Basics Beginner: Using Financial Services Wisely

Test your knowledge

Choose wisely. There is only one correct answer to each question.

0%
Keep studying!
Review your answers below to learn more.
1.
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).
2.
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.
3.
Shorting stock involves _______.
Choose wisely. There is only one correct answer.
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.
4.
What is the conflict of interest that you might encounter with a full-service broker who earns commissions?
Choose wisely. There is only one correct answer.
The broker may encourage frequent trading in order to get more commissions. While the other choices might still occur, only this one is a conflict of interest. Make sure your broker has your best interests at heart.
5.
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.
6.
If you place an order with your broker to buy a stock provided that the price does not exceed $40 per share, you have placed a _______.
Choose wisely. There is only one correct answer.
Limit order. A limit order limits the price at which the trade is being executed.