Deck 5: How Securities Are Traded

Question 1

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

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

Answer 1

B

Question 2

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

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

Answer 2

B

Question 3

Algorithmic trading:

A) is a form of technical analysis, which is also called charting.
B) involves high frequency trading involving the use of ECNs.
C) is a form of analysis arbitrage to identify mispriced securities.
D) uses computer programs to determine quantity, price, and timing for trades.

Answer 3

D

Question 4

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

Question 5

Margin accounts cannot be used to:

A) purchase securities using leverage.
B) borrow money to fund a frivolous vacation.
C) provide overdraft protection.
D) take physical delivery on maturity of a futures contract.

Question 6

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

A) They typically seek clients with at least $25,000 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 7

For an investor holding individual securities, which of the following generally 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

Question 8

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 9

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

A) securities totaling $100,000.
B) securities totaling $250,000.
C) securities totaling $500,000.
D) securities totaling $1,000,000.

Question 10

Treasury bonds can be purchased without paying transaction costs through:

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

Question 11

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 12

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

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

Question 13

Designated market makers (DMMs) 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, and vice versa.
D) sell excess inventory to maintain a strictly neutral position.

Question 14

Raymond James and Edward Jones are examples of:

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

Question 15

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 and protect the stock exchanges from loss.

Question 16

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

A) a trading halt.
B) a price adjustment at market opening to correct order imbalances.
C) a price adjustment at market closing to correct order imbalances.
D) a mid-day price adjustment to correct order imbalances.

Question 17

Which statement regarding fees 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 18

The NYSE minimum deposit for margin accounts is:

A) $2,000.
B) $10,000.
C) $50,000.
D) $100,000.

Question 19

Which of the following statements regarding discount brokers is true?

A) Discount brokers do not offer access to foreign securities.
B) Discount brokers only execute orders on stock transactions.
C) Discount brokers frequently offer limited investment advice.
D) Discount brokers do not offer SIPC protection.

Question 20

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 21

Which of the following institutions 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 Deposit Insurance Corporation

Question 22

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

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

Question 23

The NYSE is:

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

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) only when the SEC officially declares one is necessary.
B) when the market declines more than 10 percent during the day.
C) 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 designated market makers exhaust their capital.

Question 26

Ms. Brown sold short 100 shares at $78 per share. The price has declined to $69. The stock's outlook is mixed, so she would like to 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 27

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 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 from the broker call rate.
D) subtracting a percentage from the margin interest rate.

Question 29

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

A) It is derived as 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 derived as number of shares sold short divided by average trading volume.

Question 30

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 eleven regional offices and several hundred examiners.
D) The SEC administers all U.S. securities laws.

Question 31

Which of the following statements is true regarding short sales?

A) An investor can only remain in a short position for six 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 32

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 33

If maintenance margin is not maintained, the broker will:

A) sell sufficient securities to ensure the portfolio is compliant with maintenance margin requirements.
B) sell 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

Below what stock price will a margin call occur?

A) $13.50
B) $18.00
C) $42.00
D) $54.00 Solution = 1,350 = $18 100(1-.25)

Question 35

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) the SIPC.
C) the Federal Reserve.
D) the SEC.

Question 36

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 37

Since 1974, the initial minimum margin requirement for stocks has been:

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

Question 38

Which statement regarding designated market makers (DMMs) is False? DMMs:

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 39

What is the actual margin when the stock price is $56?
a. 65.9%
b. 75.9%

Question 40

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 41

The GRD Basic Industries Index had the following values for 2018, 2019, and 2020: 157, 191 and 203, respectively. What is the 2020 value of an adjusted index assuming the 2018 value is rescaled to be 100?

A) 77
B) 94
C) 106
D) 129

Question 42

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

Question 43

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

Question 44

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

Question 45

Trading delays and trading halts are types of circuit breakers employed by the NYSE.

Question 46

Insider trading often occurs when mergers and takeovers are imminent.

Question 47

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

Question 48

The Treasury Direct Program eliminates all fees for investors.

Question 49

DMMs trading on the NYSE now accounts for the majority of share volume.

Question 50

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

Question 51

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

Question 52

Which of the following regulations mandates greater corporate responsibility, such as holding a firm's executives responsible for the accuracy of the firm's financial statements?

A) Reg FD
B) Dodd-Frank
C) FINRA
D) Sarbanes Oxley

Question 53

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

Question 54

Charles Schwab and Fidelity are premium discount brokers.

Question 55

Stanley has $60,000 in cash that he plans to invest in Corning stock, which is currently selling at $50 per share. He plans to buy the stock on margin by borrowing 40% of the total investment from his broker. How many shares of Corning will Stanley purchase?

A) 1,000
B) 2,000
C) 3,000
D) 4,000

Question 56

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

Question 57

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

Question 58

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

Question 59

Dollar cost averaging, in which additional shares are purchased over time, is one advantage of dividend reinvestment plans.

Question 60

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

Question 61

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

Question 62

What is the chief advantage of a market order?

Question 63

Regulation FD created the Financial Depository agency.

Question 64

Specialists often sell short to meet public buy orders.

Question 65

The main provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was establishing stiffer penalties for insider trading.

Question 66

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

Question 67

Fixed brokerage commissions were eliminated by the Securities Act Amendments of 1975.

Question 68

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)

Question 69

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

Question 70

Mr. Whiner bought 1,000 shares of Sure-Fire, Inc. common stock at $85 and sold it 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 71

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

Question 72

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

Question 73

The agency established as the insurance company to protect investors from failure of brokerage firms is the FDIC.

Question 74

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

Question 75

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

Question 76

The margin requirement is the same across all stocks in an investor's account.

Question 77

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

Question 78

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

Question 79

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

Question 80

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