Series 6 Exam Preparation Essentials

Chapter 1: Basic Securities

Common stock represents an ownership interest, usually purchased for growth and solid returns over time. It is the most junior security, and income may be generated through dividends if declared by the Board of Directors (BOD), which are typically paid quarterly.

• Defensive stocks: Low returns, conservative, less volatile (e.g., utilities or consumer staples).
• Blue chip stocks: Consistent dividends, large-cap stocks.
• Value stocks: Underpriced with higher risk and higher returns.
• Growth stocks: Higher-than-average returns with higher risk (e.g., tech or biotech).
• Mid-cap stocks: Moderate returns.
• Speculative stocks: Small-cap or micro-cap, very risky (e.g., penny stocks/OTC stocks).

Preferred Stock: An ownership interest senior to common stock for dividends and liquidation. It acts like a fixed-income security and is subject to interest rate risk (when interest rates rise, preferred stock prices fall).

Debt: Money loaned to a corporation. Debt issuers are senior to preferred and common stockholders. Interest on bonds is a legal obligation, generally paid every six months; failure to pay results in default. Bonds have a stated par value of $1,000.

• US Government Securities: The safest, highly liquid, taxable at the federal level, and exempt from state/local taxes. Includes T-bills (short-term), T-notes (2-10 year maturities), T-bonds (30 years), TIPS (inflation-protected), and STRIPS (zero-coupon).
• Formula: Current Yield = Annual Interest / Current Market Price.
• Agency Securities: Issued by US government agencies (e.g., GNMA). Mortgage-backed securities are "pass-through" securities subject to prepayment risk.
• Corporate Bonds: Secured (pledged assets) or unsecured (debentures).
• Credit Ratings: Moody's, S&P, and Fitch (AAA is highest; BBB/Baa is lowest investment grade). Speculative bonds are known as "junk" or "high-yield" bonds.
• Municipal Securities: Issued by local governments, tax-exempt, and regulated by the MSRB.
• Money Market Securities: Short-term (1 year or less), highly liquid, and safe.

Options Contracts: Call holder (right to buy), call writer (obligation to sell), put holder (right to sell), put writer (obligation to buy). Long call/short put are bullish; short call/long put are bearish.

Chapter 2: Investment Companies

Investment companies issue securities and use proceeds to purchase other securities based on investment objectives. They must register with the SEC under the Investment Company Act of 1940.

• Types: Face-amount certificate companies, management companies, and unit investment trusts (UITs).
• Requirements: Minimum $100,000 capital, 100 shareholders, and >40% of assets invested in securities.
• Management Companies: Closed-end (one-time issuance, trade on exchange) and open-end (mutual funds, non-negotiable, redeemable).
• Fund Structure: Includes a BOD (40% non-interested), fund sponsor, distributor, investment adviser, and custodian bank.
• Diversified Fund (75-5-10 Rule): 75% of assets in securities, max 5% in any one issuer, and max 10% ownership of any one issuer's voting securities.

Chapter 3: Buying and Selling Mutual Fund Shares

Open-end and closed-end funds must file a registration statement with the SEC. The prospectus must be provided to investors; financial information cannot be older than 16 months.

• SAI: Statement of Additional Information, available upon request.
• Formula: NAV + Sales Charge (SC) = Public Offering Price (POP).
• Sales Charges: Max 8.5% of POP. Funds must offer breakpoints, rights of accumulation, and dividend reinvestment at NAV.
• Dollar Cost Averaging: Investing the same amount at regular intervals.
• 12b-1 Fees: Marketing and advertising costs; cannot exceed 1% of average annual net assets.
• Expense Ratio: Total Expenses / Average Net Assets.
• Subchapter M: If a fund distributes 90% of its income to shareholders, it is a regulated investment company.

Chapter 4: Variable Insurance Products

Annuities provide tax-deferred growth. Fixed annuities are not securities; variable annuities are securities sold via prospectus.

• Qualified vs. Nonqualified: Qualified contracts are funded with pre-tax dollars (e.g., TSAs).
• Phases: Accumulation phase (contributions) and distribution phase (payouts).
• Payout Options: Life annuity, life annuity with period certain, joint life with last survivor, and unit refund annuity.
• Life Insurance: Term, whole life, universal, and variable universal life.
• Free Look Period: Refund available up to 45 days after signing or 10 days after contract receipt.

Chapter 5: Retirement Plans

ERISA (1974): Covers private-sector retirement plans. Qualified plans (pre-tax) include defined benefit and defined contribution plans. Non-qualified plans include IRAs and deferred compensation.

• IRAs: Traditional and Roth. Contributions must be from earned income. RMDs (Required Minimum Distributions) begin at age 73.
• Municipal Fund Securities: Includes higher education savings plans, LGIPs, and ABLE accounts.

Chapter 6: Customer Accounts and Suitability

New account forms require customer details, rep signature, and principal signature. No customer signature is required on the form itself.

• KYC & Compliance: USA Patriot Act (CIP), update suitability every 3 years, retain records for 6 years.
• Trading Authority: Limited (trades only), Full (trades and withdrawals), and Discretionary (independent trading decisions).
• Suitability Obligations: Reasonable basis, customer-specific, and quantitative.
• Reg BI: Imposes disclosure, care, conflict of interest, and compliance obligations. Form CRS must be provided to retail investors.

provided to retail investors. to CRS must be provided to retail investors. to be updated within 60 days of changes.