Series 65 Unit 23
A broker-dealer receives a request from a client to purchase an OTC stock. When the broker-dealer's trading department contacts the market maker in the stock, she receives a quote of 35 − 35.25, 7 by 9. Based on this information, the spread is
$0.25
A client's mixed margin account has the following positions: Long, 100 XYZ with a current market value of $5,000 Long, 300 ABC with a current market value of $16,000 Short, 200 DEF with a current market value of $10,000 Short, 100 GHI with a current market value of $8,000 The account has a debit balance of $8,000 and a credit balance of $22,000. What is the combined equity in the account?
$17,000
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.
The SROs have instituted maintenance margin levels for those situations where the equity in a client's margin accounts is reduced to a dangerous level. Currently, those levels are
25% for a long account.
A client enters an order as follows: Sell stop 100 shares of LTC at 45 limit 45.50. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05. More than likely, the client received
45.97
A customer places an order to sell 100 MS 52.25 STOP. After placing the order, MS trades as follows: 53, 52.60, 52.20, 52.10, 52.25. Which trade triggers the order?
52.20
What is the name given to an order to purchase or sell a stock where the investor has specified a price?
A limit order
By viewing the bid and ask prices, which of the following OTC stocks is likely to be the most actively traded? A) 43-43.05 B) 22-23 C) 50-50.50 D) 17.95-18.25
A) 43-43.05
Which of the following cannot be purchased on margin? A) A long call option traded on the CBOE B) A municipal bond C) An NYSE-listed stock D) A listed bond
A) A long call option traded on the CBOE
Which of the following statements about stop orders is not true? A) A sell stop order is used to protect a short sale. B) A stop order will become a market order once a security trades at or through a specified price. C) A sell stop order is always placed at a price that is below the current market price. D) A stop order to buy is always set at a price that is higher than the current market price.
A) A sell stop order is used to protect a short sale.
A client with a bullish outlook on a particular stock would be able to benefit most from taking which of the following actions? A) Buying the stock on margin B) Entering a buy stop C) Entering a sell limit order D) Selling the stock short
A) Buying the stock on margin
One of your clients currently holds a long 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) Sell limit D) Buy stop
A) Sell stop
Which of the following best describes thinly traded stocks? A) They are either not actively traded on an exchange or not held by a large number of investors. B) They are usually highly liquid and marketable. C) They usually have less volatile price swings than actively traded stocks. D) They are actively traded on an exchange and held by a large number of investors.
A) They are either not actively traded on an exchange or not held by a large number of investors.
The Securities Exchange Act of 1934 gives the SEC the power to do all of the following except A) set margin requirements B) refer evidence for prosecution C) administer oaths D) subpoena witnesses
A) set margin requirements
Which of the following is an improper activity under the Uniform Securities Act? A) An investment adviser charges two customers two different fees for a similar service. B) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer. C) An investment adviser collects a commission on the sale of insurance products that he recommended, disclosing that a commission would be earned. D) An investment adviser charges a customer a fee for advice leading to the sale of a security, receives a commission on the sale, and discloses the amount of the commission to the customer.
B) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer.
Trading securities involves certain expenses. Which of the following is not considered to be one of them? A) Markdowns B) Advisory fees C) Markups D) Commissions
B) Advisory fees
Which of the following is regulated by the Securities Exchange Act of 1934? A) Requirements for the provisions of a prospectus B) Regulation of exchanges C) Exemptions of new issues from registration requirements D) Registration of new issues of stock
B) Regulation of exchanges
Which of the following illustrates an example of positive margin? A) The investment purchased on margin is sold for a price above its original purchase price. B) The rate of return on the investment exceeds the interest cost on the borrowed money. C) The interest rate being charged on borrowings is less than the rate of inflation. D) The stock purchase is being paid for in full rather than by using borrowed funds.
B) The rate of return on the investment exceeds the interest cost on the borrowed money.
Which of the following best describes thinly traded stocks? A) They are usually highly liquid and marketable. B) They are either not actively traded on an exchange or not held by a large number of investors. C) They usually have less volatile price swings than actively traded stocks. D) They are actively traded on an exchange and held by a large number of investors.
B) They are either not actively traded on an exchange or not held by a large number of investors.
With regard to margin accounts, all of the following are accurate statements except A) a mixed margin account is an account with a broker-dealer in which there are both long and short positions. B) margin accounts employ less leverage than cash accounts. C) initial margin is the amount required under Regulation T when a security is purchased on margin. D) maintenance margin is the amount required under SRO rules when the equity in a margin account falls below a predetermined level
B) margin accounts employ less leverage than cash accounts.
An investor has issued the following orders to her agent when GMB Corp. is trading at $29 and RML Corp. is trading at $17: 1. Buy 200 shares of GMB if the price should increase to $31 2. Sell 400 shares of RML for at least $18 The investor has issued what types of orders? GMB RML
Buy stop Sell limit
A margin account could be opened for which of the following? A) Coverdell ESA B) UTMA account C) Partnership D) IRA
C) Partnership
A stop order can be used to do all of the following except A) protect a short position B) become a market order once the security trades at or through the stop price C) give the broker-dealer discretion regarding time and price D) protect a long position
C) give the broker-dealer discretion regarding time and price
All of the following are potential benefits of high frequency trading (HFT) except A) increased liquidity, especially in very active stocks. B) lower costs for institutional purchasers. C) greater trading opportunities for the small investor. D) arbitrage opportunities increase market efficiency.
C) greater trading opportunities for the small investor
Jimmy Merchant is an agent with FLATT securities, a registered broker-dealer. When Jimmy submits an order ticket to purchase securities for a client, all of the following would appear except A) the account number B) Jimmy's name C) the current market price of the security D) the broker-dealer's name
C) the current market price of the security
Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock? A) The loan consent agreement B) The securities pledge agreement C) The credit agreement D) The hypothecation agreement
D) The hypothecation agreement
Which of the following securities can legally be purchased on margin? A) Put options where the underlying common stock is listed on the New York Stock Exchange B) Preemptive rights to acquire shares of a stock traded on the New York Stock Exchange C) Units of a variable annuity issued by an insurance company authorized to do business in the state D) Warrants exercisable into shares of a stock traded on the Nasdaq Stock Market
D) Warrants exercisable into shares of a stock traded on the Nasdaq Stock Market
Which of the following are regulated under the Securities Exchange Act of 1934? I. New issues II. Broker-dealers III. Securities exchanges
II and III
A client calls her agent and very excitedly says, "I just received a confirmation for my recent purchase and notice that you didn't charge me any commission; thank you so much". What would be the appropriate response?
If the confirmation states that the broker-dealer acted in a principal capacity, we charged you a markup instead of a commission.
What is the term used to describe a person on the floor of a stock exchange who stands ready to buy or sell shares of specified stocks?
Specialist
A client of a broker-dealer turns in an order to purchase 10,000 shares of XYZ stock on the NYSE. This would be
a block trade In the securities business, trades of 10,000 shares or more are known as block trades.
It is often said that the backbone of the over-the-counter (OTC) market is the market maker. A good description of a market maker would be
a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market.
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
a 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).
Under the Securities Exchange Act of 1934, a market maker is
a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price
Nite Capital Group is a registered broker-dealer whose primary business model is providing quotations for OTC stocks in which they position trade. Nite would be known as
a market maker
An order to immediately buy or sell a security at the best available price is known as
a market order.
A Nasdaq market maker buys 1,000 shares of stock from a customer at its bid to satisfy a customer order. This is an example of
a principal trade.
A broker-dealer acting as a principal in a trade would
add a markup to the offering price when selling shares to a client
Under the Securities Exchange Act of 1934, an exchange is
an organization that provides facilities for bringing together buyers and sellers of securities
When a securities firm is position trading, it is acting
as a dealer.
A client of a broker-dealer is obligated to replace stock she sold after borrowing it from the broker-dealer. From this information, you can conclude that she
engaged in a short sale of the stock
A new customer of your broker-dealer calls after her first stock purchase. She comments that she did not see a commission charged on the trade confirmation and wants to thank you for the good deal. It would be incumbent on you to
explain that the firm acted as a principal and included a markup in the price.
A discussion of algorithmic trading is probably referring to
high frequency trading.
Large investors, such as hedge funds or institutions, using high-speed systems to monitor and submit large number of orders to the markets are engaging in
high frequency trading.
The term algorithmic trading is most commonly associated with
high-frequency trading.
When a security purchased on margin suffers a decline in market value, it may cause the equity in the account to fall to a level such that additional funds are required under the terms of the margin agreement between the client and the broker-dealer. The term that describes the request by a broker-dealer rather than an SRO for more money is
house call.
A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to
loan out the customer's margin securities
The term used to describe a broker-dealer contacting a margin account client with a demand for additional funds is
maintenance margin
Under the Securities Exchange Act of 1934, the SEC may suspend all trading on an exchange
only with prior notification to the president of the United States
According to standard terminology used in the securities industry, when a person sells securities out of inventory, that person is acting in the capacity of a (an):
principal. In any transaction, there are two principals - the buyer and the seller. When a person sells securities out of inventory, they are acting in a principal capacity.
An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents
the bid price If you are looking to sell, the dealer will pay you his bid price
In a margin account, broker-dealers lend money to clients to enable them to leverage their investments. The account document that is evidence of the debtor-creditor relationship is
the credit agreement.
A market maker is quoting ABC common stock at $76.10 - $76.31. That means
the market maker is willing to pay $76.10 for the stock.
An investor wishing to buy US Treasury bonds receives a quote from the dealer of 98.16. This represents
the offer price the offer is the dealer's selling price
In the securities industry, the term contra party refers to
the person on the other side of the trade
A client calls to tell you that he has inherited some stock from his grandmother and would like to sell it. After a bit of research, you discover that the stock is thinly traded on the OTC market. This means
the spread between bid and ask is likely to be larger than normal.
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
this is the loan consent agreement
If a security trades in the over-the-counter (OTC) market, it means that the security
trades anywhere other than on an exchange.
