2 - Trading SecuritiesPractice

A customer places an order to sell short 100 DEF 52.25 STOP. After placing the order, DEF trades as follows: 53, 52.60, 52.20, 52.10, 52.25. Which trade triggers the order? A) 52.25. B) 52.2. C) 52.1. D) 52.6.

Your answer, 52.2., was correct!. Sell stop orders are triggered as soon as the stock trades at or through the stop price. The trade at 52.20 represents the first such transaction after the order is placed. Once triggered at 52.20, the stop order becomes a market order and will be executed at the next price in the trade sequence, 52.10. Reference: 8.4.2.4.2 in the License Exam Manual.

To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker for 800 shares. The response is "bid 15, ask 15.25." If the order is placed, the market maker must sell: A) 100 shares at $15.25 per share. B) 800 shares at $15 per share. C) 800 shares at $15.25 per share. D) 800 shares at no more than $15 per share.

Your answer, 800 shares at $15.25 per share., was correct!. A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share. Reference: 8.9.1.1 in the License Exam Manual.

Which of the following transactions would NOT be subject to the 5% markup policy? A) A client enters an order to purchase 1 share of a stock to be put in the name of her grandchild. You charge the client the minimum commission for your firm ($45) even though the stock is currently trading at $26 per share. B) Your firm agrees to do an agency cross-transaction between 2 of your clients. Each client has been charged a commission. C) Your client enters trades to purchase 2 different mutual funds in the same fund family. The combined purchases do not qualify for any breakpoints. The client is charged a sales charge of 6.5%. D) A client sells shares of an OTC stock and uses the proceeds to purchase shares from your firm's inventory account.

Your answer, A client sells shares of an OTC stock and uses the proceeds to purchase shares from your firm's inventory account., was incorrect. The correct answer was: Your client enters trades to purchase 2 different mutual funds in the same fund family. The combined purchases do not qualify for any breakpoints. The client is charged a sales charge of 6.5%. Transactions in securities that are sold by a prospectus are not subject to the 5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule. Five percent is a guideline, and markups can exceed it. Reference: 8.10.2.2 in the License Exam Manual.

A customer enters an order to buy 1,000 ABC at 50, good for the week only. How will this order appear on the order book? A) Buy 1000 ABC 50 GTW. B) Buy 1000 ABC 50 GTM. C) Buy 1000 ABC 50 Day. D) Buy 1000 ABC 50 GTC.

Your answer, Buy 1000 ABC 50 GTW., was incorrect. The correct answer was: Buy 1000 ABC 50 GTC. Limit orders and stop orders are entered on the order book as either GTC or day orders. Orders that are good for only a particular time frame (good for the week) will appear as GTC. It is the responsibility of the broker/dealer that entered the order to cancel it at the end of the week, if unexecuted. Reference: 8.4.3.2 in the License Exam Manual.

Your client feels that GGZ, currently trading around 39, would be a good buy at 38. Therefore, he places an order to buy 200 GGZ at 38 GTC. On the ex-date, when the stock splits 2-for-1, the order is still on the order book. How is the order adjusted on the ex-date? A) Buy 100 GGZ at 76 GTC. B) Buy 400 GGZ at 19 GTC. C) Buy 200 GGZ at 19 GTC. D) Buy 400 GGZ at 38 GTC.

Your answer, Buy 400 GGZ at 19 GTC., was correct!. In a stock split, the number of shares is increased and the price is reduced proportionately on the ex-date (200 shares x 2 = 400 shares; the new price is 38 x .5, or 19). Reference: 8.4.2.6.2 in the License Exam Manual.

A customer sold 100 shares of QRS short when the stock was trading at 19. If QRS is now trading at 14, and he wants to protect his gain, which of the following orders should he place? A) Buy limit at 14. B) Buy stop at 14.25. C) Sell stop at 13.75. D) Sell limit at 14.

Your answer, Buy stop at 14.25., was correct!. A buy limit order is used to buy at a lower price (when the market moves down). A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading. Reference: 8.4.2.4.1 in the License Exam Manual.

Which of the following securities are eligible for inclusion on Nasdaq? Listed common stock. Unlisted common stock. Listed convertible bonds. Unlisted convertible bonds. A) III and IV. B) I and III. C) II and IV. D) I and II.

Your answer, I and III., was incorrect. The correct answer was: II and IV. Nasdaq includes OTC securities only, which means that unlisted securities including stocks and convertible bonds are eligible. Nasdaq is an equity and equity-equivalent market. Reference: 8.8.1 in the License Exam Manual.

An all-or-none order (AON): must be executed in its entirety. may be executed in part or in full. must be executed in one attempt. may be executed after several attempts. A) I and IV. B) II and IV. C) I and III. D) II and III.

Your answer, I and IV., was correct!. In an all-or-none order, the firm handling the order can make multiple attempts to fill the order in its entirety. Reference: 8.4.3.7 in the License Exam Manual.

A buy stop order is triggered when the underlying stock trades: at the stop price. below the stop price. above the stop price. A) III only. B) I or II. C) I or III. D) I only.

Your answer, I only., was incorrect. The correct answer was: I or III. A buy stop order is placed above the prevailing market price and is triggered (becomes a market order to buy) when the stock trades at or through (above) the stop price. Reference: 8.4.2.4.1 in the License Exam Manual.

A customer has entered an option order with your broker/dealer. At which of the following locations could such an order be executed? NYSE/AMEX CBOE Nasdaq OMX PHLX None of the listed choices A) I and II B) IV only C) I, II and III D) II and III

Your answer, I, II and III, was correct!. Options orders can be executed on the NYSE/AMEX, the CBOE, and the Nasdaq OMX PHLX, which offers a hybrid of electronic and on-floor execution availability. Reference: 8.5.1.1 in the License Exam Manual.

Which of the following can be entered on the OTC Bulletin Board? Firm quotes. Subject quotes. Bids wanted. Offerings wanted. A) III and IV. B) I and II. C) I, II, III and IV. D) II and IV.

Your answer, I, II, III and IV., was correct!. Any quote entered on the OTCBB is acceptable if it is properly identified. Reference: 8.9.1.1 in the License Exam Manual.

Which of the following orders are entered above the current market? Buy stop. Sell stop. Buy limit. Sell limit. A) II and IV. B) I and IV. C) II and III. D) I and II.

Your answer, II and III., was incorrect. The correct answer was: I and IV. A limit order is used to buy or sell at a specific price or better. Therefore, buy limits are entered below the current market and sell limits are entered above the current market. Stop orders have several uses. The most common of these is to protect gains on both long and short positions. Reference: 8.4.2.4.1 in the License Exam Manual.

A sell limit order is executed when a stock is: rising. falling. at or below the limit price. at or above the limit price. A) I and III. B) II and III. C) II and IV. D) I and IV.

Your answer, II and III., was incorrect. The correct answer was: I and IV. A sell limit order is placed above the prevailing market price. Therefore, it may be executed if the market is rising. If executed, limit orders will be filled at the limit price or better, which in the case of a sell limit is the limit price or higher. Reference: 8.4.2.3 in the License Exam Manual.

All of the following securities trade in the over-the-counter market EXCEPT: A) Government and agency securities. B) Open-end investment companies. C) American depositary receipts. D) Nasdaq securities.

Your answer, Open-end investment companies., was correct!. Municipal bonds, government and agency securities, and corporate securities (listed and unlisted) all trade in the OTC market. Foreign securities trade in the United States if the companies comply with SEC registration and disclosure requirements. Mutual fund shares (open-end companies) do not trade. Reference: 8.8.1 in the License Exam Manual.

A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30 respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter? A) Sell 100 ABC 29.75 stop. B) Sell 100 ABC 19.50 stop. C) Buy 100 ABC 30.25 stop. D) Buy 100 ABC 20.50 stop.

Your answer, Sell 100 ABC 19.50 stop., was correct!. An analyst who expects a stock to fall through support is anticipating that the stock will decline. He can take advantage of this trend by establishing a short position at the top of the decline. He will enter a sell stop order just below the support price. Reference: 8.4.2.4.2 in the License Exam Manual.

An investor believes that ICBS, a Nasdaq security, is overpriced at 40. He can sell ICBS short in the over-the-counter market under which of the following circumstances? A) With no restrictions. B) Only at a price higher than the current inside bid. C) Only if he has an outstanding long position. D) Under no circumstances.

Your answer, With no restrictions., was correct!. As on exchanges, short sales in the OTC market can occur at any time in the trade sequence. Reference: 8.4.4 in the License Exam Manual.

All of the following may transact business on the trading floor of the NYSE EXCEPT: A) designated market maker B) two-dollar brokers. C) allied members. D) floor brokers.

Your answer, allied members., was correct!. Allied members are executive officers, directors, or holders of more than 5% of an NYSE member firm's voting stock. They are not allowed to trade on the exchange floor. Reference: 8.3.2 in the License Exam Manual.

A quote on Nasdaq is as follows: Bid Ask 10 10.50, 1300 x 1500 The market maker is obligated to execute all of the following customer transactions in their entirety EXCEPT: A) sell 1,300 shares at 10. B) buy 1,400 shares at 10.50. C) sell 1,500 shares at 10. D) buy 1,500 shares at 10.50.

Your answer, buy 1,400 shares at 10.50., was incorrect. The correct answer was: sell 1,500 shares at 10. This market maker has quoted a size of market of 1,300 − 1,500, which means it stands ready to buy a maximum of 1,300 shares at $10 and sell a maximum of 1,500 shares at 10.50. A sale of 1,500 shares at 10 is outside the size of this quote. Reference: 8.9.1 in the License Exam Manual.

A customer has sold short 100 GM at 70. GM is selling for 81. The customer had previously placed a GTC buy stop order at 83. GM announces a stock split and an increase in the dividend. The stock starts to move up and the customer decides to cover the short sale at a loss and instructs his broker to buy 100 shares of GM at the market. The registered representative will: A) buy 100 GM at the market. B) sell 100 GM at 83. C) sell 100 GM at the market. D) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop GTC.

Your answer, buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop GTC., was correct!. It is incumbent upon the registered representative to cancel the old order. Reference: 8.4.2.4.1 in the License Exam Manual.

All of the following are reasons for entering a stop order EXCEPT to: A) guarantee execution at a specified price. B) protect unrealized gains on a long position. C) limit losses in a long position. D) protect profits in a short position.

Your answer, guarantee execution at a specified price., was correct!. A stop (loss) order is entered to protect a profit or to limit a loss. Execution at a specific price can never be guaranteed because a stop order becomes a market order when the stop price is hit. Reference: 8.4.2.4 in the License Exam Manual.

Establishing short positions is typical for all of the following EXCEPT: A) preferred stock. B) listed stock. C) OTC common stock. D) municipal bonds.

Your answer, municipal bonds., was correct!. Even though there is no regulation that prohibits short sales of municipal bonds, this is rarely done. To short a security, it must be borrowed and later covered. The general illiquidity of the municipal market makes this difficult. Reference: 8.4.4 in the License Exam Manual.

The locate requirement for short sales applies to: A) over-the-counter securities. B) securities traded on the NYSE. C) All of these. D) Nasdaq global select and global market securities

Your answer, securities traded on the NYSE., was incorrect. The correct answer was: All of these. The locate requirement is applicable to all short sales. Reference: 8.4.4.1 in the License Exam Manual.

All of the following statements regarding the short sale of a listed security are true EXCEPT: A) a short sale can be effected at any time in the trade sequence. B) the buyer must be advised that he is purchasing borrowed shares. C) short sales may take place at the opening. D) short sales may take place at the closing. Your answer, short sales may take place at the closing., was incorrect. The correct answer was: the buyer must be advised that he is purchasing borrowed shares.

Your answer, short sales may take place at the closing., was incorrect. The correct answer was: the buyer must be advised that he is purchasing borrowed shares. On an exchange floor, short sales can be effected at any time in the trade sequence. In addition, short sales may be effected at either the opening or closing. The buyer is never informed that shares being purchased represent borrowed shares. Reference: 8.4.4 in the License Exam Manual.

On the basis of a major decline occurring within a few minutes of the close, trading is halted on all markets for the remainder of the trading day. Under the market wide circuit breaker (MWCB) rules, market-on-close (MOC) orders pending at the time trading is halted: A) should be held for execution on the following trading day. B) should be held for execution on the following trading day unless canceled by the customer. C) are converted to market orders and executed at the opening on the following trading day. D) must be canceled.

Your answer, should be held for execution on the following trading day unless canceled by the customer., was incorrect. The correct answer was: must be canceled. During shorter marketwide trading halts that will allow trading to resume on that trading day, pending and new customer orders should be forwarded to the appropriate market for execution upon the resumption of trading. If a halt closes the market for the remainder of the trading day, pending orders and new orders received during the halt should be treated as-good-till canceled and held for execution at reopening on the following day. Market-on-close orders pending at the time trading is halted should be canceled. MOC orders received after trading is halted should be declined. Reference: 8.3.4 in the License Exam Manual.

Level I Nasdaq service provides subscribers with all of the following information EXCEPT: A) the inside market. B) volume information. C) bid and ask quotes for each market maker. D) last sale information.

Your answer, the inside market., was incorrect. The correct answer was: bid and ask quotes for each market maker. Level I Nasdaq service provides subscribers with information on the inside market, last sale, and volume. The bid and ask quotes of each market maker in a particular security are shown over Level II. Reference: 8.11.1 in the License Exam Manual.