Question 1

The ________ price is the price at which a dealer is willing to sell a security.

Accepted Answer

The ask price is the price at which a dealer (or seller) is willing to sell a security, also known as the offer price. The bid price is the price that a buyer is willing to pay for a security. The clearing price is the price at which a trade is executed after matching the bid and ask prices. The settlement price is the price at which a contract is settled.

Question 2

What is the capital raising process referred to in the situation where an investor has been offered the option of buying a number of shares related to the size of his existing holding?

Accepted Answer

The capital raising process referred to in this situation is known as a rights issue. In a rights issue, existing shareholders are given the option to buy additional shares in proportion to their existing holding. This allows the company to raise additional capital while also giving existing shareholders the opportunity to maintain their proportional ownership in the company. A share purchase plan is a different type of offer where shareholders are given the option to purchase a set number of shares at a discount. A placement is when new shares are issued to institutional investors, while a dividend reinvestment plan allows shareholders to use their dividends to purchase additional shares.

Question 3

The cost of buying and selling a share include ________.
I. broker's commissions
II. dealer's bid-ask spread
III. price concessions investors may be forced to make

Accepted Answer

The cost of buying and selling a share includes broker's commissions (I), dealer's bid-ask spread (II), and price concessions investors may be forced to make (III). Therefore, all three options are correct, making choice D the best answer.

Question 4

On a given day a share dealer maintains a bid price of $1000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades which totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

Accepted Answer

The dealer's gross trading profit is calculated by the difference between the ask price and the bid price, multiplied by the number of bonds traded. The difference is $1003.25 - $1000.50 = $2.75 per bond. For 500 bonds, the profit is 500 * $2.75 = $1,375.

Question 5

You purchased XYZ share at $50 per share. The share is currently selling at $65. Your gains could be protected by placing a ________.

Accepted Answer

To protect gains, a stop-loss order is the best choice. This is an order placed with a broker to sell the security when it reaches a specific price, thereby limiting the potential loss. In this case, a stop-loss order can be set at a price just below the current market price of $65 to ensure that the gains are protected. A limit-buy order is used to purchase a security at a specific price, while a limit-sell order is used to sell a security at a specific price. A market order is an order to buy or sell a security at the best available price. However, none of these orders would provide adequate protection for gains in the given scenario.

Question 6

Margin is the amount contributed by ________.

Accepted Answer

Margin is the amount contributed by the investor. When an investor purchases securities on margin, they are borrowing funds from their broker to purchase the securities. The amount contributed by the investor is a percentage of the total value of the securities being purchased, with the remaining balance being covered by the broker's funds. The investor is responsible for paying back this borrowed amount to the broker, along with any associated interest or fees.

Question 7

The inside quotes on a limit order book would comprise the ________.

Accepted Answer

The inside quotes on a limit order book are the highest bid price and the lowest ask price, representing the best prices at which buyers are willing to buy and sellers are willing to sell.

Question 8

The allowable margin depends on ________.

Accepted Answer

The allowable margin is determined by the characteristics of the share or fund being purchased, as different securities have different margin requirements based on their risk and volatility.

Question 9

The bid-ask spread exists because of ________.

Accepted Answer

The bid-ask spread is the difference between the price a buyer is willing to pay (bid) and the price a seller is willing to accept (ask). This spread exists because dealers need to cover their expenses and make a profit. The bid-ask spread is a source of revenue for dealers and helps them to provide liquidity in the market. The other options are not accurate explanations of the bid-ask spread.

Question 10

You want to buy shares of ABC, but the current share price is too high given the firm's prospects. What type of trading order might you give to your broker?

Accepted Answer

A limit buy order allows you to specify the maximum price you are willing to pay for the shares. This will ensure that you don't buy the shares at a price that is higher than what you are comfortable with, even if the market price goes up.

Question 11

If you want the trade done quickly, which type of trading order might you give to your broker?

Accepted Answer

If you want the trade done quickly, the best choice is to give a market order to your broker. A market order instructs the broker to execute the trade at the best available price in the market. This contrasts with a limit order, which instructs the broker to execute the trade only at a specific price point or better. Stop-loss and stop-buy orders are conditional orders that are executed when the market price hits a specific level, and may not necessarily result in a quick trade execution.

Question 12

For ________, the share is to be sold if its price falls below a stipulated level.

Accepted Answer

Stop-loss orders are used to limit an investor's loss in a falling market. If the share price of a particular stock falls below a specific price limit, the stop-loss order is executed as a market order to sell the shares, thus preventing any further losses. Stop-buy orders are used to enter a long position once a security reaches a certain price point. Market buy and market sell orders are executed at the prevailing market price.

Question 13

________ is difficult to estimate, even after a trade has occurred.

Accepted Answer

Market impact refers to the degree of influence that a trade has on the price of an asset. It is difficult to estimate because it depends on various factors such as the size of the trade, the liquidity of the market, and the timing of the trade. Even after a trade has occurred, it may take some time to assess the full extent of its market impact. The other options, such as brokerage, bid-ask spread, and missed trade opportunity costs, are more easily quantifiable.

Question 14

Consider the following limit order book of a specialist. The last trade in the share occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

Accepted Answer

The answer of Consider the following limit order book of...

Question 15

Initial public offerings (IPOs) are usually ________ relative to the levels at which their prices stabilise after they begin trading in the secondary market.

Accepted Answer

Typically, IPOs are underpriced, meaning their offer price is set lower than what the market is willing to pay on the day of the IPO. This is done to ensure a successful launch and to give early investors an immediate profit. As a result, IPO prices often spike on the first day of trading, sometimes doubling or tripling in value. However, over time, the price tends to stabilize to a more sustainable level.

Question 16

What is the capital raising process referred to in the situation where an investor has been offered the option of buying a number of shares unrelated to the size of her existing holding?

Accepted Answer

A share purchase plan allows investors to buy additional shares without the need for a proportional allocation based on their existing holdings, unlike a rights issue.

Question 17

If an investor places a ________ order the share will be sold if its price falls to the stipulated level. If an investor places a ________ order the share will be bought if its price rises above the stipulated level.

Accepted Answer

A stop-loss order is placed to minimize loss when the stock price falls below a certain level. On the other hand, a stop-buy order is used to buy shares when the price rises above a certain level. Therefore, the correct answer is C, which mentions stop-loss and stop-buy orders.

Question 18

In Australia, the allowable margin usually ranges ________.

Accepted Answer

The answer of In Australia, the allowable margin usually ranges...

Question 19

The difference between the price at which a dealer is willing to buy, and the price at which a dealer is willing to sell, is called the ________.

Accepted Answer

The term used to describe the difference between the buy and sell price of a security is known as the bid-ask spread. It is often referred to as the bid-ask gap or market spread as well. Therefore, option B is the correct choice. Option A and C are partially correct as they use the term 'market spread' and 'bid-ask gap' respectively but do not mention the complete term 'bid-ask spread'. Option D is entirely incorrect as there is no such term as 'market variation'.

Question 20

The ________ price is the price at which a dealer is willing to purchase a security.

Accepted Answer

The bid price is the price at which a dealer or buyer is willing to purchase a security. It is the opposite of the ask price, which is the price at which a seller is willing to sell a security. The clearing price is the price at which the supply of securities equals the demand for them, and the settlement price is the price at which a transaction is ultimately settled.

Quiz 3: Securities Markets