Series 7 unit 16

Which of the following would be the usual use of a stop order? To protect the profit on a long position To prevent loss on a short position To buy at a specific price only To guarantee execution at or near the close

1 and 2

If a customer places an order to sell 500 ABC at 46 stop limit, which of the following statements are true? The order will be elected at 46 or lower. The order will be elected at 46 or higher. The order can be executed at 46 or higher. The order can be executed at 46 or lower.

1 and 3 Sell stop limits are placed below the current market and will be elected when the stock trades at or through (lower than) the stop price. Once elected, the order becomes a limit order to sell at 46 or better (higher).

When must a Regulation T call be met? Immediately Within 4 business days in a margin account Within 4 business days in a cash account Within 10 business days if both a cash and a margin account are maintained A) II and III B) III and IV C) I and IV D) I and II Explanation

A

If a customer with an unrealized gain on a short stock position wishes to protect her profit, she should enter A) a buy stop order. B) a buy limit order. C) a sell stop order. D) a sell limit order.

A A buy stop order can be placed above the current market to protect the short stock position. If the stock trades at or above the stop price, the order is elected and becomes a market order to buy the stock, which will be used to cover the short position.

If a customer wants to buy shares of ABC on margin, while ABC is engaged in an initial public offering, how many days must the customer wait after the public offering date? A) 30 B) 25 C) 40 D) 90

A According to Regulation T, a new issue may not be purchased on margin for the first 30 calendar days following the public offering date.

Which of the following orders is reduced on the order book on the ex-dividend date for a cash dividend? A) Limit order to buy B) Buy stop order C) Sell limit order D) Buy stop limit order

A Explanation Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price. LO 16.a

If a customer has a long margin account with a market value of $12,000, a debit balance of $8,000, and special memorandum account (SMA) of $2,000, how much can the customer withdraw from the account? A) $1,000 B) $2,000 C) $0 D) $1,500

A SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000),0 and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.

If a customer's margin account shows a long market value of $6,000 and a debit balance of $5,000, the maintenance margin call will be for A) $500. B) $3,000. C) $2,000. D) $1,000.

A The account equity is $1,000, which is below the minimum maintenance requirements of 25% of market value. The maintenance call will be an amount necessary to bring the account back to minimum, which is $1,500 (25% × $6,000). Therefore, the call will be for $500.

As an initial transaction in a margin account, a customer sells short 1,000 shares of a capital market stock at $2 per share. If Regulation T is 50%, how much money will the customer be required to deposit? A) $2,500 B) $2,000 C) $1,000 D) $3,000

A The industry requirement to short stocks below $5 per share is 100% of market value or $2.50 per share (whichever is greater

In a restricted margin account, if a customer fails to pay for a new purchase, the broker-dealer must sell out stock with a value of A) twice the margin call. B) three times the margin call. C) the margin call. D) stock cannot be purchased if the account is restricted.

A Twice the value must be sold out of the account to meet a Regulation T margin call. Cash buys stock in a margin account at a 2:1 ratio; therefore, stock will cover a cash debt at the rate of $2 of stock market value to $1 of cash debt.

A customer has sold short 100 GM at 70. GM is selling for 81. The customer had previously placed a good-til canceled 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) sell 100 GM at the market. B) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop good til canceled. C) sell 100 GM at 83. D) buy 100 GM at the market.

B

In a customer's margin account, a broker-dealer must segregate A) 100% of the long market value. B) the excess securities above 140% of the accounts debit balance. C) 140% of the debit balance. D) 50% of the equity balance.

B

Under Regulation T, action by the broker-dealer is not required when A) the amount due does not exceed $200. B) the amount due does not exceed $1,000. C) the amount due does not exceed $100. D) the total amount of the transaction does not exceed $1,000.

B

An order to sell at 38.65 stop limit is entered before the opening. The subsequent trades are 38.85, 38.50, and 38.35. The order A) was executed at 38.85. B) has not yet been executed. C) was executed at 38.50. D) was executed at 38.65.

B A stop limit order is a stop order that becomes a limit order once the stop price has been triggered. When the limit price is the same as the stop price on a stop limit order, the order may be executed only at or better than the limit price. In this case, the order has not yet been executed because no transaction has occurred at or above 38.65 because the stop was triggered at 38.50

Interest on loans to purchase securities is generally a deductible item on one's tax return unless the purchase is for A) a corporate bond. B) a municipal bond. C) stock. D) warrants.

B Because the interest received from municipal bond investments is tax free, the IRS does not allow interest paid for loans to purchase municipal bonds as a deductible item on one's tax return as it would for other securities purchased with loans (margin)

In an existing margin account with no SMA, if a customer buys 300 ABC at 40 and simultaneously buys 3 ABC OCT 40 puts at 2.50, the customer must deposit A) $6,375. B) $6,750. C) $6,100. D) $5,250.

B Buying 300 shares at 40 ($12,000) requires a deposit of $6,000. In addition, the customer is purchasing 3 puts with a total premium of $750 (3 × 2½). Most options have no loan value and must be paid in full. Adding $6,000 and $750 results in a deposit of $6,750.

A customer sells short 500 XYZ at $80 per share in a margin account. Before regular way settlement, if the stock falls to $60 per share, the minimum maintenance margin requirement is A) $7,500. B) $9,000. C) $10,000. D) $12,000.

B Minimum in a short margin account is 30% of the current market value, which is $30,000 (500 shares × 60); 30% of $30,000 is $9,000.

Which of the following actions taken by a FINRA member firm would not pose a compliance problem? A) Selling dividends B) Rehypothecation C) Interpositioning D) Backing away

B Rehypothecation is the legitimate activity of taking a customer's margin securities and repledging them to finance the loan the member made to the customer. SEC rules permit a maximum of 140% of the debit balance to be rehypothecated. Backing away is failing to honor a firm quote. Interpositioning is interjecting a third party into a trade, generally resulting in greater expense to the customer. Selling dividends is the unethical practice of encouraging investors to purchase shares of a mutual fund in advance of a previously declared dividend.

If a customer buys $10,000 worth of stock in a cash account, then sells the shares for $12,000 without first paying for the buy side, and then requests the $2,000 profit, which of the following statements are true? The $2,000 profit cannot be sent to the customer until she pays for the buy side in full. The $2,000 can be sent to the customer, but the account will be frozen for 90 days. If the customer pays for the buy side in full on or before the fourth business day following trade date, status as a frozen account is lifted. Both trades must be switched to the customer's margin account, where buying and selling in this manner are acceptable practices. A) III and IV B) II and III C) I and III D) I and II

B Selling before paying is called freeriding and is prohibited. The penalty for freeriding in a cash account is that the account will be frozen for 90 days, and orders will not be accepted without cash or securities on deposit in advance. Transactions in margin accounts are subject to the same basic rule

An investor has an established margin account with a short market value (SMV) of $4,000 and a credit balance of $6,750, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $1,500 B) $750 C) $2,000 D) $2,750

B The Regulation T requirement and equity must be calculated before excess equity can be determined. The Regulation T requirement is 50% of the SMV of $4,000 ($2,000). Equity is calculated by subtracting the SMV of $4,000 from the credit balance of $6,750 ($2,750). Excess equity is calculated by subtracting the Regulation T requirement of $2,000 from the equity of $2,750 ($750).

If a customer has a margin account with a long position worth $20,000 and a debit balance of $8,000, what is the purchasing power of this customer's account? A) $2,000 B) $4,000 C) $8,000 D) $6,000

B The account has $12,000 of equity. If 50% of the market value is $10,000, the account has $2,000 of excess equity. When Regulation T is 50%, the purchasing power of excess equity is 2:1.

A customer buys 800 shares of ABC at $70 per share in a new margin account. If the price of ABC drops to $50, the minimum maintenance margin requirement for this account is A) $14,000. B) $10,000. C) $12,000. D) $20,000.

B The minimum maintenance margin requirement for a long account is 25% of the current market value (CMV). The CMV is $40,000 (800 shares × $50 = $40,000). Therefore, minimum maintenance equals $10,000 (25% × $40,000 = $10,000).

If a customer has a restricted margin account with special memorandum account (SMA) of $2,500, how much must he deposit to purchase $10,000 worth of stock? A) $10,000 B) $2,500 C) $0 D) $5,000

B The purchase of $10,000 requires a $5,000 deposit, which can be reduced dollar for dollar by the existing SMA

At 2:15 pm ET, a customer gives his registered representative a market order to buy 100 shares of ABC at the close. What should the registered representative do with the order? A) Send in the order after the close to ensure he receives the closing price. B) Send the order to the floor immediately. C) Execute the order at the closing price first thing next morning. D) Hold it at his desk until just before market close.

B The registered representative should mark the order ticket at close. His firm's floor broker will take on the responsibility for proper execution.

Which of the following orders on the order book will not be filled if the stock rises? A) Buy stop limit B) Sell stop C) Buy stop D) Sell limit

B Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits.

Your broker-dealer is not self-clearing, but instead, is an introducing broker-dealer. Therefore, all extension requests made to your broker-dealers self-regulatory organization (SRO) on behalf of customers would be made by A) the broker-dealer. B) the broker-dealer's clearing agent. C) any party who represents the customer, such as an attorney. D) the customer.

B While extension requests are granted on behalf of customers, the request to the SRO cannot come directly from the customer or anyone representing him. For self-clearing broker-dealers, the extension request will come from the broker-dealer. However, for introducing firms that do not clear their own trades, the request comes from the clearing agent.

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

C As on exchanges, short sales on the Nasdaq Stock Market can occur at any time in the trade sequence.

Excess margin securities are defined as securities in excess of A) the minimum maintenance margin requirements. B) the customer's debit balance. C) 140% of the customer's debit balance. D) 70% of the customer's debit balance.

C Excess margin securities are securities in excess of 140% of the customer's debit balance. Margin securities (140% of the debit balance) are at a bank collateralizing the customer's debit. For example, if a customer purchases $20,000 of stock, the customer will put up $10,000 and borrow $10,000. The member will take $14,000 of the stock to a bank to collateralize the $10,000 debit. The balance ($6,000) of the stock must be placed in segregation (excess margin securities). LO 16.d

In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is A) $2,400. B) $2,000. C) $5,600. D) $5,400.

C Explanation The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600).

KLP common stock has been trading at or near $25 per share all day. Your client would like to buy 500 shares of KLP at 25, but he is willing to accept fewer shares at that price. Which of the following orders fulfills his intentions? A) Market order to buy 500 shares of KLP B) Limit order to buy 500 shares of KLP at 25 FOK (fill-or-kill) C) Limit order to buy 500 shares of KLP at 25 AON (all-or-none) D) Limit order to buy 500 shares of KLP at 25 IOC (immediate-or-cancel)

D

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

D 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.

Each of the following statements concerning fill-or-kill (FOK) orders and all-or-none (AON) orders are true except A) an FOK order must be filled in its entirety. B) an FOK order must be canceled if the whole order cannot be executed immediately. C) an AON order must be filled in its entirety. D) an AON order must be canceled if the whole order cannot be executed immediately.

D An FOK order must be executed immediately in its entirety or else it is canceled. An AON order must be executed in its entirety but is not canceled if the whole order cannot be executed immediately.

A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is A) $0. B) $1,000. C) $4,000. D) $2,000.

D Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SM

An investor is long 10 XYZ calls with a strike price of 40 in his general account. XYZ stock is currently selling at 48. In addition to the fully paid calls, the account also contains a $3,000 credit balance. Cash withdrawal from the account would not be allowed to exceed A) $6,000. B) $11,000. C) $5,000. D) $3,000.

D It must be assumed from the information given that the account has only fully paid for call options plus an additional $3,000 cash (credit balance). The investor can withdraw the cash because the options are fully paid for. The question here is whether or not he can withdraw additional cash to borrow against the value of the options contracts. The answer is no, he cannot borrow against long option positions. In other words, options have no loan value.

One of your clients has a profit in STV common stock. The purchase price was $40 per share and is now $60 per share. The client is looking to take the profit and feels the stock still has a bit more growth. The client's strategy is to enter a sell limit order at $62. It is critical that the client understand that A) the sell limit order should be entered below the current market price. B) entering this order erases the holding period of the stock. C) the order becomes a market order when the price of $62 is reached. D) if the stock never reaches $62, the order will never be executed.

D One of the risks with a limit order, buy or sell, is that the stock may never reach the price limit. In that case, the order is never executed. For this client, if the stock climbs to $61.99 and then plunges, the client has lost out on much or maybe all of the profit. Because the order can never be executed below the price limit, it never becomes a market order. It is purchasing a put option on stock held less than 12 months and one day where the holding period is erased.

Regulation T permits borrowing money for the purchase of each of the following except A) listed stocks and bonds. B) listed warrants. C) unlisted stocks and bonds. D) listed options with expirations of less than nine months.

D Options with expirations of less than nine months must be fully paid without exception. With some exceptions, warrants, stocks, and bonds may be purchased on margin.

Which of the following would accelerate a decline in a bear market? A) Sell limit B) Buy limit C) Buy stop D) Sell stop

D Sell stops, placed below the current market, become market orders to sell when the stock trades at or through (below) the stop price. Market sell orders can accelerate declines in the price of the stock.

In a margin account, which of the following would be affected by a stock dividend? A) The available special memorandum account (SMA) balance in the account B) The debit balance in the account C) The total portfolio market value of the account D) The number of shares held in the account

D Stock dividends merely give an investor more shares of stock valued at less per share. The total value of the position does not change. Therefore, the balances in the account remain unchanged as well.

Stop orders may be used for each of the following except A) to protect profits on long positions. B) to establish positions. C) to protect profits on short positions. D) to lock in a specific price to close out a position.

D Stop orders are contingent orders that are triggered when the stock trades at or through a stated price. When triggered, they become market orders to buy or sell. They are used by technical traders to establish positions above or below resistance and support levels, respectively. Stop orders never guarantee a specific execution price.

A customer sells short 1,000 XYZ at 60. Three months later, XYZ is at 44. Which two of the following strategies are the most likely the customer would use to protect her unrealized gain? Sell 1,000 XYZ 45 stop Buy 1,000 XYZ 45 stop Buy 10 XYZ Mar 45 calls Buy 1,000 XYZ 45 stop limit A) I and III B) I and IV C) II and III D) II and IV

C In this short position, the customer currently has an unrealized gain of 16. She stands to see her unrealized gain begin to erode if the stock price rises, so she could enter a buy stop order above 44 to allow herself to buy and cover her position if a price rise occurs. Purchasing calls would also be effective, because the right to exercise would allow the investor to buy stock at 45 and protect a gain of 15 points less the premium paid. If the buy stop at 45 is correct, why isn't the buy at 45 stop limit correct as well? Good question. Remember, when a stop limit order is triggered, the order becomes a limit order. When the stock rises to 45 (or higher), the customer now has a buy at 45 limit which means pay no more than 45. Once triggered, the stock may never get as low as 45 and the customer's order to buy will not be executed.

If an investor has an established margin account with a current market value of $6,000 and a debit balance of $2,500, with Regulation T at 50%, how much buying power does the investor have? A) $2,500 B) $3,500 C) $1,000 D) $6,000

C The Regulation T requirement is 50% of the current market value of $6,000 ($3,000). Equity is equal to the current market value of $6,000 minus the debit balance of $2,500 ($3,500). Excess equity is calculated by subtracting the Regulation T requirement of $3,000 from the current equity of $3,500 ($500). Buying power is calculated by multiplying the excess equity of $500 by 2 ($1,000).

A customer has a $10,000 debit balance. What is the maximum value of her securities that the broker-dealer can hypothecate? A) $2,500 B) $10,000 C) $14,000 D) $5,000

C The broker-dealer can hypothecate 140% of the customer's outstanding balance.

A customer buys 100 shares of HEX at 52, and at the same time, sells a HEX call for a premium of 4. What is his margin call deposit? A) $1,300 B) $1,560 C) $2,200 D) $2,600

C The margin call for the purchase of the stock is $2,600, and this is reduced by the sale of the call ($400) for a net of $2,200.

Each of the following can change the special memorandum account (SMA) balance in a long margin account except A) market appreciation of securities. B) cash dividends deposited. C) decrease in value of securities. D) sale of securities.

C The sale of securities in the account results in an automatic release of funds to SMA. Nonrequired cash deposits, such as dividends, will also be automatically credited to SMA. An increase in the value of the securities will increase SMA. However, a decrease in the market value of the securities will not affect SMA.

A customer purchases 200 shares of ABC Health Care at $60 per share and meets the initial margin requirement. If ABC announces an acquisition, and its stock appreciates on the news to $75, how much cash can the customer withdraw after this market move? A) $0 B) $1,000 C) $3,000 D) $1,500

D The customer could withdraw cash equal to the special memorandum account (SMA). A purchase of 200 shares at $60 per share would require an initial deposit of $6,000 on a market value of $12,000. The customer would have $6,000 in equity and a $6,000 debit. After a rise to $75 a share, the stock's market value would be $15,000. The customer's debit balance would remain unchanged at $6,000, but the equity would increase to $9,000 ($15,000 CMV − $6,000 DR). The customer needs to have 50% equity (50% × $15,000 = $7,500). Because the customer only needs $7,500 equity but now has $9,000, the excess equity of $1,500 is credited to SMA, which is the amount the customer can withdraw.

A quote on Nasdaq is as follows: BidAsk1010.501,300 × 1,500 The market maker is obligated to execute all of the following customer transactions in his entirety except A) buy 1,400 shares at $10.50. B) sell 1,300 shares at $10. C) buy 1,500 shares at $10.50. D) sell 1,500 shares at $10. Explanation

D 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.

Last week one of your customers placed a good-til-canceled order to sell 200 shares of ABC with an 18 stop when the stock was trading at $18.85. It is now the ex-date for a $0.55 dividend and the order has not yet been executed. What has happened to your customer's stop order? A) It remains at $18. B) It is canceled. C) It is increased to $18.55. D) It is reduced to $17.45.

D Unless the customer has given DNR (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend.

One of your clients has a margin account containing long and short positions. This is known as A) a combined equity account. B) an option account. C) a bull/bear account. D) a combined margin account.

D When a customer's margin account contains both long and short positions, it is known as a combined or mixed margin account.