Questions I got Wrong (8 P1)

If a customer with an unrealized gain on a short stock position wishes to protect his profit, he should enter a: A- Buy stop order B-Buy limit order C-Sell limit order D- Sell stop order

A: Buy stop order A buy stop order can be placed above the current market to protect the short stock position. If the stock trades at or above the stop price, the order is elected and becomes a market order to buy the stock, which will be used to cover the short position. Reference: 8.2.4 in the License Exam Manual

If a customer wishes to change a day order to a GTC order in the middle of the day, the registered representative should:

Allow the day order to expire at the end of the day and put in the GTC order before the next day's opening The GTC order is treated as a new order. The registered representative should wait until the close of trading so as not to lose the time priority of the original order that day. Reference: 8.2.3 in the License Exam Manual

A sell limit order is executed when a stock is 1- rising 2- falling 3- at or below the limit price 4- at or above the limit price

Ans: 1 and 4 A sell limit order is placed above the prevailing market price. Therefore, it may be executed if the market is rising. If executed, limit orders will be filled at the limit price or better, which in the case of a sell limit is the limit price or higher. Reference: 8.2.3 in the License Exam Manual

Your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will he own?

Ans: 125 shares at $20 Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged before and after the adjustment: 125 shares × $20 = $2,500, and 100 shares × $25 = $2,500. Reference: 8.2.5.2 in the License Exam Manual

Which of the following describe a securities exchange? 1- Prices are set by negotiation between interested parties 2- the highest bid and the lowest offer will prevail 3- only listed securities can be traded 4- minimum prices are established at the beginning of the day

Ans: 2 and 3 An exchange is not a negotiated market but an auction market in which securities listed on that exchange are traded. No minimum price is set for securities. Rather, the highest bid and the lowest offer prevail. Reference: 8.1.6 in the License Exam Manual

One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed? 1- $41.91 2- $42.27 3- $42.40 4- $42.75

Ans: 2 and 4 As a sell stop order with a limit of $42.15, no order may be executed below the limit price of $42.15. This order will be triggered at the price of $42.40. The only remaining prices that will meet the limit requirement after it is triggered are $42.27 and $42.75. Remember, it takes two trades for any stop order: one to trigger the order, the other for execution. Reference: 8.2.4 in the License Exam Manual

An investor enters a day order to buy 200 shares of GGZ at 63. Three hours later, with GGZ trading above that price, he calls his registered representative wanting to change the order to a good-till-canceled order. The registered representative should: 1-immediately cancel the existing order. 2-leave the existing order on the order book. 3-immediately enter a new limit order to buy 200 shares of GGZ at 63 GTC. 4-enter a new limit order to buy 200 shares of GGZ at 63 GTC before the next day's opening if the day order was unexecuted.

Ans: 2 and 4 The representative should not cancel the existing order because it would lose priority on the order book. However, the representative should not enter a GTC order that day because it could be filled twice. Instead, the representative should let the order stay for the day, when it would be canceled automatically if not executed. Then, the representative could enter a GTC order the next morning. Reference: 8.2.3 in the License Exam Manual

Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date?

Ans: 600 shares at 45.45 In this example, adjust only the share price: $50 ÷ (1 + .10) = $45.45. The number of shares in the order is not adjusted unless the shares can be increased by a full round lot (100 shares). Reference: 8.2.5 in the License Exam Manual

If a customer wishes to change a day order to a GTC order in the middle of the day, the registered representative should: A- Allow the day order to expire at the end of the day and put in the GTC order before the next day's opening B-Enter the new order as GTC and immediately cancel the day order C-Enter a change notice immediately D-Enter the new GTC order immediately and do nothing about the day order

Ans: A The GTC order is treated as a new order. The registered representative should wait until the close of trading so as not to lose the time priority of the original order that day. Reference: 8.2.3 in the License Exam Manual

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A- Trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor B- Brokers acting as agents in all order execution scenarios C- Trades in NYSE-listed securities occurring on the NYSE D- Brokers executing orders as agents in an auction market on any exchange trading floors

Ans: A FINRA's Trade Reporting Facility (TRF) is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent. Reference: 8.1.4 in the License Exam Manual

Which of the following applies to an open order to buy 600 WXYZ at 44? 1- the order may be partially filled at the limit price or better 2- the order is entered in the order book 3- this is considered a market order 4- it must be executed at the price specified or better A- 1,2,4 B- 1.2.3.4 C- 1 and 3 D- 2 and 3

Ans: A Unless the order is specified as AON or FOK, it may be partially filled. Finally, it is a limit order, which must be executed at the specified price or better. Reference: 8.2.3 in the License Exam Manual

A customer sells short 100 shares of XYZ Corporation at $78 per share. The support and resistance levels for XYZ are at $70 and $80, respectively. If he wishes to protect his position, which of the following is the best place to put in a buy stop order? A- 78.1 B- 80.1 C- 70.1 D- 69.85

Ans: A, 80.1 The client will want to place a buy stop a little above the resistance level to protect himself against an upside breakout. Entering a buy stop order too close to the purchase price (78.10) would not afford the client an opportunity for gain. Reference: 8.2.4 in the License Exam Manual

All of the following orders could be placed on the specialist (designated market maker) order display book EXCEPT: A- Limit orders B-Market orders C- Stop orders D- Stop limit orders

Ans: B, market orders Market orders are executed immediately. The order display book is for orders that are away from the current market, such as stop and limit orders. Reference: 8.2.2 in the License Exam Manual

Which of the following would accelerate a decline in a bear market? A- buy stop B- sell limit C- sell stop D- buy limit

Ans: C Sell Stop Sell stops, placed below the current market, become market orders to sell when the stock trades at or through (below) the stop price. Market sell orders can accelerate declines in the price of the stock. Reference: 8.2.4 in the License Exam Manual

Last week one of your customers placed a GTC order to sell 200 shares of ABC with an 18 stop when the stock was trading at 18.85. It is now the ex-date for a $.55 dividend and the order has not yet been executed. What has happened to your customer's stop order? A- It is cancelled B- It is increased to 18.55 C- It is reduced to 17.45 D- It remains at 18

Ans: C, it is reduced to 17.45 Unless the customer has given DNR, (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend. Reference: 8.2.5 in the License Exam Manual

Which of the following orders may be used to acquire a security at a specific price or better? 1- A buy stop limit 2- A buy limit 3- A sell stop 4- A sell limit A- 2 and 3 B- 1 and 3 C- 2 and 4 D- 1 and 2

Ans: D Only buy orders can acquire stock. Only buy limit orders can acquire stock at a specific price or better. Reference: 8.2.4 in the License Exam Manual

A specialist (designated market maker) is permitted to do all of the following EXCEPT A-Accept a limit order B-Buy and sell for a proprietary account C-Represent a bid and offer simultaneously D-Accept a not-held order

Ans: D, Accept a not-held order A specialist (designated market maker) on the floor does not deal directly with the public. Therefore, a DMM cannot accept any order that requires the exercise of discretion. A not-held order is one in which the floor broker can choose the price or time of execution. Reference: 8.1.7 in the License Exam Manual

If a customer gives his broker/dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is: A- Sell limit order B- Stop order C- Buy limit order D- Stop limit order

Ans: D, a stop limit order When an order is entered this way, the client has specified that it should not be triggered until the stock is at or below 69, a stop order. Because the client will not accept an execution below 69 it is a stop limit order. Reference: 8.2.4 in the License Exam Manual

After the market closed yesterday, ABC announced that it would file for bankruptcy under Chapter 11. The NYSE decides not to open trading in ABC. In response to the NYSE's announcement, which of the following statements regarding the OTC market is TRUE? A- it may either halt or continue trading as it sees fit B- it applies to the SEC C- it continues to trade ABC with the NYSE specialist's (designated market maker) permission D- it halts all trading in ABC until the NYSE reopens it

Ans: It may either halt or continue trading as it sees fit The over-the-counter market is not bound by actions of the NYSE or other exchanges, and third-market trading may continue in the stock. Reference: 8.2.2 in the License Exam Manual

A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30 respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter? A- Buy 100 ABC 20.50 stop B- Sell 100 ABC 29.75 stop C- Sell 100 ABC 19.50 stop D- Buy 100 ABC 30.25 stop

Ans: Sell 100 ABC 19.50 stop An analyst who expects a stock to fall through support is anticipating that the stock will decline. He can take advantage of this trend by establishing a short position at the top of the decline. He will enter a sell stop order just below the support price. Reference: 8.2.4 in the License Exam Manual

The KPL Corporation is considering having its stock listed on the New York Stock Exchange. Who will make the final decision as to whether it will be listed?

Ans: The NYSE The New York Stock Exchange has certain requirements that a company must meet before its stock can be considered for listing. Because the Exchange sets the requirements, it must make the final decision. Reference: 8.1.6 in the License Exam Manual

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

Ans: To protect a profit in a long position Buying can only protect short positions, not long positions. Reference: 8.2.4 in the License Exam Manual

A customer has an order to buy 400 ABC at 60. ABC declares a 25% stock dividend. On the ex-date, the order on the order book will read

Ans: buy 500 shares at 48 For stock dividends, all buy limit orders on the book are adjusted and the order value must be the same before and after the adjustment. Before the adjustment, 400 ABC at 60 Stop = $24,000 total value. After the adjustment, total shares on the buy order will be 500 (400 × 25% = 100 new shares, 400 + 100 = 500). To arrive at the new price, divide the total order value by the new number of shares ($24,000 / 500 shares = 48). After the adjustment the new order will read; buy 500 shares at 48. Reference: 8.2.5 in the License Exam Manual

Stocks that are listed on the NYSE can also be listed on

The Nasdaq Stock Market NYSE-listed securities can be listed on and trade on other U.S. exchanges including the Nasdaq Stock Market. NYSE listed stocks would never be listed on the OTC Bulletin board nor on options exchanges such as the CBOE and the BOX Exchange LLC. Reference: 8.1.6 in the License Exam Manual

A day order is entered to buy 500 LMN at 24.35. By the close of the trading day the firm has been able to purchase 100 shares at 24.25 and 200 shares at 24.35. If the remainder of the order is unfilled, what is the outcome?

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. Reference: 8.2.3 in the License Exam Manual