Unit 1 (Primary and Secondary Markets Quiz)

A customer enters the following order: Sell 1,000 shares of XYZ at 23. Which of the following executions would the customer accept? A) 23.50 B) 22.90 C) 22.50 D) 21.25

A) 23.50 Explanation When selling at a limit price (23), the customer will accept that price or better (higher for sell orders). Given the customer is willing to accept 23, any price of 23 or higher (in this case 23.50) is an acceptable execution. LO 1.g

Distinguishing between a sell stop order and a sell stop limit order, which of the following are true? I)The sell stop limit order becomes a sell limit once triggered. II)The sell stop order becomes a sell limit order once triggered. III)The sell stop limit order becomes an order to sell at the market when triggered. IV)The sell stop order becomes an order to sell at the market when triggered. A) I and IV B) II and IV C) II and III D) I and III

A) I and IV Explanation Stop orders become market orders once triggered, and stop limit orders become orders to sell at the specified limit once triggered. Stop or stop limit orders can be either buys or sells. LO 1.g

Which of the following statements regarding capital markets is false? A) They are used only by the private sector. B) They would include stock and bond markets. C) Securities traded in them can be bought and sold by both individuals and institutions. D) Entities can use them to finance both long- and short-term capital needs.

A) They are used only by the private sector. Explanation In capital markets, both public and private sectors sell securities (stocks and bonds) to raise funds to finance both long- and short-term needs. Both individuals and institutions can trade securities in these markets. LO 1.a

A broker-dealer that executes trades and settles transactions for another broker-dealer is called A) a carrying firm. B) an introducing firm. C) a fully disclosed firm. D) a limited broker-dealer.

A) a carrying firm. Explanation Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing or fully disclosed firms. LO 1.e

An opening transaction can be A) either a buy or a sell. B) a buy only. C) a short sale only. D) a sell only.

A) either a buy or a sell. Explanation An opening transaction can be either a buy or a sell. Which one will determine the investor's market attitude—bullish when buying to open a position and bearish when selling to open a position (selling short). LO 1.g

Electronic communication networks (ECNs) are part of A) the fourth market. B) the exchanges. C) the OTC market. D) the third market.

A) the fourth market. Explanation The market centers that operate through ECNs are known as the fourth market. These centers were created to serve large institutional investors like mutual funds and pension plans. The fourth market reduces the transparency of trading activity by these organizations and allows them to trade more efficiently. LO 1.d

James Thomas calls and is interested in buying some GNMA certificates and wants to know when payment will be due. You should tell him A) trade date plus 2 business days. B) trade date plus 1 business day. C) trade date. D) trade date plus 3 business days.

A) trade date plus 2 business days. Explanation Regular way settlement is T + 2 for everything except treasuries, money market securities, and options. LO 1.i

The Securities Act of 1933 requires that all of the following be offered by a prospectus except A) variable annuities. B) mutual fund shares. C) Treasury bonds. D) unit investment trusts.

C) Treasury bonds. Explanation Treasury securities are exempt from registration requirements and therefore do not require a prospectus. LO 1.c

A small company, in order to raise capital for expansion, wants to sell shares of stock to investors. The company has never offered ownership outside the founding partners to new investors before. This offering is known as A) a combination offering. B) an additional public offering (APO). C) an initial public offering (IPO). D) a subsequent public offering (SPO).

C) an initial public offering (IPO). Explanation The first time an issuer distributes securities to the public, it is called an initial public offering (IPO). Because the issuer (the company) receives the proceeds from the investors who are investing in the company, all IPOs are primary issuer transactions. LO 1.a

A signature endorsement on a stock certificate would not be required for good delivery if the shares were A) are in custodial name. B) in trust name. C) held in street name. D) held in safe keeping.

C) held in street name. Explanation Shares held in street name are normally registered to the broker-dealer, who hold them on behalf of the client. As these shares are likely only in electronic form no signature is required to transfer them. LO 1.i

When shares are held in street name, this refers to the shares being A) allowed to be sold only on the exchange where they were initially purchased. B) restricted, and thus, nontransferable. C) held in the name of the broker-dealer for the beneficial owner. D) held at the transfer agent for the beneficial owner.

C) held in the name of the broker-dealer for the beneficial owner. Explanation When shares are held in street name, they are being held in the name of the broker-dealer for the beneficial owner. This is done to facilitate payments and delivery. This does not encumber the shares regarding receipts of dividends or their transferability if sold. LO 1.i

In the capital markets, securities such as stocks and bonds can be A) purchased and sold by institutions only. B) purchased and sold by individuals only. C) offered by both public and private sectors. D) offered by the public sector only.

C) offered by both public and private sectors. Explanation In capital markets, both public and private sectors sell securities in order to raise funds. These securities can be bought and sold (traded) in the capital markets by individuals and institutions alike. LO 1.a

A buy stop order at 39 could fill at which of the following prices? I) 38 II)39 III)40 IV)41 A) I and II B) I, II, III, and IV C) II and III D) III and IV

B) I, II, III, and IV Explanation A buy stop order becomes a market order and fills at the next available price once it touches or passes through the stop price. LO 1.g

The Big Shoe Sneaker Company is a small manufacturer of athletic shoes. It is selling $100 million of its stock. This will be its third public offering of the company stock. It will use the money to enhance both marketing and production with a plan to grow the business and obtain a Nasdaq listing in two or three years. After the initial sale of the new shares, buyers of the stock in the over-the-counter market should expect to receive the final prospectus for how many days? A) Buyers in the secondary market are never entitled to the initial public offering (IPO) prospectus B) 40 days C) 25 days D) 90 days

B) 40 days Explanation This is an additional public offering (APO) of an unlisted, non-Nasdaq, security. The requirement is that the prospectus be made available to buyers in the secondary market for 40 days after the release date. The other requirements are: listed IPO—25 days, listed APO—0, nonlisted IPO—90 days. LO 1.b

Which of the following is true regarding a member firm operating under Financial Industry Regulatory Authority (FINRA) membership or the membership of another self-regulatory organization (SRO)? A) Member firms are required to be full-service broker-dealers. B) Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few. C) Member firms may never incorporate proprietary trading into their business model. D) Member firms must always accommodate dealing with retail investors and not limit business to that done with other industry professionals.

B) Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few. Explanation Member firms can offer all types of investment products such as stocks, bonds, mutual funds, and derivatives like options and others (be full service) or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors. LO 1.e

The price an investor can sell a security is called the A) offer. B) bid. C) ask. D) POP.

B) bid. Explanation The bid is the price within a quote that an investor sells for. Ask and offer are the terms used for the price for purchasing a security. New issues are sold at the public offering price (POP). LO 1.f

A corporation increases capitalization by selling shares of stock which can either come from a new issue or previously authorized but unissued shares. Total stock outstanding must A) always be greater than the number of shares issued. B) never exceed the number of shares authorized. C) never equal the number of shares issued. D) always equal the number shares authorized.

B) never exceed the number of shares authorized. Explanation A corporation's bylaws state the maximum number of shares authorized to be issued. Therefore, issued shares, those in the hands of public shareholders (outstanding shares) can never exceed the number of shares that were authorized. While those outstanding shares can therefore never be greater than the number of shares issued they could equal the number of shares issued. LO 1.a

The prospectus delivery requirement, access equals delivery, is satisfied when A) a red herring is initially sent by mail to investors during the cooling-off period. B) the final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC's website for investors to see. C) the final prospectus has been filed with Financial Industry Regulatory Authority (FINRA) and is available on FINRA's website for investors to see. D) the preliminary prospectus has been filed with FINRA and is therefore available on FINRA's website for investors to see.

B) the final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC's website for investors to see. Explanation Beyond physical delivery of a paper prospectus, access equals delivery is the industry standard for meeting the final prospectus delivery requirements. It is deemed to be satisfied when the final prospectus has been filed with the SEC and is therefore available on the SEC's website for investors to log in and see. This standard does not apply to delivery of a preliminary prospectus before the effective date. LO 1.b

Your client, Mary Quinn, wants to place an order to sell a stock in her portfolio when the current price is 45, but she is only willing to sell if she can sell for at least 47. Which order should she place? A) A sell stop order B) A sell stop limit order C) A sell limit order D) A market order

C) A sell limit order Explanation Sell limit orders are placed above the current market price and fill at the stated price or higher. Market orders fill at the next available price. Sell stop and sell stop limit orders are not triggered until the market drops to or through the stop price. LO 1.g

Which of the following acts requires the registration of most new issues? A) The Securities Market Improvement Act of 1975 B) The Securities Investor Protection Act of 1970 C) The Securities Act of 1933 D) The Securities Exchange Act of 1934

C) The Securities Act of 1933 Explanation The Securities Act of 1933 requires the registration of most new issues; the Securities Exchange Act of 1934 created the SEC; the Securities Investor Protection Act of 1970 created the SIPC; the Securities Market Improvement Act of 1975 created the MSRB. LO 1.b

An order is entered by a customer to sell at 30 stop limit. Once the order is entered, the stock trades in the following sequence: 32, 29, 31, and 33. The order would be executed and the investor would receive a price of A)32. B)29. C)31. D)30.

C)31. Explanation This is a sell stop order with a limit of 30. Once the stock trades at 30 or lower, the order is elected (triggered) and becomes a live working order. This occurs at 29. The order will then be executed at its limit (30) or better. This occurs at 31. LO 1.g

All of the following phrases are associated with a broker-dealer acting as a dealer except A) "trades with customers from own inventory." B) "profits on spread." C) "maintains inventory." D) "charges a commission for the transaction."

D) "charges a commission for the transaction." Explanation When a BD acts as a principal (dealer, market maker), they are selling securities from the firm's inventory to a customer or buying a security from a customer for the dealer's inventory. The firm profits on the difference between what the firm paid for the security and what the customer pays, which is called the spread (or mark-up). There is no commission when a firm acts in a principal capacity. LO 1.h

In order to qualify to invest in a Regulation A Tier 2 offering, a customer must do which of the following? A) Submit an affidavit swearing to their qualification B) Submit audited financial statements demonstrating qualification C) Submit tax documents showing qualification D) Self-certify that they meet the requirements

D) Self-certify that they meet the requirements Explanation Tier 2 investors must be qualified investors, and there are two ways to qualify: Be an accredited investor as defined in Rule 501 of Regulation D; or Limit the investment to a maximum of the greater of 10% of the investor's net worth or 10% of the investor's net income per offering. Note that self-certification of net worth and income is all that is required for Tier 2 qualification, with no burdensome filings. LO 1.c

Which of the following firms would not normally be part of an initial public offering (IPO)? A) Investment bankers B) Underwriters C) Broker-dealers D) Third-market dealers

D) Third-market dealers Explanation To facilitate a public offering, issuers will use the services of investment bankers and broker-dealers (also called underwriters) of the securities. Third-market dealers function in the over-the-counter market (secondary market), not the primary market. LO 1.a

Regarding a tombstone advertisement, all of the following are accurate statements except A) they are limited to the information that may be contained in them. B) it is the only type of advertisement permitted between the time the registration statement is filed with the SEC and the effective date. C) all such advertisements must contain an advisory stating that the ad is neither an offer to sell nor a solicitation of an offer. D) they are required by and filed with the SEC in order to announce a new issue to the investing public.

D) they are required by and filed with the SEC in order to announce a new issue to the investing public. Explanation While tombstone ads are the only type of advertisement that may run to announce a new issue during the cooling-off period, they are not required and do not need to be filed with the SEC. When they are used, they are neither an offer to sell nor a solicitation of an offer and must state so and are limited to the information that may be contained in them. LO 1.b

The Mod Family Foundation is a $500,000,000 charitable foundation headed by Clarence Mod. The foundation is seeking to purchase a large block of WeariTech, Inc., a Nasdaq listed company, for the foundation's portfolio. Seacoast Securities is assisting with this secondary market transaction. In this example, the Mod Family Foundation is A) an issuer. B) a venture capitalist. C) an institutional investor. D) a retail investor.

Explanation With half a billion in assets, the foundation is an institutional investor. We know that they are not acting as a venture capitalist because the company is already trading, and these shares are to be purchased in the secondary markets. LO 1.a