Deck 5: How Securities Are Traded

Question 1

TD Waterhouse and Bank of Montreal Investor Line are examples of:

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

Answer 1

discount brokers.

Question 2

Full-service stockbrokers provide the following services to their clients except:

A) They provide information about individual stocks, industries, bonds and other investment vehicles.
B) They sell mutual funds to a client.
C) They advise and sell the client IPOs issued by their firm.
D) They file income taxes on behalf of the client.

Answer 2

They file income taxes on behalf of the client.

Question 3

A relatively new source of revenue for brokerage firms comes from:

A) underwriting on new issues.
B) selling foreign securities.
C) administrative fees on customer accounts.
D) involvement in arbitrage.

Answer 3

administrative fees on customer accounts.

Question 4

Which of the following statements regarding discount brokers is true?

A) Brokerage firms can only be full-service or discount but not both.
B) Because discount brokers concentrate only on executing orders, they are able to charge higher fees.
C) Discount brokers offer little investment information and no advice.
D) All of these statements are true.

Question 5

Which of the following accounts allows an investor to purchase additional securities by leveraging the value of the eligible shares to purchase more shares through a loan from the broker?

A) Cash account
B) Wrap account
C) Margin account
D) All of these accounts allow loans from the broker.

Question 6

Which of the following accounts allows the broker to trade on a client's account for those clients who are unwilling or unable to attend to their own accounts?

A) Cash account
B) Managed account
C) Margin account
D) Discretionary account

Question 7

The advantages of DRIPs to the investor includes all of the following except:

A) dollar cost averaging.
B) the discount offered by the issuing firm.
C) there are usually no brokerage or administrative fees associated with the stock purchase.
D) all of the above are advantages associated with DRIPs.

Question 8

The exchange member who enters the limit order in the limit book pending future execution is the:

A) commission broker.
B) floor broker.
C) specialist.
D) delegate.

Question 9

Which of the following does not apply to a short sale?

A) Short selling must be done through a margin account.
B) Short selling is undertaken by investors who believe that the price of the security will increase.
C) Short selling involves borrowing stock from a third party.
D) Short selling must take place in the street name.

Question 10

As soon as the stop price from a stop order is reached in the market place, the order:

A) becomes a limit order.
B) becomes a market order.
C) is voided.
D) none of the above is true.

Question 11

Arrange the following orders from shortest to longest maturity.

A) day order, GTC order, good through order
B) good through order, GTC order, day order
C) day order, good through order, GTC order
D) good through order, day order, GTC order

Question 12

The Canadian counterpart of the American Securities and Exchange Commission is:

A) Canadian Securities Institute.
B) Investment Dealers Association of Canada.
C) Canadian Investor Protection Fund.
D) Canada has no central federal regulatory agency for the securities industry.

Question 13

Dealers in the over-the-counter market:

A) price securities by negotiating with customers and making competitive bids.
B) match supply and demand by standing ready to buy a security from a seller or sell to a buyer.
C) profits from the spread between the bid price and ask price.
D) All of these are correct.

Question 14

The ask price is the:

A) lowest price at which a dealer will sell.
B) highest price at which a dealer will sell.
C) highest price offered by a dealer.
D) lowest price offered by the dealer.

Question 15

Most time-related orders are:

A) day orders.
B) good through orders.
C) GTC orders.
D) fill or kill orders.

Question 16

The only SRO for the securities industry in Canada is the:

A) IIROC
B) IDA
C) CSI
D) OSC

Question 17

Margin is:

A) that part of the total value of a security transaction that the broker has to pay to initiate the transaction.
B) that part of the total value of a security transaction that a customer has to pay to initiate the transaction.
C) that part of the value of a security transactions that a customer has borrower from a third party.
D) that part of the value of a security transaction for which a commercial bank has provided a guarantee.

Question 18

You short sell 100 shares of RBC at $50. Theoretically, your maximum profit is _____ , while your maximum loss is_____ (ignore transactions costs).

A) unlimited, $5000
B) $5000, unlimited
C) $5000, $5000
D) unlimited, unlimited

Question 19

In Canada most stock and bond transactions are cleared through the:

A) OSC.
B) CATS.
C) CDS.
D) IDA.

Question 20

Which of the following statements regarding margin trading is true?

A) Its major appeal is to institutional investors.
B) It maximizes returns and minimizes losses.
C) It magnifies both gains and losses.
D) It is considered a strictly speculative tool.

Question 21

An investor buys 100 shares of TechMart at $45 per share on margin and puts up margin of 70 percent. The required margin is 25 percent. In two months, the stock goes to $56.

-What is the actual margin of the stock when it is at $56?

A) 65.9%
B) 75.9%
C) 79.9%
D) 80.9%

Question 22

An investor buys 100 shares of TechMart at $45 per share on margin and puts up margin of 70 percent. The required margin is 25 percent. In two months, the stock goes to $56.

-Below what price will a margin call occur?

A) $13.50
B) $54.00
C) $42.00
D) $18.00

Question 23

Dividend reinvestment plans

A) enable investors to earn money market rates on their dividend income.
B) enable investors to directly purchase shares from corporations, thereby eliminating brokerage commissions.
C) are provided by full-service brokerage houses only.
D) are provided by corporations to their employees only.

Question 24

Investors allow their brokerage firms to keep their securities in a street name:

A) when they have a weak credit history.
B) because of the convenience and custodial functions provided to them.
C) because it is cheaper that way.
D) when they are interested in following an active portfolio management strategy.

Question 25

Mr. Ng has researched a small company, whose stock is selling at $7.65 He wants to buy 1,000 shares but thinks that he might get the stock at $7.40. To try to buy the stock at the lower price, he should place a:

A) sell stop order at $7.40..
B) buy stop order at $7.40.
C) sell limit order at $7.40.
D) buy limit order at $7.40.

Question 26

Full-service brokers have pioneered the emergence of online trading.

Question 27

The IIROC was established to protect investors in the event of insolvency of a brokerage firm.

Question 28

Short selling trading constitutes the majority of trades during a bear market.

Question 29

Limit orders are only used when an investor is interested in buying a stock.

Question 30

The Canadian Securities Institute was created to be the national educator of the Canadian securities industry.

Question 31

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

Question 32

If a security issue is registered with the OSC, there is less risk to the investor.

Question 33

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

Question 34

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

Question 35

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

Question 36

Short sales must be covered within 30 business days of the original short sale.

Question 37

Short sales can be done through either a cash account or a margin account.

Question 38

Mr. Rondeau bought 1,000 shares of Sure-Fire, Inc. common 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 CIPF saying that he wanted to file a claim for his investment losses. Is this loss covered by CIPF? What losses are covered?

Question 39

How can companies encourage additional investment in the shares of their firm without a broker?

Question 40

Why are specialists required to have a significant amount of capital of their own?

Question 41

What is the role of the Canadian Investor Protection Fund (CIPF) in the Canadian securities industry?

Question 42

What is the Investment Industry Regulatory Organization of Canada (IIROC)?

Question 43

What is the Canadian Securities Institute (CSI)?

Question 44

What is the role of self-regulatory organizations (SROs) in the Canadian securities industry?

Question 45

What is the mandate of the Ontario Securities Commission (OSC)?

Question 46

How has technology influenced how securities are traded? Has there been growth in this market segment?

Question 47

Discuss the procedures for short selling a stock.

Question 48

Explain the role of brokerage firms and stockbrokers.

Question 49

An investor purchases 100 shares of a $60 stock and posts margin of 50 percent. The required margin is 30 percent.
a. How much does the investor put up initially in order to purchase the stock?
b. Calculate the actual margin if the price of the stock drops to $55.
c. At what stock price will a margin call occur?

Question 50

The Fed has just increased the required margin requirement from 50 percent to 60 percent.
a. If an investor buys 100 shares of stock at $60 per share and the price subsequently falls to $50, what is his loss in dollars and in percentage form? Ignore interest costs and commissions charged by the broker.
b. If the price increases to $70 per share what will his/her gross profit amount to in dollars and as a percentage?

Question 51

Assume an investor posts margin of 50 percent and the required margin is 30 percent. Joe buys 200 shares of stock on margin at $70 per share. The price of the stock drops to $60.
a. At the time of purchase, what was the amount of money that Joe would have had to invest?
b. If the price rises to 75, what is the margin in Joe's account in dollars and in percent form?
c. At what price level will Joe be faced with his first margin call?

Question 52

The Close-Up Fund's shares are currently selling for $12.00, and its net asset value (NAV) is $13.50. Last year John Doe bought 100 shares of this fund. At that time, the shares were trading at $10 and the NAV was $9.75. If the fund paid dividends of $0.25 and capital gains of $0.75 during the year, what rate of return (TR) would he realize if he sold his shares?