Question 1

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, which increases the potential for gains but also amplifies losses. It is not a risk-free way of investing and can result in significant losses if the market moves against the investor.

Question 2

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

Accepted Answer

This is true as it makes the transactions more efficient and easier to manage for both the corporation and brokers. It also helps to avoid odd lot trades (transactions involving less than 100 shares) which may result in higher fees and less liquidity in the market.

Question 3

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

Accepted Answer

When brokers talk about trading round lots, they are typically referring to 100 shares of stock, not 50.

Question 4

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

This statement is incorrect. If you buy 100 shares of IBM for $120/share, and the margin on your account is 50%, the broker will loan you 50% of the purchase price ($6,000) and you will need to pay back the loan with interest. Additionally, if the price of IBM drops significantly and the equity in your account falls below the required maintenance margin, you may be subject to a margin call and forced to either deposit more money or sell some of your shares.

Question 5

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 the value of the investor's margin account falls below the required amount set by the broker, causing the investor to need to repay any money they borrowed from the broker to purchase the stock with.

Question 6

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 as they are borrowing money to invest, which means they have to pay interest on the borrowed amount and could potentially lose more money than they initially invested.

Question 7

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

Lamont's capital gain is calculated as the selling price minus the purchase price, which is $70 - $50 = $20. The par value of the stock is not relevant to determining his capital gain.

Question 8

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

When a company announces a stock split, it typically increases the number of shares outstanding by issuing additional shares to existing shareholders. The exact number of additional shares received by each shareholder will depend on the specific terms of the stock split, but it is common for investors to receive two or more shares for every one share that they hold.

Question 9

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

Accepted Answer

Blue chip stocks are commonly known as the stocks of well-established and financially sound companies with a long track record of stable earnings, dividends, and growth. Coca-Cola and Microsoft are among the most popular blue chip stocks.

Question 10

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 pay for a portion of the stock purchase. This allows investors to increase their buying power and potentially increase their profits but also involves taking on more risk.

Question 11

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 money to purchase more shares, which can increase the potential rate of return. However, it also increases the potential risk and losses.

Question 12

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

The answer of Ricardo owns 100 shares of stock in...

Question 13

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 14

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 divides its existing shares into multiple shares. This does not involve buying shares at a discounted price.

Question 15

When you place a limit order, it means you are willing to buy or sell the stock at the best price available.

Accepted Answer

When you place a limit order, you are specifying the exact price at which you are willing to buy or sell the stock. The transaction will only be executed if the market price reaches your specified limit price or better.

Question 16

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 to buy at $38 means the investor is only willing to buy the stock if the price drops to $38 or lower. Therefore, if the current market price is $41, the broker will not execute the order as it is above the investor's limit price.

Question 17

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 a purchase of 100 shares of stock in the same company in a single transaction, while a "odd lot" is a purchase of less than 100 shares.

Question 18

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 order to buy or sell a stock immediately at its best available price in the market. The investor does not specify a price or a time limit for the order. The broker then executes the order as soon as possible at the prevailing market price.

Question 19

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

Accepted Answer

Common stock ownership represents a share in the ownership of the corporation and allows the investor to participate in the growth of the company through potential increases in stock price and dividend payments. However, it also means that the investor is subject to the risks and potential losses associated with the company's performance.

Question 20

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

Accepted Answer

A stock split does not increase the overall value of an investor's holdings, as the split simply increases the number of shares owned while reducing the price per share in proportion. The total value of the holdings remains the same.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities