The go-to guide to acing the Series 57 Exam!
Passing The Securities Trader Examination (Series 57) qualifies an individual to engage in NASDAQ and OTC Equity trading and to act as a proprietary trader. The exam covers Market Overview and Products, Engaging in Professional Conduct and Adhering to Regulatory Requirements, Trading Activities, Maintaining Books and Records and Trade Reporting. There are no prerequisites to taking the series 57 exam other than being sponsored by a FINRA member firm.
Created by the experts at The Securities Institute of America, Inc., Wiley Series 57 Exam Review 2020 arms you with everything you need to pass this challenging 125-question test. Designed to help you build and fine-tune your knowledge of all areas covered in the exam and to guarantee that you're prepared mentally and strategically to take the test, it provides:
- Dozens of examples
- Assorted practice questions for each subject area covered in the exam
- Priceless test-taking tips and strategies
- Helpful hints on how to study for the test, manage stress, and stay focused
Wiley Series 57 Exam Review 2020 is your ticket to passing the Series 57 test on the first try - with flying colors!
Visit [external URL] for more information.
The Securities Institute of America, Inc. helps thousands of securities and insurance professionals build successful careers in the financial services industry every year. Our securities training options include:
- Onsite classes
- Private tutoring
- Classroom training
- Interactive online video training classes
- State-of-the-art exam preparation software
- Printed textbooks
- Real-time tracking and reporting for managers and training directors
As a result, you can choose a securities training solution that matches your skill level, learning style, and schedule. Regardless of the format you choose, you can be sure that our securities training courses are relevant, tested, and designed to help you succeed. It is the experience of our instructors and the quality of our materials that make our courses requested by name at some of the largest financial services firms in the world.
To contact The Securities Institute of America, visit us on the web at [external URL] or call 877-218-1776.
Table of Contents
About the Series 57 Exam xix
About this Book xxiii
About the Test Bank xxv
About the Securities Institute of America xxvii
Chapter 1 Equity Securities 1
What is a Security? 1
Equity = Stock 2
Common Stock 2
Corporate Time Line 2
Values of Common Stock 4
Book Value 4
Par Value 5
Rights of Common Stockholders 5
Preemptive Rights 5
Characteristics of a Rights Offering 6
Determining the Value of a Right Cum Rights 7
Determining the Value of a Right Ex Rights 7
Voting 8
Limited Liability 9
Freely Transferable 9
The Transfer Agent 10
The Registrar 10
CUSIP Numbers 11
Inspection of Books and Records 11
Residual Claim to Assets 11
Why Do People Buy Common Stock? 11
Income 11
What are the Risks of Owning Common Stock? 12
How Does Someone Become a Stockholder? 13
Preferred Stock 14
Features of All Preferred Stock 14
Types of Preferred Stock 16
Types of Dividends 17
Dividend Distribution 18
Taxation of Dividends 20
Selling Dividends 20
Dividend Disbursement Process 21
Warrants 21
How Do People Get Warrants? 21
American Depositary Receipts (ADRs)/American Depositary Shares (ADSs) 22
Currency Risks 23
Functions of the Custodian Bank Issuing ADRs 23
Real Estate Investment Trusts/REITs 23
Non-Traded REITs 24
Direct Participation Programs and Limited Partnerships 24
Limited Partnerships 24
Tax Reporting for Direct Participation Programs 28
Limited Partnership Analysis 28
Tax Deductions vs. Tax Credits 29
Other Tax Considerations 29
Dissolving a Partnership 30
Pretest 31
Chapter 2 Debt Securities 35
Corporate Bonds 35
Types of Bond Issuance 36
Bond Certificate 37
Bond Pricing 37
Corporate Bond Pricing 38
Bond Yields 38
Yield Spreads 42
The Real Interest Rate 43
Bond Maturities 43
Types of Corporate Bonds 44
Converting Bonds into Common Stock 47
Advantages of Issuing Convertible Bonds 48
Disadvantages of Issuing Convertible Bonds 48
Convertible Bonds and Stock Splits 48
Reverse Convertible Securities 48
Forced Conversion 49
The Trust Indenture Act of 1939 49
Bond Indenture 49
Ratings Considerations 50
Retiring Corporate Bonds 50
Collateralized Mortgage Obligation (CMO) 52
CMOs and Interest Rates 53
Types of CMOs 53
Private-Label CMOs 55
Exchange-Traded Notes (ETNs) 55
Euro and Yankee Bonds 56
Pretest 57
Chapter 3 Government Securities 61
Series EE Bonds 61
Series HH Bonds 62
Treasury Bills, Notes, and Bonds 62
Treasury Bond and Note Pricing 63
Treasury Strips 64
Treasury Receipts 64
Treasury Inflation-Protected Securities (TIPS) 65
Agency Issues 65
Government National Mortgage Association (GNMA) 65
Federal National Mortgage Association (FNMA) 66
Federal Home Loan Mortgage Corporation (FHLMC) 66
Federal Farm Credit System (FFCS) 66
Sallie Mae 67
Pretest 69
Chapter 4 The Money Market 71
Money Market Instruments 71
Corporate Money Market Instruments 71
Government Money Market Instruments 73
Municipal Money Market Instruments 74
International Money Market Instruments 74
Interest Rates 74
Pretest 77
Chapter 5 Economic Fundamentals 79
Gross Domestic Product (GDP) 79
Recession 81
Depression 81
Economic Indicators 81
Schools of Economic Thought 83
Economic Policy 84
Tools of The Federal Reserve Board 84
Fiscal Policy 87
Consumer Price Index (CPI) 88
Inflation/Deflation 88
Real GDP 88
International Monetary Considerations 89
Yield Curve Analysis 89
Pretest 91
Chapter 6 Customer Accounts 95
Holding Securities 97
Mailing Instructions 98
Types of Accounts 99
Commingling Customer’s Pledged Securities 109
Wrap Accounts 110
Regulation S-P 110
Day Trading Accounts 111
Pretest 113
Chapter 7 Margin Accounts 117
Regulation of Credit 117
Regulation T 117
House Rules 120
Establishing a Long Position in a Margin Account 120
An Increase in the Long Market Value 121
Special Memorandum Account (SMA) Long Margin Account 123
A Decrease in the Long Market Value 125
Minimum Equity Requirement Long Margin Accounts 125
Establishing a Short Position in a Margin Account 126
A Decrease in the Short Market Value 127
Special Memorandum Account (SMA) Short Margin Account 128
An Increase in the Short Market Value 129
Minimum Equity Requirement Short Margin Accounts 130
Combined Margin Accounts 131
Portfolio Margin Accounts 131
Securities Backed Lines of Credit 132
Minimum Margin for Leveraged ETFs 132
Pretest 133
Chapter 8 Issuing Corporate Securities 137
The Prospectus 138
The Final Prospectus 139
Providing the Prospectus to Aftermarket Purchasers 140
SEC Disclaimer 140
Misrepresentations 141
Tombstone Ads 141
Free Riding and Withholding/FINRA Rule 5130 142
Underwriting Corporate Securities 143
Types of Underwriting Commitments 144
Types of Offerings 146
Awarding the Issue 147
The Underwriting Syndicate 147
Selling Group 147
Underwriter’s Compensation 148
Underwriting Spread 149
Factors That Determine the Size of the Underwriting Spread 149
Review of Underwriting Agreements by FINRA 149
Underwriter’s Compensation 150
Unreasonable Compensation 150
Offering of Securities by FINRA Members 152
Exempt Securities 152
Exempt Transactions 153
Crowdfunding 159
Rule 137 Nonparticipants 161
Rule 138 Nonequivalent Securities 162
Rule 139 Issuing Research Reports 162
Rule 415 Shelf Registration 163
Securities Offering Reform Rules 163
SEC Rule 405 164
Additional Communication Rules 165
DPP Roll-UP Transactions 166
Pretest 167
Chapter 9 Brokerage Office Procedure 171
Executing an Order 171
Customer Confirmations 173
Clearly Erroneous Reports 174
Execution Errors 174
Corporate and Municipal Securities Settlement Options 174
RVP/DVP/COD 175
When-Issued Securities 175
Government Securities Settlement Options 176
Accrued Interest 176
Calculating Accrued interest 177
Accrued Interest for Government Notes and Bonds 178
Rules for Good Delivery 179
Delivery of Round Lots 180
Delivery of Bond Certificates 180
Rejection of Delivery 181
Don’t Know (DK) Procedures 181
Fail to Deliver/Fail to Receive 181
Due Bills 181
Customer Account Statements 182
Carrying of Customer Accounts 182
Proxies 183
Pretest 185
Chapter 10 Trading Securities 191
Types of Orders 191
The Exchanges 195
Priority of Exchange Orders 196
The Role of the Designated Market Maker 196
Crossing Stock 199
Do Not Reduce (DNR) 199
Adjustments for Stock Splits 200
Stopping Stock 201
Commission House Broker 202
Two-Dollar Broker 202
Registered Traders 202
Super Display Book (SDBK) 202
Short Sales 203
Affirmative Determination 203
Regulation SHO 204
Rule 200 Definitions and Order Marking 204
Rule 203 Security Borrowing and Delivery Requirements 205
Threshold Securities 206
Block Trades 207
Trading Along 208
Circuit Breakers 208
Limit Up Limit Down (LULD) 209
Listing Requirements for the NYSE 209
Reading the Consolidated Tape 210
Exchange Qualifiers 212
Over-the-Counter/Nasdaq 212
High Frequency and Algorithmic Trading 223
Market Centers 225
SEC Regulation NMS 226
SEC Regulation ATS 227
Direct Market Access 228
Nasdaq International 229
Non-Nasdaq OTCBB 229
Pink OTC Market 230
Third Market 230
Nasdaq Market Center for Listed Securities 231
Fourth Market 231
Nasdaq Listing Standards 231
Market Maker Regulations and Responsibilities 232
Times for Entering a Quote 232
Withdrawing Quotes 235
Handling and Displaying Customer Limit Orders 236
The Order Audit Trail System (OATS) 238
The Manning Rule 239
Automated Confirmation System (ACT)/Trade Reporting Facility (TRF) 240
ACT Trade Scan 240
Nasdaq Trade Reporting Facility (TRF) 241
Step Out Trades 244
Market Making During Syndication 245
Regulation M, Rule 101 245
Penalty Bids 246
Regulation M, Rule 102 246
Regulation M, Rule 103 247
Passive Market Makers’ Daily Purchase Limit 247
Regulation M, Rule 104 248
Syndicate Short Positions 249
Regulation M, Rule 105 249
Trade Reporting and Compliance Engine (TRACE) 250
Broker vs. Dealer 252
FINRA 5 Percent Markup Policy 252
Markups/Markdowns When Acting as a Principal 253
Riskless Principal Transactions 254
Proceeds Transactions 255
Dominated and Controlled Markets 255
Net Transactions With Customers 256
Firm Quote Rule 256
The Firm Quote Compliance System (FQCS) 257
Trade Complaints Between Members 257
Rogue Trading Prevention 258
Arbitrage 258
Pretest 261
Chapter 11 Options 267
Option Classification 267
Option Classes 268
Option Series 268
Bullish vs. Bearish 268
Possible Outcomes for an Option 269
Characteristics of All Options 270
Managing an Option Position 270
Buying Calls 271
Selling Calls 272
Buying Puts 274
Selling Puts 275
Option Premiums 277
At the Money Options 277
Out of the Money Options 278
Intrinsic Value and Time Value 278
Using Options as a Hedge 279
Long Stock Long Puts/Married Puts 279
Long Stock Short Calls/Covered Calls 281
Maximum Gain Long Stock Short Calls 282
Maximum Loss Long Stock Short Calls 283
Short Stock Long Calls 283
Maximum Gain Short Stock Long Calls 284
Maximum Loss Short Stock Long Call 285
Short Stock Short Puts 285
Maximum Gain Short Stock Short Puts 286
Maximum Loss Short Stock Short Puts 287
Multiple Option Positions and Strategies 288
Long Straddles 288
Short Straddles 290
Spreads 292
Combinations 303
Using a T Chart to Evaluate Option Positions 304
Index Options 308
Interest Rate Options 310
Price-Based Options 310
Rate-Based Options 312
Foreign Currency Options 312
The Option Clearing Corporation 314
The Options Markets 315
The Chicago Board Options Exchange 315
Opening and Closing Option Prices 317
Order Execution 317
Expiration and Exercise 318
American vs. European Exercise 318
Market Volatility Options/VIX 319
Flex Options 319
Weekly Options 320
Mini Options 320
Position and Exercise Limits 321
Stock Splits and Stock dividends 321
Taxation of Options 322
Closing an Option Position 322
Exercising a Call 322
Exercising a Put 323
Protective Puts 323
Covered Calls 323
Option Compliance 323
Option Agreement 323
Pretest 325
Chapter 12 Securities Industry Rules and Regulations 333
The Securities Exchange Act of 1934 333
The Securities and Exchange Commission (SEC) 334
Extension of Credit 335
The National Association of Securities Dealers (NASD) 335
Becoming a Member of FINRA 337
Hiring New Employees 338
Disciplinary Actions Against a Registered Representative 339
Resignation of a Registered Representative 340
Continuing Education 340
Termination for Cause 342
Retiring Representatives/Continuing Commissions 342
State Registration 342
Registration Exemptions 343
Persons Ineligible to Register 343
Communications with the Public 343
FINRA Rule 2210 Communications with the Public 344
Broker Dealer Websites 347
Blind Recruiting Ads 348
Generic Advertising 348
Tombstone Ads 348
Testimonials 349
Free Services 349
Misleading Communication with the Public 350
Securities Investor Protection Corporation Act of 1970 350
Net Capital Requirement 350
Customer Coverage 351
Fidelity Bond 351
The Securities Acts Amendments of 1975 351
The Insider Trading & Securities Fraud Enforcement Act of 1988 352
Firewall 352
Telemarketing Rules 353
Do Not Call List Exemptions 354
The Penny Stock Cold Call Rule 354
The Role of the Principal 355
Violations and Complaints 355
Resolution of Allegations 355
Minor Rule Violation 356
Code of Arbitration 356
The Arbitration Process 357
Mediation 358
Currency Transactions 359
The Patriot Act 359
U.S. Accounts 361
Foreign Accounts 361
Annual Compliance Review 361
Business Continuity Plan 361
Sarbanes-Oxley Act 362
The Uniform Securities Act 363
Tender Offers 364
Stockholders Owning 5% of An Issuer’s Equity Securities 365
Pretest 367
Answer Keys 373
Appendix 385
Glossary of Exam Terms 419
Index 485
