Series 7: Chapter 17 Practice Question Answers

Chapter 17 Practice Question Answers

1. 1. Answer: C. According to the Exchange Act, a broker-dealer can take either side in a trade. A dealer may sell stock it holds in inventory to you at a markup. A broker holds no inventory; it charges a commission for finding a person or company willing to sell the stock to you. Another name for a broker in this instance is “agent.”
2. 2. Answer: C. The fourth market utilizes Electronic Communications Networks (ECNs), such as Instinet, to allow institutions to trade large positions without a broker-dealer.
3. 3. Answer: C. Securities are issued on the primary market. They are traded on the secondary market. The “first market” and the “over-the-counter market/second market” are two components of the secondary market.
4. 4. Answer: D. None of these orders guarantees a specific sale or purchase price. Market orders will be executed at the best price available. Stop orders will be executed at the best price available once a trigger price has been hit. Limit orders will only be executed if they can be filled at the specified price or better.
5. 5. Answer: A. Stop orders become market orders to either buy or sell once a target price is reached. If the stop order is triggered, because the order becomes a market order, it is guaranteed to execute but there is no guarantee on the execution price. Sell stop orders are typically used to limit loss on a long position. Buy stop orders are typically used to limit loss on a short position.
6. 6. Answer: B. A sell stop order helps an investor avoid further losses if a stock price continues to drop. A stop order triggers a sale or purchase if the stock reaches a certain price. In this case, James would place the order below the current market, and if the stock price decreased to his “stop price,” the order would become a market order and sell his position. The order would still allow for James to potentially recover if the stock goes up. If a market order was ent