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Stocks 202: Using Financial Services Wisely

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1.
Say you are relaxing at home a week after having bought some stock on margin, and the price of the stock has dropped immensely during those days. Suddenly your phone rings, and it is your broker. You know instinctively that this is _______.
Choose wisely. There is only one correct answer.
A margin call. If the stock price drops deeply, your broker may worry that you wont be able to pay back the loan, and he or she will give you a margin call asking you to add more cash to your account.
2.
If you are shorting a stock, and it increases greatly in price and keeps on increasing, what would be your reaction?
Choose wisely. There is only one correct answer.
You would panic. With shorting, you only make money if the stock price decreases. If it rises, you must eventually pay it back by buying it, and that means you will pay through the nose to buy it back.
3.
Full-service brokers who get paid by commission may have an interest in trading frequently for you. What are some possible downsides of this?
Choose wisely. There is only one correct answer.
Both of the above. Frequent trading, while it may have other values, can lead to commissions that chip away at your returns, and it can lead to more taxes on gains that you make.
4.
A discount brokers commission is based on the total value of holdings in the customers account.
Choose wisely. There is only one correct answer.
False. Discount brokers earn commissions based on trades.
5.
All else being equal, which of the following planners would have the biggest conflict of interest regarding your money?
Choose wisely. There is only one correct answer.
A commission-based planner. Anyone who earns commissions has an interest in encouraging as many trades as possible. To what extent they act on that interest will, of course, vary.
6.
If you place an order with your broker and it sits there for days waiting for a certain price limit to be activated, you have most likely placed a _______.
Choose wisely. There is only one correct answer.
Limit order. A limit order puts an upper or lower limit on the price, depending on whether you are buying or selling.