Basics Beginner: 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.
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.
3.
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?
Choose wisely. There is only one correct answer.
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.
4.
You short 100 shares of fictional company Hoosier Soybeans Corp. at $20. The shares subsequently drop to $15, and you close out the short position. What would your cash profit be?
Choose wisely. There is only one correct answer.
$500. Youll borrow 100 shares and immediately sell them to receive $2,000 (100 shares x $20/share). Once the stock drops to $15, you buy the shares back for $1,500. Your cash profit is $500 (cash received of $2,000 minus cash paid of $1,500).
5.
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.
6.
Financial planners and advisors get paid in one of three possible ways. Which of the following is not one of those ways?
Choose wisely. There is only one correct answer.
None of the above. All of these are ways that planners and advisors get paid.