Series-7 - Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records (73% of the exam) - Section 3.1

Analyse the characteristics, rights, and tax treatment of equity securities, including common and preferred stock, rights and warrants, ADRs, and the calculation of cost basis and capital gains.

Distinguish common stock - voting, pre-emptive, and residual-claim rights - from preferred stock, including cumulative, participating, convertible, and callable features and the preference on dissolution. Apply the tax treatment of equity transactions, including qualified versus non-qualified dividends, the wash-sale rule, holding-period determination of long-term versus short-term gains, and the calculation of adjusted cost basis after stock dividends, splits, and rights.

Common stockPreferred stockWash saleCost basisAmerican Depositary Receipt

Practice question for this objective

Free sampleProvides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Recordshard

How does a callable preferred stock differ from a convertible preferred stock with respect to who controls the feature and what the holder ultimately receives?

AWith callable preferred the holder may force the issuer to redeem the shares for cash, while with convertible preferred the issuer may compel an exchange into the company's bonds.
BBoth features are controlled by the issuer, and each results in the preferred shares being exchanged for the issuer's common stock at a stated ratio.
CThe call feature is controlled by the issuer, which may redeem the shares at a stated price, while the conversion feature is controlled by the holder, who may exchange the shares for common stock. Correct
DThe call feature lets the holder demand redemption at par, while the conversion feature lets the issuer swap the shares for common stock whenever it chooses.

Distinguish callable preferred (an issuer redemption right) from convertible preferred (a holder right to exchange into common stock). A call provision is exercised by the issuer to redeem preferred shares at a preset price, typically when rates fall, whereas a conversion privilege is exercised by the holder to exchange preferred for a fixed number of common shares. The two features sit with opposite parties and yield different outcomes: cash on a call, common stock on a conversion.

Why A is wrong: This is tempting because both features do involve a right to act, but it reverses control on both counts: the call belongs to the issuer, not the holder, and conversion produces common stock, not bonds.

Why B is wrong: It correctly notes the call is an issuer right, but it wrongly assigns the conversion decision to the issuer and wrongly says a call converts into common stock rather than redeeming for cash.

Why C is correct: Correct: a call is the issuer's option to buy the preferred back at the call price, and conversion is the holder's option to swap the preferred for a fixed number of common shares.

Why D is wrong: It is attractive to a candidate who confuses which party benefits, but it inverts both rights: the issuer controls the call and the holder controls conversion, the opposite of what is stated.

See more Series-7 practice questions, answers explained.

Exam traps in Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records

Answers that look right on this material and are not. Each one is a distractor from a different question in the Series-7 bank for this domain.

450 shares at an unchanged basis of 60 dollars each, raising his total cost basis to 27,000 dollars
Why it is wrong: The share count is right but the basis is not reduced. It is tempting to leave per-share basis alone, but a split spreads the same total cost over more shares, so basis per share must fall.
The loss is fully deductible this year, because he sold the shares before repurchasing rather than after.
Why it is wrong: The wash-sale rule applies whether the repurchase happens before or after the sale, as long as it falls within the 61-day window. Selling first does not exempt the loss.
Participating preferred carries a dividend rate that resets periodically against a benchmark such as a Treasury bill yield.
Why it is wrong: Tempting because it also modifies the dividend, but a resetting rate describes adjustable-rate preferred, not participation, which concerns sharing in extra dividends rather than a floating rate.

Examworthy is not affiliated with or endorsed by FINRA. Original, blueprint-aligned practice material only.