CSLB General Building (B) — All Questions

A market order to buy is an instruction to:

• a.Buy only at a specified price or lower
• b.Buy only when the stock trades through a stop price
• c.Buy immediately at the best available current price✓
• d.Buy at the closing price only

A market order is executed promptly at the best available price when it reaches the market, prioritizing speed of execution over price. It provides no price protection, so in fast-moving or thin markets the execution price may differ from the last quote.

A customer places a limit order to buy 100 shares at $25. This order:

• a.Will be executed only at $25 or lower✓
• b.Will be executed only at $25 or higher
• c.Guarantees immediate execution at the market
• d.Becomes a market order once the stock reaches $25

A buy limit order sets the maximum price the buyer is willing to pay, so it executes only at the limit price or lower. It provides price protection but no guarantee of execution; if the stock never trades at or below the limit, the order goes unfilled.

A sell stop order becomes a market order to sell when the stock:

• a.Rises to or through the stop price
• b.Trades at or through the stop price on the downside✓
• c.Reaches its 52-week high
• d.Pays a dividend

A sell stop is placed below the current market and is triggered when the stock trades at or through the stop price, at which point it becomes a market order to sell. Investors often use sell stops to limit losses or protect gains on a long position.

A sell stop limit order differs from a sell stop order because, once triggered, the stop limit order:

• a.Is canceled automatically
• b.Executes at any price immediately
• c.Converts to a buy order
• d.Becomes a limit order that executes only at the limit price or better✓

When a stop limit order is triggered at the stop price, it becomes a limit order rather than a market order, so it will execute only at the specified limit price or better. This adds price protection but risks non-execution if the market moves past the limit before filling.

In a securities quote, the bid and ask represent:

• a.The highest price a buyer will pay (bid) and the lowest price a seller will accept (ask)✓
• b.The opening and closing prices
• c.Two different settlement dates
• d.The dividend and the coupon

The bid is the highest price buyers are currently willing to pay, and the ask (offer) is the lowest price sellers will accept. The difference between them is the spread, which reflects liquidity and is a cost of trading; investors generally buy at the ask and sell at the bid.

Regular-way settlement for most corporate stocks and bonds currently occurs on:

• a.The same day as the trade (T+0)
• b.One business day after the trade date (T+1)✓
• c.Five business days after the trade date
• d.The last day of the month

Regular-way settlement for equities and corporate bonds is currently one business day after the trade date (T+1), meaning the exchange of securities and payment is completed the next business day. U.S. Treasury securities and options typically settle on the next business day as well.

The ex-dividend date is significant because an investor who buys the stock on or after that date:

• a.Receives a double dividend
• b.Must pay the dividend to the seller
• c.Is not entitled to the upcoming declared dividend✓
• d.Automatically reinvests the dividend

The ex-dividend date is the cutoff for dividend eligibility; buyers on or after this date are not entitled to the declared dividend, which goes to the seller. To account for the payout, the stock's opening price is typically reduced by the dividend amount on the ex-date.

A specialist or designated market maker (DMM) on an exchange is responsible for:

• a.Setting corporate dividend policy
• b.Auditing listed companies
• c.Rating bonds
• d.Maintaining a fair and orderly market in assigned securities✓

A designated market maker (formerly specialist) is charged with maintaining a fair and orderly market in assigned securities, providing liquidity by buying and selling for its own account when needed, and facilitating price discovery at the open and close. It must balance public buy and sell interest.

The primary market is where:

• a.Issuers sell new securities to investors and raise capital✓
• b.Investors trade previously issued securities among themselves
• c.Only government bonds are traded
• d.Options are exercised

The primary market is where new securities are issued and sold by the issuer, with proceeds going to the company through an underwriting. Once issued, those securities trade among investors in the secondary market, where the issuer is no longer a party to the transactions.

A stock trading 'ex-rights' means the stock:

• a.Includes the subscription rights in its price
• b.Trades without the value of the subscription rights, which now trade separately✓
• c.Cannot be sold
• d.Has been delisted

When a stock trades ex-rights, buyers no longer receive the subscription rights associated with a rights offering, and those rights trade separately in the market. The stock price typically adjusts downward to reflect the removed value of the rights.

A 'fill-or-kill' (FOK) order instructs the broker to:

• a.Fill the order over the course of the day
• b.Fill part of the order and cancel the rest
• c.Execute the entire order immediately and completely, or cancel it entirely✓
• d.Hold the order until a better price appears

A fill-or-kill order must be executed in its entirety immediately, or it is canceled outright; partial fills are not permitted. It differs from an immediate-or-cancel order, which allows partial execution, and from an all-or-none order, which does not require immediate execution.

A reverse stock split (for example, 1-for-5) results in a shareholder holding:

• a.More shares at a lower price
• b.The same number of shares at a higher price
• c.More shares at the same price
• d.Fewer shares at a proportionally higher price, with total value roughly unchanged✓

In a 1-for-5 reverse split, every five shares become one, so the shareholder holds one-fifth as many shares at roughly five times the price, leaving total market value approximately unchanged. Companies often use reverse splits to raise the per-share price, sometimes to meet exchange listing requirements.

A tender offer is:

• a.A public offer to buy shares from existing shareholders, usually at a premium✓
• b.A dividend paid in additional shares
• c.An offer to lend securities
• d.A type of bond call

A tender offer is a public bid to purchase some or all shareholders' shares, typically at a premium to the market price and within a set period, often as part of a takeover attempt. Shareholders decide whether to tender their shares under the stated terms.

When a company pays a cash dividend, on the ex-dividend date the opening stock price is typically:

• a.Increased by the amount of the dividend
• b.Reduced by the amount of the dividend✓
• c.Unchanged
• d.Doubled

On the ex-dividend date the stock's opening price is generally reduced by the dividend amount because new buyers will not receive that dividend. This adjustment keeps the market value consistent for buyers before and after the dividend right is removed.

The third market refers to:

• a.Trading of new issues
• b.Trading of foreign currencies
• c.Exchange-listed securities traded over-the-counter, often between institutions✓
• d.Options traded on an exchange

The third market is the trading of exchange-listed securities in the over-the-counter market, frequently involving institutional investors and market makers away from the primary exchange. The fourth market, by contrast, refers to direct institution-to-institution trading, often through electronic networks.

A good-till-canceled (GTC) order:

• a.Expires at the end of the trading day if unfilled
• b.Must be executed within one hour
• c.Can never be canceled
• d.Remains active until it is executed or the customer cancels it, subject to firm and exchange time limits✓

A GTC (open) order stays in effect until it is executed or canceled, rather than expiring at the day's close like a day order. Firms and exchanges may impose periodic expiration or confirmation requirements, so GTC orders are typically reviewed or refreshed periodically.

A dealer (principal) transaction differs from an agency (broker) transaction because in a principal trade the firm:

• a.Buys or sells from its own inventory and may charge a markup or markdown✓
• b.Only matches buyers and sellers for a commission
• c.Cannot profit from the trade
• d.Acts solely as a fiduciary adviser

Acting as a dealer or principal, a firm trades from its own account and earns compensation through a markup (on sales to customers) or markdown (on purchases from customers). Acting as a broker or agent, the firm arranges the trade between parties and charges a commission instead.

The National Best Bid and Offer (NBBO) represents:

• a.The average of all quotes for the day
• b.The highest bid and lowest offer available across all market centers✓
• c.Only quotes from one exchange
• d.The opening auction price

The NBBO consolidates quotes across all market centers to show the highest available bid and the lowest available offer at a given moment. Firms handling customer orders must seek to execute at prices consistent with the NBBO as part of their best execution obligations.

When an investor sells stock short, the shares delivered to the buyer are:

• a.Newly issued by the company
• b.Owned outright by the short seller
• c.Borrowed, typically through the broker-dealer✓
• d.Created by the exchange

A short sale involves selling securities the investor does not own by borrowing them, usually through the broker-dealer's securities lending arrangements. The short seller must later buy shares to return the borrowed stock (cover), and is responsible for any dividends paid while the position is open.

A stock dividend (as opposed to a cash dividend) results in:

• a.A cash payment to shareholders
• b.A reduction in the number of shares outstanding
• c.An increase in the company's total equity
• d.Additional shares to shareholders, lowering the per-share cost basis while total basis stays the same✓

A stock dividend distributes additional shares rather than cash, increasing the share count while proportionally lowering the per-share cost basis; the shareholder's total cost basis and total value are unchanged. It does not by itself increase the company's total equity, merely reclassifying amounts within equity.

An 'all-or-none' (AON) order instructs that:

• a.The entire order must be filled, though not necessarily immediately or in one transaction✓
• b.The order must be filled immediately or canceled
• c.Partial fills are always acceptable
• d.The order executes only at the close

An all-or-none order requires that the full quantity be executed, but unlike fill-or-kill it does not demand immediate execution and can be worked over time. If the full size cannot ultimately be filled, none of it is executed.

The role of a transfer agent for a corporation includes:

• a.Setting the market price of the stock
• b.Issuing and canceling certificates and maintaining records of registered shareholders✓
• c.Underwriting new securities
• d.Providing margin loans

A transfer agent handles the issuance and cancellation of share certificates, records changes in ownership, and maintains the register of shareholders, often coordinating with a registrar to prevent over-issuance. It also processes name and address changes and helps distribute dividends and proxies.

When a bond is quoted at '98', the price the investor pays (excluding accrued interest) on a $1,000 par bond is:

• a.$98
• b.$9,800
• c.$980✓
• d.$1,098

Corporate bonds are quoted as a percentage of par, so a quote of 98 means 98% of $1,000 par, or $980. The investor would also pay any accrued interest since the last coupon date in a regular-way purchase.

A buy stop order is typically used by:

• a.An investor seeking to buy below the current market
• b.A dividend-focused investor
• c.A bond issuer
• d.An investor protecting a short position or seeking to buy on upside momentum✓

A buy stop is placed above the current market and triggers when the stock rises to or through the stop price. Short sellers use buy stops to limit losses if the stock rises, and momentum buyers use them to enter once a resistance level is broken.

A trade executed at a price between the current bid and ask is said to occur:

• a.Inside the spread (price improvement for the customer)✓
• b.Outside the market
• c.At the prior close
• d.Only on a dark pool

An execution between the prevailing bid and ask occurs inside the spread and represents price improvement compared with paying the full ask or receiving only the bid. Achieving price improvement is one way firms meet their best execution responsibilities to customers.