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Investment Objectives Covered on the Series 7 Exam

Investments aren’t exactly one-size-fits-all, so asking a client about his investment objectives can be a real help for the Series 7 and the real world. As a financial expert, you’ll likely have to help clients pin down what their goals should be. Here are some possible investment objectives:

  • Preservation of capital: Investing in safe securities, such as U.S. government bonds, municipal bonds, high-rated corporate bonds, and so on

  • Current income: Investing in securities (such as bonds, preferred stock, income funds, and so on) that’ll provide interest or cash dividends

  • Capital growth: Investing in the stock of relatively new companies or ones that have a high growth potential

  • Total return: Investing in a combination of stocks and bonds, looking for both growth and income

  • Tax advantages: Investing in securities (such as municipal bonds, direct participation programs, retirement plans, and so on) that give tax breaks

  • Liquidity: Looking to purchase securities that can be bought and sold easily

  • Diversification: Investing in securities from several different companies, municipalities, and/or the U.S. government to offset the risk associated with only owning one security

  • Speculation: Investing in securities with higher risk in an attempt to maximize profits if the securities move in the right direction

  • Trading profits: Looking to buy and sell securities on a constant basis

  • Long-term or short-term: Looking to tie up money for either a long time or a short time

When recommending securities to your customers, you need to make recommendations that fit their investment objectives. Some customers may fit into more than one category (for example, looking for diversification and liquidity). All customers should have a diversified portfolio (own several different securities and/or types of securities). If a customer can’t afford to diversify, you want to recommend mutual funds.

The following question tests your ability to answer a question about investment objectives.

Mr. Johnson is a 60-year-old investor who is heavily invested in the market. Mr. Johnson is looking to invest in more securities with a high degree of liquidity. Which of the following investments are you LEAST likely to recommend?

(A)    DPPs
(B)    Blue-chip stocks
(C)    T-bills
(D)    Mutual funds

The correct answer is Choice (A). Because Mr. Johnson is looking for securities with a high degree of liquidity, you’re least likely to recommend DPPs, or limited partnerships, because they’re difficult investments to get in and out of. You need to prequalify the investor and the investor has to be accepted by the general partner. Blue-chip stocks, T-bills, and mutual funds can all be bought and sold fairly easily.

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