16 Trading Securities Flashcards

Question

What is the minimum number of shares that must be purchased when buying closed-end funds? A. 10,000 B. 100 C. 1000 D. none of the choices listed

Answer 1

D. none of the choices listed Rationale: There are no minimum order sizes, period.

Answer 2

C. Specialist Rationale: The specialist is an individual working for a specialist firm, which is a member of NYSE. The specialist's whose job it is to maintain a "fair and orderly" market in a particular NYSE-listed security. All trades happen in front of the specialist.

Answer 3

B. Your firm should not have charged both a markup and a markdown Rationale: The firm should treat this "proceeds transaction" as just one transaction, meaning they should charge either a markup OR a markdown. Another way to answer the question is to say that the combined markup/markdown should be 5% or lower.

Answer 4

C. An order to sell 125 shares ABC @40.00 Rationale: It would be adjusted exactly the way 100 shares held long would be adjusted. 25% more shares at a lower price.

Answer 5

A. Highest bid, lowest ask Rationale: The inside or "interdealer" market is simply the best deal for the customer.

Answer 6

C. It trades over the counter Rationale: Listed/exchange stocks have 3 or fewer letters in their symbol.

Answer 7

B. Sell 100 ABC@25, stop Rationale: Only the orders placed below the current market price would be reduced for a cash dividend, but not the ones with the little DNR attached.

Answer 8

C. Price dealer paid for security Rationale: Nobody cares what the dealer paid for the stock, except maybe the dealer.

Answer 9

B. II, III Rationale: Memorize where these orders are placed in relation to the overall market and work on visualizing the direction that prices have to move in order to trigger and/or fill these specialized orders.

Answer 10

C. II, III Rationale: Memorize where these orders are placed in relation to the overall market and work on visualizing the direction that prices have to move in order to trigger and/or fill these specialized orders.

Answer 11

A. NASDAQ Level 2 Rationale: That's what Level 2 does. It shows an amateur investor just enough information to lose 75% of his investment capital in a hurry.

Answer 12

B. Buy @35 stop, limit 36.35 Rationale: Don't buy until it hits this price, but don't pay any more than this price? Buy stop-limit.

Answer 13

D. Not held Rationale: Time and price discretion do/does not require written discretionary authorization. In the "not held" order, the commission house broker is not held to a particular price or time, but is also not executing immediately, as he would for a market order.

Answer 14

C. Fourth market Rationale: Also referred to as INSTINET. INSTI-tutionals trade over INSTINET.

Answer 15

D. Sell 700 shares @20.25 Rationale: The market maker's quote is always good for at least one round lot. If he knows the number of shares he's quoting, he's on the hook for that number of shares.

Answer 16

B. Usually carries a higher markup Rationale: Just like an ugly, unpopular car would fetch a lousy trade-in price at the car dealership, right? They don't want to hold some ugly, orange vehicle nobody wants, so if you want to trade it in, don't expect a good price. And if you want to buy it, they're going to try to get as much as possible for it, since it been taking up space for such a long time.

Answer 17

D. Municipal bonds Rationale: Municipal securities are often in tight supply, as most are purchased by individuals who buy them and lock them up in a safe-deposit box just to collect tax-free interest payments. You don't want to be trying to cover (buy back) your short position when the thing you're trying to buy back is in short supply.

Answer 18

A. Arbitrage Rationale: Arbitrage involves a disparity in prices between two securities. Nothing illegal about it, and there is no such thing as "short buying."

Answer 19

A. OTC Bulletin Board Rationale: If it's unlisted, it trades OTC (over the counter). The biggest, most important OTC stocks trade over NASDAQ. If the stock isn't on NASDAQ, it's on the OTC Bulletin Board or Pink Sheets.

Answer 20

C. Sell stop-limit Rationale: You see a trigger price and a limit price—that's a sell-stop, limit.

Answer 21

C. All-or-none may be left GTC Rationale: Both AON and FOK orders must be filled in their entirety. The difference is that you have to kill the FOK order if you can't fill it all on your first attempt; the AON can hang out GTC.

Answer 22

D. Buy stop Rationale: Don't name a limit price if you want protection.

Answer 23

D. Market Rationale: There would be no reason to place a market order on the specialist's book. A market order is executed ASAP. The stop and limit orders go on the specialist's book.

Answer 24

B. Sell stop order at $59 Rationale: A market order to sell would capture the profit, but the customer is still bullish on the stock and will call you 17 times a day if you sell the stock now before it starts its meteoric rise. A sell limit doesn't work either, since the stock would be sold as soon as it hit the limit price of $59—wait, it's already there, so you're accidentally placing a market order, really, as it will immediately be executed. Eliminate any choice that says "buy" in it, since the customer already bought.

Answer 25

C. Leave the order open; if it doesn't get executed today, we'll enter a new one tomorrow Rationale: If you cancel your order, you lose your place in line.

Answer 26

A. NYSE Rationale: The specialist uses these three p-words to maintain a "fair and orderly market" in a particular NYSE-listed security.

Answer 27

C. 10-Q Rationale: The "q" stands for "quarterly."

Answer 28

C. 10-K Rationale: Annual reports are also known as 10-K's

Answer 29

D. The order for 10,000 shares has precedence Rationale: Larger orders have precedence. The proverbial coin toss only happens if the orders are the same size, shouted at the same time. The coin toss is called "parity."

Answer 30

B. Took place on the third market Rationale: Exchange-listed stock traded OTC = third market

Answer 31

A. Agent Rationale: Agents have no capital at risk, only their jobs.

Answer 32

A. Syndicate member in a firm commitment Rationale: Agents/brokers never have capital at risk.

Answer 33

C. On the primary market Rationale: Make sure you know that the primary market is for issuing securities. The secondary market is for trading securities already issued.

Answer 34

D. 4 Rationale: "4" means 4 round lots. The size of the ask, by the way, would be "2.

Answer 35

B. 2 Rationale: 200 shares is 2 round lots, shown as "2" by the specialist. The size of the bid, by the way, is 4 (for 400 shares, 4 round lots).

Answer 36

C. Stop orders Rationale: Stop orders don't determine the specialist's quote. Limit orders do that, and the size is also indicated in round lots

Answer 37

D. Registration of new issues Rationale: New issues are covered by the Act of 1933.

Answer 38

D. Securities Exchange Act of 1934 Rationale: That one will probably show up on the exam. The SEC was formed with the passage of the Securities Exchange Act of 1934.

Answer 39

D. Negotiated Rationale: OTC = negotiated.

Answer 40

B. Maintaining a book of public market orders Rationale: No need to put a market order on the book—just execute it at the best available price. The orders that are waiting for a specific price are on the book.

Answer 41

D. When the stock rises to 72 or above Rationale: Doesn't have to be above the stop price—AT or above the stop price. Note that for a sell- stop the trigger occurs at or below the stop price.

Answer 42

B. When the stock drops to 55 or below Rationale: Doesn't have to be below the trigger/elect price—AT or below will do the trick. Trigger and elect mean the same thing, since everything in this business needs at least two names.

Answer 43

A. OTCBB Rationale: The OTC Bulletin Board is not considered to have "listed " stock.

Answer 44

C. 8,000 URT IOC at 55 Rationale: IOC means "immediate or cancel." The customer will take the portion that can be had at that price and cancel the remainder.

Answer 45

D. 8,000 URT FOK at 55 ``` Rationale: Fill it (all) or kill it (all). The abbreviation "FOK" implies what the investor wants to do with the order if he can't have it all. ```

Answer 46

A. 8,000 URT AON at 55 Rationale: He needs it all, but not on the first attempt. The difference between this and FOK is that FOK orders have to be killed—AON can remain GTC

Answer 47

A. Short 2,000 shares of ARZ Rationale: Just net out the two positions.

Answer 48

B. This is a violation of trading rules Rationale: Don't let the word "reasonable" throw you off – broker-dealers either charge a commission (broker) or a markup/markdown (dealer) on any one trade.

Answer 49

D. Options Rationale: Be a good test-taker...one of these things is not like the other, one of these things just doesn't belong.

Answer 50

C. II, III Rationale: The orders placed below the current market price would be executed as the market price falls, right? Note that these are also the only orders that are reduced for a dividend payment... except when they aren't (DNR).

Answer 51

B. Approve securities for sale in the primary market Rationale: The words "SEC" and "approve" do not go together. Some test-takers will convince themselves that only FINRA regulates the OTC—never forget the ultimate regulators, the SEC.

Answer 52

D. Market order Rationale: A market order is executed just as quickly as possible, without any special criteria. The exam might ask the fastest way to get an order filled—market order. Don't get fussy, just fill that thing NOW.

Answer 53

B. The buy and sell side as a total of 5% Rationale: The firm must treat both the sale and the purchase as one transaction subject to the 5% guideline.

Answer 54

D. Highest bid Rationale: The inside BID (highest bid) represents the best deal a customer could get when selling, so that's what they base the fairness of the markdown on.

Answer 55

A. 13-D Rationale: Just for fun, imagine owning 5% of MSFT ... what's 5% of 10 billion shares? Probably something worth filling out a form over.

Answer 56

B. Send the order to the floor immediately Rationale: Send the order to the floor; the floor broker will execute it at the close of the market.

Answer 57

B. II, IV Rationale: "Negotiated market" describes the OTC or "second market," not the exchange market. Only securities listed for trading on a particular exchange trade on that exchange.

Answer 58

C. Opens earlier and closes later than the NYSE Rationale: The consolidated tape reports NYSE-listed stocks, wherever they are trade, which includes NYSE, third market, and fourth market.

Answer 59

D. Authority to censure, fine, and bar the representative Rationale: The exchange can discipline a registered representative but not throw him in prison. Beyond monetary fines, registered rep's can be suspended or barred.

Answer 60

D. It is considered an auction market Rationale: OTC = negotiated. NYSE = auction.

Answer 61

B. Insurance companies offering indexed annuities only Rationale: Insurance companies are regulated by the state insurance commissioners.

Answer 62

A. NASDAQ Regional Exchange Market Rationale: The three market tiers are NASDAQ Global, NASDAQ Global Select, and NASDAQ Capital Market.

Answer 63

B. Bearish Rationale: If you get completely out of stocks, you must be bearish on the stock market.

Answer 64

B. Neutral Rationale: Only public orders can be "stopped," which means the DMM guarantees a price and gives the floor broker a chance to seek an even better price from the crowd.

Answer 65

B. 20 round lots Rationale: A new rule defines a round lot for OTC equity securities trading at $175 a share or higher as just 1 share.

Answer 66

D. ABC 12,000s25 Rationale: Up to 10,000 shares only the number of round lots is indicated, but when it gets to 10,000 shares or more, the report looks like this "10,000s or "12,000s."

Answer 67

D. All equity securities Rationale: Before executing a short sale of any equity security.

Answer 68

B. Ill, IV Rationale: A "penny stock" by definition does not trade on NASDAQ or NYSE.

Answer 69

C. Negotiation Rationale: Associate "OTC" with "negotiated market." The first market = "auction."

Answer 70

C. Principal Rationale: The specialist is not an employee of the exchange. If she buys for her own account, she's acting as a principal (dealer).

Answer 71

D. ABC 13,000s37 Rationale: For whatever reason, when the trades get as big as 10,000 shares, they use "10,000s" and so on.

Answer 72

B. 100 shares of IBM traded at 75.10, followed by 100 shares traded at 75.15 Rationale: If there is no number before the price, assume it's a trade of one round lot. There is then a space with just a ".15," meaning that another round lot traded at $75.15.

Answer 73

C. 100 shares of K traded at 44, followed by 200 shares at 44.05 Rationale: With no number before "44," assume it's a round lot. The "2s" means "200 shares," and the ".05" means to add .05 to $44 for these 200 shares.

Answer 74

A. Remain as-is Rationale: The buy-stop (like the sell-limt) order is placed above the current market price, so the paying of a dividend would not cause these orders to go off. No need to adjust them. Buy-limit and sell- stop orders are adjusted by the amount of the dividend, except when they're marked "DNR," which means "do not reduce."

Answer 75

C. The order becomes a market order for immediate execution Rationale: This buy stop is activated when the stock trades at 41 or higher. Once it's activated, it is simply executed at the best available price-it becomes a market order. Also note, that a limit price could be added to this order. But it wasn't in this question.

Answer 76

B. An agency cross transaction Rationale: It's not the firm's securities, so it cant have the word "principal" in there. It's not a violation. It's called an "agency cross transaction." The firm is acting in an agency capacity.

Answer 77

D. II, I, III, IV Rationale: The wire room sends the order to the appropriate exchange. Purchasing and sales deals with the change to the customer's account. Margin calculates margin requirements. Cashiering deals with the actual exchange of money for securities or vice versa.

Answer 78

B. She must report the sale to the SEC Rationale: She's an insider (board of directors, officers, immediate family members thereof, 10% or more owners of voting stock) so she reports her sales. It isn't fair to let the folks who really know what's going on dump all their shares and in the process drive down the share price for everybody else. Also, the little guys can draw conclusions based on what these insiders are doing with their own stock and act accordingly.

Answer 79

C. Provided registration processes for new issues of securities Rationale: The Securities Act of 1933 provides for the regulation of new issues of securities.

Answer 80

B. He may place purchase orders only if he first deposits the required amount Rationale: A "frozen account" really just means that the customer's credit is cut off for 90 days. Not that a firm has to be nice enough to ever let people buy without paying first—this regulation tells firms how nice they can be, if they want to. They can let the customer pay 2 business days after regular way settlement, but if the customer still doesn't come through, the credit has to be frozen for 90 days.

Answer 81

B. Not-held Rationale: Tricky-the specialist doesn't put market orders on his book, but he can execute them, immediately. A "market not- held" order lets the commission house broker (trader for a member firm) use his discretion as to when to enter the order.

Answer 82

B. Stop order Rationale: The stop order becomes a market order once it's activated. A limit order is executed at a specific price or better.

Answer 83

C. She has realized a short-swing profit, which must be disgorged to the corporation Rationale: As if the test doesn't have enough stuff to hit you with, it might bring up that insiders cant make short-swing profits (within 6 months) on their company's stock. If they do it, the corporation can sue to recover it.

Answer 84

B. If the DJIA drops by 20% or more from its previous close, all trading halts for two hours Rationale: 10% decline = 1-hour halt 20% decline = 2-hour halt 30% decline = enough already!

Answer 85

C. 200 shares of GE traded at $33.50, but the trade is being reported out of sequence Rationale: SLD means that this price actually should have been reported earlier-therefore, it cant trigger any stop orders.

Answer 86

C. 150 shares of ABC preferred stock traded for $77 per share Rationale: A round lot for preferred stock is 10 shares. So 15s means 150 shares. The price is $77.

Answer 87

D. Request an extension Rationale: Too late to cancel the order. This is a legitimate reason for the customer to be granted an extension. He had no idea if or when the GTC buy-limit order would be executed.

Answer 88

D. May 17th Rationale: Cash settlements are "same day." If this had been "regular way," settelement would have occured on the next business day, Monday May 20th.

Answer 89

B. A trade of Treasury bonds settles three business days after the trade Rationale: Treasuries settle next business day (regular way), as do listed options.

Answer 90

B. Agent Rationale: The firm is "effecting a transaction in securities for the accounts of others" here, which is to act as broker/agent for the customer. The firm is a dealer/principal if it sells stock from the firm's inventory to the customer.

Answer 91

C. Broker-dealer in the OTC market Rationale: Securities sold with a prospectus (mutual fund, IPO) aren't subject to the mark-up policy. The mark-up policy has to do with the secondary market for OTC securities.

Answer 92

B. II, III, IV Rationale: Open-end funds don't trade among investors.