Orders and Trades on the Series 7 Exam - dummies

By Steven M. Rice

As a registered rep, you’ll need to know the intricacies of orders and trades and, if needed, be able to explain them to customers or potential customers. This section of the Series 7 exam covers questions about the different securities markets, primary and secondary market, the roles of broker-dealers, types of orders, reporting systems, and so on.

Practice questions

  1. One of your clients is interested in purchasing an OTCBB stock.

    Right now, only one market maker is displaying a firm quote for this stock. Your broker-dealer must contact how many dealers to determine the prevailing price of the stock?

    A. 0

    B. 1

    C. 2

    D. 3

    Answer: D. 3

    OTC (Over-the-Counter) Bulletin Board and Pink Market securities are non-NASDAQ securities and are subject to the three-quote rule. If at least two market makers aren’t displaying firm quotes, it’s up to the broker-dealer to contact at least three dealers to get the best price for the customer.

  2. A dealer purchases 1,000 shares of HIJK at $17.50 per share for its own inventory.

    Several weeks later, HIJK is being quoted at $16.80 to $17.00, and the dealer sells 1,000 shares to one of his customers. Which of the following prices is the basis for the dealer’s markup?

    A. $16.80

    B. $17.00

    C. $17.25

    D. $17.50

    Answer: B. $17.00

    The dealer has to sell at the current offering (ask) price, which is $17.00. The fact that the dealer paid more than that to purchase the stock for his own inventory doesn’t come into play.

    Dealers are speculating that the price of a security that they have in inventory will appreciate, just like investors hope that the prices of securities that they have in their portfolios will appreciate. Because the price decreased, the dealer lost money.

  3. When a customer purchases a stock from a dealer, she pays a price that

    A. includes a markup

    B. includes a commission

    C. includes a commission and a markup

    D. any of the above

    Answer: A. includes a markup

    Dealers (principals) sell securities out of their own inventory and buy securities for their own inventory. Dealers charge a markup when selling securities from their own inventory and a markdown when purchasing securities for their own inventory. Brokers act as middlemen and charge a commission.