Unit 22 Trading Securities (4)
Which of the following transactions on the NYSE in ABC common stock would meet the minimum size requirement to be considered a block trade? A) 100,000 shares B) 10,000 shares C) $100,000 total market value D) 200,000 shares
B. A block trade is defined as at least 10,000 shares of stock or a trade with a total market value of at least $200,000. U22LO6
An exchange specialist is A) a trader who makes a market in OTC stocks and ADRs B) a dealer on the New York Stock Exchange who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks C) an electronic brokerage concern that executes trades online and through specialized trading order executing services D) a floor broker on the New York Stock Exchange who only executes trades for other brokers in return for commissions
B. A specialist (more accurately a designated market maker - DMM, but NASAA may not use the current term on the exam) is a dealer on the NYSE who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks. A specialist must have sufficient capital to buy and sell from his own account in order to maintain a liquid and orderly market. U22LO3
A buy stop order may be used for all of the following EXCEPT A) to protect a profit in a short position B) to protect a profit in a long position C) to protect against loss in a short position D) to acquire a long position as a stock breaks through resistance
B. Buy stop orders go into effect when the price of the security reaches or exceeds the specified "stop" price. As such, they are commonly used by short sellers who either wish to protect a profit they've already made, or protect against a loss if the stock should go up. Buy stops can also be used by those wishing to acquire stock when it breaks through a resistance level. However, when one is already long the stock, turning in an order to buy more is not going to offer any protection. U22LO6
Under the Securities Exchange Act of 1934, which of the following is (are) TRUE regarding the authority of the SEC to suspend trading? The SEC may suspend all trading on a specific exchange for up to 90 days. The SEC may summarily suspend trading on a particular nonexempt security for up to 10 days. The SEC may suspend trading on exempt securities. A) I, II, and III B) I and II C) I and III D) I only
B. The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification of the president of the United States and may summarily suspend securities trading in a registered security listed on a stock exchange for up to 10 days. The SEC does not have the authority to suspend trading in exempt securities. U22LO3
Which of the following statements is TRUE about sales of new issues under the Securities Exchange Act of 1934? A) Installment payments are allowed on purchases. B) The use of credit to purchase new issues is prohibited for the first 30 days. C) The SEC determines what issues may be purchased on margin. D) Credit may be used in purchasing new issues.
B. The Securities Exchange Act of 1934 specifically bars the use of credit in purchasing new issues for the first 30 days from the date of issue. In addition, it prohibits installment payments on issues that can be bought on margin. The Securities Exchange Act of 1934 also empowered the Board of Governors of the Federal Reserve Board (FRB) to set margin requirements, and the FRB determines which issues may be purchased on margin. U22LO1
A day order is entered to buy 500 LMN at 24.35. By the close, the firm has 100 shares at 24.25 and 200 at 24.35. If the remainder is unfilled, what is the outcome? A) The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day. B) The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close. C) The customer may demand that the firm deliver the remaining shares at 24.35. D) The customer may reject the incomplete order unless the remainder can be filled within 3 business days.
B. The customer must accept the order for 300 shares. The representative cannot guarantee that the order will be filled by the end of day. U22LO6
An investor has her agent enter a sell stop order at 60, limit 60. Following the order entry, trades occur at 62.12, 60, 59.95, 60.06, 61. More than likely, the investor received A) 60 B) 60.06 C) 61 D) 59.95
B. This is really two orders. The first is to "stop" at 60. That is, once the stock trades at 60 or lower, enter my order. That second order is a sell, but with a limit of 60. So the first time the stock hits 60 (or less) is the trade at 60. That triggers the sell limit. The next trade is a 59.95. Because the limit order is saying, "Get me 60 or higher, the 59.95 is not an acceptable price." But, the next trade, 60.06 will meet the client's goal of receiving no less than 60. U22LO6
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 A) $6,000 B) $3,000 C) $9,000 D) $1,000
C. 9K 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. U22LO2
The Securities Exchange Act of 1934 defines a market maker is A) an agent whose clients are institutions B) an agent for the issuer C) a dealer who, with respect to a security, holds himself out as being willing to buy and sell that security for his own account on a regular or continuous basis D) a person who buys and sells securities for her own account or for the accounts of others
C. A market maker is a dealer who holds himself out as being willing to buy or sell a security at a quoted price on a regular and continuous basis. U22LO4
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 A) this is the credit agreement B) this is the hypothecation agreement C) this is the loan consent agreement D) if the client does not sign the document, the account cannot be opened
C. No broker-dealer shall lend securities that are held on margin for a customer and that are eligible to be pledged or loaned, unless the broker-dealer shall first have obtained a written authorization from such customer permitting the lending of such securities. That written authorization is known as the loan consent agreement and is the only one of the margin documents that is optional. U22LO2
Under the Securities Exchange Act of 1934, an exchange is A) a disposition of a security for value B) any transaction involving a security C) an organization that provides facilities for bringing together buyers and sellers of securities D) an organization of securities professionals designed to promote fair practices in doing business with the public
C. Under the Securities Exchange Act of 1934, exchange does not refer to a transaction but to an organization or facilities for bringing together buyers and sellers of securities. It is important to distinguish this function from other activities carried out by persons in the secondary market, such as transfer agents, securities information processors, or broker-dealers. U22LO3
Which of those documents discloses the interest rate charged by the broker-dealer, including the method of interest computation and situations under which interest rates may change?
Credit Agreement - It is the credit agreement that discloses the terms of the credit extended by the broker-dealer, including the method of interest computation and situations under which interest rates may change. U22LO2
The formula for computing the combined equity in a mixed margin account is
Current market value of the long positions, plus the credit balance in the short account, minus the current market value of the short positions, minus the debit balance in the long account. - This computation is basically subtracting what you "owe" from what you "own." You own the long stock and, just like with your credit card accounts, a credit balance is yours. You owe the debit balance in the long account, and because you must replace the borrowed stock in a short account, you "owe" the current market value it would cost to buy those shares back. U22LO2
Mr. Berg has been charting DMF stock prices. The stock usually fluctuates between 71 and 86. The stock is currently at 84, and the increasing upside volume makes him believe that a breakout is possible. Which of the following would he most likely enter? A) A sell limit at 88 B) A buy limit at 85 C) A sell stop at 70 D) A buy stop at 88
D. A breakout occurs when a security trades outside an established range. In this case, because Mr. Berg has no position, he would want to purchase only if the stock breaks through the resistance level already established. U22LO6
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 stock purchase is being paid for in full rather than by using borrowed funds. C) The interest rate being charged on borrowings is less than the rate of inflation. D) The rate of return on the investment exceeds the interest cost on the borrowed money.
D. Positive margin means that you were successful in your use of the leverage afforded by using margin (borrowed money). That means that the investor's total return exceeds the cost of the borrowed money. It is possible to actually sell the security for a price above its original purchase price, but not more than the total of the cost plus the interest. That would result in negative margin. U22LO2
Which of the following is regulated by the Securities Exchange Act of 1934? A) Requirements for the provisions of a prospectus B) Registration of new issues of stock C) Exemptions of new issues from registration requirements D) Regulation of exchanges
D. The purpose of the Securities Exchange Act of 1934 is to regulate secondary market trading of securities that have already been issued. It created the SEC and requires that all securities exchanges and firms register with the SEC if they are involved in interstate commerce.
Securities Act of 1933
Dealt with registration and exemption from registration of new issues and prospectus delivery requirements.
Which of the following investments is the most liquid? A) Oil drilling limited partnership interest B) Municipal revenue bond issued by a township C) Common stock in a small oil drilling corporation that is quoted on the OTC Link D) Long-term municipal bond fund
The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within 7 days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin trading markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades on the OTC Link (formerly known as the "Pink Sheets") may also have a thin trading market. U22LO3
