The series 7 material has been provided by The Securities Institute to help Investopedia visitors prepare for the exam. In order to successfully complete the exam it is recommended that you read the following material in addition to reading a full textbook and doing as many practice exams as you can. Series 7 textbooks, software and video training classes are available here. This first chapter will build the foundation upon which the rest of this text is built. A thorough understanding of equity securities will be necessary in order to successfully complete the Series 7 exam. Equity securities are divided into two types: common and preferred stock. We will examine the features of common stock and preferred stock, as well as the benefits and risks associated with their ownership. But first we must define exactly what meets the definition of a security.
What Is a Security?
A security is any investment product that can be exchanged for value and involves risk. In order for an investment to be considered a security, it must be readily transferable between two parties and the owner must be subject to the loss of some, or all, of the invested principal. If the product is not transferable or does not contain risk, it is not a security. Securities include:
- Mutual funds
- Variable annuities
- Variable life insurance
- Exchange traded funds & exchange trade notes ETFs / ETNs
- American depository receipts
Equity = Stock
The term equity is synonymous with the term stock. Throughout your preparation for this exam, and on the exam itself, you will find many terms that are used interchangeably. Equity or stock creates an ownership relationship with the issuing company. Once an investor has purchased stock in a corporation, he or she becomes an owner of that corporation. The corporation sells off pieces of itself to investors in the form of shares in an effort to raise working capital. Equity is perpetual, meaning that there is no maturity date for the shares and the investor may own the shares until he or she decides to sell them. Most corporations use the sale of equity as their main source of business capital.
There are thousands of companies whose stock trades publicly and who have used the sale of equity as a source of raising business capital. All publicly traded companies must issue common stock before they may issue any other type of equity security. The two types of equity securities are common stock and preferred stock. Although all publicly traded companies must have sold or issued common stock, not all companies may want to issue or sell preferred stock. Let’s take a look at the formation of a company and how common stock is created.
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