated the loss. Within 30 days of the sale at a loss on December 30th, 300 shares of Ford were purchased on January 10th. The December 30th loss cannot be deducted in the year of sale due to the fact that the Ford stock was bought in the first few days of January. -
Series 7
What percentage of its income is a REIT required to distribute to its equity investors?
Correct — A. To qualify as a ‘Regulated Investment Company’ and get the special flow-through tax treatment under the Internal Revenue Code, 90% flow through is a requirement. IF the REIT doesn’t distribute enough income, it will pay taxes on 100% of its net investment income. -
Series 7
Capitalization refers to a company’s equity plus its long-term debt. Which of the following ratios are used to calculate capitalization:
Correct — C. Capitalization refers to a company’s equity plus its long-term debt. There are several ratios used to calculate this from various perspectives.<br/><br/>debt-to-equity ratio, Bond ratio, Common-stock and preferred-stock ratio.<br/><br/>Capitalization refers to a company’s equity plus its long-term debt. There are several ratios used to calculate this from various perspectives.<br/><br/>debt-to-equity ratio, Bond ratio, Common-stock and preferred-stock ratio. -
Series 7
A company issues one million shares of common stock in a rights offering to raise $10 million of new capital. How many rights will the company distribute to its shareholders if at the time of the offering, there are already six million shares in outstanding?
Correct — D. Each outstanding share is given one right. -
Series 7
A member may not publish a research report regarding a subject company for which the member acted as manager or co-manager of a secondary offering for <code>________</code> days following the date of the offering.
Correct — C. A member may not publish a research report regarding a subject company for which the member acted as manager or co-manager of a secondary offering for 10 calendar days following the date of the offering. -
Series 7
SEC Rule 10b-18 provides an opportunity for publicly traded issuers to reacquire their shares in the secondary market. To comply with this regulation:
Correct — C. There are volume reacquisition limits set forth in 10b-18 as well as time-of-day and bid price restrictions. -
Series 7
All of the following are regulated by the Securities Act of 1933 EXCEPT:
Correct — C. Since the Securities Act of 1933 is a Federal law, the Act of 1933 does not include Blue Sky (state) laws. -
Series 7
Big House Brokerage bought 1000 bonds of XYZ Ltd for $1000 per bond. Over the course of the day Big House sold various smaller quantities of these bonds to their own customers for $1010 per bond each. This difference in price between what Big House bought the bonds for and sold them to their clients for is known as what?
Correct — C. Markup is when a brokerage sells bonds directly to a customer in a principal trade at a higher price than it paid to buy the bonds. -
Series 7
Which of the following are advantages of a transfer on death (TOD) account?
Correct — D. Avoiding probate, assets passing directly to the beneficiaries, and being allowed to name beneficiaries on a taxable account are all advantages of a transfer on death (TOD) account. -
Series 7
Five years after purchasing a ten-year municipal at 102, an individual sells it at 101. What is tax treatment?
Correct — B. The $20 premium is amortized over the bond's ten-year life. Half of the premium has been written down after five years. The remaining premium is the same as the premium that was paid when the bond was sold. There is no gain or loss from the sale at 101. -
Series 7
Rule 10b-5 was enacted in 1951 and listed acts/practices that were prohibited from being used by <code>________</code>.
Correct — D. 10b-5 lists acts/practices that are prohibited from being used by any person engaging in securities transactions. -
Series 7
Trades appear on Tape A as follows:<br/><br/>XYZ 49……..XYZ 48.95……..XYZ 48.90…….XYZ 49.05<br/><br/>Your customer’s 100 share order to sell XYZ at 49 stop, GTC placed prior to the above trade reports would be executed at:
Correct — D. Sell stop orders are placed below the market. Sell stop orders must first be triggered, also called activated or elected, by a trade at or below the stop price. Once triggered, they become market orders and will be executed at the next available price. The trade at 49 triggers this order. The execution takes place at 48.95. -
Series 7
Which of the following will not lend money to an agent of a broker-dealer?
Correct — A. Mortgage brokers work to make loan arrangements; they are not money lenders. Reps are not permitted to borrow money from clients who act as loan "arrangers," but they can borrow from other lenders, including banks, broker/dealers as in margin account lending, and their own employer or affiliates thereof. -
Series 7
What is required for an offering to be an intrastate offering, according to Rule 147?
Correct — A. All of these requirements must be met in order for an offering to qualify for an intrastate offering under Rule 147. -
Series 7
Paying a brokerage firm for services through commission revenue is doing so in
Correct — B. <strong>Soft dollars</strong> are a means of paying brokerage firms for their services through commission revenue, as opposed to through normal direct payments (hard-dollar fees). The investing public tends to have a negative perception of soft-dollar arrangements, because they believe that buy-side firms should pay expenses out of their profits, rather than from investors' pockets. -
Series 7
In case an investor misses the margin call and is not able to deposit additional funds, <code>________</code>.
Correct — D. The brokerage would sell the securities to recoup the amount lent. This is known as liquidation. Liquidation results in selling at a lower price than the market and results in further trading losses. -
Series 7
Mr. Watney has placed a buy order for 1000 shares of ABC at the market. The execution price was $42 in his cash account on Wednesday, February 4th. If he fails to make payment by Monday, February 9th, the most likely consequence will be:
Correct — C. Regulation T states that public customers are given 2 business days beyond regular way settlement to make payment. Therefore, non payment in T+3 does not result in any action. -
Series 7
What is a broker/dealer allowed to do in order to fulfill a customer's order to purchase an over-the-counter stock?
Correct — A. These are all typical methods the broker uses to fulfill the client's order. -
Series 7
Which of the following is not a requirement for advertisements of investment company products that utilize rankings?
Correct — D. Advertisements of investment company products that utilize rankings must state the fact that past performance is no guarantee of future results, the name of the category (i.e., high yield), the name of the ranking entity, as well as the time period and its ending date. -
Series 7
Which of these strategies is illegal?
Correct — C. Late trading is an illegal activity that is undertaken by some investors whereby they trade after the fund NAVs have been calculated but get the price calculated at the close of day.
Series 7 sample questions
Tap any question below to reveal the answer and a plain-English explanation.
Series 7 Which of the following will not lend money to an agent of a broker-dealer?
A. a mortgage broker. ✓
B. a corporate affiliate of the agent’s member firm.
C. a client which is a bank.
D. a broker-dealer.
Correct — A. Mortgage brokers work to make loan arrangements; they are not money lenders. Reps are not permitted to borrow money from clients who act as loan "arrangers," but they can borrow from other lenders, including banks, broker/dealers as in margin account lending, and their own employer or affiliates thereof.
Series 7 What is required for an offering to be an intrastate offering, according to Rule 147?
A. all of these are required ✓
B. 80% of the corporation’s assets must be located in that state
C. 80% of the corporation’s revenue must be earned in that state
D. 80% of the proceeds of the offering must be used in that state
Correct — A. All of these requirements must be met in order for an offering to qualify for an intrastate offering under Rule 147.
Series 7 Paying a brokerage firm for services through commission revenue is doing so in
A. creative arrangement
B. soft dollars ✓
C. hard dollars
D. original arrangement
Correct — B. <strong>Soft dollars</strong> are a means of paying brokerage firms for their services through commission revenue, as opposed to through normal direct payments (hard-dollar fees). The investing public tends to have a negative perception of soft-dollar arrangements, because they believe that buy-side firms should pay expenses out of their profits, rather than from investors' pockets.
Series 7 In case an investor misses the margin call and is not able to deposit additional funds, <code>________</code>.
A. The exchange would be notified
B. Additional notices would be sent
C. Court notice would be sent
D. The securities will be sold to recoup the losses (liquidation) ✓
Correct — D. The brokerage would sell the securities to recoup the amount lent. This is known as liquidation. Liquidation results in selling at a lower price than the market and results in further trading losses.
Series 7 Mr. Watney has placed a buy order for 1000 shares of ABC at the market. The execution price was $42 in his cash account on Wednesday, February 4th. If he fails to make payment by Monday, February 9th, the most likely consequence will be:
A. the firm will do a sell-out, at Mr. Watney’s expense, and freeze his account for 90 calendar days.
B. an extension of time will be requested on his behalf and if granted, no liquidation will occur.
C. no extension of time is necessary under these circumstances: he has two additional business days in which to make payment. ✓
D. the purchase will be canceled for non-payment: his account will be frozen for 90 calendar days.
Correct — C. Regulation T states that public customers are given 2 business days beyond regular way settlement to make payment. Therefore, non payment in T+3 does not result in any action.
Series 7 What is a broker/dealer allowed to do in order to fulfill a customer's order to purchase an over-the-counter stock?
A. all of these ✓
B. sell him shares from the firm’s inventory
C. sell these shares short to the customer
D. act as agent on this transaction
Correct — A. These are all typical methods the broker uses to fulfill the client's order.
Series 7 Which of the following is not a requirement for advertisements of investment company products that utilize rankings?
A. The name of the category (i.e., high yield)
B. The time period and its ending date
C. The name of the ranking entity
D. Past performance is indicative of future results ✓
Correct — D. Advertisements of investment company products that utilize rankings must state the fact that past performance is no guarantee of future results, the name of the category (i.e., high yield), the name of the ranking entity, as well as the time period and its ending date.
Series 7 Which of these strategies is illegal?
A. Dollar-cost averaging (DCA)
B. After-hours trading
C. Late trading ✓
D. Market timing
Correct — C. Late trading is an illegal activity that is undertaken by some investors whereby they trade after the fund NAVs have been calculated but get the price calculated at the close of day.
About the Series 7 test
Study for the FINRA Series 7 (General Securities Representative) exam with original practice questions written from the publicly available FINRA Series 7 content outline. Every question has a clear explanation.
What you get
- Opening accounts and suitability, equity and debt securities, options strategies and math, municipal and packaged products, trading, settlement and margin, and regulations and prohibited practices.
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- Common mistakes and how to avoid them
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Rules, standards and best-practice procedures
Real-world scenarios and how to respond
Common mistakes and how to avoid them
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