Deck 5: How Securities Are Traded

Question 1

Which of the following accounts often requires an annual fee?

A)a cash account
B)a wrap account
C)a margin account
D)All of the above require an annual fee.

Answer 1

B

Question 2

The Financial Industry Regulatory Authority (FINRA)created in 2007 is the largest regulator for securities firms in the U.S.FINRA's objective is to:

A)protect the bid-ask spread and exchange participants' profits
B)protect corporations and investors
C)protect investors and ensure market integrity
D)ensure market integrity

Answer 2

C

Question 3

Merrill Lynch and UBS are examples of:

A)discount brokers
B)wholesale brokers
C)full-service brokers
D)blue-chip brokers

Answer 3

C

Question 4

The NYSE requires customers to deposit a minimum of how much in securities for margin accounts

A)$2,000
B)$2,500
C)$5,000
D)$10,000

Question 5

Which of the following statements is true regarding full-service brokers?

A)They typically seek clients with at least $10,000 in their accounts.
B)They derive only a small percentage of their revenues from commissions.
C)They compete primarily on price and services offered.
D)Less than 10 percent of U.S.households now use a full-service broker.

Question 6

NYSE Specialists are required to

A)maintain a bid-ask spread no greater than 1 cent per share
B)maintain a fair and orderly market.
C)buy when most others are selling,or vice versa.
D)selling off inventory and maintaining strictly neutral positions

Question 7

Algorithmic trading is:

A)technical analysis,also called charting
B)high frequency trading in ECNs
C)analysisarbitrage
D)involve the use of computer programs to initiate trade orders,including decision-making on security,quantity,price,and timing

Question 8

Margin accounts cannot be used to:

A)purchase securities using leverage
B)borrow money from a brokerage account to fund a frivolous vacation
C)provide overdraft protection
D)take physical delivery of an underlying asset on maturity of a futures contract

Question 9

Which of the following laws eliminated all fixed commissions?

A)Securities Exchange Act of 1934
B)Securities Acts Amendments of 1975
C)Investor Advisor Act of 1940
D)Securities Investor Protection Act of 1970

Question 10

Which of the following statements regarding discount brokers is true?

A)All discount brokers offer on-line trading.
B)Discount brokers only execute orders on stock transactions.
C)Discount brokers may offer little investment advice.
D)Discount brokers do not offer SIPC protection.

Question 11

If an investor is attempting to buy a stock that is very volatile,it would be best to use a:

A)market order
B)limit order
C)stop-loss order
D)contingency order

Question 12

An order that must be filled immediately in its entirety,or otherwise must be canceled,is known as:

A)an immediate or cancel order.
B)an all or none order. c a fill or kill order.
D)a full or bust order.

Question 13

A newer variation of the wrap account is the:

A)mutual fund wrap account
B)asset allocation wrap account
C)small-cap wrap account
D)index wrap account

Question 14

The Securities Investor Protection Corporation (SIPC)insures customer accounts at member brokers against brokerage failure as follows:

A)securities totaling $250,000,cash totaling $100,000
B)securities totaling $250,000,cash totaling $250,000
C)securities totaling $500,000,cash totaling $100,000
D)securities totaling $500,000,cash totaling $250,000

Question 15

Direct stock purchase programs (DSPs)are an outgrowth of :

A)electronic trading
B)dividend reinvestment plans
C)increased NASDAQ trading
D)decreased regulation

Question 16

The NYSE maintains circuit breakers to protect investors from unusual market activity.One of these circuit breakers is:

A)trading halt
B)strict adherence to market opening
C)strict adherence to market closing
D)Stockwatch

Question 17

Open orders,if not cancelled or renewed,remain in effect for:

A)one week.
B)one month.
C)six months
D)twelve months.

Question 18

Which of the following requires a relatively large minimum investment,usually $100,000 or higher?

A)a cash account
B)an asset management account
C)a margin account
D)a wrap account at a large brokerage firm

Question 19

Which of the following statements regarding commissions charged by full-service brokers is not true?

A)Commissions vary by product.
B)The more complicated the transaction,the higher the commission.
C)The commission on many bonds is already built into the trade.
D)There is no commission on U.S.Treasury securities.

Question 20

Treasury bond buyers can purchase bonds transaction cost free through:

A)U.S.Federal Reserve Bank
B)Treasury Direct
C)DSPs
D)discount brokers

Question 21

Ms.Brown sold short 100 shares of common stock at $78 per share.The price has declined to $69.The outlook for the stock is mixed,so she would cover her short position if the stock moves up as much as $1 but hold if it continues down.Ms.Brown should place a

A)sell stop order at $70.
B)buy stop order at $70.
C)sell limit order at $70.
D)buy limit order at $70.

Question 22

The NYSE is:

A)a free agent market.
B)an agency auction market.
C)a negotiated market.
D)a dealer market.

Question 23

Margin Call price is the amount borrowed divided by:

A)number of shares x (1 - initial margin proportion)
B)number of shares x (1 - maintenance margin proportion)
C)current value of the shares purchased x (1 - initial margin proportion)
D)current value of the shares purchased x (1 - maintenance margin proportion)

Question 24

Mr.King has researched a small company,whose stock is selling at $7.50.He wants to buy 1,000 shares but thinks that he might get the stock at $7.25.To try to buy the stock at the lower price,he should place a

A)sell stop order at $7.25.
B)buy stop order at $7.25.
C)sell limit order at $7.25.
D)buy limit order at $7.25.

Question 25

A trading halt on the NYSE occurs:

A)when the SEC declares one
B)when the market declines more than 10 percent during the day
C)typically lasts less than an hour but can be longer-is called during the trading day to allow a company to announce important news or where there is a significant order imbalance between buyers and sellers in a security.
D)any time specialists exhaust their capital

Question 26

Which of the following statements regarding specialists is FALSE? Specialists:

A)are expected to maintain a fair and orderly market in their assigned stocks.
B)perform a dual role as brokers and dealers.
C)must be approved by the Federal Reserve Board.
D)must often go "against the market."

Question 27

Which of the following statements is true regarding short sales?

A)An investor can only remain in a short sale 6 months or less.
B)Short sales can be done on either a cash or margin account.
C)Short sellers borrow the stock sold short from the exchanges.
D)Dividends paid during the short sale must be covered by the seller.

Question 28

The interest rate charged on margin accounts is determined by:

A)adding a percentage to the broker call rate.
B)adding a percentage to the margin interest rate.
C)subtracting a percentage to the broker call rate.
D)subtracting a percentage to the margin interest rate.

Question 29

The initial margin requirement on security trades is set by the:

A)SEC
B)FINRA
C)SIPC
D)Federal Reserve

Question 30

Which of the following statements regarding arbitration of broker-client disputes is not true?

A)There is a cost to arbitration.
B)Arbitration is a binding process that can determine damages.
C)It is advised that investors hire a lawyer for the arbitration process.
D)Arbitration rulings are frequently appealed.

Question 31

Which of the following statements regarding the SEC is not true?

A)The SEC is an independent,quasi-judicial agency of the U.S.government
B)The SEC has the power to disapprove securities for lack of merit
C)The SEC has nine regional offices and approximately 200 examiners
D)The SEC administers all U.S.securities laws

Question 32

A sell stop order is placed:

A)above the current price.
B)below the current price.
C)at the current price.
D)at the breakeven point.

Question 33

If maintenance margin is not maintained,the broker will place:

A)a sell order on sufficient securities to ensure the portfolio is compliant with maintenance margin requirements
B)a sell order on sufficient securities to ensure the portfolio is compliant with initial margin requirements
C)contact the investor with a margin put
D)contact the investor with a margin call

Question 34

An investor buys 100 shares of Walmart at $45 per share on margin with an initial margin of 70 percent and a maintenance margin of 25% percent. In two months, the stock goes to $56.

-Below what price will a margin call occur? $$\begin{array} { l l } \text { a. } & \$ 13.50 \\\text { b. } & \$ 54.00 \\\text { c. } & \$ 42.00 \\\text { d. } & \$ 18.00\end{array} \quad \text { Solution } = \frac { 1350 } { 100 ( 1 - .25 ) } = \$ 18$$

Question 35

Which of the following statements regarding the short interest ratio is true?

A)It is calculated by the total shares sold short divided by total shares outstanding
B)It indicates the dollar amount needed to cover all short positions
C)The higher the ratio,the more bullish investors are
D)It is the amount of shares sold short divided by average trading volume

Question 36

The independent,quasi-judicial agency of the U.S.government that administers laws in the securities field and protects investors and the public in securities transactions is:

A)FINRA
B)SIPC
C)The Federal Reserve Bank
D)SEC

Question 37

Which of the following has helped to eliminate the use of stock certificates by placing stock transactions on computers.

A)Federal Reserve
B)Securities Exchange Commission
C)Depository Trust Company
D)Federal Depository Insurance Corporation

Question 38

The law that requires that all new issues being offered for public sale to be registered with the SEC is the:

A)Securities Act of 1933
B)Securities Exchange Act of 1934
C)Maloney Act of 1936
D)Securities Investor Protection Act of 1970

Question 39

An investor buys 100 shares of Walmart at $45 per share on margin with an initial margin of 70 percent and a maintenance margin of 25% percent. In two months, the stock goes to $56.

-What is the actual margin of the stock when it's at $56? $$\begin{array} { l l l } \text { a. } & 65.9 \% & \\\text { b. } & 75.9 \% & \text { Solution: } \frac { 5600-1350 } {5600 }=\\\text { c. } & 79.9 \% & \\\text { d. } & 80.9 \%\end{array}$$

Question 40

Since 1974,the current initial margin requirement on stock is:

A)30 percent.
B)40 percent.
C)50 percent.
D)60 percent.

Question 41

If a security issue is registered with the SEC,there is less chance the investor will lose money on the investment.

Question 42

All asset management accounts offer automatic reinvestment of credit balances in shares of a money market or other fund.

Question 43

Dollar cost averaging,in which more shares are purchased at low prices than at high prices,is one advantage of dividend reinvestment plans.

Question 44

Insider trading often occurs when mergers and takeovers are imminent.

Question 45

Buying Treasury securities through the Treasury Direct Program eliminates all brokerage commissions and other fees.

Question 46

Charles Schwab,Fidelity and Vanguard are examples of premium discount brokers.

Question 47

Sidecars,trading halts and Rule 80A are all types of circuit breakers employed by the NYSE.

Question 48

Most full-service stockbrokers derive over 80% of their income from customer commissions.

Question 49

The NYSE regulatory triad consists of: _____________________________,_________________,and _______________________________________.

Question 50

Negotiated commissions are the norm for institutional investors; whereas most individual investors pay specified commissions set by the brokerage firms.

Question 51

Most securities are sold on a regular way basis,which means the settlement date is one week after the trade date.

Question 52

Under SIPC,customer accounts with brokerage firms are insured for up to $1 million.

Question 53

"Street names" are the nicknames used for commonly-held securities,such as "IBM" for International Business Machines.

Question 54

The SIPC limit for insurance coverage on cash is _____________________.

Question 55

A sell stop loss order is placed above the current market price.

Question 56

The Securities and Exchange Commission is a division of the Department of Justice.

Question 57

Specialist trading on the NYSE now accounts for the majority of share volume on a yearly basis.

Question 58

The Specialist's Electronic Book,which is part of the SuperDot system,records and reports limit and market orders.

Question 59

The use of stock certificates,compared to book-entry systems,is on the rise due,in part,to increased computer fraud.

Question 60

"Circuit breakers" are program traders that attempt to bypass the exchange regulations.

Question 61

Under margin accounts,investors can purchase more stock without putting up additional cash by leveraging the value of the eligible shares.

Question 62

What is the chief advantage of a market order?

Question 63

A margin call occurs anytime the equity position of the margin account falls below the initial margin.

Question 64

The short interest ratio indicates the number of days it would take for short sellers to cover all the shares sold short.

Question 65

Small investors often pay brokerage commissions according to the firm's chart of fees.How can this be when rates are negotiable?

Question 66

An investor sells 100 shares of stock short at $40.
(a)Ignoring commissions,at what price will the investor earn $700?
(b)Ignoring commissions,what is the gain or loss if the stock price goes to $53 and the investor closes out the position?

Question 67

Investors who sell short are expecting the price of the security to fall.

Question 68

What are some of the functions of the NASD?

Question 69

What is the rationale for different margin requirements on different types of securities? (For example,50 percent on common stock,and 30 percent on bonds corporate bonds)

Question 70

What is the difference between the potential gains and losses on long positions versus the potential gains and losses on short sales?

Question 71

Mr.Whiner bought 1,000 shares of Sure-Fire,Inc.,common stock at 85 and sold three months later at 73.He lost $12,000 plus commissions on this ill-fated stock purchase.He then contacted the SIPC saying that he wanted to file a claim for his investment losses.Is this loss covered by SIPC? What losses are covered?

Question 72

Joe Edwards purchased 150 shares of XYZ at $100 per share.Currently the stock is selling at $120.If he wants to be assured of a profit of at least $4050,what type of order should he place and at what price per share?

Question 73

What are two methods of investing in stocks without a broker?

Question 74

What is insider trading? Does it only affect large investors?

Question 75

Does the expression "you get what you pay for" apply to full-service brokers and discount brokers?

Question 76

Specialists often sell short to meet public buy orders.

Question 77

What costs and risks are incurred in using a margin account that are not present in a cash account?

Question 78

What are the advantages to investors' of keeping their securities in street name?

Question 79

Compare and contrast the functions and responsibilities of a NYSE specialist with those of an OTC dealer.

Question 80

Most short sales are executed by the broker acting as the "lender" of the security sold.