Investing

Chapter 05

The Stock Market

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Multiple Choice Questions

1. High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets?

A. primary
B. secondary
C. third
D. fourth
E. over-the-counter

 

2. Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets?

A. primary
B. secondary
C. third
D. fourth
E. fifth

 

3. Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n):

A. open-end sale
B. break-out issue
C. public service offering
D. initial public offering
E. initial trial issue

 

4. A firm that specializes in arranging financing for companies is called a(n):

A. floor broker
B. investment banking firm
C. investment dealer
D. private broker
E. marketing firm

 

5. The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called:

A. underwriting
B. capitalizing
C. securing
D. brokering
E. deploying

 

6. The financing provided for new ventures that are frequently high-risk investments is referred to as “venture _______”.

A. capital
B. leverage
C. risk funds
D. funding
E. investing

 

7. Marco Painting Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n):

A. supplemental offering.
B. seasoned equity offering.
C. initial public offer.
D. market expansion offer.
E. after-market underwriting.

 

8. Under the provisions of a general cash offer, shares of stock are offered to:

A. underwriters on a guaranteed sale basis only.
B. current shareholders prior to being offered to the general public.
C. institutional investors only.
D. the issuer’s employees on a cash purchase basis only.
E. the general public on a “first-come” basis.

 

9. A public offering of securities which are offered first to current shareholders is called a(n):

A. existing shareholder offer.
B. limited offer.
C. rights offer.
D. venture offer.
E. preference offer.

 

10. The difference between the price an underwriter pays an issuer and the underwriter’s offering price is called the:

A. spread.
B. margin.
C. offer differential.
D. firm commitment.
E. underwriting capital.

 

11. When a group of underwriters jointly work together to sell a new issue of securities, the underwriters form a(n):

A. underwriting cartel.
B. market union.
C. venture capital association.
D. Dutch market.
E. syndicate.

 

12. When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting.

A. Dutch auction
B. full-fledge
C. firm commitment
D. best efforts
E. guaranteed sale

 

13. When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting.

A. Dutch auction
B. partial
C. firm commitment
D. best efforts
E. pro-rata

 

14. When the price of newly issued shares is determined by competitive bidding the underwriting is known as a _____ underwriting.

A. Dutch auction
B. market-priced
C. seasoned
D. best efforts
E. rights

 

15. Which one of the following is the federal agency which regulates the financial markets in the U.S.?

A. Treasury Department
B. National Association of Securities Dealers
C. Over the Counter Commission
D. Federal Reserve
E. Securities and Exchange Commission

 

16. The document that must be prepared in order to receive approval for a stock offering is called a:

A. tombstone.
B. prospectus.
C. offering agreement.
D. regulatory report.
E. offering paper.

 

17. A preliminary document provided to investors who are interested in a stock offering is called a(n):

A. prospectus.
B. inquiry form.
C. draft offer.
D. green shoe.
E. red herring.

 

18. A securities dealer is a(n):

A. intermediary who arranges trades between a buyer and a seller.
B. trader who buys and sells from his or her inventory.
C. firm which charges a commission for arranging a transaction.
D. person who buys securities for his or her own account on an exchange floor.
E. trader who transacts business on behalf of a securities issuer.

 

19. Which one of the following best describes a broker?

A. intermediary who arranges trades between a buyer and a seller
B. trader who buys and sells from his or her inventory
C. firm which charges a commission for arranging a transaction
D. person who buys securities for his or her own account on an exchange floor
E. trader who transacts business on behalf of a securities issuer

 

20. Which one of the following prices will an individual investor receive if he or she sells shares of Microsoft?

A. bid
B. ask
C. issue
D. offer
E. Dutch

 

21. Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding?

A. issue
B. option
C. bid
D. ask
E. primary

 

22. The profit a dealer makes on a purchase and resale of shares of stock is called the:

A. margin.
B. bid.
C. float.
D. offer.
E. spread.

 

23. A private equity fund: I. is set up as a limited partnership II. usually use a 2/20 fee structure III. place no constraints on manager compensation IV. typically have a stated life of 7 to 10 years

A. I and II only
B. I and III only
C. I, II and III only
D. I, II and IV only
E. I, II, III, and IV

 

24. Which of the following is correct regarding the compensation paid to private equity fund managers?

A. Managers typically receive 20% of fund profits but no separate management fee.
B. Managers typically receive a high percentage management fee but no portion of fund profits.
C. Management compensation is usually subject to a “clawback” provision to limit the performance fees.
D. “Carried interest” refers to the interest fund managers earn on performance fees.
E. Fees paid to fund managers do not reduce the net return of the fund.

 

25. An owner of a trading license on the NYSE is called a:

A. broker.
B. shareholder.
C. member.
D. trader.
E. dealer.

 

26. An NYSE Supplemental Liquidity Provider: I. can trade the same stocks as designated market makers II. can trade only from offices outside the exchange III. must quote bid or ask quotes a certain % of the day IV. are paid 30 cents per 100 shares traded

A. I and II only
B. I, II and III only
C. I and III only
D. I, II, and IV only
E. I, II, III and IV

 

27. The party who serves as a dealer for a few securities on an exchange floor and is obligated to maintain an orderly market for those securities is called a:

A. floor trader.
B. designated market maker.
C. floor broker.
D. member.
E. house broker.

 

28. A trading floor broker:

A. is a NYSE member who trades on the floor for his or her personal account.
B. executes orders on behalf of commission brokers in exchange for a fee.
C. executes customers’ orders in exchange for a commission.
D. trades a limited number of securities and is obligated to maintain an orderly market for those securities.
E. is any party who owns a NYSE trading license.

 

29. The NYSE’s Super Display Book is an electronic system which:

A. maintains the historical records of each customer’s trading activity.
B. transmits the latest market information to the news media.
C. allows floor traders to execute trades via cell phones.
D. tracks the activity on an exchange floor to ensure regulatory compliance.
E. is based on NYSE’s ARCA electronic trading engine.

 

30. A NYSE member who trades only for his or her own account is called a(n):

A. floor trader.
B. specialist.
C. individual broker.
D. floor broker.
E. house broker.

 

31. The location on an exchange floor where a particular security trades is called a(n):

A. specialist’s post.
B. broker’s terminal.
C. floor spot.
D. exchange spot.
E. market pit.

 

32. You want to sell shares of stock at the current price. Which type of order should you place?

A. limit
B. post
C. market
D. short
E. stop

 

33. An order to buy shares of stock at a stated price or less is called a _____ order.

A. limit
B. stop
C. market
D. short
E. bid

 

34. An order to sell that involves a preset trigger point is called a _____ order.

A. limit
B. day
C. stop
D. short
E. market

 

35. A market centered on dealers buying and selling for their own inventories is called a(n):

A. exchange floor.
B. SuperDot.
C. OTC market.
D. subscriber market.
E. Big Board.

 

36. Which one of the following describes an ECN?

A. Web site used by investors to trade directly with other investors
B. Web site limited to use by professional brokers and dealers
C. computerized trading floor
D. communications network used by specialists
E. cellular trading network

 

37. Inside quotes are the:

A. highest asked and lowest bid quotes offered by securities dealers.
B. highest bid and lowest asked quotes offered by securities dealers.
C. latest prices at which corporate insiders have purchased or sold securities.
D. bid and asked prices which are offered only to institutional traders or large private investors.
E. latest price at which a security traded.

 

38. The off-exchange market in which exchange-listed securities trade is referred to as the _____ market.

A. independent
B. secondary
C. fourth
D. third
E. primary

 

39. The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market.

A. home
B. independent
C. third
D. fourth
E. SuperDot

 

40. Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price?

A. balanced
B. market-weighted
C. dollar-weighted
D. price-weighted
E. value-weighted

 

41. When stocks are held in an index in proportion to their total company market value, the index is:

A. dollar-weighted.
B. front-weighted.
C. back-weighted.
D. price-weighted.
E. value-weighted.

 

42. An index is valued on a daily basis. However, some stocks in this particular index have not traded recently. As a result, this index suffers from index:

A. fatigue.
B. devaluation.
C. flatness.
D. staleness.
E. weighting.

 

43. Which one of the following statements concerning the NYSE is correct?

A. The NYSE was created based on the Walnut Tree Agreement.
B. The average daily trading volume on the NYSE in 2007 was approximately one billion shares.
C. The NYSE and NASDAQ merged in 2007.
D. The NYSE is part of a firm that also operates a stock exchange in Amsterdam.
E. The NYSE merged with NASDAQ in 2007.

 

44. Which of the following are common sources of venture capital? I. private individuals II. NASDAQ III. university endowment funds IV. insurance companies

A. I and II only
B. III and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV

 

45. Which one of the following statements concerning venture capital is correct?

A. Venture capital is frequently provided in stages with each stage financed by a different venture capitalist.
B. Most venture capitalists are passive investors.
C. The founders of a firm generally realize substantial payoffs as soon as the firm receives venture financing.
D. Venture capitalists generally compete with banks to find projects to finance.
E. Well established firms tend to absorb most of the available venture capital.

 

46. How long is the “lock-up” period that is commonly found in an IPO underwriting contract?

A. one month
B. three months
C. six months
D. one year
E. eighteen months

 

47. Which one of the following can be assumed when the SEC approves an IPO registration?

A. The securities offering will provide value to the shareholders.
B. The issuer is financially sound.
C. The issuer will remain solvent.
D. All rules have been followed to allow for full disclosure of information.
E. The stock price is set at a level which will allow shareholders to earn a positive rate of return.

 

48. Which one of the following transactions occurs in the primary market?

A. sale of stock by Shareholder A to Shareholder B
B. gift of shares from a grandmother to her granddaughter
C. sale of newly issued shares by the issuer to a shareholder
D. sale of shares in the third market
E. purchase of shares by a dealer from a shareholder

 

49. Trevor currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trevor is a securities:

A. broker.
B. representative.
C. underwriter.
D. floor broker.
E. dealer.

 

50. Anna is an individual investor. She purchases shares at the _____ price and sells at the _____ price.

A. asked; bid
B. average; asked
C. bid; asked
D. bid; average
E. asked; average

 

51. What is the current structure of the NYSE?

A. general partnership
B. limited partnership
C. non-profit organization
D. publicly traded corporation
E. government agency

 

52. In 2007, NYSE Holdings merged with which one of the following?

A. NASDAQ
B. AMEX
C. Chicago Stock Exchange
D. London Stock Exchange
E. Euronext, N.V.

 

53. In order to currently trade on the floor of the NYSE, members must:

A. be registered as a floor trader
B. own a seat
C. purchase a trading license
D. be a specialist
E. be designated as a floor broker

 

54. Which one of the following has the greatest duty to provide liquidity to the financial market?

A. floor broker
B. independent broker
C. dealer
D. designated market maker
E. floor trader

 

55. The SuperDOT system has lessened the role of which one of the following?

A. personal financial advisers
B. floor traders
C. specialists
D. floor brokers
E. underwriters

 

56. Which one of the following statements related to the NYSE Hybrid market is correct?

A. Floor brokers operate both electronically and in person.
B. The Hybrid system replaces the market specialists.
C. The automated system works better than the specialist for stocks with minimal liquidity.
D. The automated system will only replace the specialist in times of market duress.
E. Investors can automatically trade an unlimited number of shares.

 

57. To be listed on the NYSE, a firm must have at least:

A. 2,500 shareholders
B. 100,000 shares traded on an average day
C. 1.5 million shares held by the public
D. $75 million in market value for an IPO
E. pre-tax aggregate earnings of $10 million in the previous 3 years

 

58. Lucas wants to sell 9,000 shares of stock and places a market order. The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to “stop” the stock. What has the specialist agreed to do?

A. cancel the order
B. place the order into the order book to hold until an order to buy 9,000 shares is received
C. purchase the shares if no other buyer is readily available
D. sell the shares to the next available buyer regardless of the price received
E. sell the shares at the end of the trading day at the best price available at that time

 

59. The duties of a specialist include which of the following? I. maintain an orderly market II. offer a higher bid price than the floor brokers III. provide liquidity to the market IV. purchase all shares offered as limit sells

A. I and III only
B. II and III only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV

 

60. Faith placed an order to sell 7,500 shares of stock she currently owned. As soon as the order reached the trading floor, the shares were immediately sold. Which type of order did Faith place?

A. limit
B. day
C. market
D. short
E. stop

 

61. Steve placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Steve know for sure? I. His order will execute but the time of execution is unknown. II. His order may never execute. III. He will receive exactly $7,000 if his order executes. IV. He could receive more, but not less, than $14 a share.

A. I and III only

 
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