The majority of retail-oriented wealth managers will spend a lot of their time on equity securities, but it’s important to note that this is actually a minority part of the broader capital markets, with real estate and debt being much bigger and significant (and your chances of working in either sector of the industry is not low). Still, equity drives corporate finance and is a consideration with both real estate and debt financing, so these fundamentals are important for everyone to understand.
For the Series 7 exam, you will need to be aware of the different kinds of shares that exist: outstanding shares (that is issued minus Treasury, two other share types you’ll need to know), as well as the rules for how dividends (in terms of cash, stock or property) are paid out and how equity pricing or amount is adjusted as a result of these dividends.
You’ll need to know the D-E-R-P order of dividend payout events, the difference between cash and stock dividends, and how splits adjust dividend and market prices. The test also covers reverse stock splits.
So much for equity structure. The test will also spend some time on preferred stocks, even if preferreds are a pretty small part of capital markets. You’ll need to remember that straight or noncumulative preferred stocks mean that missed dividends are not payable, while cumulative preferreds mean that preferred dividends must be paid—including in arrears—before present common stocks can be paid their dividends.
Like bonds, preferreds can be callable, participating, and have adjustable rates tied to another rate (usually the Treasury Bill rate), meaning even equity analysts cannot avoid remembering the details of debt assets.
Equities come with certain rights—and not others. The most testable right that equityholders do not have is the ability to set dividends—this makes intuitive sense, and FINRA likes testing on this particular topic. Beyond that, testtakers should be aware that common stockholders do have the right to vote in according with their shares, and they can vote on stock splits, issuing convertible securities or more common shares, or any substantial change in the business like a merger or acquisition. While supervoting stock is a separate class of common stock which, as you’d expect, has more votes than other kinds of shareholders, this topic isn’t frequently on the Series 7.
More likely you will see questions on statutory versus cumulative voting. In cumulative voting, stockholders can allocate their total votes however they choose, while statutory voting allows a stockholder to cast only one vote per share owned for each item on a ballot, so if you have 1000 shares and there are three board of director seats to vote for, you can not vote more than 1000 shares per one board (for a total of 3,000) while in cumulative voting you could put more than 1,000 or indeed all 3,000 votes on one seat if you’d like. Cumulative voting helps smaller investors, and the test asks this a lot.
While you’ll need to know what proxies are, this isn’t too difficult of a concept so rarely makes it to the test, while nonvoting stock may appear in a test question to trick you—just know what it means (it’s pretty obvious, it’s a separate class of stock that has no voting rights) and you will be fine.
Finally, the most important part of the Series 7—like all FINRA exams—is practicing test questions. Getting used to how the information is presented in the FINRA style is very important, because even an options expert can get tripped up by some tricky wording. But most industry professionals find the FINRA exams relatively easy to pass once they get used to the test itself—provided they really know their stuff.