7) Which one of the following statements concerning stock trades is correct?
A) Brokerage firms send customer orders to a market maker on the floor of the NYSE.
B) Confirmation of a trade is transmitted directly from the NYSE to the customer who placed the
order.
C) A broker transmits OTC orders from a customer directly to a floor broker in the OTC market.
D) Brokerage firms generally hold securities in street name so they can be transferred without
the customer’s signature.
8) Which is the correct order of events when an individual buys a stock through a brokerage
firm?
I. The order is transmitted to the main office of the brokerage firm.
II. The customer places the order with their local stockbroker.
III. The confirmation of the order is sent to the broker placing the order.
IV. The order is sent to the floor of the exchange.
A) I, II, III, IV
B) II, I, III, IV
C) II, IV, I, III
D) II, I, IV, III
9) Holding securities in street name
A) makes the trading of securities easier and more efficient for individual investors.
B) allows the brokerage firm to sell securities without the customers approval.
C) enables the brokerage firm to collect the stock dividends as compensation for their services.
D) means that the brokerage firm actually owns the securities.
10) A report describing the transactions in an account, listing the dividend and interest payments
received, and detailing the current holdings is called a
A) prospectus.
B) red herring.
C) statement.
D) street certificate.
11) A brokerage firm which provides analyst reports, investment advice and information as well
as online brokerage services is called a(n)
A) premium discount broker.
B) full-service broker.
C) basic discount broker.
D) electronic broker.
12) Most brokerage firms will invest surplus cash, dividends and interest received, proceeds
from the sale of stock and the like in
A) additional securities of the same type.
B) certificates of deposit.
C) a non-interest bearing account.
D) a money market mutual fund.
13) Which one of the following is the LEAST important when selecting a stockbroker?
A) knowing the stockbroker personally
B) selecting a stockbroker who best understands your investment goals
C) considering the services offered and the related costs
D) getting referrals from personal acquaintances with similar investment objectives
3.5 Learning Goal 5
1) A limit order is an order to buy or sell at the limit price or less.
2) A stop-loss order is activated once the stock reaches the specified price.
3) When placing an order on-line, an individual investor should always double check the ticker
symbol prior to submitting the order.
4) Many day traders are also margin traders.
5) Most on-line brokers execute their own trades on the floor of the New York Stock Exchange.
6) If the market moves rapidly, an on-line trader may experience difficulty placing a trade.
7) It is generally a good idea to use limit orders when purchasing IPOs on-line.
8) Traders who hold stocks for less than a full day can reduce the tax burden on their profits.
9) Commission structures vary with the type of security being traded, the type of broker involved
and the size of the order.
10) Small investors normally have a negotiated commission schedule while large investors
benefit from a fixed-commission schedule.
11) Placing your trades with a discount broker can save you as much as 80% of the commission
charged by a full-service broker.
12) Investors are protected from market losses by the SIPC insurance offered by some full–
service brokers.
13) Many brokerage firms require that disputes between individual investors and brokers be
settled through arbitration.
14) If you have a problem with an on-line trade, you should immediately email your complaint to
the broker.
15) Excessively trading a customers account to increase a stockbrokers commission income is
A) an acceptable method of timing the market to increase rates of return.
B) called churning which is an illegal practice.
C) probably unethical but yet is acceptable by the securities industry.
D) permitted provided that the customer does not object.
16) The documents signed when a customer opens a brokerage account
A) serve as an informal relationship between the customer and the stockbroker.
B) limit the customer to dealing only through that brokerage firm.
C) may be signed by a minor child provided that the money being invested belongs to the child.
D) establish a legal relationship between the customer and the brokerage firm.
17) Whose responsibility is it to determine if a client can pay for the securities they purchase?
A) the stockbroker who opens the account for the client
B) the floor broker who places the trade on the floor of the exchange
C) the dealer who acts as the seller in the trade
D) the broker in charge of churning
18) An individual investor who wishes to borrow money to buy stocks must open a
A) signature account.
B) margin account.
C) joint account.
D) custodial account.
19) David opens a cash account with a brokerage firm. He buys 100 shares of GIA Co. stock at
$30 a share. His broker charges a commission of $35. Which of the following statements
concerning this transaction is correct?
A) Daniel must have $3,035 in cash in his account on the day the trade is made.
B) Daniel must have $2,965 in cash in his account on the day the trade is made.
C) Daniel must have $3,035 in cash in his account within three business days.
D) Daniel must have $2,965 in cash in his account within five business days.
20) A margin account
A) can be opened by any investor who wants to purchase securities by charging them to his/her
credit card.
B) allows an investor to borrow one hundred percent of the cost of the securities purchased.
C) allows an investor to borrow a portion of the purchase price at a reasonable rate of interest.
D) is permitted only in wrap accounts.
21) Which of the following are characteristics of a wrap account?
I. a flat amount of commission per transaction
II. an increased probability of account churning
III. a money manager
IV. detailed performance reports
A) I and II only
B) III and IV only
C) II, III and IV only
D) I, III and IV only
22) An odd-lot trade involves a trade
A) of only 100 shares.
B) that is generally priced at a discount to the market price.
C) of 100,000 shares or more.
D) consisting of any number of shares that is not a multiple of 100.
23) Heather places an order to buy 525 shares of stock. This is an order for
A) five round lots and one odd lot.
B) 21 round lots of 25.
C) one odd lot.
D) five hundred round lots and twenty-five odd lots.
24) An order to sell 300 shares of ABC stock at the best available price is called a
A) limit order.
B) market order.
C) stop loss order.
D) fill-or-kill order.
25) McDonald’s stock is now selling for $57 per share. Kim wants to buy 100 shares but only if
she can do so at $55 or less. She should place a(n)
A) stop order.
B) market order.
C) limit order.
D) odd-lot order.
26) Which one of the following statements about limit orders is correct?
A) The execution of the trade will occur prior to the close of trading on the day the trade is
placed.
B) The execution will occur at the regular open on the day following the day the trade is placed.
C) The trade may be executed only at the limit price or better at any time prior to expiration or
cancellation of the order.
D) The trade will be executed at the market price at the end of the third business day, if not
executed previously at the limit price.
27) A fill-or-kill order will be
A) executed immediately upon order arrival on the floor of the exchange.
B) will be cancelled if not immediately executed at the stated price or better.
C) will be cancelled at the end of the trading day if not executed by that time.
D) in effect until cancelled by the customer who placed the order.
28) Ryan places a good-’til-canceled limit order to sell 300 shares of KM at $18 a share. When
his order reaches the trading floor, KM is trading at $18.20. Which of the following statements is
true concerning Roy’s order?
A) The trade will not be executed and will be immediately cancelled.
B) The specialist will record the order in the order book and execute the trade as soon as the
price hits $18.00.
C) The brokerage firm will sell the 300 shares at $18.20 and keep the additional $0.20 as a
commission.
D) The order will be executed at $18.20 with the proceeds credited to Roy’s account.
29) Which of the following statements concerning market and limit orders are correct?
I. Market orders guarantee both a price and an execution.
II. Market orders guarantee an execution but not a price.
III. Limit orders guarantee a price but not an execution.
IV. Limit orders guarantee both a price and an execution.
A) I and III only
B) II and III only
C) I and IV only
D) II and IV only
30) On March 15, Marcos placed a good-’til-canceled order to buy 200 shares of ABC at $10 a
share. ABC sold between $10.50 and $11.00 on that day. Over the following two months the
stock price continued to rise and Marcos forgot about the order. After the markets closed on June
6, some bad news concerning ABC was released. The stock opened on June 7 at a price of $8.00
a share. Which one of the following statements is correct concerning Marcos’ order?
A) The order was cancelled on May 15 because it had not been executed within the allowable
two-month time period.
B) The order was executed on March 15 at $10.50 a share since that was the best available price
of the day.
C) The order was executed on June 7 at a price of $10.00 a share.
D) The order was executed on June 7 at a price of $8.00 a share.
31) Which one of the following statements is correct about a good-’til-cancelled order?
A) The order generally expires after six weeks.
B) The order will automatically renew unless cancelled by the customer.
C) The order helps customers obtain a specific price without watching the market continuously.
D) The order will be cancelled at the end of the trading day if not executed.
32) On October 12, Kevin placed a day order to purchase 100 shares of ABC stock at $21 a
share. During the day, the stock sold at prices ranging from $21.01 to $22.49. Over the following
month the stock sold in a range of $21.60 to $23.05. On December 2, the market declined
radically and the price of ABC stock dropped to $19.94. Which one of the following statements
is correct concerning Allen’s order?
A) The order was never executed.
B) The order was executed at $21.01 per share.
C) The order was executed at $22.49.
D) The order was executed at $19.94.
33) Ryan bought a stock three years ago for $6 a share. Today, June 22, the stock is selling for
$72 a share. Ryan is afraid that the price will fall and does not want to lose his profits so he
places a stop-loss order to sell at $70. The stock sells between $71 and $75 throughout the
remainder of the day on June 22. On the morning of June 23, the stock opens at $9 a share based
on rumors of a possible bankruptcy due to inappropriate accounting procedures. Which one of
the following statements is true concerning this situation?
A) Ryan was able to sell his stock for $70 a share thereby protecting his profits.
B) Ryan’s stock was sold for $9 a share causing him to lose most of his profits.
C) Ryan still owns his shares of stock since his order was never executed at the $70 price.
D) Ryan received a call from the specialist asking him what he wanted to do about his order.
34) Mike bought 200 shares of EG stock two years ago at $16 per share. The stock has traded in
a range of $21 to $44 a share over the past year. EG is now selling for $43.60 a share. EG
announces its earnings today and Mike feels the stock could go to $60 on good news or fall to
$30 on bad. To protect his profits, the most appropriate order for him to place is
A) market order to sell immediately.
B) a limit sell order at $60.00.
C) a stop loss order at $42.
D) a stop-limit order to sell at $45.
35) Angela placed a stop-limit order to sell 100 shares of RST stock at $28 when the market
price of RST was $31. Shortly after Angela placed her order, trading on RST was halted due to a
pending news announcement. When trading re-opens RST is priced at $24 a share. Within
minutes the price of RST began to drop further until it reached $19 a share. Which one of the
following statements is correct concerning Angela’s stop-limit order to sell?
A) Angela’s stock was sold for $28 a share.
B) Angela’s stock was sold for $24 a share.
C) Angela’s stock was sold at a price between $19 and $24 a share.
D) Angela still owns her 100 shares of stock.
36) At 10:45 a.m., Ashley placed a stop-loss order to sell 200 shares of Alpha stock at $43 a
share. At 2:15 p.m., the price of Alpha fell to $42.90 and then rose to $43.40 a share by the end
of the trading day. Ashley order was executed that day. Ashley would have received a price
A) of $42.90 a share for her stock since her order was already recorded in the specialist’s book.
B) of $43.40 a share for her stock since that was the closing price on the day of execution.
C) between $42.90 and $43.40 a share depending upon when her trade executed.
D) equal to the average prices paid by the specialist during that trading day.
37) Which of the following statements concerning day traders are correct?
I. Day traders generally do not hold securities over night.
II. Day trading is a relatively low risk approach to investing.
III. Some day traders sell stocks short.
IV. Day trading was declared illegal by the Market Stabilization Act of 2002.
A) I and II only
B) I and III only
C) I, II and IV only
D) II, III and IV only
38) The Securities Investor Protection Corporation insures individual investors against
A) the loss of up to $500,000 in securities or $100,000 in cash held by a broker.
B) market losses of $500,000 total or $100,000 per transaction.
C) losses of up to $100,000 incurred due to innocent online trading errors.
D) losses incurred up to $500,000 due to churning by a broker.
39) In which of the following cases might an investor receive help from The Securities Investor
Protection Corporation?
A) The investor purchased a stock at $40 per share because his broker recommended it. Over the
next six months, it fell to $20 per share.
B) The investor purchases stock in a company that shortly later was forced into bankruptcy
because of accounting fraud.
C) The investor holds $100,000 worth of stock in certificate form. The certificates are destroyed
in a fire.
D) A broker took money sent by investors to cover stock purchases, but never invested it and
sent falsified statements to cover the fraud.
40) An informal, voluntary agreement to solve disputes between an investor and his/her broker
by utilizing a person to facilitate negotiations between the two parties is called
A) voluntary arbitration.
B) binding arbitration.
C) mediation.
D) litigation.
1) Chartered Financial Analysts and Certified Financial Planners must pass a rigorous series of
exams, as well as meet educational and experience requirements.
2) A person can become a Certified Financial Planner merely by filling out an application and
paying an annual fee.
3) Investment clubs are legal partnerships.
4) Investment advisors are legally responsible for losses incurred by their clients.
5) Which of the following designations does not have formal education and testing requirements.
A) Chartered Financial Analyst
B) Certified Financial Planner
C) Registered Investment Adviser
D) Certified Public Accountant
6) Recent studies suggest that, on average, investments clubs
A) outperform broad market indexes by several percentage points.
B) underperform broad market indexes by a several percentage points.
C) earn average rates of return.
D) no data is available on investment club performance.
7) Which of the following are advantages of investment clubs?
I. Small investors can pool their money to build a portfolio.
II. Members can share research responsibilities.
III. Individual members may have different goals and tolerance levels for risk.
IV. Investment clubs typically buy stocks for the long term rather than short term profits.
A) I and III only.
B) III and IV only.
C) I, II, and IV only
D) I, II, III, and IV