SIE 18 Position, Strategies, Trade Authority
wrap accounts
- accounts for which firms provide a group of services (i.e., asset allocation, portfolio management, executions, and administration) - fee: quarterly /monthly; % of assets under management (AUM) - classified as an investment advisory accounts
short / open position
- an investor is in this position when they SELL a security they do not own - borrow stock from a stock lender and selling (shorting) the borrowed shares - bearish: anticipate decline in stock - investor's profit: difference between short sale price and price at which sales are bought back - risk: price of borrowed shares will increase, forcing seller to buy at a higher price - Maximum loss: unlimited potential (stock's can rise indefinitely)
long position
- the position the investor takes when security is PURCHASED - bullish: anticipate rise in value; later sell for a profit - risk: if security value falls - Maximum loss: security becomes worthless - OPEN: buy - CLOSE: sell
what constitutes a discretionary trade? (3 As)
1. Action (buy/sell) 2. Amount of trade (shares/dollars) 3. specific Assets to be traded + element of time and price
to enter a discretionary trade
1. client must agree (in writing) to grant a RR discretionary trading authority AND 2. principal of firm must approve
Two months ago your customer sold short 200 shares of Seabird Airlines at $15 a share. Today, the stock is trading at $10 a share. In order to close out the position your customer would A) buy 200 shares of Seabird. B) realize a $5 a share loss. C) buy Seabird calls. D) borrow 200 shares of Seabird.
A) buy 200 shares of Seabird. - open short sell -- close buying - a customer would need to buy the shares in order to close this short position - borrowing shares does not close the short, nor does buying the call - the could buy the call and then exercise, but the buy alone does not close the position - if they closed the position at $10, they would have a gain
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 A) buy short and sell short. B) buy long and sell long. C) buy short and sell long. D) buy long and sell short.
B) buy long and sell long. - long buy: purchase of the stock - long sale: the subsequent sale of the long position
Before executing a short sale the broker-dealer must first A) have the customer deposit funds sufficient the cover the potential loss. B) check to see if the customer already owns the shares. C) locate the shares to be borrowed. D) do all of these.
C) locate the shares to be borrowed. - the locate requirement (Regulation SHO) mandates that the BD locates the share to be borrowed before the order is executed - if a customer already owns the shares, then this would be a short against the box (still requires BD to locate shares) - unlimited risk position ---> impossible to deposit sufficient funds to cover potential loss
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 A) margin account. B) discretionary account. C) wrap account. D) commission-based account.
C) wrap account. - wrap accounts: accounts in which firms provide a group of services (i.e., asset allocation, portfolio management, executions, and administration) for a single fee - generally investment advisory accounts (can be cash, margin, discretionary, or non discretionary accounts)
Entering a sale of stock short without locating the shares first is an uncovered short and is a violation of: a. regulation SHO b. regulation SHRT c. uptick rule d. short against the box
a. regulation SHO - the Locate requirement is part of Regulation SHO
time and price authority
allowing the RR to choose the time or price at which the trade is executed - NOT discretionary
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 A) short against the long. B) an effective tax strategy. C) a closing transaction. D) short against the box.
D) short against the box. - short against the box: popular way of locking in a capital gain and deferring the tax consequences into another year - this practice was restricted by the Tax Relief Act of 1997 (has largely disappeared since)
sales proceeds
the $ the investor receives when they close their position
cost basis
the amount an investor pays for a position
discretionary trade
where a customer grants trading authority to a RR to place trades in their account WITHOUT preauthorization from a custom - trade must be marked as such (failure to do so is a serious violation) - the 3 As constitute + element of time and price
solicited trade
A trade that originates from and is initiated by a registered representative (recommending a securities transaction to a customer). - must be marked on trade ticket
unsolicited trade
A trade that originates from and is initiated by the customer - must be marked on trade ticket
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 A) an unsolicited trade B) an unclassified trade C) a solicited trade D) a discretionary trade
A) an unsolicited trade - the RR didn't introduce the trade to the customer - unsolicited - the customer provides the 3 key elements to the order (Action, Asset, Amount) --> not a discretionary trade
locate requirement
Before a short sale, BDs must locate and secure the securities for borrowing to ensure that delivery will be made on settlement date - Regulation SHO requirement
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? I. This is a secondary market transaction. II. This is a primary market transaction. III. This is a long sale of the stock. IV. This is a short sale of the stock (he never purchased it). A) II and III B) II and IV C) I and III D) I and IV
C) I and III - This is a secondary market transaction. - This is a long sale of the stock. - the issuer has no part of this transaction --> so it is a secondary market transaction - it doesn't matter if Bill bought the shares or not, he still owns them - this is a long sale
A registered representative placing trades in a customer account must have discretionary authority if they choose which of the following aspects of the trade? A) The action to be taken, the asset to be traded, and the amount of the trade. B) The asset to be traded and the amount of the trade. C) The action to be taken and the asset to be traded. D) The action to be taken, the asset to be traded, or the amount of the trade
D) The action to be taken, the asset to be traded, or the amount of the trade - RR needs to choose one or more of the 3 As (Action, Asset, Amount) to be considered discretionary
Who must grant permission for a representative to have discretionary trading authority on an account? A) The customer and the representative B) The customer, the principal, and the representative C) The representative and a principal D) The customer and a principal of the broker-dealer
D) The customer and a principal of the broker-dealer - authorization for discretionary trading must come from 1) the customer and 2) the firm (principal)
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) an unsolicited trade B) an unclassified trade C) a discretionary trade D) a solicited trade
D) a solicited trade - The RR Pete introduced the security other customer = solicited trade - customer provided three key elements (action, asset, amount) = so it is not a discretionary trade
short against the box
Long a Security and Sells the same security Short - to hedge an anticipated decline in their long stock position (but maintain long-term investment status for tax purposes)
Your customer Cleveland Brown would like you to be a able to place trades in his account as and when you think best. in order to trade on a discretionary basis in Mr. Brown's account, you will need authorization from which of these? I. FINRA II. a principal III. the customer IV. the state administrator a. I and II b. II and III c. I and III d. I and IV
b. II and III - adding discretion to an account requires authorization from 1. the customer and 2. the firm's principal - discretionary trade: giving registered representative preauthorization to trade for the customer
your client Dan Brown believes that the Seabird Coffee Company's shares are significantly overvalued and will soon drop sharply in value. in order to profit from this drop, he could: a. buy calls on Seabird common stock b. sell Seabird shares short c. sell Seabird shares long d. sell puts on Seabird common stock
b. sell Seabird shares short - selling shares short is bearish - profit if shares drop - buying calls and selling puts are bullish - not profitable if shares drop - selling shares just takes the customer out of the position
your customer calls and requests you purchase 300 shares of Seabird Coffee COmpany. he recently read an article online about the company's new collaboration with Sorag coffee makers and likes the prospects of Seabird. this is an example of: a. a solicited trade b. unsolicited trade c. discretionary trade d. suggested trade
b. unsolicited trade
three years ago, your client Lucy Jones purchased 200 shares of Tremor Corporation. the shares have appreciated and she wants to take her profits. she would do this by entering: a. an opening sale b. a short sale c. a closing sale d. a covering purchase
c. a closing sale - a long position (open - buy) is closed by selling the position (closing sale)
the customer must agree to 3 specific elements of a trade before the trade's execution for the trade to be non discretionary. which of the following is NOT required? a. action b. asset c. allowance d. amount
c. allowance 3 As of a discretionary trade: - Action: buy or sell - Amount of the trade: shares / dollars - Asset: what you are buying / selling
