Unit 23: Trading Securities

Question 1

cash account

Answer 1

must pay in full for all securities purchased

Question 2

margin account

Answer 2

may borrow funds to pay for securities, or use already paid for securities to borrow against.

Question 3

marginable securities

Answer 3

-Exchange-listed stocks and bonds
-Stocks traded on the Nasdaq Stock Market
-Warrants traded on either of the above
**Mutual funds/New Issues (including preemptive rights) cannot be purchased on margin, but can be used as collateral after owned for 30 days.

Question 4

Margin Agreement

Answer 4

-credit agreement
-hypothecation agreement
-optional loan consent
**must secure written margin agreement from client promptly AFTER initial transaction in account

Question 5

Must secure written margin agreement promptly…

Answer 5

AFTER initial transaction in account

Question 6

Credit Agreement

Answer 6

discloses terms, interest methods, assurance notices are done as frequently as interest charges

Question 7

Hypothecation agreement

Answer 7

Gives the firm permission to pledge securities to a lending institution

Question 8

Loan Consent

Answer 8

Gives the firm permission to loan securities to other brokers

Question 9

risk disclosure document (FINRA)

Answer 9

-delivered prior to or at the time of account opening.
-discusses risks associated with margin trading

Question 10

broker call loanrate

Answer 10

interest rate banks charge B/Ds on money borrowed to lend to margin customers.

Question 11

margin call

Answer 11

deposit needed for margin transaction

Question 12

maintenance call

Answer 12

if equity falls below 25%, additional funds must be deposited. if not met, firm will liquidate securities.

Question 13

house maintenance

Answer 13

if a firm imposes stricter than 25% requirements for equity

Question 14

long equity

Answer 14

Long CMV - debit balance

Question 15

short equity

Answer 15

Credit Balance - Short CMV

Question 16

net equity

Answer 16

short + long equity

Question 17

positive margin

Answer 17

returns are exceeding cost of borrowed money

Question 18

margin interest

Answer 18

is tax deductible (unless purchasing muni’s)

Question 19

primary market

Answer 19

proceeds of sales go to issuer

Question 20

secondary market

Answer 20

previously issued securities traded on an exchange

Question 21

listed security

Answer 21

traded on an exchange

Question 22

SEC power over exchanges

Answer 22

-suspend trading in any nonexempt security for up to 10 days without prior notice;
-suspend trading on an entire exchange for up to 90 days (SEC must give prior notification to the president of the United States)

Question 23

specialist/DMM

Answer 23

maintains orderly markets and price continuity

Question 24

OTC market

Answer 24

where unlisted securities trade
-includes stocks, corporate bonds, and muni/govt bonds
-negotiated markets, buyer and seller can negotiate with each other

Question 25

Dual capacity of B/D

Answer 25

-cannot act as both broker and dealer in same transaction
-capacity must be disclosed on trade confirm

Question 26

Acting as Broker

Answer 26

-agency capacity;
-facilitates trades between buyer and seller;
-earn a commission

Question 27

Acting as Dealer

Answer 27

-principal capacity;
-buy/sell for their own account and inventory
-earns markup/markdown

Question 28

Carrying B/D

Answer 28

-holds accounts, securities, and funds of its clients
-provide clearing and settlement services
-must follow Customer Protection Rule

Question 29

Introducing B/D

Answer 29

-must disclose to clients that it is an introducing firm.
-does not need to follow Customer Protection Rule

Question 30

two items that DO NOT need to be on order ticket

Answer 30

-current market price
-client’s name/address

Question 31

items required on order ticket

Answer 31

-account number;
-solicited, unsolicited, or discretionary (including time or price);
-if a sale, long or short;
-market, limit, or stop;
-number of shares or aggregate par value;
-the time of order entry (execution time and execution price will be added);
-name of broker-dealer and registered individual responsible for order.

Question 32

market order

Answer 32

-guaranteed execution, unless security is no longer trading
-has priority over other order types

Question 33

limit order

Answer 33

-can only be executed at specified price or better
-held with DMM if not executed immediately
-will do partial fills if able

Question 34

selling short

Answer 34

-borrows and sells shares of stock
-must “buy” shares to close position
-must occur in margin account

Question 35

stop order

Answer 35

-entered to protect profit or prevent loss
-stop price triggers order and becomes market order
-can do stop limit order where becomes a limit order

Question 36

uses of a buy stop order

Answer 36

-protect against loss in short position
-protect gain in short position
-establish long position when breakout occurs above line of resistance

Question 37

uses of a sell stop order

Answer 37

-protect against loss in long position
-protect gain in long position
-establish short position when breakout occurs below line of support

Question 38

capping

Answer 38

form of market manipulation where sell orders are entered to prevent it from rising above a certain price

Question 39

pegging

Answer 39

form of market manipulation where buy or sell orders are entered to keep price from moving

Question 40

block trade - NYSE Rule 72

Answer 40

an order with the lower of 10,000 shares or $200,000 USD.

Question 41

High Frequency Trading

Answer 41

using algorithms and automated systems to frequently trade and profit from small movements and differences in markets.
-increases market efficiency and liquidity
-potential cause of market manipulation due to many trades entered and cancelled, sending trade signals to other traders
-can cause snowballing effect.

Question 42

dark pools are typically used by

Answer 42

institutions due to anonymity

Question 43

Which act authorizes use of margin?

Answer 43

Securities Exchange Act of 1934

Question 44

Payment for order flow

Answer 44

is permitted.

Question 45

disclosing markup/markdown

Answer 45

does not always need to be disclosed.

Question 46

mixed margin acount; own/owe

Answer 46

You OWN: Long CMV & Short credit balance
You OWE: Short CMV & Long debit balance