Chapter 22 Quiz: trading securities
A client owns 300 shares of BACH common stock in a margin account. The stock was originally purchased at a price of $40 per share and the Reg. T call was met. If the BACH is now selling for $50 per share, disregarding interest charges, the client's equity is now
$9,000 Purchasing 300 shares at $40 per share is a total of $12,000. The Reg. T call of 50% requires a deposit of $6,000 with the remaining $6,000 the loan from the broker-dealer. If the market price of the shares increases to $50, the current market value of the account is $15,000. With a debit balance (the amount borrowed from the BD) of $6,000, the equity is $9,000. If you answered $3,000, you probably forgot the investor owned 300 shares, not 100.
Mixed margin account
-margin account contains both long and short positions CALCULATING ACCOUNT EQUITY: 1. Long Equity = CMV long - Debit Balance (own-owe) 2. Short Equity = Credit Balance - CMV Short (have-owe)
Under the Securities Exchange Act of 1934, which of the following is (are) TRUE regarding the authority of the SEC to suspend trading? 1.The SEC may suspend all trading on a specific exchange for up to 90 days. 2.The SEC may summarily suspend trading on a particular nonexempt security for up to 10 days. 3.The SEC may suspend trading on exempt securities.
1 & 2
minimum size order for block trade
10,000 shares The term block trade refers to a transaction involving a minimum of 10,000 shares.
Which of the following orders would be used to protect a short sale profit?
A buy stop For a short sale to earn a profit, the current market value must be lower than the sale price. An investor must buy the stock at a lower price to realize a profit. To protect denotes buying if the market starts to rise. Therefore, a buy stop would be entered above the current market value to protect the profit and trigger a purchase in the event the market starts to rise.
Which of the following orders may be used to acquire a security at a specific price or better? A buy stop limit A buy limit A sell stop A sell limit
A buy stop limit A buy limit Only buy orders can acquire stock. Only buy limit orders (or buy stop orders with a limit attached) can acquire stock at a specific price or better.
One of your clients has a margin account. There is a drop in the value of the stock owned in the account, and additional funds are required based on the terms of the firm's margin agreement. This would be known as
A house call When additional funds are required, it is known as a house or maintenance call. If based on the firm's stricter requirement, it is a house call; if based on the requirement of the SRO, it is a maintenance call. The initial or Regulation T call occurs at the time of the purchase. If any call for funds is not met, then there will be a sellout.
In general, it could be said that an investor is exposed to the greatest potential risk of loss when maintaining
A margin account Of the accounts listed, the only one for which customers must receive a risk disclosure document before trading in the account is the margin account. Using leverage always increases the potential risk.
In order to comply with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is NOT required to open a margin account for a trust? A) A completed margin suitability form B) Specific text in the trust agreement authorizing a margin account C) Approval of the account by the designated supervisory person D) A margin agreement
A) A completed margin suitability form A margin account allows the customer to borrow money from the broker-dealer in order to buy securities. Although that does entail assuming greater risk on the part of the trust, there is no such thing in the Statement of Policy as a margin suitability form. However, under the Statement of Policy, the margin forms and agreements must be completed promptly after the initial margin trade. All accounts, not just margin, or trust accounts, require the approval of an appropriate supervisory person.
When a brokerage firm sells stock from its own inventory, it is acting in the capacity of A) a principal, and charges a markup B) an agent, and charges a commission C) a principal, and charges a commission D) an agent, and charges a markup
A) Principal and charges a markup A broker-dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge markups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker-dealer receives a commission.
A day order is entered to buy 500 LMN at 24.35. By the close, the firm has 100 shares at 24.25 and 200 at 24.35. If the remainder is unfilled, what is the outcome? A) The customer may demand that the firm deliver the remaining shares at 24.35. B) The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close. C) The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day. D) The customer may reject the incomplete order unless the remainder can be filled within 3 business days.
B)
When an agent submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT A) the broker-dealer's name B) the current market price of the security C) the agent's name D) the details of the order
B) The current market price of the security WTF? Any order ticket submitted by an agent for execution at a broker-dealer will always include the agent's name and that of the BD. All order details must be listed (e.g. the number of shares, limit or market, etc.), but the current market price is never included.
A securities trade is made. Under normal circumstances, all of the following would be noted on the order ticket EXCEPT A) the account number B) the name of the individual who transmitted the order C) the time stamp of the time of order submission D) the registered agent who accepted the order
B) The name of the individual who transmitted the order Transmitting an order is a clerical function, and we don't put that on the order ticket. A typical ticket will include the account for which the trade is being made, the registered individual placing the order for the client, time stamps for entering and execution (or cancellation), execution price, and terms and conditions of the order (market, limit, etc.).
If a client places an order to buy 300 DWQ at 140 stop, but not over 144, and the order is left with a specialist, this is
Buy stop limit order The customer has placed a buy stop limit order. If the stock rises to the stop price of $140, the order will be triggered and becomes a buy limit order at $144, meaning an order to buy at $144 or better (lower).
Which of the following takes place on the New York Stock Exchange?
Buying and selling stocks on the secondary market The secondary market is the market in which securities are traded after they are issued to the public. The secondary market takes place on exchanges, such as the New York Stock Exchange (NYSE), and on the over-the-counter (OTC) market. The OTC market is the market for securities that are not traded on an exchange.
One of your clients currently holds a short position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell stop B) Buy limit C) Buy stop D) Sell limit
C) The risk to a short seller is to the upside (there is, at least theoretically, no limit as to how high the stock's price can go). To protect against an increase to the stock's price beyond the point the investor is willing to lose, it is wise to enter a buy stop order at that price. If the stock should reach that price, the order is triggered, a market order is entered, and the short position is closed out. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.
When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted A) as an agent B) in an unethical manner C) as a contra party to the trade D) for the benefit of the client
C) As the contra party to the trade. In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra party to the other side of the trade.
An agent of a broker-dealer has a client who lost her job but will be starting a new job in 3 weeks. The client is in need of $900 for the 3-week gap. Under what circumstances may the agent arrange a loan for the client? A) If the client is agent's niece B) If the loan is repaid within 30 days C) If the client has $5,000 in her brokerage account D) If the loan is less than $1,000
C) If the client has $5,000 in her brokerage account Loans may be made to clients if the person making the loan is in the lending business. Broker-dealers are permitted to lend money against securities held in client's portfolios. This is known as a margin loan. In fact, with $5,000 in the account, current regulations would permit a loan of up to $2,500.
Which of the following could accelerate a rise in a bull market? A) Sell stop B) Sell limit C) Buy limit D) Buy stop
D) Buy Stop Buy stop orders are placed above the market, and as prices increase, the stops are hit, creating additional buying.
A customer's limit order to buy 500 shares of QRS at 60 is executed and the agent reports the trade execution to the customer. One hour later, the customer notices that QRS is down 2 points and informs the agent that he no longer wants the stock and is not planning to pay for it. The agent should tell the customer that A) he personally will repurchase the securities from the customer for the price paid B) the firm will repurchase the securities from the customer for the price paid C) he may sell the stock at the purchase price in the open market D) he owns the stock and must submit payment
D) He owns the stock and must pay for it
Which of the following investments is the most liquid? A) Common stock in a small oil drilling corporation that is quoted on the OTC Link B) Municipal revenue bond issued by a township C) Oil drilling limited partnership interest D) Long-term municipal bond fund
D) Long term munincipal bond The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within 7 days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin trading markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades on the OTC Link (formerly known as the "Pink Sheets") may also have a thin trading market.
A new client is opening a margin account and notices the following wording in the documentation: "You are authorized to lend to yourself or others any securities held by you in my margin account and to carry all securities lent as general loans, and you shall have no obligation to retain under your possession and control a like amount of such securities." When the client asks you what this is about, you would respond that A) if the client does not sign the document, the account cannot be opened B) this is the credit agreement C) this is the hypothecation agreement D) this is the loan consent agreement
D) this is the loan agreement
The term used to describe a broker-dealer contacting a margin account client with a demand for additional funds is
Margin maintenance The original call for funds is the Reg. T or margin call. But, when the call is for additional money, it is known as maintenance margin. This generally occurs when the value of the collateral in the account has fallen sharply.
Margin regulations are determined by the Board of Governors of the Federal Reserve System. The authority for them to do so is found in
Securities exchange act 1934
An investor wishing to buy US Treasury bonds receives a quote from the dealer of 98.16. This represents
The Offer price A dealer's quotes consist of the bid and the offer (ask). The bid price is what the dealer will pay a customer to purchase a security, and the offer is the dealer's selling price. In this case, the client wishes to purchase bonds, so the 98.16 represents the price the dealer is asking for them. Yes, the quote is a discount, but the better answer for this question is offer.
Specialist
The specialist performs his activities on the floor of an exchange, the specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market
Spread
The spread is the difference between the bid (35) and the ask (35.25) prices. In this question, that is 25 cents ($0.25). The 7 by 9 means that the market maker is willing to buy up to 700 shares at the $35 bid and sell up to 900 shares at the $35.25 ask. NASAA does not have a markup policy; the 5% Policy is FINRA's.
Thinly traded stocks
Thinly traded stocks are stocks that are not actively traded on an exchange or that are not held by a large number of investors. Because thinly traded stocks are usually less marketable and less liquid than actively traded stocks, the spread between their bid and ask prices tends to be considerably higher. They also tend to have more volatile price swings.
The Securities Exchange Act of 1934 defines a market maker is
a dealer who, with respect to a security, holds himself out as being willing to buy and sell that security for his own account on a regular or continuous basis
What is the name given to an order to purchase or sell a stock where the investor has specified a price?
a limit order
Which of the following is an order to purchase at higher than the current market?
buy stop
Investors open margin accounts to
leverage their investment dollars Margin accounts employ the use of leverage—borrowed money. If the investment is successful, the leverage magnifies returns. However, if unsuccessful, the losses are magnified and can even be greater than the amount invested.
The hypothecation agreement
permits the broker-dealer to accept the client's margin securities as collateral for theloan that the BD makes to the investor. It also permits the BD to re-hypothecate those securities as collateral for a loan that it takes out to provide the money for the loan it makes to the investor. In simple terms, there are two loans taking place under the hypothecation agreement: The loan from the BD to the client with the client's securities used as collateral. The loan from a bank to the BD with the client's securities used as collateral for the BD's loan.
market makers
traders who execute trades on the OTC market and earn commissions in the form of a bid-ask spread the market maker stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market
