Chapter 03 – How Securities are Traded
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Chapter 03
How Securities are Traded
Multiple Choice Questions
1. The trading of stock that was previously issued takes place
E. B and C.
Difficulty: Easy
2. A purchase of a new issue of stock takes place
A. in the secondary market.
B. in the primary market.
Difficulty: Easy
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3. Firms raise capital by issuing stock
A. in the secondary market.
Difficulty: Easy
4. The following statements regarding the specialist are true:
A. Specialists maintain a book listing outstanding unexecuted limit orders.
B. Specialists earn income from commissions and spreads in stock prices.
Difficulty: Moderate
5. Investment bankers
A. act as intermediaries between issuers of stocks and investors.
B. act as advisors to companies in helping them analyze their financial needs and find buyers
Difficulty: Moderate
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6. In a “firm commitment”
D. B and C.
E. A and B.
Difficulty: Moderate
7. The secondary market consists of
A. transactions on the AMEX.
Difficulty: Moderate
8. The use of the Internet to trade and underwrite securities
A. is illegal under SEC regulations.
Difficulty: Moderate
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9. Initial margin requirements are determined by
A. the Securities and Exchange Commission.
Difficulty: Moderate
10. You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your
gains may be protected by placing a __________.
A. stop-buy order
Difficulty: Moderate
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11. You sold JCP stock short at $80 per share. Your losses could be minimized by placing a
__________.
A. limit-sell order
Difficulty: Moderate
12. Which one of the following statements regarding orders is false?
A. A market order is simply an order to buy or sell a stock immediately at the prevailing
market price.
Difficulty: Moderate
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13. Restrictions on trading involving insider information apply to the following except
A. corporate officers and directors.
B. relatives of corporate directors and officers.
Difficulty: Moderate
14. The cost of buying and selling a stock consists of __________.
A. broker’s commissions
Difficulty: Moderate
15. Assume you purchased 200 shares of GE common stock on margin at $70 per share from
your broker. If the initial margin is 55%, how much did you borrow from the broker?
A. $6,000
Difficulty: Moderate
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16. You sold short 200 shares of common stock at $60 per share. The initial margin is 60%.
Your initial investment was
A. $4,800.
B. $12,000.
Difficulty: Moderate
17. You purchased 100 shares of IBM common stock on margin at $70 per share. Assume the
initial margin is 50% and the maintenance margin is 30%. Below what stock price level
would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.
A. $21
Difficulty: Difficult
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18. You purchased 100 shares of common stock on margin at $45 per share. Assume the
initial margin is 50% and the stock pays no dividend. What would the maintenance margin be
if a margin call is made at a stock price of $30? Ignore interest on margin.
A. 0.33
B. 0.55
Difficulty: Difficult
19. You purchased 300 shares of common stock on margin for $60 per share. The initial
margin is 60% and the stock pays no dividend. What would your rate of return be if you sell
the stock at $45 per share? Ignore interest on margin.
A. 25%
B. -33%
Difficulty: Difficult
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20. Assume you sell short 100 shares of common stock at $45 per share, with initial margin at
50%. What would be your rate of return if you repurchase the stock at $40/share? The stock
paid no dividends during the period, and you did not remove any money from the account
before making the offsetting transaction.
A. 20%
Difficulty: Moderate
21. You sold short 300 shares of common stock at $55 per share. The initial margin is 60%.
At what stock price would you receive a margin call if the maintenance margin is 35%?
A. $51
Difficulty: Difficult
22. Assume you sold short 100 shares of common stock at $50 per share. The initial margin is
60%. What would be the maintenance margin if a margin call is made at a stock price of $60?
A. 40%
Difficulty: Difficult
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23. Specialists on stock exchanges perform the following functions
A. Act as dealers in their own accounts.
B. Analyze the securities in which they specialize.
Difficulty: Moderate
24. Shares for short transactions
A. are usually borrowed from other brokers.
Difficulty: Moderate
25. Which of the following orders is most useful to short sellers who want to limit their
potential losses?
A. Limit order
Difficulty: Moderate
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26. Which of the following orders instructs the broker to buy at the current market price?
A. Limit order
Difficulty: Moderate
27. Which of the following orders instructs the broker to buy at or below a specified price?
A. Limit-loss order
Difficulty: Moderate
28. Which of the following orders instructs the broker to sell at or below a specified price?
A. Limit-sell order
Difficulty: Moderate
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29. Which of the following orders instructs the broker to sell at or above a specified price?
A. Limit-buy order
Difficulty: Moderate
30. Which of the following orders instructs the broker to buy at or above a specified price?
A. Limit-buy order
Difficulty: Moderate
31. Shelf registration
A. is a way of placing issues in the primary market.
Difficulty: Easy
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32. Block transactions are transactions for more than _______ shares and they account for
about _____ percent of all trading on the NYSE.
A. 1,000; 5
Difficulty: Moderate
33. A program trade is
A. a trade of 10,000 (or more) shares of a stock.
B. a trade of many shares of one stock for one other stock.
Difficulty: Moderate
34. When stocks are held in street name
A. the investor receives a stock certificate with the owner’s street address.
Difficulty: Moderate
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35. NASDAQ subscriber levels
A. permit those with the highest level, 3, to “make a market” in the security.
Difficulty: Easy
36. You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as
possible. You would most likely place a
A. stop-loss order
B. stop-buy order
Difficulty: Easy
37. You want to purchase XON stock at $60 from your broker using as little of your own
money as possible. If initial margin is 50% and you have $3000 to invest, how many shares
D. 500 shares
E. 25 shares
Difficulty: Moderate
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38. A sale by IBM of new stock to the public would be a(n)
A. short sale.
Difficulty: Easy
39. The finalized registration statement for new securities approved by the SEC is called
A. a red herring
Difficulty: Moderate
40. The minimum market value required for an initial listing on the New York Stock
Exchange is
A. $2,000,000
B. $2,500,000
Difficulty: Moderate
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41. In 2005, the price of a seat on the NYSE reached a high of
A. $1,000,000
Difficulty: Moderate
42. The floor broker is best described as
D. a frequent trader who performs no public function but executes trades for himself.
E. any counter party to a trade executed on the floor of the exchange.
Difficulty: Easy
43. You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum
possible loss is
A. $4500
Difficulty: Moderate
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44. You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%.
The next day Qualitycorp’s price drops to $25 per share. What is your actual margin?
A. 50%
Difficulty: Moderate
45. When a firm markets new securities, a preliminary registration statement must be filed
with
A. the exchange on which the security will be listed.
Difficulty: Easy