Question 1

____ offer advice to customers on stocks to buy or sell.

Accepted Answer

Full-service brokers offer comprehensive services including investment advice, research, and recommendations on stocks to buy or sell.

Question 2

The bid-ask spread is negatively related to

Accepted Answer

The bid-ask spread is negatively related to trading volume because higher trading volumes typically lead to more liquidity, reducing the market maker's risk and inventory costs, thereby allowing for a narrower spread.

Question 3

The SEC's ____ reviews the registration statement filed when a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues.

Accepted Answer

The SEC's Division of Corporation Finance is responsible for reviewing registration statements for initial public offerings, as well as corporate filings for annual and quarterly reports, and proxy statements related to voting for board members or other corporate governance issues.

Question 4

Trading halts are intended to prevent insider trading.

Accepted Answer

Trading halts are primarily implemented to provide the market with time to absorb significant news, maintain orderly trading, and reduce price volatility, not specifically to prevent insider trading.

Question 5

The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call.

Accepted Answer

The initial margin is the percentage of the purchase price of securities (that can be bought on margin) that the investor must pay for with his/her own cash or marginable securities; it is not about maintaining a minimum amount to avoid a margin call, but rather the initial requirement to enter into the position. The maintenance margin is the minimum amount that must be maintained to avoid a margin call.

Question 6

A margin call from a broker means that the investor is required to provide more collateral (cash or stocks)or sell the stock.

Accepted Answer

A margin call occurs when the value of an investor's margin account falls below the broker's required amount. The investor must then deposit more cash or securities to meet the margin requirement or sell some of the securities held in the account.

Question 7

Regulation Fair Disclosure (FD)requires firms to disclose relevant information first to their most important clients.

Accepted Answer

Regulation Fair Disclosure (FD) requires that all publicly traded companies must disclose material information to all investors at the same time, not just to a select few.

Question 8

In naked short selling, short-sellers sell a stock short that they currently own.

Accepted Answer

In naked short selling, short-sellers sell shares that they have not borrowed or do not own, unlike traditional short selling where the seller borrows the stock before selling it.

Question 9

A(n)____ from a broker requires the investor to put up additional collateral.

Accepted Answer

A margin call occurs when the value of an investor's margin account falls below the broker's required amount. To meet the margin call, the investor must deposit more funds or securities to bring the account back to the required level.

Question 10

Which of the following is incorrect in regard to short selling?

Accepted Answer

The SEC's uptick rule does not specifically prevent speculators from taking a short position in stocks that have declined at least 30 percent for the day. Instead, the uptick rule, when it was in effect, required that the price of the stock be higher than the previous trade price before a short sale could be made, which is not contingent on a stock's daily percentage decline.

Question 11

Under the SEC's uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price.

Accepted Answer

The SEC's uptick rule, also known as the "alternative uptick rule" or Rule 201, does not prohibit speculators from taking short positions in stocks that have declined by at least 10 percent. Instead, it restricts short selling only when the price of a stock is below its current best bid when the stock has dropped 10 percent or more from the previous day's closing price. The rule is designed to prevent short selling from further driving down the price of a stock that is already experiencing significant declines.

Question 12

Which of the following is incorrect with regard to taxes imposed on stock transactions?

Accepted Answer

The maximum federal tax rate on dividends and long-term capital gains is higher than 14 percent. As of the last update, it can be up to 20% for individuals in the highest income bracket, not including the additional 3.8% Net Investment Income Tax that may apply.

Question 13

The SEC's Division of Trading and Markets assesses possible violations of the SEC's regulations and can take action against individuals or firms.

Accepted Answer

The SEC's Division of Trading and Markets primarily oversees the major securities market participants and infrastructure. It is the Division of Enforcement that investigates and prosecutes violations of securities laws and regulations.

Question 14

It is not illegal for investors to take positions in a stock based on inside information that they received from an insider at the company, although it would be illegal for the insider to take a position based on that information.

Accepted Answer

It is illegal for investors to trade on material, non-public information received from an insider, as this constitutes insider trading, which is a violation of securities laws.

Question 15

Dark pools

Accepted Answer

Dark pools are indeed computerized platforms used by institutional investors to trade stocks privately, without the transparency of public stock exchanges. This allows them to make large trades without impacting the market before their trade is executed.

Question 16

When the ratio of the number of shares of a stock sold short divided by the total number of shares outstanding is 3 percent or higher, this suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline.

Accepted Answer

A short interest ratio of 3 percent or higher indicates a significant number of investors are betting against the stock, expecting its price to fall, which is why they have sold the stock short.

Question 17

Which of the following statements is incorrect with respect to the structure of the SEC?

Accepted Answer

The SEC (Securities and Exchange Commission) is composed of five commissioners, not seven, appointed by the president of the United States.

Question 18

Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?

Accepted Answer

The answer of Which of the following statements is incorrect...

Question 19

When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it.

Accepted Answer

When investors sell short, they borrow the stock from a broker, sell it, and then hope to buy it back later at a lower price to return it to the broker, not to the investor from whom they borrowed.

Question 20

A trading halt prevents a stock from experiencing a loss in response to news.

Accepted Answer

A trading halt temporarily stops trading of a stock, but it does not prevent the stock from experiencing a loss once trading resumes and the market reacts to the news.

Quiz 12: Market Microstructure and Strategies