Trading Markets Quiz #2
The Second Market is the: A trading of OTCBB stocks B issuance of listed stocks C trading of listed stocks on the floor of an exchange D issuance of listed and unlisted stocks
The best answer is A. The Second Market is over-the-counter trading of securities that are not listed on a stock exchange. For equities, the Second Market is the OTCBB (Over-The-Counter Bulletin Board) and the Pink OTC Markets. The First Market is trading of listed stocks on an exchange. Choices B and D are definitions of the primary (new issue) market - not the secondary (trading) markets.
Traditionally, First Market trading occurred in a(n): A auction market B negotiated market C unregulated market D primary market
The best answer is A. The first market is trading of listed stocks on the floor of an exchange. Exchanges started as pure "auction" markets, where an open outcry auction determined the price of a stock. With the advent of computerized trading, the NYSE is now a "hybrid" market that offers both a computerized matching market and an auction market that is done both electronically and manually.NASDAQ, as the first "virtual" exchange, does not use the auction model. It simply uses computerized matching. The over-the-counter market (e.g., OTCBB and Pink Sheets), by comparison, is a negotiated market.
Prior to the opening of the options exchange, an investor wishes to place an order to buy an option contract at a premium that is lower than the previous day's close. The order type to be placed is a(n): A At the open order B Limit order C Stop order D Not Held order
The best answer is B. The orders that are placed lower than the current market are "OBLOSS" - Open Buy Limit orders and Open Sell Stop orders. Thus, to buy an option at a premium that is lower than the closing price, an open buy limit order would be placed. Conversely, the orders that are placed higher than the current market are "OSLOBS" - Open Sell Limits and Open Buy Stops. Thus, to buy at a price higher than the current market, an open buy stop order would be placed.
Which statement is TRUE about stock cost basis reporting? A Stock cost basis is reported on Form 1099-DIV and LIFO is the default assumption B Stock cost basis is reported on Form 1099-B and LIFO is the default assumption C Stock cost basis is reported on Form 1099-B and FIFO is the default assumption D Stock cost basis is reported on Form 1099-DIV and FIFO is the default assumption
The best answer is C. Cost basis reporting to the IRS is required on Form 1099-B. The Form includes the cost basis of the security, the sale proceeds, and whether the holding period is short term or long term. If there are multiple purchases of the stock position, absent customer instructions, FIFO is used to report cost basis. If the customer gives instructions to the broker, then specific identification can be used - which is beneficial if higher cost shares are selected to either reduce capital gains or increase reported capital losses.
ABC Corporation has declared a rights offering to stockholders of record on Thursday, October 22nd, payable on Friday, November 6th. Under the offer, shareholders need 20 rights to subscribe to 1 new share at a price of $60. Fractional shares can be rounded up to purchase 1 full share. The last day to buy ABC shares before they go ex rights is: A Monday, October 19th B Tuesday, October 20th C Friday, November 6th D Monday, November 9th
The best answer is C. The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date. The payable date is Friday, November 6th, therefore the ex date is Monday, November 9th. To buy the shares before they go ex rights, the shares must be purchased before Monday, November 9th, meaning they must be purchased on Friday, November 6th.
All of the following are requirements for a company to have its stock quoted on the OTCBB EXCEPT: A the company must be registered with the Securities and Exchange Commission B the company must be current in its filings with the Securities and Exchange Commission C there must be a minimum of 1 registered market maker quoting the security D the stock must be quoted at a minimum price of $1 per share
The best answer is D. Unlike exchanges which have listing standards, the Over the Counter Bulletin Board (OTCBB) is simply a quotation service for companies that do not meet exchange listing standards. To be quoted on the OTCBB, the company must be registered with the SEC and it must be current in its SEC filings. There must be at least 1 market maker quoting the stock (if there wasn't one, then there would be no quote!). There is no minimum share price to be quoted on the OTCBB, as is the case with NASDAQ. NASDAQ requires a minimum $4 share price to be listed and to maintain a NASDAQ listing, the price cannot fall below $1.
When a corporation splits its stock, all of the following will occur EXCEPT: A the market price per share will be reduced B the number of outstanding shares will be increased C individual investors are more likely to buy the stock D each shareholder's proportionate ownership in the corporation will be increased
The best answer is D. When a corporation splits its stock, each shareholder's proportionate ownership in the corporation remains the same. For example, if a customer owns 100 shares at $50 and the corporation splits its stock 2 for 1, the customer will now own 200 shares at $25 (in both cases, it's a $5,000 investment). The other statements are true. Splitting the stock will cause the market price per share to be reduced and the number of outstanding shares will be increased. Also, individual investors are more likely to buy a $25 stock than a $50 one, since cheaper stocks are more affordable.
