Kaplan SIE Unit 18

Which of the following orders can be used to close a short position in CDT stock that consists of 1,000 shares?A)Write 10 CDT call optionsB)Buy 1,000 shares of CDTC)Buy 10 CDT call optionsD)Sell 1,000 shares of CDT

B)Buy 1,000 shares of CDTTo close a short position consisting of 1,000 shares of CDT stock, one would need to purchase 1,000 shares—buy 1,000 shares of CDT. Buying the call options would not close the position, but once owned, they could be exercised with the purchased shares then used to close the short position.

Potential risks of owning common stock include all of the following exceptA)business risk.B)unlimited liability.C)low priority in liquidation.D)market risk.

B)unlimited liability.

Discretion given to a registered representative to make transactions applies to all of the following exceptA)the number of shares or units for the transaction.B)whether to buy or sell.C)the security for the transaction.D)timing and price only.

D)timing and price only.Discretion is defined as the authority to decide, what security, the number of shares or units, and whether to buy or sell. Discretion does not apply to decisions regarding only the timing of an investment or the price at which it is bought or sold.

Which type of accounts bills a single fee annually for a group of services that might include asset allocation, portfolio management, and executions?A)Wrap account.B)Option account.C)Cash account.D)Margin account.

A)Wrap account.Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. A wrap account can be a cash or margin account and like any other be approved for option trading.

Which of the following choices would a registered representative be able to make for a customer in a nondiscretionary account?I. The time of execution of the tradeII. Which security to buyIII. How much of the security to buyIV. At what price to execute the tradeA)II and IVB)II and IIIC)I and IID)I and IV

D)I and IVIf the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without needing to place the trade in a discretionary account.

Which of the following transactions has the least risk?A)Selling to openB)Selling shortC)Short against the boxD)Buying to open

C)Short against the boxShort against the box is when a customer owns the shares she wants to sell but borrows some additional shares, sells the borrowed shares, and then covers the short position with shares already owned. Historically it was a tax strategy, but it doesn't work as well anymore with the tax law change. There is no loss potential. Buying to open can cause a loss of the amount invested; selling short and selling to open have unlimited loss potential.

All of the following are required for a discretionary account exceptA)the customer must authorize discretion.B)the account must receive FINRA approval prior to the first trade.C)a principal at the firm must authorize discretion.D)all trades must be promptly approved by a principal at the firm.

B)the account must receive FINRA approval prior to the first trade.

Selling long is equivalent to which of the following?A)Selling to closeB)Selling to open then buying to closeC)Selling to openD)Selling short

A)Selling to closeWhen a customer owns a position and then sells that position, that is referred to as selling long or selling to close.

A customer called his registered representative to place a trade to buy 100 shares of ABC. The customer wants to put a limit on the order, but is unsure what would be an appropriate price. At the suggestion of the registered representative, the customer enters the order with a limit of $30. This trade wasA)discretionary.B)unsolicited.C)solicited.D)not held.

B)unsolicited.The customer, independent of the registered representative, placed the order, making it unsolicited. While the rep did advise on what an appropriate limit price would be, the customer ultimately placed the order instructions with the limit, and would not be considered discretionary.

Shares must be borrowed in order toA)sell short to close a position.B)buy to close a position.C)sell short to open a position.D)buy to open a position.

C)sell short to open a position.When selling short, an investor is opening a position (a short position). Selling short means selling shares not yet owned. In order to do so, the shares must be borrowed first.

A customer wishes to sell short 1,000 shares of ABC. Prior to executing the order, the registered representative mustA)receive principal permission to execute the trade.B)receive permission from the customer to borrow shares.C)have the customer pledge personal collateral to cover the sale.D)locate shares that can be lent to effect the sale.

D)locate shares that can be lent to effect the sale.Regulation SHO requires that prior to executing any short sale, the broker-dealer must locate the shares borrowed. Shorting stock uncovered is a violation of Regulation SHO and may result in disciplinary action against the member firm.

Ownership of a security indicates that one isA)long the position and bullish.B)short the position and bullish.C)long the position and bearish.D)short the position and bearish.

A)long the position and bullish.Owning a security means that one is long the position. When one is long (owns) the security, the person is bullish, anticipating it will go up in value in the hopes of selling it later at a higher price than it was purchased for.

A person who is vested with legal rights and powers to be exercised for the benefit of another is known asA)a dealer.B)a sponsor.C)a fiduciary.D)a broker.

C)a fiduciary.

A customer who is short against the box may close the position by all the following exceptA)combining purchases of stock with stock already owned by the customer.B)depositing the fair market value of the shorted stock into his account.C)purchasing twice the stock in the open market.D)covering the short with the stock in his account.

B)depositing the fair market value of the shorted stock into his account.A customer who is short against the box owns the stock he shorted. As a result, the customer may use his owned stock to cover the short position, buy back the short position in the open market, or any combination of the two. The customer cannot simply deposit funds into his account.

All of the following are bullish positions exceptA)long warrants.B)short stock.C)long stock.D)long calls.

B)short stock.

Your customer opens a position at 45 and then closes it later at 47. This representsA)a 2-point gain.B)a 47-point gain.C)a 2-point loss.D)a 2-point gain or loss.

D)a 2-point gain or loss.

Short sellers haveA)limited profit and loss potential.B)limited profit potential and an unlimited loss potential.C)unlimited profit and loss potential.D)unlimited profit potential and limited loss potential.

B)limited profit potential and an unlimited loss potential.Short sellers are bearish—wanting to see the stock go down in value. Because stock could only go down as far as zero, the profit for a short seller is limited to the difference between the price the stock was shorted at and zero. By contrast, the risk for a short seller is that the stock goes up in value and there is no limit to how high the stock might rise, giving the short seller potentially unlimited losses.

Blaine Smith has owned XYZ stock for several years and believes it is time to take his profit and invest that money in another stock. He shouldA)sell XYZ to close.B)sell XYZ to open.C)buy XYZ to open.D)buy XYZ to close.

A)sell XYZ to close.When a client owns a stock and wants to get out of that position, he should sell the stock in a closing transaction.

A client calls a registered representative and states that she lives in New York City and is looking for a bond that would be triple tax free in New York. The registered representative tells the client that his firm has some bonds in inventory that are from the Albany New York School District that would be triple tax free for the client. Which of the following would be the registered representative's best course of action?A)Determine suitability prior to the trade and mark the trade unsolicited.B)No suitability determination is required because the bonds will be tax free for the client and mark the trade solicited.C)No suitability determination is required because these bonds will be tax free for the client and mark the trade unsolicited.D)Determine suitability prior to placing the trade and mark the trade solicited.

D)Determine suitability prior to placing the trade and mark the trade solicited.For a trade to be unsolicited, the client would need to specifically identify the bonds he wanted to purchase; instead the registered representative is the one who recommended these bonds, making the trade solicited. Suitability must be determined on solicited trades.

Which of the following are required in discretionary accounts?A)SEC approval to open the accountB)Prior approval by a principal before each discretionary trade is placedC)FINRA approval to open the accountD)Approval by a principal for discretion to be permitted in an account

D)Approval by a principal for discretion to be permitted in an accountThe SEC and FINRA do not approve accounts. Approval of the trade is required promptly afterwards by a principal, not before. Both the customer and a principal must approve discretionary trading authority for an account.

When investors open a position by going long the security, they can close the position byA)buying the security.B)selling the security.C)selling the security short.D)opening a new position in the security.

B)selling the security.Going long a security means that it was purchased. If a position was opened by purchasing the security, it would be closed by selling it.

A customer who is bullish on ABC would most likelyA)sell ABC long.B)buy ABC short.C)buy ABC long.D)sell ABC short.

C)buy ABC long.

Which of the following best describe a wrap account?I. The firm offering the account would need to be registered as both a broker-dealer and an investment advisorII. The account fee covers both transactions and adviceIII. The wrap fee for the account covers only where the firm acts as a broker or acts as a dealerIV. The firm may only be registered as a broker or dealerA)I and IVB)II and IIIC)I and IID)III and IV

C)I and IIThe fee covers both the advice and any transaction, so the firm must be registered as both a broker-dealer and an investment advisor.

An investor with no existing positions in MMS stock sells 100 shares. This isA)a short bullish position.B)a long bullish position.C)a short bearish position.D)a long bearish position.

C)a short bearish position.With no other existing positions, this sale transaction would have to be opening a position. Sell to open a position = short = bearish.

Which of the following is true regarding short sales?A)Selling short means selling less shares than were purchased.B)Selling short involves selling shares not yet owned.C)Selling shares not yet owned is prohibited.D)Selling short involves purchasing the shares first.

B)Selling short involves selling shares not yet owned.Short sales involve selling shares not yet owned. This is permitted. When selling short, investors are borrowing the shares to be sold, which must be replaced later by buying them. Investors who sell short are bearish, hoping the shares go down in value so that they can be purchased later at a lower price than they were initially sold for.

An investor is long MJS stock. For this investor, which of the following is true?A)The risk is that the stock falls in price.B)The risk is that the stock remains stable in price.C)The risk is that the stock goes up in price.D)Maximum loss can be unlimited.

A)The risk is that the stock falls in price.

Selling shares not yet borrowed or located to be borrowed isA)known as closing a short sale with a purchase.B)known as closing a position with a sale and is prohibited.C)known as a short sale and is prohibited.D)known as a naked short sale and is prohibited.

D)known as a naked short sale and is prohibited.In order to open a position with a short sale, the shares to be sold must be borrowed or located to be borrowed first. Not doing so is known as selling short naked (naked short sale) and is prohibited.

A closing transaction can beA)a short sale.B)either a buy or a sell.C)a sell only.D)a buy only.

B)either a buy or a sell.

The trade would need to be placed in a discretionary account if the registered representative chooses which of the following?I. The time of execution of the tradeII. Which security to buyIII. How much of the security to buyIV. At what price to execute the tradeA)I and IIB)II and IVC)I and IVD)II and III

D)II and IIIIf the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without the needing to place the trade in a discretionary account.

The locate requirement is an element of which of the following transactions?A)Sell to closeB)Sell to openC)Buy to closeD)Buy to open

B)Sell to openWhen selling short (selling to open), shares must be borrowed from the dealer. The dealer finding those shares that can be loaned to the seller is part of the locate requirement.

A registered representative is explaining discretionary and nondiscretionary accounts to a customer. Only one of the following statements is accurate and can be made by the registered representative. Which is it?A)In a discretionary account you will have the opportunity to approve any order I want to enter before I enter it.B)I decide if the account should be set up as discretionary or nondiscretionary, but must do so in your best interest.C)In a nondiscretionary account no order can be entered without your prior approval.D)If I decide that the account should be a discretionary one you will no longer be able to enter orders yourself.

C)In a nondiscretionary account no order can be entered without your prior approval.In a nondiscretionary account no order can be entered without the customer's prior approval. In a discretionary account the customer's prior approval is not required. Only the customer can decide if the account should be a discretionary one and grants that discretion with a limited power of attorney giving trading authorization to the registered representative. Even in a discretionary account the customer may still enter their own orders.

Meeting the location requirements and the borrowing of securities when a customer wants to sell short is done byA)the customer who wants to sell short.B)the customer or entity that the shares will be borrowed from.C)the purchaser of the securities being sold short.D)the broker-dealer on behalf of the short-selling customer.

D)the broker-dealer on behalf of the short-selling customer.Meeting the location requirements and the borrowing of securities is done by the back office of the broker-dealer on behalf of the short-selling customer. Meeting these requirements is not something the short-selling customer would undertake without a broker-dealer.

A registered representative enters a discretionary order for her clients account. All of the following are required exceptA)the order must be approved by a principal prior to entry.B)a record of the order must be maintained.C)the order should be included in those required to be reviewed frequently.D)the order must be identified as or marked discretionary.

A)the order must be approved by a principal prior to entry.Each discretionary order must be identified as such at the time it is entered for execution, a principal, officer or a partner of the BROKER-DEALER must approve each order promptly and in writing, but not necessarily before order entry, a record must be kept of all transactions including discretionary ones, and as with all trading activity, it is subject to frequent and systematic review by a designated supervisor or manager.

Which of the following transactions has the most risk?A)Selling shortB)Buying to openC)Short against the boxD)Selling to close

A)Selling shortShort against the box is when a customer owns the shares she wants to sell, but borrows some additional shares, sells the borrowed shares, and then covers the short position with shares already owned. Historically it was a tax strategy, but it doesn't work as well anymore with the tax law change. There is no loss potential. Buying to open can cause a loss of the amount invested; selling short has unlimited loss potential.

An investor who has a short position in 500 shares of JKH common stock would eliminate that position byA)entering an opening purchase order for 500 shares of JKH.B)entering a closing sale order for 500 shares of JJK.C)entering a closing purchase order for 500 shares of JKH.D)entering a closing purchase order for 500 shares of ABC.

C)entering a closing purchase order for 500 shares of JKHIn order to eliminate a position, long or short, the investor always takes an action opposite that of the one that began (opened) the position. Therefore, we always close the position with a closing order. In the case of a short position, we began with a sale, so we close with a purchase of the same security that was initially sold short—in this case, 500 shares of JKH.

A registered representative suggests a trade to a customer which the customer agrees is suitable given their investment objectives. The order is entered. This transaction isA)solicited but the order ticket need not be marked in any special way.B)solicited and the order ticket must be marked solicited.C)unsolicited and the order ticket should be marked unsolicited.D)neither solicited or unsolicited and the order ticket should be marked as neither.

B)solicited and the order ticket must be marked solicited.

Shares to sell short have been located in order to be borrowed. Once sold short, these shares will be known asA)closed.B)uncovered.C)covered.D)naked.

C)covered.Selling short requires borrowing or locating the shares to be borrowed first. These shares, because they have already been located to be borrowed, are known to be covered.

An opening transaction can beA)a short sale only.B)a buy only.C)either a buy or a sell.D)a sell only.

C)either a buy or a sell.

With a discretionary accountA)the customer may still enter orders.B)churning is permitted by the party given the discretion.C)the customer may refuse any trades done by the party given the discretion.D)a full power of attorney is needed on file to grant discretion.

A)the customer may still enter orders.With a discretionary account the customer can continue to enter orders themselves. A trading authorization or limited power of attorney, not full power of attorney is required. The customer is bound to accept all trades done by the party given the discretion and churning, trades done only for the purpose of generating commissions, is never permitted.