Choose wisely. There is only one correct answer to each question.
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1.
All else being equal, which of the following planners would have the biggest conflict of interest regarding your money?
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.
2.
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 _______.
Limit order. A limit order puts an upper or lower limit on the price, depending on whether you are buying or selling.
3.
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?
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.
4.
Shorting stock involves _______.
Borrowing shares of stock, selling them, and intending to buy them back at a lower price. With shorting, you can actually profit when a stock drops in price.
5.
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.)
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).
6.
Full-service brokers typically _______.
Provide a lot of personal attention and advice. Though full-service brokers certainly charge large commissions, they do provide personal attention and advice, and they deserve to get paid for it. An inherent problem with paying for advice via commissions is that the advisor gets paid more the more you trade, and trading frequently is typically not in your best interests.