Choose wisely. There is only one correct answer to each question.
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1.
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?
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.
2.
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.
3.
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.
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.)
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.
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.
6.
Full-service brokers who get paid by commission may have an interest in trading frequently for you. What are some possible downsides of this?
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.
