CHAPTER 2

Buying and Selling Securities

I. DEFINITIONS
CASH ACCOUNT
1. A brokerage account in which purchases can only be made if sufficient funds are
available is called a(n) _____ account.
a. clearing
b. access available
c. cash
d. call
e. margin
CALL MONEY RATE
2. The call money rate is the:
a. rate at which you borrow money to make a margin purchase.
b. percentage of a securitys value which must be paid to a broker when you receive a
margin call.
c. percentage interest rate which must be paid on any margin shortfall until the brokerage
firm
receives the funds requested in a margin call.
d. rate at which the brokerage firm borrows funds which are subsequently loaned to
margin
customers.
e. minimum percentage rate of equity which must be maintained at all times.
MARGIN
3. Jennifer is buying $21,000 worth of a stock. She is paying 65 percent in cash and
borrowing the remaining 35 percent of the cost. The 65 percent is referred to as
the:
a. call premium.
b. initial margin.
c. maintenance margin.
d. call money.
e. financial margin.
INITIAL MARGIN
4. Initial margin is the term used to define the amount of money which:
a. is being borrowed to purchase a security.
b. represents the maximum amount which your brokerage firm will lend to purchase a
security.
c. represents the maximum amount which the Federal Reserve allows as a loan for a
security
purchase.
d. represents the minimum equity which must be maintained in a security at all times.
e. must be paid in cash to purchase a security.

MAINTENANCE MARGIN
5. The minimum equity that must be maintained at all times in a margin account is called
the:
a. initial margin.
b. initial equity position.
c. maintenance margin.
d. call requirement.
e. margin call.
MARGIN CALL
6. When your equity position in a security is less than the required amount, your
brokerage firm will issue a:
a. margin call.
b. maintenance margin statement.
c. cash certificate.
d. debtors lien.
e. leverage call.
EFFECTIVE ANNUAL RETURN
7. The return on an investment expressed on an annualized basis is called the:
a. earned return.
b. leveraged return.
c. holding period percentage return.
d. annual percentage rate.
e. effective annual return.
HYPOTHECATION
8. Martha pledged 400 shares of ABC stock as collateral against her margin loan. This
process is called:
a. street naming.
b. hypothecation.
c. leveraging.
d. maintaining the margin.
e. cash accounting.
STREET NAME
9. Leo owns 500 shares of XYZ stock but his brokerage firm is listed as the registered
owner of the securities. Under this arrangement, the securities are said to be held
in:
a. transit.
b. record ownership status.
c. street name.
d. a wrap account.
e. a discretionary account.
SHORT SALE
10. Alita is selling a stock which she does not currently own. This is known as a:
a. margin sale.
b. long position.
c. wrap trade.
d. hypothecated sale.

e.

short sale.

SHORT INTEREST
11. Short interest is the number of shares of common stock:
a. for which sell orders are outstanding.
b. for which buy orders are outstanding.
c. held in short positions.
d. held in margin accounts.
e. pledged as security for margin loans.
MARKET TIMING
12. Market timing is the:
a. hours during which margin trades can be placed.
b. period of time between the placement of a short sale and the purchase of the security.
c. buying and selling of securities in anticipation of the overall direction of the market.
d. staggering of buy and sell orders so that they do not all occur on the same trading day.
e. placing of trades just prior to the opening bell which starts trading for the day.
ASSET ALLOCATION
13. Asset allocation is the:
a. buying and selling of securities in response to anticipated moves in the overall market.
b. division of a purchase price between a cash payment and a margin loan.
c. division of a portfolio into short and long positions.
d. construction of a balance sheet to determine how securities are divided between equity
and debt
positions.
e. distribution of investment funds among various broad categories of assets.
SECURITY SELECTION
14. Amanda is reviewing pharmaceutical firms to determine which firms stock to
purchase. This
process is known as:
a. asset allocation.
b. security selection.
c. market timing.
d. shorting.
e. diversification.
SPREAD
15. The amount by which the interest rate on your margin account exceeds your brokers
call money rate is called the:
a. margin rate.
b. short rate.
c. spread.
d. straddle.
e. cash rate.
II. CONCEPTS
BROKERAGE FIRMS

16. Rose Marie recently inherited $284,000 which she wishes to invest in the stock and
bond
markets. However, Rose Marie has no investment experience and wants a
knowledgeable professional to make all of her investment decisions for her. Rose
Marie most likely needs the
services offered by a(n):
a. deep-discount broker.
b. discount broker.
c. full-service broker.
d. on-line broker.
e. cyberbroker.
BROKER-CUSTOMER RELATIONS
17. Which one of the following statements is correct?
a. Advice received from your broker is guaranteed to be accurate.
b. Most brokerage agreements require disputes to be settled in a court of law.
c. Arbitration is the legal process of settling a case without a jury.
d. The churning of a customers account is a recommended brokerage activity.
e. Commission brokers always have a potential conflict of interest with their clients.
SIPC
18. You have an investment account with a brokerage firm that is SIPC insured. The
account consists of $40,000 in cash and $170,000 in securities. Which one of the
following
statements is true about this account?
a. Only $100,000 of the account is insured against fraud.
b. The $40,000 of cash and $60,000 of the securities are insured against loss from any
source.
c. The entire account is guaranteed safe by the U.S. government agency issuing the SIPC
insurance.
d. The $40,000 in cash plus the first $100,000 in securities is guaranteed by the private
insurance fund backing the SIPC insurance.
e. The entire account is protected by a private fund but only for losses resulting from
fraud or other failures of the brokerage firm.

INITIAL MARGIN
22. The absolute minimum initial margin requirement is set by the:
a. individual investor.
b. brokerage firm.
c. individual broker.
d. SEC.
e. Federal Reserve.
MAINTENANCE MARGIN
23. You open a margin account with a local broker and purchase shares of ABC stock. The
maintenance margin on your purchase is established by:
a. you when you open your account.

b.
c.
d.
e.

your brokerage firm.

the SEC.
the SIPC.
the Federal Reserve.

EFFECTS OF MARGIN
24. By utilizing a margin account rather than a cash account you will potentially _____
your sizeable positive returns and _____ your sizeable negative returns.
a. decrease; decrease
b. decrease; increase
c. increase; decrease
d. increase; increase
e. increase; not effect
MARGIN CALL
26. You will receive a margin call every time your margin:
a. exceeds the required maintenance margin.
b. is less than the required maintenance margin.
c. is less than the initial margin.
d. increases.
e. decreases.
MARGIN CALL
27. If you ignore a margin call, your broker:
a. will create a loan on your behalf to cover the call amount.
b. will sell all of your securities and close your account.
c. may place a short sale on your behalf to cover the amount of the call.
d. may sell some of your securities.
e. will increase both your margin loan and the rate of interest on that loan.

ARBITRATION
30. Jackie has an investment account with Sam, who is a broker with DR Brokers. Jackie
believes that Sam has mishandled her account by churning it. If she files a
complaint
against Sam seeking compensation for Sams actions, her case
will most likely be
decided by:
a. the chief compliance officer for DR Brokers.
b. a civil suit judge.
c. a jury in a civil court.
d. an arbitration panel.
e. the SEC Hearing Board.
STREET NAME
31. Kate Smith, wife of Terry Smith, has a margin account with a local brokerage firm,
Financial
Strength Securities. Kate recently purchased 600 shares of T.L.
Rex
common stock which trades on the New York Stock Exchange (NYSE). These
shares
are held in street name and are
registered under the name of:
a. Kate Smith.

b.
c.
d.
e.

Terry Smith.
Financial Strength Securities.
New York Stock Exchange.
The registration name can not be determined from the information provided.

DISCRETIONARY ACCOUNT
33. If you authorize your broker to trade for you, you have a(n) _____ account.
a. discretionary
b. margin
c. asset management
d. mutual
e. wrap
LONG POSITION
34. If you own a security and make money if the price of the security increases you are said
to have a _____ position.
a. cash
b. margin
c. short
d. long
e. discretionary
SHORT POSITION
35. Which one of the following describes a short position?
a. purchasing a security on margin
b. selling a security which you originally purchased on margin
c. loaning a security to your broker so that it can be loaned to another brokerage client
d. having less equity than required in your margin account
e. selling a security which you do not own
SHORT SALE
37. A short sale:
a. is a guaranteed method of earning a profit.
b. involves the borrowing of securities.
c. is the purchase of less than 100 shares of a stock.
d. puts the investor in a position of earning a profit if the security price increases.
e. is the selling of a security within 24 hours of purchase.
SHORT POSITION
38. If you benefit when a security in your account decreases in value, you have a _____
position in the security.
a. long
b. margined
c. short
d. covered
e. wrapped
INVESTOR CONSTRAINTS

40. Stephen is a day trader who constantly buys and sells only medical-related stocks.
Stephen has _____ asset allocation strategy and a(n) _____ security selection
strategy.
a. an active; active
b. an active; passive
c. a passive; active
d. a passive; passive
e. no; active
LIQUIDITY
42. To be considered liquid a security must:
a. be held in a cash account.
b. have a dividend yield in excess of 5 percent.
c. be able to be sold on short notice.
d. be sold within 30 days of purchase.
e. be able to be sold quickly with little, if any, loss in value.
ASSET ALLOCATION
44. Joshua has decided to invest 40 percent of his money in large company stocks, 35
percent in small company stocks, and the balance in bonds. This is a(n) _____ decision.
a. market timing
b. security selection
c. tax-advantaged
d. active strategy
e. asset allocation