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Question 1 of 10
1. Question
Which of the following statements is true regarding bids, offers, quotes, and spreads?
Correct
Bids, offers, quotes, and spreads
A quote is the bid and offer on a particular security offered by a market maker to help facilitate trading. The bid price of a security is the highest price at which a dealer is willing to buy a security from a seller. The offer price is the lowest price at which an investor may buy a security from a dealer. The difference in the two prices is called the spread. Usually the offer price is slightly higher than the bid price. This is how the dealer makes money. The market maker makes available the bid and offer prices on a certain security via the quote. The investor may then purchase the security from the dealer at the offer price or sell it to the dealer at the bid price. The dealer then makes money by effectively charging a “spread,” which is the slight difference between the bid and offer price.Incorrect
Bids, offers, quotes, and spreads
A quote is the bid and offer on a particular security offered by a market maker to help facilitate trading. The bid price of a security is the highest price at which a dealer is willing to buy a security from a seller. The offer price is the lowest price at which an investor may buy a security from a dealer. The difference in the two prices is called the spread. Usually the offer price is slightly higher than the bid price. This is how the dealer makes money. The market maker makes available the bid and offer prices on a certain security via the quote. The investor may then purchase the security from the dealer at the offer price or sell it to the dealer at the bid price. The dealer then makes money by effectively charging a “spread,” which is the slight difference between the bid and offer price. -
Question 2 of 10
2. Question
Which of the following statements is true regarding securities orders?
Correct
Securities orders
The four types of securities orders are market orders, limit orders, stop orders, and stop limit orders. Market orders are placed when the investor wants to buy a security at the next available price. The trade is immediately executed without regard to the price. Limit orders act as a wall for the order to stay behind or against. A trade won’t be executed if the limit is exceeded. A stop order is a triggering order. If a price hits or trades through the stop amount, the stop order will be executed. A stop limit is a combination of stop and limit orders, as the name suggests. The order is entered as a stop order, and if the stop is triggered, it changes to a limit order. This guarantees the investor will receive the trigger price or better, or the trade will not be executed.Incorrect
Securities orders
The four types of securities orders are market orders, limit orders, stop orders, and stop limit orders. Market orders are placed when the investor wants to buy a security at the next available price. The trade is immediately executed without regard to the price. Limit orders act as a wall for the order to stay behind or against. A trade won’t be executed if the limit is exceeded. A stop order is a triggering order. If a price hits or trades through the stop amount, the stop order will be executed. A stop limit is a combination of stop and limit orders, as the name suggests. The order is entered as a stop order, and if the stop is triggered, it changes to a limit order. This guarantees the investor will receive the trigger price or better, or the trade will not be executed. -
Question 3 of 10
3. Question
Which of the following statements is true regarding short sales?
Correct
Short sales
Short selling is a strategy whereby the investor may speculate on the downward movement of the price of a security. To do this, the investor borrows a security from the inventory of a broker-dealer and sells the security. The investor must eventually replace the security borrowed and return it to the broker-dealer. If the value of the security decreases, the investor may buy it at the lower price and return it to the broker-dealer, while keeping the difference in what he or she received and what he or she paid. If the borrowed securities decrease in value to zero, the investor need not return it to the broker-dealer. The extra risk inherent in short selling comes with the upside of the price of the security.Incorrect
Short sales
Short selling is a strategy whereby the investor may speculate on the downward movement of the price of a security. To do this, the investor borrows a security from the inventory of a broker-dealer and sells the security. The investor must eventually replace the security borrowed and return it to the broker-dealer. If the value of the security decreases, the investor may buy it at the lower price and return it to the broker-dealer, while keeping the difference in what he or she received and what he or she paid. If the borrowed securities decrease in value to zero, the investor need not return it to the broker-dealer. The extra risk inherent in short selling comes with the upside of the price of the security. -
Question 4 of 10
4. Question
Which of the following statements is false regarding Cash accounts vs. margin accounts?
Correct
Cash accounts vs. margin accounts
Cash brokerage accounts are traditional investment accounts by which the investor may purchase and sell securities. A cash account itself bears no additional risk, and the additional fees may only come in the form of transaction fees and yearly account maintenance fees. Investors usually choose cash accounts to hold securities for a traditional long-term investment strategy, in which they buy and hold securities and hope for long- term gains. Margin accounts are investment accounts by which investors may amplify the eventual results of their investing (good or bad). In a margin account, an investor may use the securities they currently hold as collateral for a loan from which they may buy more securities, or withdraw cash.Incorrect
Cash accounts vs. margin accounts
Cash brokerage accounts are traditional investment accounts by which the investor may purchase and sell securities. A cash account itself bears no additional risk, and the additional fees may only come in the form of transaction fees and yearly account maintenance fees. Investors usually choose cash accounts to hold securities for a traditional long-term investment strategy, in which they buy and hold securities and hope for long- term gains. Margin accounts are investment accounts by which investors may amplify the eventual results of their investing (good or bad). In a margin account, an investor may use the securities they currently hold as collateral for a loan from which they may buy more securities, or withdraw cash. -
Question 5 of 10
5. Question
Which of the following statements is true regarding broker-dealer acting as a principal or an agent?
Correct
Broker-dealer acting as a principal or an agent
Broker-dealers are firms that facilitate the flow of securities trading by acting in separate capacities. If a client wishes to sell a security, the broker-dealer acts in an agency capacity on behalf of the client and provides a buyer for the client’s security. In this regard, the firm is a broker, or agent, for the client. If a client wishes to buy a security, the broker-dealer may choose to sell the security to the client from its own reserves of securities. In this case, the broker-dealer is acting on its own behalf, for profit. In this role, the broker-dealer is a principal. The broker-dealer makes money by charging a fee to the client when it acts in an agency role, and by charging a markup on the securities it sells from its own inventory when it acts as a principal.Incorrect
Broker-dealer acting as a principal or an agent
Broker-dealers are firms that facilitate the flow of securities trading by acting in separate capacities. If a client wishes to sell a security, the broker-dealer acts in an agency capacity on behalf of the client and provides a buyer for the client’s security. In this regard, the firm is a broker, or agent, for the client. If a client wishes to buy a security, the broker-dealer may choose to sell the security to the client from its own reserves of securities. In this case, the broker-dealer is acting on its own behalf, for profit. In this role, the broker-dealer is a principal. The broker-dealer makes money by charging a fee to the client when it acts in an agency role, and by charging a markup on the securities it sells from its own inventory when it acts as a principal. -
Question 6 of 10
6. Question
Which of the following statements is false regarding role of broker-dealers in trading securities?
Correct
Role of broker-dealers in trading securities
Brokers act in an agency capacity for clients by arranging for trades to be made between them and a client seeking to buy the securities. They charge commissions for these transactions. Brokers facilitate trading between parties and charge commissions, but do not trade on their own behalf or hold securities in inventory. Dealers act in a principal capacity on their own behalf buying and selling securities for their own account. When trading for their own account, they are said to be position trading. Dealers do not charge commissions on transactions, but instead charge a markup on the securities. The price of the security plus the markup is referred to as the net price. Broker-dealers act in both capacities, facilitating selling as brokers and facilitating buying from their inventories as dealers. Broker-dealers charge commissions on trades in which they act as agents, and markups on transactions in which they act as principals.Incorrect
Role of broker-dealers in trading securities
Brokers act in an agency capacity for clients by arranging for trades to be made between them and a client seeking to buy the securities. They charge commissions for these transactions. Brokers facilitate trading between parties and charge commissions, but do not trade on their own behalf or hold securities in inventory. Dealers act in a principal capacity on their own behalf buying and selling securities for their own account. When trading for their own account, they are said to be position trading. Dealers do not charge commissions on transactions, but instead charge a markup on the securities. The price of the security plus the markup is referred to as the net price. Broker-dealers act in both capacities, facilitating selling as brokers and facilitating buying from their inventories as dealers. Broker-dealers charge commissions on trades in which they act as agents, and markups on transactions in which they act as principals. -
Question 7 of 10
7. Question
Which of the following statements is true regarding role of specialists in trading securities?
Correct
Role of specialists in trading securities
The role of the specialist is to maintain orderly trading practices in the market and provide prices with stability. To accomplish this, the specialist will fill market or limit orders from the investing public. Specialists will also trade from their own account to help provide market stability and help facilitate trading when the security for which the specialist trades experiences trading anomalies. Specialists’ main roles are to ensure fair and orderly market conduct for his or her specific security. Specialists also attempt to prevent large price disparities that may occur when the trading day opens. This is accomplished by the specialist buying or selling, in a principal capacity, when such actions are needed. Typically, though, the specialist allows the law of supply and demand to determine the security’s price.Incorrect
Role of specialists in trading securities
The role of the specialist is to maintain orderly trading practices in the market and provide prices with stability. To accomplish this, the specialist will fill market or limit orders from the investing public. Specialists will also trade from their own account to help provide market stability and help facilitate trading when the security for which the specialist trades experiences trading anomalies. Specialists’ main roles are to ensure fair and orderly market conduct for his or her specific security. Specialists also attempt to prevent large price disparities that may occur when the trading day opens. This is accomplished by the specialist buying or selling, in a principal capacity, when such actions are needed. Typically, though, the specialist allows the law of supply and demand to determine the security’s price. -
Question 8 of 10
8. Question
Which of the following statements is true regarding role of market makers in trading securities?
Correct
Role of market makers in trading securities
The roles of market makers are filled by broker-dealers that stand by to buy and sell securities for their own accounts to help to facilitate trading in markets. They sell from their inventory at the “ask” price and buy for their inventory at the “bid” price, in a principal capacity. Market-making broker-dealers will accept and execute trades in the smallest minimum trading unit, one hundred shares or greater. Market makers are often responsible for movement in the price of securities. This is referred to as price dynamics. Market makers affect price dynamics by offering higher bid prices to solicit sellers, thus raising stock prices, and by lowering its ask price to solicit buyers, thus lowering stock prices.Incorrect
Role of market makers in trading securities
The roles of market makers are filled by broker-dealers that stand by to buy and sell securities for their own accounts to help to facilitate trading in markets. They sell from their inventory at the “ask” price and buy for their inventory at the “bid” price, in a principal capacity. Market-making broker-dealers will accept and execute trades in the smallest minimum trading unit, one hundred shares or greater. Market makers are often responsible for movement in the price of securities. This is referred to as price dynamics. Market makers affect price dynamics by offering higher bid prices to solicit sellers, thus raising stock prices, and by lowering its ask price to solicit buyers, thus lowering stock prices. -
Question 9 of 10
9. Question
Which of the following statements is false regarding OTC markets?
Correct
OTC markets
Stocks that trade in some manner other than via a traditional stock exchange are said to be traded “over the counter.” These securities are usually traded over a dealer network rather than a centralized exchange such as the New York Stock Exchange. Because there is not necessarily a large market for OTC stocks, and no specialists or market makers as with large stock exchanges, OTC stocks can be very illiquid, and investors in such stocks should consider the liquidity risks of stocks purchased over the counter. The best known example of an OTC market is the NASDAQ. It is an electronic trading exchange that is not considered to be a formal exchange. Many companies listed on major exchanges pay to be listed on the NASDAQ for ease of trading. These companies’ stocks are not considered traditional OTC stock, but are traded OTC.Incorrect
OTC markets
Stocks that trade in some manner other than via a traditional stock exchange are said to be traded “over the counter.” These securities are usually traded over a dealer network rather than a centralized exchange such as the New York Stock Exchange. Because there is not necessarily a large market for OTC stocks, and no specialists or market makers as with large stock exchanges, OTC stocks can be very illiquid, and investors in such stocks should consider the liquidity risks of stocks purchased over the counter. The best known example of an OTC market is the NASDAQ. It is an electronic trading exchange that is not considered to be a formal exchange. Many companies listed on major exchanges pay to be listed on the NASDAQ for ease of trading. These companies’ stocks are not considered traditional OTC stock, but are traded OTC. -
Question 10 of 10
10. Question
Which of the following statements is true regarding additional costs when trading securities?
Correct
Additional costs when trading securities
When broker-dealers facilitate securities trading, they must make a profit to maintain their ability to continue providing this service. They profit from the transactions they facilitate by charging commissions, markups, and spreads. Commissions are transactional fees that are charged based on a percentage of the transaction’s principal. Broker-dealers collect commissions when they act in an agency role and sell securities for clients. Markups are fees that broker-dealers collect when they act as a principal and sell securities from their inventory to clients. In order to make money, they charge a small premium per share when selling from inventory. This is called the markup. The spread is the difference between the ask price and bid price of a security.Incorrect
Additional costs when trading securities
When broker-dealers facilitate securities trading, they must make a profit to maintain their ability to continue providing this service. They profit from the transactions they facilitate by charging commissions, markups, and spreads. Commissions are transactional fees that are charged based on a percentage of the transaction’s principal. Broker-dealers collect commissions when they act in an agency role and sell securities for clients. Markups are fees that broker-dealers collect when they act as a principal and sell securities from their inventory to clients. In order to make money, they charge a small premium per share when selling from inventory. This is called the markup. The spread is the difference between the ask price and bid price of a security.