Customer Recommendations, Professional Conduct, and Taxation

Question 1

Making a suitable recommendation

Answer 1

Investment objectives.
Financial status.
Income.
Investment holdings.
Retirement needs.
College and other major expenses.
Tax bracket.
Attitude toward investing.

Question 2

How to obtain an Income focused investment Objective

Answer 2

Corporate bonds
Municipal bonds
Government bonds
Preferred stocks
Money market funds
Bond funds

Question 3

How to obtain a Growth focused investment objective

Answer 3

Common Stock

Common Stock Funds

Question 4

How to obtain a preservation of capital investment objective

Answer 4

Money market funds
Government bonds
Municipal bonds
High-grade corporate bonds

Question 5

How to obtain a tax benefit investment objective

Answer 5

Municipal Bonds

Municipal Bonds Funds

Question 6

How to obtain a liquidity investment objective

Answer 6

Money market funds
Stocks/bonds/mutual funds
Annuities
Collateralized mortgage obligations (CMOs)
Direct participation programs
Real estate

Question 7

How to obtain a speculation investment objective

Answer 7

High Risk- High Reward investing: 
Penny stocks
Small cap stocks
Some growth stocks
Junk bonds

Question 8

Capital Risk

Answer 8

The risk of losing some or all of the invested capital

Question 9

Market Risk

Answer 9

Also known as Systemic Risk. This risk is inherent in all investments in the markets. You could own stock in the greatest company in the world but lose money because the market overall went down.

Question 10

Nonsystemic Risk

Answer 10

Risk that affects only a single company or industry

Question 11

Legislative Risk

Answer 11

Risk that involves the government interferring in an industry.

Question 12

Timing Risk

Answer 12

The customer buys or sells at the wrong time.

Question 13

Credit Risk

Answer 13

The risk that the debtor defaults on the loan. This would cause the investor to lose some/all of their investment.

Question 14

Reinvestment Risk

Answer 14

When interest rates decline and higher yielding bonds mature the investor will be forced to reinvest at a lower return or assume more risk for the same amount of return

Question 15

Call Risk

Answer 15

Call Risk only applies to preferred stocks and bonds with a call feature. If interest rates decline and higher yielding bonds/stocks are called than the investor is forced to reinvest at a lower rate or assume more risk for the same amount of return.

Question 16

Liquidity Risk

Answer 16

The risk that the investor will not be able to liquidate the asset or if they do, it will affect the price negatively.

Question 17

Progressive Taxes

Answer 17

Levy a higher rate for higher income earners.
Examples:
Income Taxes
Estate Taxes

Question 18

Regressive Taxes

Answer 18

Levy the same amount of taxes on everyone
Examples: 
Sales Tax
Property Tax
Excise tax

Question 19

Taxable Events

Answer 19

The following are taxable events:
The selling of a security for a profit
The selling of a security for a loss
Receiving dividends or interest as income

Question 20

Long Term Capital Gain Tax

Answer 20

Any gain from an asset that is held for 1 year or more. The maximum tax is 15%

Question 21

Short Term Capital Gain Tax

Answer 21

Any gain from an asset that is held for less than 1 year. Taxed at ordinary income rate.

Question 22

Holding Period

Answer 22

Begins the day after purchase and ends the day of the sale.

Question 23

Deducting Capital Loss

Answer 23

Up to $3,000 a year can be used to offset either income tax or a capital gain. If the capital loss is higher than $3,000 then it may be rolled over to subsequent years.

Question 24

Withholding Tax

Answer 24

Broker Dealers are required to withhold 31% if the customer did not provide a tax number or social security number.