Question 1

An investor placing a market order with a broker agrees to buy or sell a stock immediately at the best price available.

Accepted Answer

A market order is an instruction to buy or sell a stock at the current market price. The investor agrees to buy or sell the stock immediately at the prevailing market price, without specifying a specific price.

Question 2

A stock split immediately increases the value of an investor's holdings.

Accepted Answer

A stock split does not increase the overall value of the investor's holdings. Instead, it increases the number of shares held by the investor while reducing the price per share proportionally. As a result, the total value of the investor's holdings remains the same.

Question 3

Buying stock on margin lowers the overall risk for the investor.

Accepted Answer

Buying stock on margin actually increases the overall risk for the investor. Margin allows an investor to borrow money to purchase more shares than they could with their own funds, but it also adds leverage and magnifies potential losses. If the stock price falls, the investor may need to either put up more cash or sell the stock at a loss to repay the borrowed funds, which can result in significant losses.

Question 4

A margin call requires an investor to repay money borrowed from the broker used to purchase the stock.

Accepted Answer

A margin call occurs when an investor's margin account falls below a certain level required by the broker. The investor is then required to deposit additional funds or securities to bring the account back up to the required level. Failure to do so may result in the broker selling some or all of the investor's assets to repay the borrowed money.

Question 5

A round lot refers to the purchase of 100 shares of stock in the same company in a single transaction.

Accepted Answer

A round lot is indeed the purchase of 100 shares of stock in the same company in a single transaction.

Question 6

If a company announces a stock split,the investor may receive two or more shares of the company stock,for every one share that he/she holds.

Accepted Answer

A company announcing a stock split means that the investor will receive two or more shares of the company stock for every one share they hold.

Question 7

If you buy 100 shares of IBM for $120/share,and the margin on your account is 50%,the broker will float you an interest free loan of $6,000,until the price of IBM sufficiently rises to the point where you are willing to sell.You pay the broker back its $6,000,and you enjoy the capital gain.

Accepted Answer

The answer of If you buy 100 shares of IBM...

Question 8

Ricardo owns 100 shares of stock in the ABC Corporation that currently sell for $100 per share.ABC just announced a two-for-one stock split for all current stockholders.Ricardo now owns $20,000 worth of stock in the ABC Corporation.

Accepted Answer

After the two-for-one stock split, Ricardo will own 200 shares of stock in the ABC Corporation (100 shares multiplied by 2). However, the value of each share will be reduced to $50 (original price of $100 divided by 2). Therefore, Ricardo will still own $10,000 worth of stock in the ABC Corporation (200 shares multiplied by $50 per share), not $20,000.

Question 9

If an individual investor places a limit order at $38 and the stock currently sells for $41 per share,the broker will buy the stock for the investor.

Accepted Answer

A limit order is an order to buy or sell a stock at a specified price or better. In this case, the investor has placed a limit order to buy at $38, which is lower than the current market price of $41. Therefore, the broker will not execute the order and buy the stock for the investor at $41. The order will remain open until the stock price drops to $38 or lower, at which point it may be executed.

Question 10

A stock split refers to buying a share of stock at a discounted price if full payment is made at the time of purchase.

Accepted Answer

A stock split is when a company increases the number of shares outstanding by issuing more shares to current shareholders, which reduces the price per share. It does not involve buying shares at a discounted price.

Question 11

Buying on margin is a relatively risk-free way of investing in the stock market.

Accepted Answer

Buying on margin involves borrowing money from a broker to purchase securities, with the securities themselves serving as collateral for the loan. While this strategy can amplify gains in a rising market, it also increases losses in a declining market. Margin trading is not risk-free and should only be undertaken by experienced investors who understand the potential risks and rewards.

Question 12

Buying stock on margin allows investors to increase the potential rate of return made on a stock investment.

Accepted Answer

Buying stock on margin allows investors to borrow funds from a broker to purchase more shares of stock than they could with just their own money. This amplifies the potential returns on the investment, but also increases the risk and potential for losses.

Question 13

Investing in common stock can give an individual the opportunity to participate in the success or failure of a corporation.

Accepted Answer

Investing in common stock means that the investor owns a share of the corporation and has a vested interest in its success or failure, as the stock value will reflect the company's performance.

Question 14

Lamont bought a share of stock in the ABC Corporation for $50.When he sold the stock later that year,he received $70.The par value of the stock is $5.Lamont's capital gain is $25.

Accepted Answer

The answer of Lamont bought a share of stock in...

Question 15

The stocks of high quality companies such as Coca-Cola and Microsoft are called blue chip stocks.

Accepted Answer

Blue chip stocks are typically stocks of well-established, financially stable companies with a strong reputation in the market. Coca-Cola and Microsoft are both examples of blue chip stocks.

Question 16

Buying on margin means you are borrowing part of the value of the stock purchase from the brokerage firm.

Accepted Answer

Buying on margin involves borrowing money from a brokerage firm to purchase stocks, allowing the investor to increase their purchasing power and potential returns. However, it also carries risks as the investor must repay the borrowed money with interest and may face the possibility of losing more than their initial investment if the stocks decline in value.

Question 17

When brokers talk about trading round lots,they are referring to 50 shares of stock.

Accepted Answer

Brokers typically refer to trading round lots as 100 shares of stock, not 50.

Question 18

If you are willing to hold on to your growth stock long enough,at least five years or more,you will realize capital gains.

Accepted Answer

The answer of If you are willing to hold on...

Question 19

Ken owns 100 shares in XYZ Company,currently selling for $60 per share.His stock split yesterday 3-for-1.The number of shares that Ken owns has tripled.

Accepted Answer

After the 3-for-1 stock split, Ken would now have 300 shares (100 x 3). Although the number of shares has tripled, the value of each share would decrease to $20 (since the total value of the shares remains the same at $6,000).

Question 20

Corporations and brokers prefer to have stock purchases conducted in round lots of 100 shares.

Accepted Answer

This is true. Round lots of 100 shares are preferred because it makes trading more efficient and reduces transaction costs.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities