Deck 5: The Stock Market

Question 1

Which one of the following best describes a broker?

A) intermediary who arranges trades between a buyer and a seller
B) trader who buys and sells from his or her inventory
C) firm which charges a commission for arranging a transaction
D) person who buys securities for his or her own account on an exchange floor
E) trader who transacts business on behalf of a securities issuer

Answer 1

A

Question 2

The document that must be prepared in order to receive approval for a stock offering is called a:

A) tombstone.
B) prospectus.
C) offering agreement.
D) regulatory report.
E) offering paper.

Answer 2

B

Question 3

Which one of the following is the federal agency which regulates the financial markets in the U.S.?

A) Treasury Department
B) National Association of Securities Dealers
C) Over the Counter Commission
D) Federal Reserve
E) Securities and Exchange Commission

Answer 3

E

Question 4

A firm that specializes in arranging financing for companies is called a(n):

A) floor broker
B) investment banking firm
C) investment dealer
D) private broker
E) marketing firm

Question 5

The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the:

A) spread.
B) margin.
C) offer differential.
D) firm commitment.
E) underwriting capital.

Question 6

Under the provisions of a general cash offer, shares of stock are offered to:

A) underwriters on a guaranteed sale basis only.
B) current shareholders prior to being offered to the general public.
C) institutional investors only.
D) the issuer's employees on a cash purchase basis only.
E) the general public on a "first-come" basis.

Question 7

When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting.

A) Dutch auction
B) partial
C) firm commitment
D) best efforts
E) pro-rata

Question 8

When a group of underwriters jointly work together to sell a new issue of securities, the underwriters form a(n):

A) underwriting cartel.
B) market union.
C) venture capital association.
D) Dutch market.
E) syndicate.

Question 9

Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n):

A) open-end sale
B) break-out issue
C) public service offering
D) initial public offering
E) initial trial issue

Question 10

Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets?

A) primary
B) secondary
C) third
D) fourth
E) fifth

Question 11

When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting.

A) Dutch auction
B) full-fledge
C) firm commitment
D) best efforts
E) guaranteed sale

Question 12

The financing provided for new ventures that are frequently high-risk investments is referred to as "venture _______".

A) capital
B) leverage
C) risk funds
D) funding
E) investing

Question 13

Marco Painting Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n):

A) supplemental offering.
B) seasoned equity offering.
C) initial public offer.
D) market expansion offer.
E) after-market underwriting.

Question 14

The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called:

A) underwriting
B) capitalizing
C) securing
D) brokering
E) deploying

Question 15

High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets?

A) primary
B) secondary
C) third
D) fourth
E) over-the-counter

Question 16

A securities dealer is a(n):

A) intermediary who arranges trades between a buyer and a seller.
B) trader who buys and sells from his or her inventory.
C) firm which charges a commission for arranging a transaction.
D) person who buys securities for his or her own account on an exchange floor.
E) trader who transacts business on behalf of a securities issuer.

Question 17

Which one of the following prices will an individual investor receive if he or she sells shares of Microsoft?

A) bid
B) ask
C) issue
D) offer
E) Dutch

Question 18

A public offering of securities which are offered first to current shareholders is called a(n):

A) existing shareholder offer.
B) limited offer.
C) rights offer.
D) venture offer.
E) preference offer.

Question 19

When the price of newly issued shares is determined by competitive bidding the underwriting is known as a _____ underwriting.

A) Dutch auction
B) market-priced
C) seasoned
D) best efforts
E) rights

Question 20

A preliminary document provided to investors who are interested in a stock offering is called a(n):

A) prospectus.
B) inquiry form.
C) draft offer.
D) green shoe.
E) red herring.

Question 21

The location on an exchange floor where a particular security trades is called a(n):

A) specialist's post.
B) broker's terminal.
C) floor spot.
D) exchange spot.
E) market pit.

Question 22

An order to buy shares of stock at a stated price or less is called a _____ order.

A) limit
B) stop
C) market
D) short
E) bid

Question 23

The profit a dealer makes on a purchase and resale of shares of stock is called the:

A) margin.
B) bid.
C) float.
D) offer.
E) spread.

Question 24

A trading floor broker:

A) is a NYSE member who trades on the floor for his or her personal account.
B) executes orders on behalf of commission brokers in exchange for a fee.
C) executes customers' orders in exchange for a commission.
D) trades a limited number of securities and is obligated to maintain an orderly market for those securities.
E) is any party who owns a NYSE trading license.

Question 25

A market centered on dealers buying and selling for their own inventories is called a(n):

A) exchange floor.
B) SuperDot.
C) OTC market.
D) subscriber market.
E) Big Board.

Question 26

Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price?

A) balanced
B) market-weighted
C) dollar-weighted
D) price-weighted
E) value-weighted

Question 27

The party who serves as a dealer for a few securities on an exchange floor and is obligated to maintain an orderly market for those securities is called a:

A) floor trader.
B) designated market maker.
C) floor broker.
D) member.
E) house broker.

Question 28

You want to sell shares of stock at the current price. Which type of order should you place?

A) limit
B) post
C) market
D) short
E) stop

Question 29

The NYSE's Super Display Book is an electronic system which:

A) maintains the historical records of each customer's trading activity.
B) transmits the latest market information to the news media.
C) allows floor traders to execute trades via cell phones.
D) tracks the activity on an exchange floor to ensure regulatory compliance.
E) is based on NYSE's ARCA electronic trading engine.

Question 30

Which of the following is correct regarding the compensation paid to private equity fund managers?

A) Managers typically receive 20% of fund profits but no separate management fee.
B) Managers typically receive a high percentage management fee but no portion of fund profits.
C) Management compensation is usually subject to a "clawback" provision to limit the performance fees.
D) "Carried interest" refers to the interest fund managers earn on performance fees.
E) Fees paid to fund managers do not reduce the net return of the fund.

Question 31

An order to sell that involves a preset trigger point is called a _____ order.

A) limit
B) day
C) stop
D) short
E) market

Question 32

A private equity fund: I. is set up as a limited partnership
II) usually use a 2/20 fee structure
III) place no constraints on manager compensation
IV) typically have a stated life of 7 to 10 years

A) I and II only
B) I and III only
C) I, II and III only
D) I, II and IV only
E) I, II, III, and IV

Question 33

Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding?

A) issue
B) option
C) bid
D) ask
E) primary

Question 34

The off-exchange market in which exchange-listed securities trade is referred to as the _____ market.

A) independent
B) secondary
C) fourth
D) third
E) primary

Question 35

Which one of the following describes an ECN?

A) Web site used by investors to trade directly with other investors
B) Web site limited to use by professional brokers and dealers
C) computerized trading floor
D) communications network used by specialists
E) cellular trading network

Question 36

An NYSE Supplemental Liquidity Provider: I. can trade the same stocks as designated market makers
II) can trade only from offices outside the exchange
III) must quote bid or ask quotes a certain % of the day
IV) are paid 30 cents per 100 shares traded

A) I and II only
B) I, II and III only
C) I and III only
D) I, II, and IV only
E) I, II, III and IV

Question 37

A NYSE member who trades only for his or her own account is called a(n):

A) floor trader.
B) specialist.
C) individual broker.
D) floor broker.
E) house broker.

Question 38

The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market.

A) home
B) independent
C) third
D) fourth
E) SuperDot

Question 39

An owner of a trading license on the NYSE is called a:

A) broker.
B) shareholder.
C) member.
D) trader.
E) dealer.

Question 40

Inside quotes are the:

A) highest asked and lowest bid quotes offered by securities dealers.
B) highest bid and lowest asked quotes offered by securities dealers.
C) latest prices at which corporate insiders have purchased or sold securities.
D) bid and asked prices which are offered only to institutional traders or large private investors.
E) latest price at which a security traded.

Question 41

Which one of the following statements related to the NYSE Hybrid market is correct?

A) Floor brokers operate both electronically and in person.
B) The Hybrid system replaces the market specialists.
C) The automated system works better than the specialist for stocks with minimal liquidity.
D) The automated system will only replace the specialist in times of market duress.
E) Investors can automatically trade an unlimited number of shares.

Question 42

To be listed on the NYSE, a firm must have at least:

A) 2,500 shareholders
B) 100,000 shares traded on an average day
C) 1.5 million shares held by the public
D) $75 million in market value for an IPO
E) pre-tax aggregate earnings of $10 million in the previous 3 years

Question 43

Which one of the following transactions occurs in the primary market?

A) sale of stock by Shareholder A to Shareholder B
B) gift of shares from a grandmother to her granddaughter
C) sale of newly issued shares by the issuer to a shareholder
D) sale of shares in the third market
E) purchase of shares by a dealer from a shareholder

Question 44

Trevor currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trevor is a securities:

A) broker.
B) representative.
C) underwriter.
D) floor broker.
E) dealer.

Question 45

Which one of the following can be assumed when the SEC approves an IPO registration?

A) The securities offering will provide value to the shareholders.
B) The issuer is financially sound.
C) The issuer will remain solvent.
D) All rules have been followed to allow for full disclosure of information.
E) The stock price is set at a level which will allow shareholders to earn a positive rate of return.

Question 46

How long is the "lock-up" period that is commonly found in an IPO underwriting contract?

A) one month
B) three months
C) six months
D) one year
E) eighteen months

Question 47

What is the current structure of the NYSE?

A) general partnership
B) limited partnership
C) non-profit organization
D) publicly traded corporation
E) government agency

Question 48

In 2007, NYSE Holdings merged with which one of the following?

A) NASDAQ
B) AMEX
C) Chicago Stock Exchange
D) London Stock Exchange
E) Euronext, N.V.

Question 49

The duties of a specialist include which of the following?
I) maintain an orderly market
II) offer a higher bid price than the floor brokers
III) provide liquidity to the market
IV) purchase all shares offered as limit sells

A) I and III only
B) II and III only
C) I, II, and III only
D) I, III, and IV only
E) I, II, III, and IV

Question 50

Lucas wants to sell 9,000 shares of stock and places a market order. The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to "stop" the stock. What has the specialist agreed to do?

A) cancel the order
B) place the order into the order book to hold until an order to buy 9,000 shares is received
C) purchase the shares if no other buyer is readily available
D) sell the shares to the next available buyer regardless of the price received
E) sell the shares at the end of the trading day at the best price available at that time

Question 51

Which one of the following has the greatest duty to provide liquidity to the financial market?

A) floor broker
B) independent broker
C) dealer
D) designated market maker
E) floor trader

Question 52

When stocks are held in an index in proportion to their total company market value, the index is:

A) dollar-weighted.
B) front-weighted.
C) back-weighted.
D) price-weighted.
E) value-weighted.

Question 53

Which one of the following statements concerning the NYSE is correct?

A) The NYSE was created based on the Walnut Tree Agreement.
B) The average daily trading volume on the NYSE in 2007 was approximately one billion shares.
C) The NYSE and NASDAQ merged in 2007.
D) The NYSE is part of a firm that also operates a stock exchange in Amsterdam.
E) The NYSE merged with NASDAQ in 2007.

Question 54

Anna is an individual investor. She purchases shares at the _____ price and sells at the _____ price.

A) asked; bid
B) average; asked
C) bid; asked
D) bid; average
E) asked; average

Question 55

Which one of the following statements concerning venture capital is correct?

A) Venture capital is frequently provided in stages with each stage financed by a different venture capitalist.
B) Most venture capitalists are passive investors.
C) The founders of a firm generally realize substantial payoffs as soon as the firm receives venture financing.
D) Venture capitalists generally compete with banks to find projects to finance.
E) Well established firms tend to absorb most of the available venture capital.

Question 56

An index is valued on a daily basis. However, some stocks in this particular index have not traded recently. As a result, this index suffers from index:

A) fatigue.
B) devaluation.
C) flatness.
D) staleness.
E) weighting.

Question 57

In order to currently trade on the floor of the NYSE, members must:

A) be registered as a floor trader
B) own a seat
C) purchase a trading license
D) be a specialist
E) be designated as a floor broker

Question 58

Which of the following are common sources of venture capital?
I) private individuals
II) NASDAQ
III) university endowment funds
IV) insurance companies

A) I and II only
B) III and IV only
C) I, III, and IV only
D) I, II, and IV only
E) I, II, III, and IV

Question 59

The SuperDOT system has lessened the role of which one of the following?

A) personal financial advisers
B) floor traders
C) specialists
D) floor brokers
E) underwriters

Question 60

Faith placed an order to sell 7,500 shares of stock she currently owned. As soon as the order reached the trading floor, the shares were immediately sold. Which type of order did Faith place?

A) limit
B) day
C) market
D) short
E) stop

Question 61

Steve placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Steve know for sure?
I) His order will execute but the time of execution is unknown.
II) His order may never execute.
III) He will receive exactly $7,000 if his order executes.
IV) He could receive more, but not less, than $14 a share.

A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I only

Question 62

Which one of the following orders is frequently used as a means to limit losses resulting from a short sale?

A) limit
B) market
C) day
D) stop-sell
E) stop-buy

Question 63

Stock market indexes:

A) are all computed using the same methodology.
B) all react the same to a change in the price of a particular stock.
C) all cover the same market sectors.
D) are all price-weighted.
E) vary in the type of stocks included.

Question 64

The DJIA is an index of the stock prices of _____ firms.

A) 25
B) 30
C) 50
D) 100
E) 500

Question 65

Reliant Underwriters has agreed to a firm commitment underwriting in which they will pay $36.75 million in exchange for 3 million shares of stock for an IPO offering. The offering price is expected to be $13.50 a share. How much will the underwriters earn if all of the shares can be sold?

A) $1.25 million
B) $2.75 million
C) $3.75 million
D) $4.25 million
E) $4.50 million

Question 66

The orders displayed on NASDAQ are placed by:

A) individuals on ECNs only.
B) market makers only.
C) both market makers and individuals on ECNs.
D) brokerage firms.
E) floor brokers.

Question 67

Alco Metals just sold 2.7 million shares through an IPO offering. The shares were offered at $21 a share and all shares were sold. The firm received a total of $60,385,500 for this issue. What was the spread?

A) 5.50 percent
B) 6.25 percent
C) 6.50 percent
D) 7.00 percent
E) 7.25 percent

Question 68

Which one of the following is the primary flaw of a price-weighted index?

A) Price-weighted indexes ignore stock splits which affect stock prices.
B) The effect a company has on the index is dependent solely on the price per share.
C) Only a small number of stocks can be included in a price-weighted index.
D) If the number of shares outstanding of an index stock changes, the index divisor must be recomputed.
E) The index can only be computed once the trading day is over.

Question 69

Which of the following are common characteristic of the OTCBB market?
I) low stock prices
II) dual listings with NASDAQ
III) high percentage price changes
IV) thinly traded securities

A) I and III only
B) I, II, and III only
C) I, III, and IV only
D) II, II, and IV only
E) I, II, III, and IV

Question 70

NASDAQ has which of the following characteristics?
I) trading floor
II) computer network
III) specialist system
IV) multiple market makers

A) I and IV only
B) II and IV only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, III, and IV

Question 71

In a recent IPO, the Sausage Co. offered 1.6 million shares of stock at an offer price of $18 a share. The underwriting was conducted on a best efforts basis with a spread of 7.0 percent. The Sausage Co. received a total of $25,079,868.00 in sale proceeds. How many shares were sold?

A) 1,378,700 shares
B) 1,486,500 shares
C) 1,498,200 shares
D) 1,505,700 shares
E) 1,508,400 shares

Question 72

Kelly wants to sell 600 shares of DeLux stock at the going market price after the stock reaches $42 a share. Which type of order should she place?

A) stop
B) limit
C) market
D) fixed
E) loss

Question 73

Which one of the following statements related to stock indexes is correct?

A) The index divisor increases in value whenever a stock in the index undergoes a stock split.
B) A value-weighted index includes both dividends and capital gains.
C) The S&P 500 index is value-weighted.
D) The DJIA is value-weighted.
E) Index staleness is more apt to be a problem for the DJIA than for the Wilshire 5000.

Question 74

Which one of the following statements concerning NASDAQ is correct?

A) The NASDAQ Capital Market has the most stringent listing requirements of any of the NASDAQ companies.
B) NASDAQ is actually comprised of four separate markets.
C) Microsoft shares are listed on the NASDAQ Global Market.
D) NASDAQ has more total dollar volume of trading than does the NYSE.
E) There are more companies listed on NASDAQ than on NYSE.

Question 75

Which one of the following statements is correct regarding the NYSE uptick rule?

A) The rule prevents any further selling of shares when the last sale was an uptick.
B) The rule prevents any further selling of shares when the last sale was a downtick.
C) The rule prevents short-selling except following an uptick.
D) The rule prevents short-selling except following a downtick.
E) The rule was recently adopted to limit market volatility.

Question 76

NASDAQ dealers post which one of the following in addition to their bid and ask prices?

A) commission rates
B) front-end load charges
C) number of shares they will commit to buy or sell
D) total trades for the day
E) trading fees

Question 77

The stocks listed on the Pink Sheets:

A) are those stocks trading on the NASDAQ CAPITAL MARKET.
B) do not have to file financial statements with the SEC.
C) have all been delisted by the NYSE.
D) are the highest priced stocks listed on NASDAQ.
E) must file financial statements with the SEC but do not have to meet any listing requirements.

Question 78

Marcus just placed a stop limit order to sell 100 shares at $21 stop, $18 limit. Which one of the following statements is correct concerning this order if the current market price is $16?

A) As soon as the price rises to $18, the stock will be sold.
B) The stock will sell for at least $18 but less than $21.
C) The stock will sell for $18 a share as soon as the price hits $21.
D) The order will become a limit order to sell at $21 once the market price reaches $18.
E) The order will become a limit order to sell at $18 once the market price reaches $21.

Question 79

Stocks which are listed on the NYSE can:

A) not be listed on any other exchange.
B) only be dual listed on a regional exchange.
C) only be dual listed on Instinet.
D) only be dual listed on the Archipelago Exchange.
E) also be listed on NASDAQ.

Question 80

After the trigger point is reached, a stop-loss order will be executed at the:

A) trigger price.
B) stop price.
C) trigger price or better.
D) stop price or better.
E) market price.