Planning Beginner: Using Financial Services Wisely

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1.
Sometimes, the more you trade, the lower your per-trade commissions.
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True. Some brokers reward "active traders," as they are called, with lower per-trade commissions, provided that the traders meet a certain minimum number of trades per time period.
2.
Shorting stock involves _______.
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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.
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?
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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.
If you place a market order to buy 100 shares of fictional company Wolverines Sailboats Corp., at what price and when would the trade be executed?
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The trade would be executed immediately at the best available price. A market order tells the broker to buy or sell at the best price available, and the trades are usually executed immediately, assuming the market is open.
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.)
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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.
If you are paying your financial advisor 1.2% of your portfolio every year, your planners compensation is known as _______.
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A percentage of your assets. This payment method involves charging you a certain percentage of the assets under the advisors management.