Chapter 15 Investing Stocks

You bought IBM stock at $70 per share. It is now $120 a share. You think it could go higher but you are nervous that it could go down and you would lose your gains. To protect your gains but still give yourself the chance to make future profits you could place a A) market order. B) sell stop order at $100 a share. C) buy stop order at $100 a share. D) sell stop order at $150 a share.

B) sell stop order at $100 a share.

Which of the following actions of the U.S. government could not be considered part of fiscal policy? A) Federal Reserve open market operations B) The Tax Relief Act of 2001 C) Operation Enduring Freedom D) Creating the Department of Homeland Security

A) Federal Reserve open market operations

The stock exchange which is the largest in terms of dollar volume is the A) NYSE. B) AMEX. C) NASDAQ. D) regional exchanges.

A) NYSE

Stocks would be most favorably affected by A) a decline in interest rates and a decline in inflation. B) an increase in interest rates and a decline in inflation. C) a decline in interest rates and an increase in inflation. D) an increase in interest rates and an increase in inflation.

A) a decline in interest rates and decline in inflation

When you place an order to buy or sell stock, you must specify all of the following except A) commission you are willing to pay. B) limit order. C) ticker symbol. D) whether you are buying or selling.

A) commission you are willing to pay

A measure of inflation that represents prices of various products, such as groceries, household products, housing, and gasoline is the ________ index. A) consumer price B) cost of living C) inflationary D) household

A) consumer price

When economic conditions are weak, the aggregate demand for products and services A) declines. B) increases. C) remains the same. D) may either decline or increase.

A) declines

A PE of 10 means that the firm's stock price is ten times the firm's A) earnings per share. B) book value. C) net income. D) dividends.

A) earnings per share

The CPI is used as part of the ________ analysis. A) economy B) industry C) firm D) government

A) economy

Compared to discount brokers, full service brokers A) give stock advice to their clients. B) execute stock trades faster. C) charge competitive rates. D) seldom meet with clients.

A) give stock advice to their clients

Usually, firms with high P/E ratios are ________ firms. A) growth B) declining C) mature D) risky

A) growth

The ________ shows the firm's operating results over a period of time. A) income statement B) statement of cash flows C) balance sheet D) statement of retained earnings

A) income statement

A ________ order is an order to execute a transaction to buy or sell a stock only if the price is within the range specified. A) limit B) stock C) market D) written

A) limit

Generally, stocks perform better when interest rates are A) low. B) high. C) average. D) Stocks are unaffected by interest rates.

A) low

On the over-the-counter market trades are executed by A) market-makers. B) day traders. C) floor traders. D) specialists.

A) market-makers

If a firm performs strongly over a period of time the impact on its stock price is A) relative. B) inversely related. C) uncertain. D) unrelated.

A) relative

In reading a corporate income statement, cost of goods sold is subtracted from A) revenue. B) operating expenses. C) earnings before interest and taxes. D) taxes.

A) revenue

What is the highest price paid for a share of Coca Cola stock in the last 52 weeks? A) $40.90 B) $45.26 C) $40.31 D) $1.12

B) $45.26

How much cash would you need to purchase 500 shares of stock at $21 per share plus brokerage commissions of $125, if you purchase on margin and the margin requirement is 50%? A) $10,625 B) $5,312.50 C) $10,500 D) $5,250

B) $5,312.50

A company's earnings are $3 per share, its dividend is $2 per share, and its stock price is $30 per share. Its PE ratio is A) 15. B) 10. C) 1.5. D) 33.

B) 10

A round lot of stock is ________ shares. A) 10 B) 100 C) $100 worth of D) $1,000 worth of

B) 100

The Federal Reserve currently limits the margin rate, the amount that can be borrowed from the brokerage firm, to ________ percent. A) 40 B) 50 C) 60 D) 75

B) 50

Which of the following is the most risky? A) Buying stocks online B) Buying on margin C) Buying from a broker D) Buying a bond

B) Buying on margin

Which of the following is not a good source of current stock quotations? A) Newspapers, such as The Wall Street Journal B) Magazines, such as Fortune C) News television networks, such as CNBC D) Web sites

B) Magazines, such as Fortune

The ________ is a measure of inflation that represents prices of products such as coal, lumber, and metals that are used to produce other products. A) CPI B) PPI C) inflation index D) cost of living index

B) PPI

Assets and liabilities on the balance sheet are classified as A) personal and business. B) short-term and long-term. C) fundamental and discretionary. D) secure and insecure.

B) short-term and long-term

A company's annual report usually includes all of the following but A) an auditor's report. B) testimonials from employees. C) a letter from the CEO. D) management discussion and analysis.

B) testimonials from employees

The best time to sell stock is when you A) need the money. B) think the stock price has peaked. C) want to purchase another stock. D) have achieved 25% return.

B) think the stock price has peaked

A ________ symbol is used to identify a stock for trading purposes. A) company B) ticker C) graphic D) numeric

B) ticker

A ________ trader is one who executes trades to fulfill orders placed by other investors. A) day B) stock C) floor D) specialist

C) floor

Some stock brokers or analysts encourage frequent buying and selling of your securities which may cause you to A) increase your profit margin. B) pay less commissions. C) incur additional tax liabilities. D) reduce your risk of loss.

C) incur additional tax liabilities

A low P/E ratio usually means that a firm is A) a growth stock. B) has positive expectations for the future. C) is a mature firm. D) is doomed in the marketplace.

C) is a mature firm

A ________ order is an order to execute a transaction to buy or sell a stock at its prevailing price. A) limit B) stock C) market D) written

C) market

If you are a day trader you would probably utilize a(n) A) discount brokerage firm. B) full-service brokerage firm. C) online brokerage service. D) commercial bank trust department.

C) online brokerage service.

A ________ is an order for a brokerage firm to sell a stock when the price falls to a specified level. A) stop order B) buy stop order C) sell stop order D) go order

C) sell stop order

Fundamental analysis is based on all of the following except A) the firm's revenue. B) the firm's earnings. C) the firm's stock price over the last year. D) the firm's sensitivity to economic conditions.

C) the firm's stock price over the last year

With an online brokerage firm, you have all of the following except A) money market fund for uninvested cash. B) a personal sales representative to answer your questions. C) quick and convenient trades. D) very low cost trades.

B) a personal sales representative to answer to your questions

A ________ is an order for a brokerage firm to buy a stock when the price rises to a specified level. A) stop order B) buy stop order C) sell stop order D) go order

B) buy stop order

When corporate taxes rates are ________, the after-tax earnings of corporations are ________, which means ________ money for shareholders. A) increased; decreased; more B) decreased; increased; more C) increased; increased; more D) decreased; decreased; less

B) decreased; increased; more

The means by which the U.S. government imposes taxes on individuals and corporations and by which it spends its money is the ________ policy. A) taxing B) fiscal C) financial D) spending

B) fiscal

People with seats on the NYSE who execute stock trades for others are called A) day traders. B) floor traders. C) stock traders. D) commission traders.

B) floor traders

The valuation of stocks based on an examination of revenues or earnings is called A) technical analysis. B) fundamental analysis. C) fiscal analysis. D) financial analysis.

B) fundamental analysis

An increased demand for stock ________ the price. A) has no effect on B) increases C) decreases D) stabilizes

B) increases

If you want recommendations you can A) trade with an online broker. B) open an account at a full-service brokerage firm. C) visit the SEC Web site. D) contact a discount broker.

B) open an account at a full-service brokerage firm

Electronic communications networks that allow investors to buy or sell securities is called a(n) A) electronic communications network. B) over-the-counter market. C) AMEX. D) regional stock exchange.

B) over-the-counter market

When aggregate demand by consumers ________, firms produce ________ products to accommodate the demand. A) rises; less B) rises; more C) declines; more D) All of the above.

B) rises; more

To start an online brokerage account, you need to do all of the following except A) follow instructions to set up an account. B) mail or deposit cash in an account. C) go to the Web site. D) deposit a minimum number of shares already owned.

D) deposit a minimum number of shares already owned.

An investment in stock requires all but A) cash. B) time. C) risk. D) luck.

D) luck

A ________ trader helps create a market in one or more stocks by taking an opposite position to the orders placed by clients. A) day B) stock C) floor D) specialist

D) specialist

Fees charged by brokerage firms A) are set by the NYSE. B) are set by the Federal Reserve. C) are set by the National Association of Securities Dealers. D) vary according to the services offered.

D) vary according to the services offered.

A discount brokerage firm executes transactions and provides investment advice at a price less than that of full-service brokers. (true/false)

False

Economic growth, as measured by increases in the gross domestic product (GDP) signals the start of a bull market where stock prices are bound to rise. (true/false)

False

Interest rates can affect economic growth and therefore have a direct impact on stock prices. (true/false)

False

Limit orders can only be placed for a short period of time, usually a week or less. (true/false)

False

Some traders, called specialists, help to make a market in stocks by taking the same position as those who want to buy or sell the stock. (true/false)

False

Stocks are usually bought or sold in round lots, which are multiples of $100. (true/false)

False

The American Stock Exchange (AMEX) is the largest of the physical stock exchanges. (true/false)

False

The daily stock quotations found in most large newspapers will not tell you the annual dividends paid per share of stock. (true/false)

False

The income statement for a company is like a budget in that it shows how much money the company would like to have made in a given accounting period. (true/false)

False

The most up-to-date quotes of stock prices may be found in The Wall Street Journal. (true/false)

False

You can currently borrow up to 75% of stock transactions under today's margin rate. (true/false)

False

You made a $10,000 stock purchase on margin (50%). You put $5,000 into your account initially to cover the purchase. Your stock has declined in value to $7,000 and you receive a margin call. How much cash must you put into your account as a result of the margin call? A) $1,500 B) $3,000 C) $5,000 D) None—you already have $5,000 in your account.

A) $1,500

If you had 100 shares of CitiGroup, how much would you expect to receive in dividends annually? A) $176 B) $360 C) $1,100 D) $76

A) $176

Three hundred shares of stock are purchased on margin at a price of $42 per share plus $150 in brokerage commissions at a time when the margin requirement is 50 percent. How much additional cash would you need to deposit with your broker if the price of the stock dropped to $37 per share? A) $825 B) $1,500 C) $1,650 D) $5,550

A) $825

A stock purchased at a price of $22 per share, has risen to $46 per share. You wish to avoid losing your profit; therefore, you should put in a sell stop order at a price of A) $22 per share. B) $40 per share. C) $43 per share. D) $46 per share.

B) $40 per share

What was the closing price per share for BlackHills on the day before the trading shown on this listing? A) $29.19 B) $35.25 C) $34.61 D) $35.89

C) $34.61

How many shares of Brady A were traded the previous day? A) 1,723 B) 17,230 C) 172,300 D) 1,723,000

C) 172,300

All of the following are odd lots except A) 99 shares. B) 189 shares. C) 200 shares. D) 970 shares.

C) 200 shares

The yield represents which of the following? A) Earnings per share B) Dividend payment C) Annual return from dividends D) Market price

C) Annual return from dividends

The demand for which of the following will decrease the most with a weak economy? A) Cereal B) Bread C) Boats D) Paper towels

C) Boats

The ________ is/are not a physical location, but rather an electronic communications network to buy and sell stocks. A) NYSE B) AMEX C) NASDAQ D) regional exchanges

C) NASDAQ

The stock exchange with the most stringent listing requirements is the A) NASDAQ. B) AMEX. C) NYSE. D) regional exchanges.

C) NYSE

One of the most commonly used measures of inflation is the A) gross domestic product. B) fiscal policy. C) consumer price index. D) inflation factor.

C) consumer price index

Computer systems that match up purchases and sales of stocks even at night when the other exchanges are closed are A) NASDAQ. B) the over-the-counter (OTC) markets. C) electronic communication networks. D) the regional stock exchanges.

C) electronic communication networks

Approximately how much did Clorox earn per share of common stock during the last year? A) $1.16 B) $2.00 C) $.26 D) $6.35

D) $6.35

Which of the following stocks is the best value considering only the dividend it pays? A) BlackDeck B) Boeing C) BoWater D) CitiGroup

D) CitiGroup

All of the following online publications provide information about inflation except A) Bloomberg. B) Yahoo. C) Federal Reserve. D) Consumer Reports.

D) Consumer Reports

Which of the following is not a reason some investors never purchase stock? A) They are afraid of the risk. B) They lack the knowledge. C) They like safe investments such as CDs. D) They don't want to make better returns.

D) They don't want to make better returns

A margin call is a request from a brokerage firm for the investor to increase the cash in the account in order to bring the margin back up to the minimum level. (true/false)

True

A market order is normally executed much more quickly than a limit order. (true/false)

True

A stop order is a special form of limit order; it is an order to execute a transaction when the stock price reaches a specified level. (true/false)

True

An odd lot is the purchase of less than 100 shares of stock. (true/false)

True

Before buying a stock, you should estimate its future market value, just as you would the future value of a car or a home. (true/false)

True

Fiscal policy, the means by which the U.S. government imposes taxes on individuals and corporations and spends its money, has an impact on spending and thus an impact on the stock of some companies (true/false)

True

Floor traders on the NYSE are willing to trade stocks for others and earn a commission for doing so. (true/false)

True

If you don't need advice or other services offered, you are better off using a discount broker or Internet broker rather than a full-service broker. (true/false)

True

In getting recommendations from brokers and analysts, you need to be careful that frequent suggestions to buy or sell are not being made in order to generate revenues for these traders. (true/false)

True

Low interest rates tend to entice investors into the stock market where they can achieve better returns. (true/false)

True

NASDAQ has less stringent trading requirements than the organized exchanges and tends to attract newer, high-tech companies. (true/false)

True

On-line trading of stocks is not only less expensive than using traditional brokers, but is usually more convenient too. (true/false)

True

Technical analysis and fundamental analysis are methods commonly used by investors to value stocks. (true/false)

True

The daily stock quotations found in most large newspapers will tell you the closing price per share of stock for the previous day's trading, the range of prices the stock traded the previous day, and a range of trading prices for the last year. (true/false)

True

The two parts of a company's balance sheet: (1) assets and (2) liabilities and shareholder's equity, must be equal or in balance. (true/false)

True

When you buy a stock on margin, your gain is magnified if the stock goes up in value. (true/false)

True