Unit 18 Position, Strategies, and Trade Authority SIE

what is two steps for a discretionary trading?

1. client must agree in writing to grant a representative discretionary trading authority 2. principal of the firm must, in writing, approve the discretionary trading authority

Who must grant permission for a representative to have discretionary trading authority on an account? The customer, the principal, and the representative The customer and a principal of the broker-dealer The representative and a principal The customer and the representative

The customer and a principal of the broker-dealer Authorization for discretionary trading must come from both the customer and the firm (represented by a principal). The representative's authorization is not a requirement.

Short against the box

an investor borrows and sells short stock that they own

Rep. Pete receives a call from his client, Neil, to place a trade. He wants to buy 200 shares of the Starshine Entertainment Company. Pete asks Neil a few questions about the trade before placing it. This is

an unsolicited trade As the representative did not introduce the trade to the customer this is an unsolicited trade. The customer provide the three key elements of the order (Action, Asset, Amount) it is not a discretionary trade.

Shares to sell short have been located in order to be borrowed. Once sold short, these shares will be known as covered. closed. naked. uncovered.

covered. Selling short requires borrowing or locating the shares to be borrowed first. These shares, because they have already been located to be borrowed, are known to be covered.

difference between closing a short and long security

Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back

Investment Advisers Act of 1940

Governs the regulation of firms that earn fees for providing investment advice

uncovered short

Has unlimited risk Does not own the shares being sold

Which of the flowing is true regarding short sales? Selling short involves purchasing the shares first. Selling shares not yet owned is prohibited. Selling short involves selling shares not yet owned. Selling short means selling less shares than were purchased.

Selling short involves selling shares not yet owned. 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.

Which of the following transactions has the least risk? Selling short Buying to open Short against the box Selling to open

Short against the box Short against the box is when a customer owns the shares she wants to sell but borrows some additional shares, sells the borrowed shares, and then covers the short position with shares already owned. Historically it was a tax strategy, but it doesn't work as well anymore with the tax law change. There is no loss potential. Buying to open can cause a loss of the amount invested; selling short and selling to open have unlimited loss potential.

A registered representative placing trades in a customer account must have discretionary authority if they choose which of the following aspects of the trade?

The action to be taken, the asset to be traded, or the amount of the trade In order for a trade to be considered discretionary the representative needs to choose any one or more of the three aspects of the trade (asset, action, or amount). It does not require more than one aspect, so the best response to the question is Action, Asset, or Amount. Any response that includes "and" suggests more than one of the "A"s needs to be controlled and is not accurate.

sales proceeds

The amount received upon the disposition of an asset. When calculating the tax implications of an asset sale, the sales proceeds are compared to the investor's cost basis to determine the taxable amount

buy long

The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.

A customer who is short against the box may close the position by all the following except covering the short with the stock in his account. depositing the fair market value of the shorted stock into his account. purchasing twice the stock in the open market. combining purchases of stock with stock already owned by the customer.

depositing the fair market value of the shorted stock into his account. 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.

Short sellers have

limited profit potential and an unlimited loss potential. 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.

Before executing a short sale the broker-dealer must first

locate the shares to be borrowed. The locate requirement mandates that the broker-dealer have located the share to be borrowed before the order is executed. If the customer already owns the shares then this would be a short against the box, and still requires the broker-dealer locate the shares. As this is an unlimited risk position it would be impossible to deposit sufficient funds to cover the potential loss.

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

solicited and the order ticket must be marked solicited. 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.

All of the following are required for a discretionary account except the customer must authorize discretion. the account must receive FINRA approval prior to the first trade. a principal at the firm must authorize discretion. all trades must be promptly approved by a principal at the firm.

the account must receive FINRA approval prior to the first trade. FINRA approval is not required for opening accounts.

A customer has an account with a broker-dealer who provides a group of services, such as asset allocation, portfolio management, trade executions, and administration, for a single fee. This is known as a

wrap account. Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee rather than charging commissions for individual transactions. Wrap accounts are generally investment advisory accounts and can be cash accounts, margin accounts, discretionary accounts, or nondiscretionary accounts.

Cost basis

the original value of a purchased asset, usually the purchase price

short sale

the sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan

Discretion given to a registered representative to make transactions applies to all of the following except: whether to buy or sell. the security for the transaction. the number of shares or units for the transaction. timing and price only.

timing and price only Discretion is defined as the authority to decide, what security, the number of shares or units, and whether to buy or sell. Discretion does not apply to decisions regarding only the timing of an investment or the price at which it is bought or sold.

open position

wide intervals between parts

solicited trade

A trade that originates from and is initiated by a registered representative (recommending a securities transaction to a customer).

unsolicited trade

A trade that originates from and is initiated by the customer

wrap account

All the expenses associated with your account are "wrapped" into a single fee. Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee rather than charging commissions for individual transactions. Wrap accounts are generally investment advisory accounts and can be cash accounts, margin accounts, discretionary accounts, or nondiscretionary accounts.

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

At what price to execute the trade, The time of execution of the trade 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.

Which of the following orders can be used to close a short position in CDT stock that consists of 1,000 shares? Write 10 CDT call options Buy 1,000 shares of CDT Sell 1,000 shares of CDT Buy 10 CDT call options

Buy 1,000 shares of CDT To close a short position consisting of 1,000 shares of CDT stock, one would need to purchase 1,000 shares—buy 1,000 shares of CDT. Buying the call options would not close the position, but once owned, they could be exercised with the purchased shares then used to close the short position.

A registered representative is explaining discretionary and nondiscretionary accounts to a customer. Only one of the following statements is accurate and can be made by the registered representative. Which is it? In a discretionary account you will have the opportunity to approve any order I want to enter before I enter it. In a nondiscretionary account no order can be entered without your prior approval. I decide if the account should be set up as discretionary or nondiscretionary, but must do so in your best interest. If I decide that the account should be a discretionary one you will no longer be able to enter orders yourself.

In a nondiscretionary account no order can be entered without your prior approval. In a nondiscretionary account no order can be entered without the customer's prior approval. In a discretionary account the customer's prior approval is not required. Only the customer can decide if the account should be a discretionary one and grants that discretion with a limited power of attorney giving trading authorization to the registered representative. Even in a discretionary account the customer may still enter their own orders.

sell long

Sale of securities that the seller owns and can deliver. This differs from short selling, where the investor does not own the securities.

An investor is long MJS stock. For this investor, which of the following is true? The risk is that the stock goes up in price. The risk is that the stock remains stable in price. Maximum loss can be unlimited. The risk is that the stock falls in price.

The risk is that the stock falls in price. 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.

Your client, Bill Hearst, inherited several thousand shares of his grandfather's auto parts manufacturer, National Autoparts. He sells a portion of the position in order to raise some cash to buy a new boat. Which of these is true? This is a secondary market transaction. This is a primary market transaction. This is a long sale of the stock. This is a short sale of the stock (he never purchased it).

This is a secondary market transaction. This is a long sale of the stock. The issuer has no part of this transaction; it is considered a secondary market transaction. It does not matter that Bill did not buy the shares; it matters that he owned them. This is a long sale.

A person who is vested with legal rights and powers to be exercised for the benefit of another is known as

a fiduciary. A fiduciary is expected to place the interest of the beneficial owner first and is morally and legally responsible for acting in that capacity.

Two weeks ago representative Pete introduced his customer Neil to the Windmill Growth Fund in response to Neil's interest in growth funds. Today the customer calls Pete to place a trade to invest $10,000 in the Windmill Growth Fund. This is

a solicited trade As the representative introduced the security to the customer, this is a solicited trade. The customer provided the three key elements of the order (action, asset, amount) it is not a discretionary trade.

discretionary trade

a trade in which the registered representative chooses one or more of the following: Asset (security), Action (buy or sell), or Amount (in shares or dollars)

Your customer purchased 300 shares of XYZ stocks six months ago and sold the shares last week. The actions your customer took in relation to XYZ were to

buy long and sell long. The purchase of the stock is a long buy. The subsequent sale of the long position is a long sale.

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 buy XYZ to open. buy XYZ to close. sell XYZ to close. sell XYZ to open.

sell XYZ to close. When a client owns a stock and wants to get out of that position, he should sell the stock in a closing transaction.

Shares must be borrowed in order to

sell short to open a position. When selling short, an investor is opening a position (a short position). Selling short means selling shares not yet owned. In order to do so, the shares must be borrowed first.

A customer is long 400 shares of BuyStuff Inc., a big-box retailer. He borrows 400 shares to sell while maintaining his long position. This sale is called

short against the box. This is called a short against the box. It was a popular way of locking in a capital gain and deferring the tax consequences into another year. However, this practice was restricted by the Tax Relief Act of 1997; it was so restricted that it has largely disappeared as a practice.