The truth behind commission-free trading platforms

Negotiable vs. redeemable securities: A guide for FINRA exam candidates

If you're preparing for the SIE, Series 6, Series 7, or another FINRA licensing exam, understanding the difference between negotiable and redeemable securities is essential. These investment products are bought and sold in different ways, and questions about them frequently appear on FINRA exams.

Beyond helping you pass your exam, learning how negotiable and redeemable securities work will strengthen your understanding of investing, liquidity, pricing, and brokerage services.

In this guide, we'll explain negotiable vs. redeemable securities, review common exam concepts, discuss how commission-free trading has changed the investing landscape, and highlight key terminology every financial professional should know.

What are negotiable and redeemable securities?

The primary difference between negotiable and redeemable securities is how investors buy and sell them.

Negotiable securities

Negotiable securities are financial instruments that trade between investors on secondary markets. Their prices are determined by supply and demand, and investors can buy or sell them throughout the trading day.

Examples of negotiable securities include:

• Common stocks
• Preferred stocks
• Exchange-traded funds (ETFs)
• Corporate bonds
• Municipal bonds
• Treasury securities

Because these securities trade on active markets, they generally offer high liquidity, allowing investors to enter or exit positions quickly.

Redeemable securities

Redeemable securities are purchased directly from and sold back to the issuer rather than traded between investors on a secondary market.

The most common examples include:

• Mutual funds
• Unit investment trusts (UITs)

The price of a redeemable security is based on its net asset value (NAV), which is calculated as the fund's holdings less its liabilities. Transactions occur at the next calculated NAV, typically after the market closes.

Unlike negotiable securities, redeemable securities cannot be traded throughout the day at fluctuating market prices.

Negotiable vs. redeemable securities: Key differences

Key takeaway

Negotiable securities provide flexibility and real-time market pricing, while redeemable securities are bought and sold directly through the issuer at NAV.

How this appears on FINRA exams

Questions about negotiable and redeemable securities often focus on trading mechanics and pricing.

Exam alert

If an exam question states that an investor purchases shares directly from the issuer at net asset value, the correct answer is likely a mutual fund or another redeemable security.

If the question describes buying or selling securities between investors at market-determined prices, the security is likely negotiable.

Practice question

Which investment product is purchased directly from the issuer at net asset value?

A. Common stock

B. Corporate bond

C. ETF

D. Mutual fund

Answer: D. Mutual fund

Mutual funds are redeemable securities that are purchased and redeemed through the issuer at NAV.

The rise of commission-free trading

Over the past decade, many brokerages have eliminated visible trading commissions, making investing more accessible to retail investors.

While commission-free trading has lowered barriers to entry, investors should understand that brokers still generate revenue through other channels.

How do commission-free brokers make money?

Common revenue sources include:

Payment for order flow (PFOF)

Some brokers route customer orders to market makers who pay to execute those trades. This practice helps brokers generate revenue but has raised questions about execution quality and potential conflicts of interest.

Interest from idle cash

Brokerages may earn interest on uninvested cash balances held in customer accounts, often sharing only a portion of that interest with clients.

Margin lending

When investors borrow money to purchase securities, brokers charge interest on the loan.

Securities lending

Brokerages may lend customer securities to other market participants, such as short sellers, generating additional income.

What should investors know?

Although trading commissions have largely disappeared, costs still exist behind the scenes. Investors should understand how their brokerage firm generates revenue and review disclosures regarding order routing and execution practices.

Key takeaway

Commission-free trading reduces visible costs, but investors should remain aware of indirect costs and potential conflicts of interest.

Commissions, loads, and investment costs

Understanding investment costs is important for both FINRA exam success and real-world investing.

Commissions

Commissions are fees charged when buying or selling negotiable securities such as stocks and ETFs. While many brokers no longer charge traditional commissions, some transactions may still involve fees.

Sales charges (loads)

Sales loads are most commonly associated with mutual funds.

Common types include:

• Front-end loads: Charged when purchasing fund shares
• Back-end loads: Charged when redeeming fund shares
• 12b-1 fees: Ongoing marketing and distribution expenses

Example of a front-end load

Suppose you invest $10,000 in a mutual fund with a 5% front-end load.

• Sales charge: $500
• Amount invested: $9,500

Although you contributed $10,000, only $9,500 is invested in the fund.

How to reduce investment costs

Investors can take several steps to lower expenses and improve long-term returns.

Consider no-load funds

Many mutual funds no longer charge front-end or back-end loads, particularly when purchased directly from the fund company.

Use low-cost brokers

Online brokerages often provide access to ETFs and mutual funds with minimal transaction costs.

Monitor ongoing expenses

Management fees, expense ratios, and recurring charges can significantly impact returns over time.

Key takeaway

Even small differences in fees can compound over the years and meaningfully affect portfolio performance.

Diversification: Mutual funds vs. self-managed portfolios

Diversification helps reduce risk by spreading investments across multiple securities, industries, and asset classes.

Mutual funds make diversification relatively simple because each fund typically holds a broad collection of investments.

For many investors, building a similarly diversified portfolio using individual securities requires substantially more capital, research, and ongoing management.

Additionally, maintaining a self-managed portfolio often involves:

• More trading activity
• Greater monitoring requirements
• Increased research responsibilities
• Potentially higher transaction costs

By contrast, mutual funds and professionally managed portfolios handle diversification and rebalancing for investors.

Key takeaway

Mutual funds provide a convenient way to achieve diversification, making them particularly attractive for investors with limited time or resources.

Why FINRA terminology matters

Understanding industry terminology is critical for passing FINRA exams and serving clients effectively.

Many terms have precise regulatory definitions that differ from their everyday meanings.

Examples include:

• Exclusive right to sell
• Principal-agent relationship
• Dual agency
• Net asset value
• Market maker
• Payment for order flow

Confusing similar terms can lead to incorrect exam answers and misunderstandings in professional practice.

Exam tip

Create a glossary of commonly tested FINRA terms and review it regularly. Mastering industry vocabulary can improve both exam performance and long-term career success.

Key takeaways

Before your exam, make sure you can confidently explain the following concepts:

• Negotiable securities trade between investors on secondary markets.
• Redeemable securities are purchased and redeemed directly through the issuer.
• Mutual funds are priced using net asset value (NAV).
• Stocks, ETFs, and most bonds are negotiable securities.
• Commission-free trading does not eliminate costs; it changes how brokers generate revenue.
• Understanding fees, diversification, and industry terminology is essential for FINRA exam success.

Final thoughts

Financial markets continue to evolve through innovations such as commission-free trading, digital brokerage platforms, and new investment products. However, the core concepts tested on FINRA licensing exams remain largely unchanged.

By mastering the differences between negotiable and redeemable securities, understanding how investment costs work, and learning key industry terminology, you'll be better prepared to pass your exam and build a successful career in financial services.

Pro tip: Review your investment platforms regularly, examine fee disclosures closely, and stay up to date on market changes so you can take full advantage of your financial opportunities.