5.9 Markets and Market Participants

Which of the following could accelerate a rise in a bull market? A) Buy stop. B) Sell stop. C) Buy limit. D) Sell limit.

A) Buy stop. Buy stop orders are placed above the market and as prices increase, the stops are hit creating additional buying.

A short investor enters an order marked buy DMF at 25.50 stop. Which of the following would trigger the order? A) If the market price goes to or above 25.50. B) If the market price goes below 25.50. C) The order need not be triggered, but it must be executed at 25.50. D) This order cannot be executed.

A) If the market price goes to or above 25.50. Buy stop orders are usually entered to protect short sales. The stop would trigger the order when DMF reached 25.50 or higher.

Stock prices in the over-the-counter market are determined by: A) negotiation. B) the five percent markup policy. C) an auction. D) a competitive bid.

A) negotiation. The five percent markup policy regulates commissions and markups, not prices. The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market.

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 stop at 88. C) A buy limit at 85. D) A sell stop at 70.

B) A buy stop at 88. 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.

**Which of the following orders would be used to protect a short sale profit? A) A sell stop. B) A buy stop. C) A sell short. D) A buy limit.

B) A buy stop. For a short sale to earn a profit, the current market value must be lower than the sale price. An investor must buy the stock at a lower price to realize a profit. To protect denotes buying if the market starts to rise. Therefore, a buy stop would be entered above the current market value to protect the profit and trigger a purchase in the event the market starts to rise.

Which of the following statements about stock exchanges is TRUE? A) Any stock can be listed on any exchange. B) A securities exchange market is an auction market in which prices are established by auction. C) A securities exchange market is one in which prices are established by negotiations between buyers and sellers. D) A stock exchange buys and sells stocks itself.

B) A securities exchange market is an auction market in which prices are established by auction. A stock exchange does not buy or sell stocks itself; it simply supplies the facilities for its members to trade. Prices are established in an auction process rather than by direct negotiations between buyer and sellers, as occurs in the over-the-counter (OTC) market. Only stocks that satisfy the exchange's standards can be listed on the exchange.

*A client of a broker/dealer turns in an order to purchase 10,000 shares of XYZ stock. This would be: A) arbitrage. B) a block trade. C) churning. D) front running.

B) a block trade In the securities business, trades of 10,000 shares or more are known as block trades.

It is often said that the backbone of the over-the-counter market is the market-maker. A good description of a market maker would be: A) a subscriber to the Nasdaq system. B) a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market. C) a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded on a listed exchange. D) an investment banker who participates in a firm underwriting.

B) a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market. This is the basic definition of a market maker. Specialists perform essentially the same service on the listed exchanges.

Market makers are involved in the trading of all of the following EXCEPT: A) preferred stocks. B) new issues. C) common stock. D) municipal bonds.

B) new issues. New issues are originally sold in the primary market.

A member of a stock exchange who is responsible for maintaining a fair and orderly market by buying and selling for his own account to reduce any temporary disparities between supply and demand is best described as a: A) two-dollar broker. B) specialist. C) Nasdaq market maker. D) trading supervisor.

B) specialist. The specialist's role is to maintain a fair and orderly market in the stocks in which he is appointed specialist.

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) 61 C) 60.06 D) 59.95

C) 60.06 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. Since 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.

Which of the following is an order to purchase at higher than the current market? A) A buy, immediate or cancel. B) A buy, fill or kill. C) A buy stop. D) A buy limit.

C) A buy stop. Buy stop orders are entered above the current market value of the stock.

Which of the descriptions of time-related orders is NOT true? A) A market not held order allows the floor broker to use his judgment as to price and timing of the transaction. B) An all-or-none order must be filled in full but not immediately. C) A fill-or-kill order must be executed immediately and the remainder of the shares not sold or purchased is canceled. D) An immediate-or-cancel order must be executed immediately and the remainder of the shares left unsold, or not purchased, are canceled.

C) A fill-or-kill order must be executed immediately and the remainder of the shares not sold or purchased is canceled. A fill-or-kill order must be executed immediately and completely, or the entire order is canceled. An immediate-or-cancel order must be executed immediately, and the remainder of the shares left unsold or not purchased is canceled. A market not held order is a type of market order that allows the investor to give discretion regarding the price and/or time at which a trade is executed. An all-or-none order must be completed in full, but not immediately.

**Mr. Donaldson is short 100 XYZ at $80 and has entered a buy stop XYZ at 82.50 GTC. The current market value for XYZ is $76. A favorable report is released, and XYZ starts to rally. Mr. Donaldson wants to cover immediately. The order ticket should be written as: A) Sell short exempt 100 XYZ at market. B) Buy 100 XYZ at 76 stop; cancel buy 100 at 82.50 stop GTC. C) Buy 100 XYZ at market; cancel buy 100 at 82.50 stop GTC. D) Sell 100 XYZ at market.

C) Buy 100 XYZ at market; cancel buy 100 at 82.50 stop GTC. To change an open order, the open order must be canceled and a new order must be entered. In this case, Mr. Donaldson wants to cover it immediately, which means at the market regardless of the price. As such, he would not enter another stop order; he would enter a market order and cancel the existing stop order

Which of the following statements about short sales are TRUE? In a short sale, an investor sells securities she does not own. Risks can be minimized by confining short sales to cash accounts rather than margin accounts. In a short sale, an investor hopes that the price of a security will go down. A) II and III. B) I, II and III. C) I and III. D) I and II.

C) I and III. In a short sale, an investor sells securities she does not own. The investor must later purchase securities to cover the short sale. If the price of the securities drops before the sale must be covered, the investor profits. The investor realizes a loss, though, if the price of the securities goes up. Because borrowing is involved, all short sales must take place in margin accounts, never in a cash account.

Which of the following statements about stop orders are TRUE? A stop order will become a market order once a security trades at a specific price. A sell stop order is always placed at a price that is below the current market price. A stop order to buy is always set at a price that is higher than the current market price. A) I and III. B) II and III. C) I, II and III. D) I and II.

C) I, II and III. Stop orders become market orders once the security trades at a specific price. A sell stop order is typically used to protect a profit or limit a loss on a security the investor has already purchased at a higher price. Therefore, sell stop orders are always entered at a price that is below the current market price. Conversely, a stop order to buy is always placed at a price that is higher than the current price and is used to protect a short sale.

**An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents the: A) premium. B) yield to maturity. C) bid price. D) offer price.

C) bid price. If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price. What does the 5% coupon and the 15 years to maturity have to do with the question? NOTHING. And, knowing that treasuries are quoted in 32nds has nothing to do with it either. And, one more thing. The price quote is above 100 so it is at a premium, BUT, the better answer is bid price because the question is referring to the quote.

A stop order can be used to do all of the following EXCEPT: A) protect a short position. B) offer a security at the market price. C) give the broker/dealer discretion regarding time and price. D) protect a long position.

C) give the broker/dealer discretion regarding time and price. A stop order becomes a market order when the stop price is reached. Stops can be used to protect both long and short positions. The stop order does not give the agent or the firm any discretion.

The execution of a market order to sell occurs at the: A) highest offer. B) lowest offer. C) highest bid. D) lowest bid.

C) highest bid. (Bid = what the MM is willing to pay) A market order to sell is filled at the highest bid while a market order to buy is filled at the lowest offer.

An order to immediately buy or sell a security at the best available price is known as a: A) limit order. B) stop order. C) market order. D) short order.

C) market order. A market order to buy is an instruction to purchase a security at the lowest price available in the market; conversely, a market order to sell means to sell at the highest available price.

A buy stop order may be used for all of the following EXCEPT: A) to acquire a long position as a stock breaks through resistance. B) to protect against loss in a short position. C) to protect a profit in a long position. D) to protect a profit in a short position.

C) to protect a profit in a long position. 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

What is the name given to an order to purchase or sell a stock where the investor has specified a price? A) A market order. B) An all or none order. C) A discretionary order. D) A limit order.

D) A limit order. The distinguishing feature of a limit order is that the investor sets a specific price limit. In the case of a buy limit, it is the maximum price he is willing to pay; in the case of a sell limit, it is the lowest price he is willing to accept. Although an all or none order does specify a price, it is categorized as a type of limit order so you must choose the most all encompassing answer.

Which of the following orders may be used to acquire a security at a specific price or better? A buy stop limit. A buy limit. A sell stop. A sell limit. A) I and III. B) II and III. C) II and IV. D) I and II.

D) I and II. Only buy orders can acquire stock. Only buy limit orders (or buy stop orders with a limit attached) can acquire stock at a specific price or better.

Which of the following statements about bid and asked prices are TRUE? The bid price is the price a dealer is willing to pay to buy a security. The asked price is the price a dealer is willing to accept to sell a security. The bid price for a security is higher than the asked price for the security. A) I and III. B) II and III. C) I, II and III. D) I and II.

D) I and II. The bid price is the price at which a dealer will buy a security, and the asked price is the price at which a dealer will sell. A dealer will always bid a lower price to buy a stock than to sell it.

Which of the following would be a common use of a stop order? To protect the profit on a long position. To prevent loss in a short position. To buy at a specific price guaranteed by a specialist. To lock in a price with the specialist. A) I and III. B) II and III. C) II and IV. D) I and II.

D) I and II. To protect the profit on a long position. To prevent loss in a short position. A buy stop may protect an investor against losses in a short position, and a sell stop may protect an investor's profits on stock she holds long.

When a broker/dealer engages in a customer transaction from its own account, which of the following statements are TRUE? Partners of the broker/dealer are trading in their personal accounts. The broker/dealer is trading from its inventory with customers. The broker/dealer must disclose its capacity as a principal in the transaction. The broker/dealer must disclose its capacity as agent in the transaction. A) I and III. B) I and IV. C) III and IV. D) II and III.

D) II and III. The Uniform Securities Act defines a broker/dealer as a legal person (entity) engaging in the business of effecting securities transactions for the account of others or for its own account. In this context, trading for its own account means that the broker/dealer is trading from its inventory with customers. The broker/dealer has an ethical responsibility to disclose its capacity as a principal in the transaction. When trading for its own account, a broker/dealer is functioning as a principal or dealer. When trading for the accounts of others with no participation as a direct party to the trade, a broker/dealer functions in an agency capacity.

What is the term used to describe a person on the floor of a stock exchange who stands ready to buy or sell shares of specified stocks? A) Market maker. B) Floor broker. C) Arbitrageur. D) Specialist.

D) Specialist. This is the basic definition of the specialist. If the question had said the over-the-counter market, it would have been a market maker.

**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 may reject the incomplete order unless the remainder can be filled within 3 business days. C) The customer may demand that the firm deliver the remaining shares at 24.35. D) The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close.

D) The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close. The customer must accept the order for 300 shares. The representative cannot guarantee that the order will be filled by the end of day.

Which of the following reasons is appropriate justification for selling a stock short? A) To cut losses on a long position. B) To benefit from a rise in the price of the stock. C) To seek a modest potential reward with limited risk. D) To benefit from a decline in the price of the stock.

D) To benefit from a decline in the price of the stock. The appropriate time to sell short is when (one believes) a stock price is about to drop. The investor sells borrowed stock at current prices and then buys the stock later at a lower price to replace the borrowed stock. Selling short does not reduce the risk of a long position; the investor is selling borrowed, not owned, stock. If the stock moves up, the short investor can lose a great deal of money. If the stock price moves up, the risk of loss is unlimited.

Under the Securities Exchange Act of 1934, a market maker is: A) a marketplace to bring together buyers and sellers of securities. B) a security in high demand. C) any person who buys and sells securities for his own account or for the accounts of others. D) a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price.

D) a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price. A market maker is a dealer who holds itself out as being willing to buy or sell a security at a quoted price on a regular and continuous basis.

If a client places an order to buy 300 DWQ at 140 stop, but not over 144, and the order is left with a specialist, this is a: A) buy stop order. B) buy limit order. C) market order. D) buy stop limit order.

D) buy stop limit order. The customer has placed a buy stop limit order. If the stock rises to the stop price of $140, the order will be triggered and becomes a buy limit order at $144, meaning an order to buy at $144 or better (lower).

*An exchange specialist is a(n): A) trader who makes a market in OTC stocks and ADRs. B) floor broker on the New York Stock Exchange who only executes trades for other brokers in return for commissions. C) electronic brokerage concern that executes trades online and through specialized trading order executing services. D) 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.

D) 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. A specialist 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.

The Securities Exchange Act of 1934 defines a market maker is a(n): A) agent whose clients are institutions. B) person who buys and sells securities for her own account or for the accounts of others. C) agent for the issuer. D) 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) 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. 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.