Stocks Beginner: Using Financial Services Wisely

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1.
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.
2.
All else being equal, which of the following planners would have the biggest conflict of interest regarding your money?
Choose wisely. There is only one correct answer.
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.
3.
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 _______.
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Limit order. A limit order puts an upper or lower limit on the price, depending on whether you are buying or selling.
4.
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).
5.
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?
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$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).
6.
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.