Chapter 23 (4 Questions from this Unit)

Question 1

Cash Account

Answer 1

a customer must pay in full for any securities purchased

Question 2

Types of investment accounts that can only be opened as a Cash Account:

Answer 2

1) Personal Retirement Accounts (Ex. IRAs)
2) Corporate Retirement Accounts
3) Custodial Accounts (UTMA)
4) Coverdell ESAs

Question 3

Margin Account

Answer 3

allows a customer to borrow money for investing

Question 4

Marginable Securities

Answer 4

1) Exchange-listed stocks and bonds
2) Stocks traded on the Nasdaq Stock Market
3) Warrants traded on either of the above

Question 5

Non- Marginable Securities

Answer 5

1) Options (puts and calls); LEAPS are an exception, but that is unlikely to be tested
2) Stock rights (preemptive)
3) Insurance contracts, e.g., variable annuities and variable life

Question 6

cannot be purchased on margin, but may be used as margin collateral once owned at least 30 days:

Answer 6

1) Mutual funds
2) New issues

Question 7

Credit Agreement

Answer 7

Discloses the terms under which credit is extended, including the use of the client’s securities as collateral for the margin loan

Question 8

Hypothecation Agreement

Answer 8

Gives the firm permission to pledge (hypothecate) securities held on margin to a lending institution; it is a mandatory part of a margin agreement.

Question 9

Loan Consent

Answer 9

Gives the firm permission to lend securities held in the margin account to other brokers, usually for short sales. It is not mandatory for customers to sign the loan consent agreement

Question 10

Maintenance Call

Answer 10

Self-Regulated Organizations (SROs- FINRA, NYSE), have minimum levels of equity in a margin account which will call out for additional funds if it falls below a certain threshold

Question 11

House Maintenance Call

Answer 11

describes stricter limits on the SRO (Finra/NYSE) Maintenance call imposed by the broker-dealers themselves

Question 12

Margin call

Answer 12

Set by the Federal Reserve Board under Regulation T, this is the initial deposit required when purchasing securities on margin (the broker-dealer lends the balance of the purchase price). For most equity securities, the initial margin requirement is 50% of the purchase price.

Question 13

Mixed Margin Account

Answer 13

When the margin account contains both long and short positions, it is said to be a mixed margin account. (Short sales MUST take place in a Margin Account)

Question 14

Positive Margin

Answer 14

positive margin simply means that your returns are higher than the cost of the borrowed money to carry the positions in a margin account.

Question 15

Negative Margin

Answer 15

If you sold the stock for less than your interest cost you would have negative margin

Question 16

Margin interest

Answer 16

a tax-deductible expense (Except for Municipal Securities bc municipal securities income is tax-exempt, and IRS does not allow taxpayers to deduct margin interest expense on Municipal securities)

Question 17

Primary Market

Answer 17

the proceeds of sales go to the issuer of the securities sold

Question 18

Secondary Market

Answer 18

previously issued securities are bought and sold

Question 19

The Major Exchanges are

Answer 19

1) New York Stock Exchange - NYSE
2) NYSE American LLC (Formerly known as the American Stock Exchange AMEX)
3) The Chicago Board Operations Exchange (CBOE)
4) Nasdaq Stock Market
*Other trades take place in the nationwide network of broker dealers known as the Over-the-Counter Market (OTC)

Question 20

Listed security

Answer 20

any security listed for trading on an exchange.

Question 21

Criteria for a Security to be Listed on an Exchange

Answer 21

1) Location- must maintain central marketplaces and trading floors
2) Pricing System- operate as auction markets, some even have floor brokers compete to execute trades at the most favorable prices. AUCTION.
3) Specialist maintains an orderly market and provides price continuity and fulfils orders

Question 22

Over-the-Counter (OTC) Market

Answer 22

functions as an interdealer market in which unlisted securities—that is, securities not listed on any exchange—trade. dealers across the country are connected by computer and telephone.

Question 23

Criteria for a Security to be Listed on the OTC Market

Answer 23

1) Technology- Trading place is over the phone with no central location
2) Interdealer network pricing- registered market makers compete to post the best bid and ask prices. NEGOTIATED.
3) Market Makers must stand ready to buy and sell at least the minimum trading unit.

Question 24

Securities Exchange

Answer 24

listed securities = prices determined by auction

Question 25

Securities sold OTC

Answer 25

unlisted securities = prices determined by negotiation. Government and municipal bonds and unlisted corporate stocks and bonds trade in the OTC market.

Question 26

_________ has the power to close a stock exchange for up to 90 days.

Answer 26

The Securities and Exchange Commission (SEC)

Question 27

True or false: Most securities firms act as both brokers and dealers and sometimes in the same transaction

Answer 27

FALSE: Most securities firms act as both brokers and dealers but never in the same transaction

Question 28

Brokers

Answer 28

Agency Capacity, the firm represents clients who wish to buy a security by finding a seller, or finding a buyer for those clients with a security to sell.

Question 29

Dealers

Answer 29

Principal Capacity, selling from their own account.

Question 30

True or False: Disclosure of the capacity in which the broker-dealer acted is always required on the trade confirmation.

Answer 30

True

Question 31

Carrying (Clearing) Firms

Answer 31

carries customer accounts and accepts funds and securities from customers. Provides clearing and settlement functions, and acts as introducing firm's back office

Question 32

Introducing Firms (Fully Disclosed Firms)

Answer 32

introduces its customers to a clearing firm and is therefore often called an introducing firm. The clearing firm holds funds and securities of the introducing firm's customers and performs related functions, such as sending confirmations and statements for its correspondent firms.

Question 33

Commissions

Answer 33

when an investor buys a security, the broker's commission will be added to the investor's purchase price. Likewise, when an investor sells a security, the broker's commission will be deducted from the investor's proceeds.

Question 34

Markup and Markdown

Answer 34

dealers charge the buying customers a markup rather than a commission. When buying for their inventory, dealers charge the selling customers a markdown (they buy for less than they can sell it for—think about what happens when the auto dealer buys your used car from you and what it sells for on the lot a week later after they've cleaned it up).

Question 35

firm quote

Answer 35

market maker's current bid and offer on a security

Question 36

Current Bid

Answer 36

the highest price at which the dealer will buy

Question 37

Current Offer

Answer 37

the lowest price at which the dealer will sell.

Question 38

the spread

Answer 38

The difference between the bid and ask--"The more active the stock, the narrower the spread."