Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
If you are paying your financial advisor 1.2% of your portfolio every year, your planners compensation is known as _______.
A percentage of your assets. This payment method involves charging you a certain percentage of the assets under the advisors management.
3.
Sometimes, the more you trade, the lower your per-trade commissions.
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.
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.
What is the conflict of interest that you might encounter with a full-service broker who earns commissions?
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.
6.
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 _______.
Limit order. A limit order puts an upper or lower limit on the price, depending on whether you are buying or selling.
