SIE Units 16-20
1. The current quote for Generic Motors stock is bid 32-ask 32.05 5 × 2. Your customer places an order to sell 300 shares. How much will they likely receive, before commission? A) $3,200 B) $9,600 C) Cannot be determined because only 200 shares are available on this side of the quote D) $9,615
B) $9,600 Explanation Your customer will sell at the bid (32), or likely very close to it. The bid size is 500 shares so the market can absorb the entire order. 32 × 300 = $9,600. Customers who are selling receive the bid. Those who are buying pay the ask. The size shows bid × ask; 500 shares may be sold at 32 and 200 shares are available to buy at 32.05.
A client entering a sell limit order at 43 would accept which of these trades? A) 42 B) 44 C) 42.90 D) 42.50
B) 44 Explanation A sell limit at 43 means the investor will only accept a price of 43 or better (higher). Certainly, if the client is willing to sell at 43, she would be even happier to receive 44.
An investor receives a quote of 32-32.15 for XYZ common stock. Which of these is correct? i. Purchasing the stock will cost $32 per share. ii. Purchasing the stock will cost $32.15 per share. iii. The spread is $.15. iv. The investor will receive $32.15 per share if selling. A) III and IV B) II and III C) I and IV D) I and III
B) II and III Explanation A quote always represents the bid and the ask (offer) price. Investors pay the current ask price when purchasing and receive the current bid price when selling. The spread is the difference between the bid and the ask.
Four of the best-known indices and averages are listed as follows. How do they rank from most to fewest issues in the index? i. Dow Jones Industrial Average ii. NYSE Composite Index iii. Standard & Poor's 500 iv. Wilshire 5000 A) III, II, IV, I B) IV, II, III, I C) II, III, I, IV D) I, IV, III, II
B) IV, II, III, I Explanation The Wilshire actually had about 3,800 stocks, but still the most on this list. The NYSE composite is around 1,900. The S&P 500 is actually about 500, and the Dow Jones industrials in 30.
The Windmill Growth Fund is composed of many stocks from a variety of large companies. It has a stated objective of capital appreciation from holding the stock of the large companies. If you wanted to compare the performance of the fund to the market, which of these indices would be the best? A) EAFE Index B) S&P 500 C) Wilshire 5000 D) S&P 400
B) S&P 500 Explanation The S&P 500 is the standard benchmark for large cap stocks. The S&P 400 is for midcap stocks. The Wilshire 5000 is a broad-based-U.S. equity index that includes large, mid, and small cap stocks. The EAFE is an index for international equities.
Two months ago your customer sold short 200 shares of Seabird Airlines at $15 a share. Today, the stock is trading at $10 a share. In order to close out the position your customer would A) buy Seabird calls. B) buy 200 shares of Seabird. C) borrow 200 shares of Seabird. D) realize a $5 a share loss.
B) buy 200 shares of Seabird. Explanation A customer would need to buy the shares in order to close this short position. Borrowing the shares does not close the short, nor does buying the call. They could buy the call and then exercise, but the buy, alone, does not close the position. If they closed the position at $10 they would have a gain.
A signature endorsement on a stock certificate would not be required for good delivery if the shares were A) held in safe keeping. B) held in street name. C) are in custodial name. D) in trust name.
B) held in street name. Explanation Shares held in street name are normally registered to the broker-dealer, who hold them on behalf of the client. As these shares are likely only in electronic form no signature is required to transfer them.
Before executing a short sale the broker-dealer must first A) have the customer deposit funds sufficient the cover the potential loss. B) locate the shares to be borrowed. C) do all of these. D) check to see if the customer already owns the shares
B) locate the shares to be borrowed. Explanation The locate requirement mandates that the broker-dealer have located the share to be borrowed before the order is executed. If the customer already owns the shares then this would be a short against the box, and still requires the broker-dealer locate the shares. As this is an unlimited risk position it would be impossible to deposit sufficient funds to cover the potential loss.
Good delivery of a stock certificate requires all of the following except A) certificates in good condition. B) proper signatures of a firm principal on the certificate. C) proper endorsement by all owners. D) the correct number of shares are delivered.
B) proper signatures of a firm principal on the certificate. Explanation The broker-dealer does not sign the certificate. All the rest of these are requirements.
All of these dates are set by the board of directors of a corporation except A) the record date. B) the ex-dividend date. C) the payable date. D) the declaration date.
B) the ex-dividend date. Explanation The ex-date is set by the market center (i.e., an exchange), or is set by FINRA if it is an over-the-counter traded security.
A bearish sentiment means that a person believes A) the firm appears to be slow and lumbering. B) the security will decline in value. C) the company will devour its competition. D) the security will increase in value.
B) the security will decline in value. Explanation Bearish means one believes the security will decline in value.
A customer has an account with a broker-dealer who provides a group of services, such as asset allocation, portfolio management, trade executions, and administration, for a single fee. This is known as a A) discretionary account. B) wrap account. C) commission-based account. D) margin account.
B) wrap account. Explanation Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee rather than charging commissions for individual transactions. Wrap accounts are generally investment advisory accounts and can be cash accounts, margin accounts, discretionary accounts, or nondiscretionary accounts.
Skye purchased 100 shares of Moreno, Inc., for $20 a share. One year later, she sold the shares for $21 dollars. Over the year, Moreno paid a $0.25 quarterly dividend. What was Skye's gain or loss and how much investment income did she earn? A) $2 total gain B) $2 in income C) $1 gain and $1 in income D) Cannot be determined from this information
C) $1 gain and $1 in income Explanation Gains are derived from opening and closing trades buy and sell in this example). She bought at $20 and sold for $21, so there is $1 in gain. She collected four quarterly dividends for $0.25 each, so a total in $1 in investment income.
Your customer purchased 1,000 shares of SmallCo Stock at $10 a share. SmallCo pays no dividends. Exactly one year later, the customer sold the shares for $12 a share. They realized a A) $2,000 long-term capital gain. B) $2,000 long-term capital loss. C) $2,000 short-term capital gain. D) $2,000 short-term capital loss.
C) $2,000 short-term capital gain. Explanation They bought the shares for $10, and sold for $12, so a $2,000 gain. To be a long-term gain the position must be held for more than one year.
On Friday, July 1 your customer purchased 10 3% T-bonds maturing in 15 years. This trade will settle on A) July 3 B) July 6 C) July 5 D) July 2
C) July 5 Explanation Treasuries settle T+1 (next business day after the trade). A trade on Friday would normally settle on Monday, but this Monday is a holiday (Independence Day). Remember the July 4 and December 25 are not settlement days.
Ron buys 522 shares of Narcissus Inc., common stock in a cash account on Monday, March 19. He deposits cash in the account sufficient to cover the trade on March 20. How soon would he be able to withdraw those shares? A) Thursday, March 22 B) Friday, March 23 C) Wednesday, March 21 D) Tuesday, March 20
C) Wednesday, March 21 Explanation This is a regular way settlement of a corporate security (T+2). The trade is fully paid for so the customer may request the shares be moved on or after settlement on Wednesday, March 21.
Two weeks ago representative Pete introduced his customer Neil to the Windmill Growth Fund in response to Neil's interest in growth funds. Today the customer calls Pete to place a trade to invest $10,000 in the Windmill Growth Fund. This is A) an unclassified trade B) an unsolicited trade C) a solicited trade D) a discretionary trade
C) a solicited trade Explanation As the representative introduced the security to the customer, this is a solicited trade. The customer provided the three key elements of the order (action, asset, amount) it is not a discretionary trade.
Drew purchased 100 shares of Moreno, Inc., for $20 a share. One year later, he sold the shares for $21 dollars. Over the year, Moreno paid a $0.25 quarterly dividend. What is Drew's total return? A) 5.00%. B) $2.00. C) $1.00. D) 10.00%.
D) 10.00%. Explanation Total return includes any income the investment return produces; it is also expressed as a percentage, not dollars. The formula is as follows: ((sales proceeds - cost basis) + income) / cost basis. ((21 - 20) + 1) / 20 = 0.10
To fill a customer buy order, over-the-counter, your broker-dealer requests a quote from a market maker for 800 shares. The response is 15 bid, and ask 15.25. If the order is placed, the market maker must sell A) 800 shares at $15 per share. B) 800 shares at no more than $15 per share. C) 100 shares at $15.25 per share. D) 800 shares at $15.25 per share.
D) 800 shares at $15.25 per share. Explanation This is a buy order. The quote was for 800 shares, and the dealer did not place any qualifiers on the quote. The dealer is committed to selling 800 shares at the ask.
Your customer has performed the following trades · Bought 200 shares of ABC at $40 · Bought 400 shares of ABC at 50 · Sold 600 shares of ABC at 55 What is the result of these trades? A) A $6,000 loss B) A $5,000 loss C) A $6,000 gain D) A $5,000 gain
D) A $5,000 gain Explanation They bought 200 at 40 for $8,000; then 400 at 50 for $20,000; then sold 600 at 55 for $33,000. $33k - $28k = profit of $5,000.
Your client, Bill Hearst, inherited several thousand shares of his grandfather's auto parts manufacturer, National Autoparts. He sells a portion of the position in order to raise some cash to buy a new boat. Which of these is true? i. This is a secondary market transaction. ii. This is a primary market transaction. iii. This is a long sale of the stock. iv. This is a short sale of the stock (he never purchased it). A) II and III B) II and IV C) I and IV D) I and III
D) I and III Explanation The issuer has no part of this transaction; it is considered a secondary market transaction. It does not matter that Bill did not buy the shares; it matters that he owned them. This is a long sale.
Your customer, Ellesha, places a sell stop at 50 on DEZ stock while it is trading at $53 per share. After the order is elected, Ellesha may sell her shares at which of the following prices? i. $48 ii. $49 iii. $50 iv. $51 A) III and IV B) I, II, and III C) I and II D) I, II, III, and IV
D) I, II, III, and IV Explanation Once triggered (i.e., elected), this becomes a market order to sell. Market orders may sell at any price.
Which of these is correct regarding the ex-date for a common stock? i. It is set by the board of directors. ii. It is set by FINRA or the exchange. iii. It is the first date an investor can purchase a security and not be entitled to the dividend. iv. It is the date the seller reimburses the buyer for the amount of the dividend paid. A) I and IV B) I and III C) II and IV D) II and III
D) II and III Explanation Ex-dates, for securities that trade in the secondary markets, are set by the market center where the trade occurs. It represents the day the new owner of a security will no longer receive the dividend if the trade settles regular way.
An investor receives a quote of 48.70—48.75 for XYZ common stock. Which of these is true? i. Purchasing the stock will cost $48.70 per share. ii. Purchasing the stock will cost $48.75 per share. iii. The spread is $.05. iv. The investor will receive $48.75 per share if selling. A) I and IV B) III and IV C) I and III D) II and III
D) II and III Explanation Quotes are provided in bid-ask form. The first number, the bid, is the price an investor can sell a security. The second number, the ask, is the price an investor will need to pay to buy the security. The spread is the difference between these two numbers.
The market for Dizzy Rides Inc., is at $52 per share. Your customer would like to sell his shares for $55, and believes the stock will climb to that level in the next two to three weeks. What order should he place? A) Sell limit 55 FOK B) Sell limit 55 C) Sell limit 55 AON D) Sell limit 55 GTC
D) Sell limit 55 GTC Explanation Only the good-til-canceled (GTC) order will live past today. All the others will cancel if unexecuted by the end of the day. If there is no qualifier then it is a day order. Fill-or-Kill (FOK) orders that cannot be filled immediately are cancelled. An all-or-none order would need to also be marked GTC to go into the next day.
Seabird Airlines common stock is listed on the NYSE. Appalachia Securities is an over-the-counter market maker and has a posted quote for Seabird of 55.25-55.50. If Appalachia wants to enter a new quote, the smallest incremental change is A) $ 0.01. B) $ 0.001. C) $ 0.05. D) $ 0.25.
A) $ 0.01. The correct answer is $0.01. This stock is quoted in increments of no less than one cent ($0.01). Sub-penny pricing is only allowed on stocks trading below a dollar.
A trade of an equity option settles in ( ) days, while an exercise of an equity option must be completed in ( ) days. A) 1,2 B) 1,1 C) 2,1 D) 2,2
A) 1,2 Explanation An option trade settles next business day (T+1); the exercise of an equity option settles in two days from exercise.
On March 3, the board of directors of Seabird Airlines declares a $0.20 a share dividend payable to holders of record, as of March 30. Seabird stock jumps on the news from $35 a share to $40 a share on the news. The current yield of Seabird stock is A) 2.00%. B) 2.25%. C) 0.50%. D) 5.00%.
A) 2.00%. Explanation The formula is (quarterly dividend x 4) / current market value. (0.2 x 4) / 40 = (.8) / 40 = .02 (2%)
An investor has her registered representative enter a sell stop limit order at 50. Following the order entry, trades occur at 52, 50, 49, 51, and 53. The investor would receive A) 51 B) 49 C) 53 D) 50
A) 51 Explanation This is really two orders. The first is to stop at 50. That is, once the stock trades at 50 or lower, the order is elected (triggered) and becomes a live working order. That order is to sell at 50 or better. Therefore, the first time the stock hits 50 (or less), is the trade at 50. That triggers the sell limit order to sell at 50 or better. The next trade is at 49 and that is not an acceptable price given the limit order set at 50. The following price, however, at 51, is the next acceptable price after the order is triggered and that is where the order would be executed.
An investor has a long position in ABC Chemical Corp. (ABCCC), with a substantial unrealized loss. Wishing to use that loss to offset realized gains, the investor sells the stock. In reinvesting the proceeds of the sale, the investor could avoid violating the wash-sale rule by purchasing A) ABCCC put options. B) ABCCC warrants. C) ABCCC convertible bonds. D) ABCCC call options.
A) ABCCC put options. Explanation In order to avoid violations of the wash-sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period prior to or following the sale incurring the loss. Substantially identical would include anything that is exercisable or convertible into the same shares of stock; rights, warrants, call options, or a convertible bond. Note that when put options are exercised, the owner now has the right to sell the stock, not purchase it. Therefore buying puts in no way violates the wash-sale rule.
Narcissus, Inc., a social media company, has shares selling at $52. Your customer likes the company but thinks it is currently a bit too high and would like to buy the stock if the price declines to $50 per share. Which of the following orders meets this customer's request? A) Buy limit @ 50 B) Buy stop at 55, limit 50 C) Buy puts with a 50 strike D) Buy stop at 50
A) Buy limit @ 50 Explanation This order instructs the broker to buy at a price of $50 or better. Entering a buy stop at 50 would trigger the order immediately, becoming a market order to buy at the current price. The stop limit would not trigger until the stock rose to 55, then it would be an order to buy at 50, so the stock would have to rise to at least 55 then drop to 50 or below. Owning the puts gives him the right to sell the stock at the strike of 50, not buy it.
On Tuesday, December 10 your customer Bought 5 OEX (S&P 100 Index) 230 March calls at four. On Tuesday, March 10 the calls are in-the-money and your customer issues exercise instructions. On what days did the trade and the exercise settle? A) December 11 and March 11 B) December 12 and March 12 C) December 11 and March 12 D) December 12 and March 11
A) December 11 and March 11 Explanation All option trades settle next business days. The exercise of an Index option settles the next business day.
Your customer places an order to buy 500 shares of Narcissus, Inc., (the ticker is NCS) at $50 per share fill-or-kill (FOK). When the order is entered, there are 450 shares available at $50 per share. What happens to the order? A) The order will be canceled and nothing is done. B) She will buy 450 shares, the rest of the order will be canceled C) She will do nothing, but the order stays open until the end of the day if more inventory becomes available. D) She will buy 450 shares, and the remainder of the order remains open until filled.
A) The order will be canceled and nothing is done. Explanation A fill-or-kill order (FOK) instructs that the order be filled in its entirety and immediately. As there are insufficient shares available to fill this order, it will be canceled and nothing is done.
Your customer buys 300 shares of Steel Tools common stock on Tuesday and will be an owner of record as of the close of business that same Tuesday. This must be A) a cash settlement trade. B) not possible. C) a mutual fund. D) a quick settlement trade.0
A) a cash settlement trade. Explanation This is called a cash settlement trade. It states that the trade is a common stock, so not a mutual fund. There is no formal quick settlement trade.
Narcissus, Inc., a social media company, has shares selling at $50. Your customer is bearish. He would like to sell the stock short, but not until it retreats at least 10% from its current price. In order to catch the drop he could A) enter a sell short at stop 45. B) enter a buy stop at 45. C) sell calls at strike price of 45. D) enter a sell long at 50.
A) enter a sell short at stop 45. Explanation The uncovered call does not help. If exercised he would have to buy the shares before he delivers them, leaving him flat (no position). The buy stop at 45 would trigger immediately and would become a market order to buy. As there is nothing that indicated he owns the shares now, the sell long would be rejected. The sell stop short at $45 would become a market order to sell the stock short when it trades at 45.
A customer is long 400 shares of BuyStuff Inc., a big-box retailer. He borrows 400 shares to sell while maintaining his long position. This sale is called A) short against the box. B) an effective tax strategy. C) a closing transaction. D) short against the long.
A) short against the box. Explanation This is called a short against the box. It was a popular way of locking in a capital gain and deferring the tax consequences into another year. However, this practice was restricted by the Tax Relief Act of 1997; it was so restricted that it has largely disappeared as a practice.
An order that when triggered becomes a market order is called a A) stop order. B) limit order. C) market order. D) stop limit order.
A) stop order. Explanation This is the basic purpose of a stop order.
A document that substitutes for the owners signatures on the back of a stock or bond certificate is called a A) security substitution letter. B) certificate power. C) stock or bond power. D) signature substitution letter.
C) stock or bond power. Explanation A stock (or bond) power signed by the owners may be used in lieu of the customer's signature on the back of the certificate.
A registered representative placing trades in a customer account must have discretionary authority if they choose which of the following aspects of the trade? A) The asset to be traded and the amount of the trade. B) The action to be taken and the asset to be traded. C) The action to be taken, the asset to be traded, and the amount of the trade. D) The action to be taken, the asset to be traded, or the amount of the trade
D) The action to be taken, the asset to be traded, or the amount of the trade Explanation In order for a trade to be considered discretionary the representative needs to choose any one or more of the three aspects of the trade (asset, action, or amount). It does not require more than one aspect, so the best response to the question is Action, Asset, or Amount. Any response that includes "and" suggests more than one of the "A"s needs to be controlled and is not accurate.
Who must grant permission for a representative to have discretionary trading authority on an account? A) The customer and the representative B) The customer, the principal, and the representative C) The representative and a principal D) The customer and a principal of the broker-dealer
D) The customer and a principal of the broker-dealer Explanation Authorization for discretionary trading must come from both the customer and the firm (represented by a principal). The representative's authorization is not a requirement.
Your customer is quite nervous about the stock market but expresses his belief that equities are still the place to save for retirement over the long term. He places a trade for 500 shares of an equity index fund. Overall your customer is likely A) unsure of where the market is going. B) a bear. C) a tiger. D) a bull.
D) a bull. Explanation This customer has expressed confidence in stocks and has invested money to back up his belief. He is not confused at all. He recognizes that the equities can produce nerve-wracking consequences but have the best record of long-term growth, He is a bull.
Rep. Pete receives a call from his client, Neil, to place a trade. He wants to buy 200 shares of the Starshine Entertainment Company. Pete asks Neil a few questions about the trade before placing it. This is A) a discretionary trade B) an unclassified trade C) a solicited trade D) an unsolicited trade
D) an unsolicited trade Explanation As the representative did not introduce the trade to the customer this is an unsolicited trade. The customer provide the three key elements of the order (Action, Asset, Amount) it is not a discretionary trade.
Your customer purchased 300 shares of XYZ stocks six months ago and sold the shares last week. The actions your customer took in relation to XYZ were to A) buy long and sell short. B) buy short and sell short. C) buy short and sell long. D) buy long and sell long.
D) buy long and sell long. Explanation The purchase of the stock is a long buy. The subsequent sale of the long position is a long sale.
Shares held in electronic form at a clearing house under a broker-dealers account are A) held in safe keeping. B) in trust name. C) are in custodial name. D) held in street name.
D) held in street name. Explanation Shares held in street name are normally registered to the broker-dealer, who hold them on behalf of the client at the broker-dealers clearing firm.
A cash settlement trade settles A) in two business days. B) the regular way, but no margin borrowing is permitted. C) the next day. D) the same day as the trade.
D) the same day as the trade. Explanation A cash settlement trade settles the same day as the trade. A cash trade is a trade that occurs in a cash account (meaning no margin).