5: Selling Short / 2nd Market Trades

Question 1

What is a short sell?

Answer 1

1 - The broker borrows the security from someone else and sells it on behalf of the investor.

2 - Later the investor buys the security and the broker returns it to the lender.

Question 2

Explain the risks of a short sell.

Answer 2

1. No limit as to how high a stock’s price might rise (huge loss exposure)
2. The investor might be forced to buy back the security at an undesirable time if the lender wants to sell it and a new loan cannot be found.

Question 3

Extremely large trades generally require a ______ distribution (sale) or ______ offer (buy).

Answer 3

secondary

tender

Question 4

Intermediate-sized trades may be handled by a ______ trader or as a ______ offering.

Answer 4

block

special

Question 5

What are the fee components of a transaction?

Answer 5

1. Commission (explicit)
2. Bid-Ask Spread (implicit)
3. Price impact (implicit)

Question 6

What fee component is the dealer’s primary source of income?

Answer 6

the bid-ask spread

Question 7

20 bid and 20 1/4 ask means…

Answer 7

dealer will buy at $20 and sell at $20.25

Question 8

What is price impact?

Answer 8

refers to the correlation between an incoming order (buy or sell) and the subsequent price change

Question 9

What does explicit mean?

Answer 9

stated clearly and in detail

Question 10

What does implicit mean?

Answer 10

implied though not plainly expressed

Question 11

A request to activate a market order if the stock price trades at or below the designated stop price.

Answer 11

stop-sell (a.k.a. stop-loss) order

Question 12

What is a stop-buy order?

Answer 12

Used in conjuction with a short sell, this is a request to activate a market order shoudl the stock price trade at or above the designated stop price, usually set above the current market price.

Question 13

A ______ is a variation of the limit order. It can be to sell or buy. It automatically converts to a limit order when the stop price is hit.

Answer 13

stop-limit order

Question 14

How are good-‘til-canceled orders, Day, Week, Month, Fill-or-Kill, and All-or-Nothing Orders related?

Answer 14

each of these deal with limit, stop-sell, or stop-limit orders

Question 15

Describe a day order.

Answer 15

an order executable only during the day the order is placed

Question 16

What order is canceled if not immediately executed?

Answer 16

Fill-or-Kill order

Question 17

When are commissions computed?

Answer 17

1. At the close of each day.

2. When trades take multiple days to complete, commissions are calculated separately on each day’s trading.

Question 18

All-or-nothing orders must trade as a ______ that incurs a single commission but can be executed only when sufficient ______ is available.

Answer 18

1. unit

2. Volume

Question 19

All-or-nothing orders are superseded by any other ______ that other customers have placed at that same price.

Answer 19

limit orders

Question 20

What does it mean to go long?

Answer 20

involves buying a security, hoping the price goes up, and then selling it

Question 21

What does it mean to sell short?

Answer 21

an investor will sell a security that he does not own, hoping the price goes down, and then buys it at the lower price

Question 22

What requirements does the short seller have to fulfill?

Answer 22

1. pay dividends that accrue on the borrowed stock
2. leave short-sale proceeds and an additional percentage (margin) of the sale price in a non-interest-bearing account at the brokerage house
3. be ready to pay a margin call should the price of the shorted stock start to go up

Question 23

Which carries the risk of losing far more than what was invested: going long or selling short?

Answer 23

selling short

Question 24

What is the Uptick Rule and under what circumstances is it activated?

Answer 24

1. Created in February 2010 to eliminate the unscrupulous activity known as bear raids
2. only activated when a stock’s price has fallen by 10 percent or more in one day. Short sales can then only take place at a price that is about the current national best bid.