SIE prac exam part3 (16-18)
Your customer opens a position at 45 and then closes it later at 47. This represents A) a 2-point gain or loss. B) a 47-point gain. C) a 2-point loss. D) a 2-point gain.
A Because we do not know if the opening transaction was a buy or a sell from what we are told, this could be either a 2-point gain or loss. If the opening transaction was a buy, this represents a gain (bought at 45, sold at 47). But if the opening transaction was a sell, this represents a 2-point loss (sold at 45, bought back at 47).
Which of the following best describes how a buy stop @ 39 would fill? A) The next available price after the market price rises to 39 B) The next available price after the market price falls to 39 C) The next price above 39 after the market price rises to 39 D) The next price below 39 after the market price falls to 39
A 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.
A registered representative suggests a trade to a customer which the customer agrees is suitable given their investment objectives. The order is entered. This transaction is A) solicited and the order ticket must be marked solicited. B) solicited but the order ticket need not be marked in any special way. C) unsolicited and the order ticket should be marked unsolicited. D) neither solicited or unsolicited and the order ticket should be marked as neither.
A Explanation A transaction initiated by an agent or registered representative is known as a solicited transaction. Unsolicited transactions are those initiated by the customer. Order tickets should always be marked solicited or unsolicited.
Caleb McCann got a tip from his brother Nate on XYZ stock two months ago. Caleb hasn't previously been investing in the stock market but has been watching this stock since he got the tip from his brother. Caleb is now very bullish on XYZ and wants to place a trade. Which of the following would you recommend? A) Buy XYZ to open a long position B) Buy XYZ to close out a short position C) Sell XYZ to close a long position D) Sell XYZ to open a short position
A Explanation Because McCann has no existing position, this would be an opening transaction, and if bullish on the stock it, would be a purchase.
John Bourne places a buy limit order at 42 when the market price of the stock is at 45. Which of the following best describes how the order would fill? A) The order can only be filled at a price of 42 or lower. B) The order would be filled between when the stock price is between 42 and 45. C) The order would be filled immediately because the market price is already above 42. D) The order would be filled at the next available price after the stock price drops to 42.
A Explanation Buy limit orders are placed below the current market price and fill at the stated price or lower.
An investor is long MJS stock. For this investor, which of the following is true? A) The risk is that the stock falls in price. B) The risk is that the stock goes up in price. C) Maximum loss can be unlimited. D) The risk is that the stock remains stable in price.
A Explanation For an investor with a long stock position, the risk is that the stock falls in value. Maximum loss occurs at zero and is therefore limited to the amount paid for the stock when purchased.
Which of the following would be required in discretionary accounts? A) Prompt approval by a principal following each discretionary trade B) Financial Industry Regulatory Authority (FINRA) approval to open the account C) Securities and Exchange Commission (SEC) approval to open the account D) Prior approval by a principal before each discretionary trade is placed
A Explanation The SEC and FINRA do not approve accounts approval of the trade is required promptly afterwards by a principal not before.
Unless otherwise specified, the size of a firm quote is A) 100 shares. B) 500 shares. C) 10,000 shares. D) 1,000 shares.
A Explanation This is according to a Financial Industry Regulatory Authority (FINRA) rule.
Selling shares not yet borrowed or located to be borrowed is A) known as a naked short sale and is prohibited. B) known as closing a position with a sale and is prohibited. C) known as a short sale and is prohibited. D) known as closing a short sale with a purchase.
A In order to open a position with a short sale, the shares to be sold must be borrowed or located to be borrowed first. Not doing so is known as selling short naked (naked short sale) and is prohibited.
A customer wishes to sell short 1,000 shares of ABC. Prior to executing the order, the registered representative must A) locate shares that can be lent to effect the sale. B) receive principal permission to execute the trade. C) receive permission from the customer to borrow shares. D) have the customer pledge personal collateral to cover the sale.
A Regulation SHO requires that prior to executing any short sale, the broker-dealer must locate the shares borrowed. Shorting stock uncovered is a violation of Regulation SHO and may result in disciplinary action against the member firm.
Which of the following transactions has greatest risk? A) Selling short B) Buying to open C) Short against the box D) Selling to close
A Short against the box is when a customer owns the shares they want to sell but borrows some additional shares and sells the borrowed shares then covers the short position with shares already owned. Historically it was a tax strategy but it doesn't work as well any more with the tax law change. There is no loss potential buying to open can cause a loss of the amount invested, selling short has unlimited loss potential.
ABC currently has the following quotes: Bid----- Ask ---Size (What's the inside quote?) A) 10.25 - 10.45 3 × 3 B) 10.25 - 10.50 3 × 2 C) 10.00 - 10.60 3 × 2 D) 10.20 - 10.45 4 × 3
A The inside quote is the highest bid (the highest price someone is willing to buy) paired with the lowest offer, or ask (the lowest price someone is willing to sell). In this case, the most someone was willing to pay was 10.25, and the lowest someone was willing to sell was 10.45.
Bid Ask Size 10.00 10.50 3 × 2 10.20 10.45 4 × 3 10.25 10.60 3 × 2 What is the spread in ABC? A) 0.20 B) 0.50 C) 0.30 D) 0.25
A The spread is computed as the difference between the lowest ask and the highest bid. In this case, the lowest ask is 10.45 and the highest bid is 10.25. Therefore, 10.45 - 10.25 = 0.20.
Which of the following transactions has the least risk? A) Short against the box B) Selling short C) Selling to open D) Buying to open
A A short against the box position is created when an investor creates a short stock position (sells short) while also holding the shares long. The investor already holds the shares needed to close the short position, so there is very little risk of loss. This strategy was traditionally used to delay realizing capital gains in order to take gains in a later year, reducing capital gains taxes for the current year. Subsequent changes in tax law have largely eliminated this strategy, but the concept may still appear on the exam.
A registered representative enters a discretionary order for her clients account. All of the following are required except A) the order must be approved by a principal prior to entry. B) the order should be included in those required to be reviewed frequently. C) a record of the order must be maintained. D) the order must be identified as or marked discretionary.
A) the order must be approved by a principal prior to entry. Explanation Each discretionary order must be identified as such at the time it is entered for execution, a principal, officer or a partner of the BROKER-DEALER must approve each order promptly and in writing, but not necessarily before order entry, a record must be kept of all transactions including discretionary ones, and as with all trading activity, it is subject to frequent and systematic review by a designated supervisor or manager.
Your client Alice Tate with no other positions in her margin account is bearish on ABC stock. Which of the following transactions would you recommend? A) Buy ABC to open B) Sell ABC to open C) Sell ABC to close D) Buy ABC to close
B Because there are no other positions, this would be an opening transaction and selling the stock would be bearish.
A buy stop order @ 39 could fill at which of the following prices? 1. 38 2. 39 3. 40 4. 41 A) II & III B) I, II, III, & IV C) III & IV D) I & II
B 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.
What is the spread on a stock quote? A) The range of prices the stock has shown over the course of one trading day B) The difference between the bid price and the ask price or offer C) The broker-dealer's commission charges for the transaction D) The profit margin for an individual trade
B Explanation A quote consists of a bid and an ask price. Dealers post their bid price—the price they are willing to pay for a stock—and their ask price—the price at which they are willing to sell the stock. The spread is the difference between the two.
Potential risks of owning common stock include all of the following except A) low priority in liquidation. B) unlimited liability. C) business risk. D) market risk.
B Explanation As a common stockholder, an investor cannot lose more than she invested.
All of the following would be required for a discretionary account except A) all trades must be promptly approved by a principal at the firm. B) the account must receive Financial Industry Regulatory Authority (FINRA) approval prior to the first trade. C) the customer must authorize discretion. D) a principal at the firm must authorize discretion.
B Explanation FINRA approval is not required for opening accounts.
In left unexecuted, a good til cancel (GTC) order will automatically be canceled when? A) On the first business day of April and the first business day of October B) On the last business day of April and the last business day of October C) On the cancel date specified by the customer at the time the order is entered D) On the last business day of June and the last business day of December
B Explanation GTC orders are valid until executed or canceled. Any GTC orders left unexecuted are automatically canceled on the last business day of April and the last business day of October. If the customer wishes to have the order remain working beyond those specific days, the customer must reenter the order.
Which of the following would be required for a good 'til canceled order to remain in force for more than six months? A) Nothing; it stays on the books until the customer cancels it B) The customer would need to reconfirm the order C) The specialist on the NYSE would need to reconfirm the order D) The broker-dealer would need to reconfirm the order for it to remain in force
B Explanation Good 'til canceled orders historically have been canceled the end of April and October. Some firms will cancel them more frequently, but for the order to stay in effect longer than six months, the customer would need to reinstate the order.
Which of the following orders need not be immediately filled in their entirety? Immediate or cancel (IOC) Fill or kill (FOK) Market at open All or none (AON) A) II and III B) I and IV C) I and III D) II and IV
B Explanation Immediate or cancel (IOK) orders allow partial execution, with the unexecuted portion of the order being canceled. All-or-none (AON) orders may be executed piecemeal, until the end of the day (for day orders) or until they can be filled in their entirety (for good til canceled, or GTC) orders. Both FOK and market at open orders are expected to be filled immediately and in their entirety. If unable, a FOK order would be canceled (killed).
Which of the following are required in discretionary accounts? A) Prior approval by a principal before each discretionary trade is placed B) Prompt approval by a principal following each discretionary trade C) SEC approval to open the account D) FINRA approval to open the account
B Explanation The SEC and FINRA do not approve accounts. Approval of the trade is required promptly afterwards by a principal, not before.
Blaine has owned XYZ stock for several years and believes it is time to take his profit and invest that money in another stock. He should A) buy XYZ to close. B) sell XYZ to close. C) buy XYZ to open. D) sell XYZ to open.
B Explanation When a client owns a stock and wants to get out of that position they would sell the stock in a closing transaction.
Blaine Smith has owned XYZ stock for several years and believes it is time to take his profit and invest that money in another stock. He should A) sell XYZ to open. B) sell XYZ to close. C) buy XYZ to open. D) buy XYZ to close.
B Explanation When a client owns a stock and wants to get out of that position, he should sell the stock in a closing transaction.
The locate requirement is an element of which of the following transactions? A) Sell to close B) Sell to open C) Buy to close D) Buy to open
B Explanation When selling short (selling to open), shares must be borrowed from the dealer. The dealer finding those shares that can be loaned to the seller is part of the locate requirement.
Which of the following best describes how a market order to sell would fill if placed when the price of the stock is a 40? A) The next available price below 40 B) The next available price C) The next available price above 40 D) Only at 40
B Market order always get the next available price regardless of if it is a buy or sell and regardless of price.
Ownership of a security indicates that one is A) short the position and bullish. B) long the position and bullish. C) long the position and bearish. D) short the position and bearish.
B Owning a security means that one is long the position. When one is long (owns) the security, the person is bullish, anticipating it will go up in value in the hopes of selling it later at a higher price than it was purchased for.
Which of the following best describes how a sell stop at 39 order would be filled? A) The next available price after the market price rises to 39 B) The next available price after the market price falls to 39 C) The next price above 39 after the market rises to 39 D) The next price below 39 after the market falls to 39
B Sell stop orders are placed below the current market price and become market orders once the price touches or passes through the stop price.
Which of the following best describes the size of a quote it tells? A) The number of shares the broker-dealer has in inventory B) The number of shares the broker-dealer is willing to buy or sell at that price C) The number of shares that were traded in the over-the-counter (OTC) market the prior day D) The number of shares that were traded on the NYSE that day
B) The number of shares the broker-dealer is willing to buy or sell at that price
WRJ stock is quoted as 21 bid, 21.15 offer. Which of the following is true? A purchase can be made at $21 per share if buying at the market. A purchase can be made at $21.15 per share if buying at the market. The spread is $0.15. A sale can be made at $21.15 per share if selling at the market. A) I and III B) III and IV C) II and III D) I and IV
C Explanation A quote always represents the bid and an ask (offer) price. Investors pay the current ask price when purchasing (21.15) and receive the current bid price when selling (21). The spread is the difference between the bid and the ask price—in this quote, 0.15.
If your client, Marvin Blackwell, places a sell stop order at 38 when ABC is trading at 40, at which of the following prices could the order be filled? 1. 38 2. 39 3. 40 4. 41 A) II and III B) III and IV C) I, II, III, and IV D) I and II
C Explanation A sell stop order is an instruction to sell at the market when a trade occurs at or below the stop price. If ABC stock's price drifted down and trades at 38, the stop is triggered. Even if it leaps over 38 to 37.95, for example, the stop would trigger. Remember that a stop, when triggered, becomes a market order. Market orders may fill at any price.
Your client, Jane Anderson, has owned QRS for a few years but has now turned bearish on QRS. What transaction would you recommend? A) Buy QRS to open B) Sell QRS to open C) Sell QRS to close D) Buy QRS to close
C Explanation Because Anderson already owns the stock, this would be a closing transaction, and because she is bearish it would be a sell.
Your client Mrs. Bourne has owned has owned QRS for a few years but has now turned bearish on QRS. Which transaction would you recommend? A) Buy QRS to open B) Buy QRS to close C) Sell QRS to close D) Sell QRS to open
C Explanation Because Mrs. Bourne already owns the stock, this would be a closing transaction and because she is bearish it would be a sell.
Your client, Randall Stephens, has been bearish on LMN stock and sold it short several months ago. He now believes the company is in a good position for a turnaround and wants to change his strategy on LMN. What should he do to implement his new strategy? A) Buy an equal number of shares to his existing short position B) Sell short QRS to close his existing position C) Buy to close his existing position and open a new long position in the stock D) Sell an equal number of shares to his existing position
C Explanation Buying to close will eliminate his existing position, but if he now wants to engage in a bullish strategy on LMN, he would need to buy additional shares.
All of the following would be required for a discretionary account except A) a principal at the firm must authorize discretion. B) all trades must be promptly approved by a principal at the firm. C) the account must receive Financial Industry Regulatory Authority (FINRA) approval prior to the first trade. D) the customer must authorize discretion.
C Explanation FINRA approval is not required for opening accounts.
Who must reconfirm a good 'til canceled order for it to stay in force more than six months? A) No one; they will remain in force until the customer cancels it B) The broker-deaker who accepted the order C) The customer who placed the order D) The specialist on the NYSE
C Explanation Good 'til canceled orders historically have been canceled at the end of April and October. Some firms will cancel them more frequently, but for the order to stay in effect longer than six months, the customer would need to reinstate the order.
Who must reconfirm a good-til-canceled order for it to stay in force more than six months? A) The broker-dealer who accepted the order B) No one they will remain in force until the customer cancels it C) The customer who placed the order D) The specialist on the NYSE
C Explanation Good-til-canceled orders historically have been canceled the end of April and October. Some firms will cancel them more frequently, but for the order to stay in effect longer than six months the customer would need to reinstate the order.
Which of the following choices would a registered representative be able to make for a customer in a nondiscretionary account? The time of execution of the trade What security to buy How much of the security to buy At what price to execute the trade A) II and III B) I and II C) I and IV D) II and IV
C Explanation If the registered representative chooses the Asset the Action or the Amount, it must be placed in a discretionary account. The registered representative can choose time or price without the needing to place the trade in a discretionary account.
The trade would need to be placed in a discretionary account if the registered representative chooses which of the following? 1. The time of execution of the trade 2. Which security to buy 3. How much of the security to buy 4. At what price to execute the trade A) I and II B) I and IV C) II and III D) II and IV
C Explanation If the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without the needing to place the trade in a discretionary account.
Which of the following choices would a registered representative be able to make for a customer in a nondiscretionary account? The time of execution of the trade Which security to buy How much of the security to buy At what price to execute the trade A) I and II B) II and IV C) I and IV D) II and III
C Explanation If the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without needing to place the trade in a discretionary account.
An investor who has a short position in 500 shares of JKH common stock would eliminate that position by A) entering an opening purchase order for 500 shares of JKH. B) entering a closing sale order for 500 shares of JJK. C) entering a closing purchase order for 500 shares of JKH. D) entering a closing purchase order for 500 shares of ABC.
C Explanation In order to eliminate a position, long or short, the investor always takes an action opposite that of the one that began (opened) the position. Therefore, we always close the position with a closing order. In the case of a short position, we began with a sale, so we close with a purchase of the same security that was initially sold short—in this case, 500 shares of JKH.
A market order to buy must be executed when and at what available price? A) Within 24 hours, at the lowest B) Within 24 hours, at the highest C) Immediately, at the lowest D) Immediately, at the highest
C Explanation Market orders carry the idea of immediate execution at the best available price. A market order to buy would require execution at the lowest available price.
Which of the following best describes how a sell stop at 39 order would be filled? A) Only the next price below 39 after the market falls to 39. B) The next available price after the market price rises to 39. C) The next available price after the market price falls to 39. D) The next price above 39 after the market rises to 39.
C Explanation Sell stop orders are placed below the current market price and become market orders once the price touches or passes through the stop price.
Short sellers have A) unlimited profit potential and limited loss potential. B) limited profit and loss potential. C) limited profit potential and an unlimited loss potential. D) unlimited profit and loss potential.
C Explanation Short sellers are bearish—wanting to see the stock go down in value. Because stock could only go down as far as zero, the profit for a short seller is limited to the difference between the price the stock was shorted at and zero. By contrast, the risk for a short seller is that the stock goes up in value and there is no limit to how high the stock might rise, giving the short seller potentially unlimited losses.
Distinguishing between a sell stop order and a sell stop limit order, which of the following are true? 1. The sell stop limit order becomes a sell limit once triggered. 2. The sell stop order becomes a sell limit order once triggered. 3. The sell stop limit order becomes an order to sell at the market triggered. 4. The sell stop order becomes an order to sell at the market triggered. A) II and IV B) I and III C) I and IV D) II and III
C 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.
Which of the following best describe a wrap account? 1. The firm offering the account would need to be registered as both a broker-dealer and an investment advisor 2. The account fee covers both transactions and advice 3. The wrap fee for the account covers only where the firm acts as a broker or acts as a dealer 4. The firm may only be registered as a broker or dealer A) II and III B) III and IV C) I and II D) I and IV
C Explanation The fee covers both the advice and any transaction, so the firm must be registered as both a broker-dealer and an investment advisor.
ABC currently has the following quotes: Bid---Ask---Size 10.00 10.50 3 × 2 10.20 10.45 4 × 3 10.25 10.60 3 × 2 The inside bid good is for? A) 400 shares. B) 100 shares. C) 300 shares. D) 200 shares.
C Explanation The inside bid is the highest bid, or the most someone is willing to pay. In this situation, MM3 is willing to pay 10.25 for 300 shares.
The bid price represents the price the broker-dealer is willing to pay when buying a security. the price the customer will pay when buying a security. the price a customer will receive when selling a security. the price the broker-dealer will receive when buying a security. A) II and IV B) I and II C) I and III D) II and III
C The broker-dealer buys at the bid and sells at the ask. The customer buys at the ask and sells at the bid.
A client calls a registered representative and states that she lives in New York City and is looking for a bond that would be triple tax free in New York. The registered representative tells the client that his firm has some bonds in inventory that are from the Albany New York School District that would be triple tax free for the client. Which of the following would be the registered representative's best course of action? A) Determine suitability prior to the trade and mark the trade unsolicited. B) No suitability determination is required because the bonds will be tax free for the client and mark the trade solicited. C) Determine suitability prior to placing the trade and mark the trade solicited. D) No suitability determination is required because these bonds will be tax free for the client and mark the trade unsolicited.
C Explanation For a trade to be unsolicited, the client would need to specifically identify the bonds he wanted to purchase; instead the registered representative is the one who recommended these bonds, making the trade solicited. Suitability must be determined on solicited trades.
Your client, 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 limit order B) A market order C) A sell stop order D) A sell limit order
D 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.
Caleb McCann got a tip from his brother Nate on XYZ stock two months ago Caleb hasn't previously been investing in the stock market but has been watching this stock since he got the tip from his brother. Caleb is now very bullish on XYZ and wants to place a trade. Which of the following would you recommend? A) Buy XYZ to close out a short position B) Sell XYZ to close a long position C) Sell XYZ to open a short position D) Buy XYZ to open a long position
D Caleb has no existing position. This would be an opening transaction and if bullish on the stock it would be a purchase.
A customer called his registered representative to place a trade to buy 100 shares of ABC. The customer wants to put a limit on the order, but is unsure what would be an appropriate price. At the suggestion of the registered representative, the customer enters the order with a limit of $30. This trade was A) not held. B) discretionary. C) solicited. D) unsolicited.
D Explanation The customer, independent of the registered representative, placed the order, making it unsolicited. While the rep did advise on what an appropriate limit price would be, the customer ultimately placed the order instructions with the limit, and would not be considered discretionary.
A customer enters the following order: Sell 1,000 shares of XYZ at 23. Which of the following executions would the customer accept? A) 22.50 B) 21.25 C) 22.90 D) 23.50
D 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.
Which of the following best describes how a market order to buy would fill if placed when the market price of the stock was at 40? A) The next available price below 40 B) Only at 40 C) The next available price above 40 D) The next available price
D Market order always gets the next available price, regardless of if it is a buy or sell and regardless of price.
Which of the flowing is true regarding short sales? A) Selling shares not yet owned is prohibited. B) Selling short involves purchasing the shares first. C) Selling short means selling less shares than were purchased. D) Selling short involves selling shares not yet owned.
D Short sales involve selling shares not yet owned. This is permitted. When selling short, investors are borrowing the shares to be sold, which must be replaced later by buying them. Investors who sell short are bearish, hoping the shares go down in value so that they can be purchased later at a lower price than they were initially sold for.
The locate requirement is an element of which of the following transactions? A) Buy to close B) Buy to open C) Sell to close D) Sell to open
D) Sell to open Explanation When selling short (selling to open) shares must be borrowed from the dealer. The dealer finding those share that can be loaned to the seller is part of the locate requirement.
A customer who is short against the box may close the position by all the following except A) purchasing twice the stock in the open market. B) combining purchases of stock with stock already owned by the customer. C) covering the short with the stock in his account. D) depositing the fair market value of the shorted stock into his account.
D) depositing the fair market value of the shorted stock into his account. Explanation A customer who is short against the box owns the stock he shorted. As a result, the customer may use his owned stock to cover the short position, buy back the short position in the open market, or any combination of the two. The customer cannot simply deposit funds into his account.