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Stocks 202: Using Financial Services Wisely

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1.
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.
2.
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.
3.
Say you bought 100 shares of fictional company Hawkeyes Footballs, Inc. on margin for $100 per share. You borrow 50% of the funds used for the purchase. If the stock price increased to $110, what would your return on investment be? (Ignore commissions and interest costs.)
Choose wisely. There is only one correct answer.
20%. It will cost $10,000 to purchase 100 shares at $100. Since you are buying on margin, and borrow 50% of the funds, you put up only $5,000. The stock goes up 10%, so the value of the 100 shares is now $11,000, a $1,000 increase. The return on your investment, however, is 20% ($1,000/$5,000).
4.
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.
5.
If you choose a discount broker over a full-service broker, you may have to sacrifice certain services. Which of the following is not one of those services that might be sacrificed?
Choose wisely. There is only one correct answer.
Trades. Trades are the one service that all brokers will offer, or else they would not be brokers at all. The other services are more likely to be offered by the full-service brokers.
6.
If you are paying your financial advisor 1.2% of your portfolio every year, your planners compensation is known as _______.
Choose wisely. There is only one correct answer.
A percentage of your assets. This payment method involves charging you a certain percentage of the assets under the advisors management.