Stocks Beginner: Using Financial Services Wisely

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

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1.
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 _______.
Choose wisely. There is only one correct answer.
Limit order. A limit order puts an upper or lower limit on the price, depending on whether you are buying or selling.
2.
Buying an investment on margin means _______.
Choose wisely. There is only one correct answer.
Borrowing money from another to purchase it. Buying on margin involves borrowing money, usually from a broker, to purchase an investment and then returning the money along with a commission.
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?
Choose wisely. There is only one correct answer.
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.
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.
5.
If you are shorting a stock, and it increases greatly in price and keeps on increasing, what would be your reaction?
Choose wisely. There is only one correct answer.
You would panic. With shorting, you only make money if the stock price decreases. If it rises, you must eventually pay it back by buying it, and that means you will pay through the nose to buy it back.
6.
Sometimes, the more you trade, the lower your per-trade commissions.
Choose wisely. There is only one correct answer.
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.