I85PREP
⌘ K
ROC-A Exam study materials
ROC-A Exam study resources

ROC-A Exam practice questions

One question at a time. Build your ROC-A Exam understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Regulatory framework and market structure

Under the UK regulatory framework, which body is responsible for supervising the conduct of authorised firms and markets such as the London Stock Exchange?

  1. The Prudential Regulation Authority
  2. The Payment Systems Regulator
  3. The Bank of England's Monetary Policy Committee
  4. The Financial Conduct Authority Correct answer.

Explanation

Conduct supervision of authorised firms and recognised investment exchanges in the UK sits with the Financial Conduct Authority, which also sets listing and disclosure rules. The PRA focuses on prudential soundness of banks and insurers, while the MPC sets monetary policy.

Question 2Regulatory framework and market structure

In the context of securities markets, what does the term 'primary market' refer to?

  1. The market where newly issued securities are sold by the issuer to investors Correct answer.
  2. The market for repurchase agreements between banks
  3. The market where already issued securities trade between investors
  4. The market for foreign exchange derivatives

Explanation

The primary market is where an issuer raises capital by selling new securities, for example through an initial public offering or a bond issue. Subsequent trading of those securities between investors occurs in the secondary market.

Question 3Regulatory framework and market structure

Which of the following best describes the role of a central counterparty (CCP) in clearing?

  1. It sets the official closing price for listed equities
  2. It matches buy and sell orders on an exchange's electronic order book
  3. It becomes the buyer to every seller and the seller to every buyer, managing counterparty risk Correct answer.
  4. It provides custody and safekeeping of client assets

Explanation

A CCP interposes itself between trade counterparties through novation, becoming the buyer to every seller and seller to every buyer. This centralises and mutualises counterparty credit risk, backed by margin and a default fund.

Question 4Regulatory framework and market structure

A firm wishes to carry out regulated activity in the UK without being authorised. Which exemption could legitimately allow it to do so?

  1. It is an appointed representative of an authorised firm Correct answer.
  2. It holds a professional qualification in investment advice
  3. It has registered with a trade association
  4. It has signed a client agreement with an authorised firm

Explanation

Appointed representative status allows a firm to carry on certain regulated activities under the oversight and permission of an authorised principal firm. Client agreements, qualifications and trade body registration do not confer an exemption from authorisation.

Question 5Regulatory framework and market structure

Which regulator is primarily responsible for prudential supervision of banks in the euro area under the Single Supervisory Mechanism?

  1. The European Banking Authority
  2. The Single Resolution Board
  3. The European Central Bank Correct answer.
  4. The European Securities and Markets Authority

Explanation

The ECB acts as the direct prudential supervisor of significant banks within the Single Supervisory Mechanism. ESMA and EBA coordinate rules and market supervision but do not directly supervise individual banks in the SSM.

Question 6Regulatory framework and market structure

What is the main purpose of a market abuse regime in securities regulation?

  1. To determine the interest rate on government bonds
  2. To set minimum capital requirements for investment firms
  3. To guarantee investors a minimum investment return
  4. To protect market integrity by prohibiting insider dealing and market manipulation Correct answer.

Explanation

Market abuse rules prohibit conduct such as insider dealing, unlawful disclosure and manipulation that undermines market integrity and investor confidence. They do not set capital levels, returns or interest rates.

Question 7Regulatory framework and market structure

Which statement correctly describes the difference between a 'recognised investment exchange' and a 'multilateral trading facility' in the UK?

  1. A recognised investment exchange is owned by the government, while an MTF is privately owned
  2. An MTF can only trade bonds, while a recognised investment exchange trades equities
  3. A recognised investment exchange does not need to report transactions, while an MTF does
  4. A recognised investment exchange is a self-regulating body with its own rulebook, while an MTF is operated by an authorised firm under its permissions Correct answer.

Explanation

Recognised investment exchanges are recognised bodies with their own rulebooks and certain self-regulatory responsibilities. MTFs are trading venues operated by authorised investment firms under their regulatory permissions.

Question 8Regulatory framework and market structure

What is the principal function of a central securities depository (CSD)?

  1. To underwrite new equity issues
  2. To provide margin financing to retail investors
  3. To calculate benchmark interest rates
  4. To hold and transfer ownership of securities through book-entry records Correct answer.

Explanation

A CSD provides safekeeping of securities and enables transfer of ownership by book-entry, forming the foundation of settlement. It does not provide retail margin finance, set benchmarks or underwrite issuances.

Question 9Regulatory framework and market structure

A portfolio manager receives non-public information about an upcoming takeover from a company director and trades on it. Under market abuse rules, this conduct is best characterised as:

  1. Spoofing
  2. Wash trading
  3. Insider dealing Correct answer.
  4. Market manipulation

Explanation

Trading on inside information obtained from a person connected to the issuer constitutes insider dealing under market abuse rules. Manipulation, spoofing and wash trading involve misleading order or trade behaviour rather than use of confidential information.

Question 10Regulatory framework and market structure

Which of the following is a core objective of the Markets in Financial Instruments Directive framework in the EU?

  1. Setting the euro area's inflation target
  2. Harmonising investment services rules and increasing market transparency across member states Correct answer.
  3. Guaranteeing bank deposits up to a fixed amount
  4. Administering the EU's fiscal budget

Explanation

MiFID harmonises authorisation, conduct and transparency rules for investment services across the EU, promoting an integrated market. Inflation targets, deposit guarantees and fiscal budgets fall to other bodies and frameworks.

Question 11Regulatory framework and market structure

What is the role of a sponsor in the UK listing process?

  1. To guide an issuer through listing and provide assurances to the regulator on eligibility and disclosure Correct answer.
  2. To act as the sole market maker for the newly listed shares
  3. To audit the issuer's financial statements
  4. To guarantee the share price for the first year of trading

Explanation

A sponsor advises the issuer on listing requirements and provides assurances to the regulator that the issuer has complied with eligibility and disclosure obligations. Market making, price guarantees and auditing are separate functions.

Question 12Regulatory framework and market structure

Which body sets the Basel Committee's capital adequacy standards that national regulators implement?

  1. The International Organization of Securities Commissions
  2. The Financial Stability Board's secretariat
  3. The Basel Committee on Banking Supervision Correct answer.
  4. The World Trade Organization

Explanation

The Basel Committee on Banking Supervision develops the Basel capital, leverage and liquidity standards that jurisdictions transpose into national rules. IOSCO focuses on securities regulation and the WTO on trade.

Question 13Regulatory framework and market structure

A firm acts as a systematic internaliser. What does this mean?

  1. It provides only investment advice without dealing
  2. It operates a multilateral trading facility
  3. It executes client orders against its own book outside a trading venue on a systematic basis Correct answer.
  4. It clears and settles trades for other firms

Explanation

A systematic internaliser is an investment firm that, on an organised, frequent and systematic basis, deals on its own account by executing client orders outside a trading venue. It is distinct from operating an MTF, giving advice or clearing.

Question 14Regulatory framework and market structure

What does the term 'best execution' require of an investment firm?

  1. Executing every order at the day's closing price
  2. Guaranteeing that no client order incurs a loss
  3. Taking all sufficient steps to obtain the best possible result for clients when executing orders Correct answer.
  4. Routing all orders to the cheapest venue regardless of other factors

Explanation

Best execution requires firms to take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, likelihood of execution and settlement. It does not promise a specific price or protect against losses.

Question 15Regulatory framework and market structure

Which statement best describes the purpose of a prospectus when securities are offered to the public?

  1. It provides investors with the information needed to make an informed assessment of the issuer and the securities Correct answer.
  2. It replaces the need for audited financial statements
  3. It guarantees that the issuer will repay investors in full
  4. It sets the maximum price at which the securities may be sold

Explanation

A prospectus is a disclosure document giving investors the information necessary to make an informed assessment of the issuer's assets, liabilities, financial position and the securities offered. It does not guarantee repayment or cap pricing.

Question 16Regulatory framework and market structure

In the context of the EU's second Markets in Financial Instruments Directive, which instrument category is subject to position limits?

  1. Retail mortgages
  2. Money market funds
  3. Government bonds
  4. Commodity derivatives Correct answer.

Explanation

MiFID II imposes position limits and reporting requirements on commodity derivatives to prevent market abuse and disorderly pricing. Government bonds, money market funds and mortgages fall under different regimes.

Question 17Regulatory framework and market structure

What is the function of a trade repository in derivatives markets?

  1. To collect and maintain records of derivative transactions reported to it Correct answer.
  2. To set margin requirements for clearing members
  3. To lend securities to short sellers
  4. To match and execute derivative orders on an exchange

Explanation

Trade repositories centrally collect and maintain records of reported derivative transactions, improving transparency for regulators. Execution, securities lending and margin setting are performed by other entities.

Question 18Regulatory framework and market structure

Which of the following best explains why regulators impose short-selling disclosure requirements?

  1. To guarantee that short sellers make a profit
  2. To set the interest rate on stock borrowing
  3. To prevent any investor from ever holding a short position
  4. To give the market and regulators visibility of significant short positions that may affect price stability Correct answer.

Explanation

Short-selling disclosure rules provide transparency about significant net short positions, supporting market stability and enabling regulators to monitor risks. They do not ban short selling outright or set borrowing rates.

Question 19Regulatory framework and market structure

What is the main role of the Prudential Regulation Authority in the UK?

  1. To supervise the safety and soundness of banks, insurers and major investment firms Correct answer.
  2. To regulate consumer credit agreements
  3. To set the Bank of England base rate
  4. To prosecute criminal market abuse cases

Explanation

The PRA is responsible for the prudential regulation and supervision of banks, building societies, insurers and designated investment firms, promoting their safety and soundness. Criminal prosecution, monetary policy and consumer credit are handled elsewhere.

Question 20Regulatory framework and market structure

A client instructs a broker to buy shares, and the trade settles two business days later. What is this settlement cycle commonly called?

  1. T+0 settlement
  2. Same-day settlement
  3. T+2 settlement Correct answer.
  4. T+5 settlement

Explanation

Standard settlement for many equity markets occurs two business days after the trade date, known as T+2. The other options describe different cycles that are not the standard convention described.

Question 21Regulatory framework and market structure

Which of the following activities is a 'regulated activity' requiring authorisation when carried out by way of business in the UK?

  1. Publishing a newspaper's general financial news column
  2. Dealing in investments as principal Correct answer.
  3. Providing general tax advice to individuals
  4. Selling office stationery to investment firms

Explanation

Dealing in investments as principal is a specified regulated activity under the UK's regulated activities order, requiring authorisation or exemption. General journalism, tax advice and selling goods fall outside the scope.

Question 22Regulatory framework and market structure

What is the purpose of the client money rules that apply to investment firms?

  1. To set the interest rate paid on client balances
  2. To require clients to hold accounts at a single bank
  3. To ensure client funds are segregated and protected if the firm fails Correct answer.
  4. To allow firms to use client money for their own trading

Explanation

Client money rules require firms to segregate client funds from firm assets and hold them in trust, protecting clients in the event of insolvency. They prohibit using client money for proprietary trading and do not set interest rates.

Question 23Regulatory framework and market structure

Which statement best describes the difference between a directive and a regulation in EU law?

  1. Both apply directly without any national implementation
  2. A directive applies directly, while a regulation requires transposition
  3. Both require national transposition before taking effect
  4. A directive must be transposed into national law, while a regulation applies directly Correct answer.

Explanation

An EU directive sets objectives that member states must implement through national legislation, whereas a regulation is directly applicable and binding without transposition. This distinction shapes how financial rules enter domestic law.

Question 24Regulatory framework and market structure

What does 'know your customer' (KYC) require of a financial firm?

  1. Checking whether clients hold a professional qualification
  2. Requiring clients to disclose all personal social media accounts
  3. Confirming that clients have prior investment experience only
  4. Identifying clients and verifying their identity before establishing a business relationship Correct answer.

Explanation

KYC is part of anti-money laundering obligations, requiring firms to identify and verify the identity of clients and understand the nature of their business before onboarding. It is not limited to experience checks or qualifications.

Question 25Regulatory framework and market structure

A trading venue operator wishes to offer trading in a new derivative. Which consideration is most relevant to whether the product may be offered to retail clients?

  1. Whether the venue has more than fifty employees
  2. Whether the derivative's name includes the word 'structured'
  3. Whether the product is subject to a product intervention or restriction applying to retail distribution Correct answer.
  4. Whether the derivative is denominated in euros

Explanation

Product intervention measures can restrict or ban the sale of certain products to retail clients, so the operator must check whether any such restriction applies. Naming, headcount and currency are not determinants of retail distribution eligibility.

Question 26Regulatory framework and market structure

Under the UK regime, which body acts as the conduct regulator for financial services firms and markets?

  1. The Payment Systems Regulator
  2. The Prudential Regulation Authority
  3. The Competition and Markets Authority
  4. The Financial Conduct Authority Correct answer.

Explanation

The Financial Conduct Authority is the conduct regulator, responsible for protecting consumers, ensuring market integrity and promoting effective competition across financial services. The Prudential Regulation Authority handles prudential supervision of banks and insurers, while the other bodies cover payment systems and competition respectively.

Question 27Regulatory framework and market structure

Which statement best describes the role of the European Securities and Markets Authority (ESMA)?

  1. It supervises individual banks for capital adequacy
  2. It operates the eurozone's payment settlement system
  3. It sets monetary policy for the euro area
  4. It coordinates national securities regulators and promotes supervisory convergence Correct answer.

Explanation

ESMA is an EU agency that brings together national securities regulators, develops technical standards and guidelines, and fosters consistent supervision across member states. It does not directly supervise individual banks, conduct monetary policy or run settlement infrastructure.

Question 28Regulatory framework and market structure

What is the primary purpose of the senior managers and certification regime in the UK?

  1. To assign clear individual accountability for a firm's regulated activities Correct answer.
  2. To set minimum capital levels for large banks
  3. To standardise disclosure of product charges to retail clients
  4. To coordinate cross-border resolution of failing firms

Explanation

The regime requires firms to map senior responsibilities to named individuals and to certify that staff in key roles are fit and proper, so that accountability for failures can be traced to specific people. Capital, disclosure and resolution matters are governed by separate prudential and disclosure rules.

Question 29Regulatory framework and market structure

Which of the following best describes the function of a financial ombudsman scheme?

  1. It resolves individual consumer complaints against firms through an independent adjudication process Correct answer.
  2. It prosecutes insider dealing cases in criminal courts
  3. It approves prospectuses before securities are offered
  4. It supervises trading venues for market abuse

Explanation

An ombudsman scheme gives consumers an independent route to resolve disputes with financial firms, typically free of charge and with awards that can bind the firm. Criminal prosecution, prospectus approval and market abuse supervision rest with other authorities.

Question 30Regulatory framework and market structure

A firm wants to carry on a regulated activity in the UK. Which legal basis must it generally obtain before doing so by way of business?

  1. Membership of a recognised investment exchange
  2. Registration with a trade repository
  3. Authorisation from the Financial Conduct Authority Correct answer.
  4. A banking licence issued by the central bank

Explanation

Carrying on a regulated activity by way of business in the UK is a criminal offence unless the firm is authorised or exempt, and authorisation is granted by the FCA (with the PRA for dual-regulated firms). Exchange membership or repository registration does not substitute for authorisation.

Question 31Regulatory framework and market structure

Which statement correctly describes the 'passporting' concept in EU financial services law?

  1. It exempts cross-border trades from transaction reporting
  2. It allows firms to use foreign currencies for domestic transactions
  3. It allows an authorised firm to provide services or establish branches in other member states without separate local authorisation Correct answer.
  4. It permits consumers to transfer accounts between banks without penalty

Explanation

Passporting flows from the single market: a firm authorised in its home state can provide services in another member state either on a cross-border basis or through a branch, subject to notification. It does not concern consumer account transfers, currency use or reporting exemptions.

Question 32Regulatory framework and market structure

A trading venue wants to admit a new equity security to trading. Which requirement is most directly relevant under securities regulation?

  1. The issuer must obtain a credit rating from a recognised agency
  2. The issuer must guarantee a minimum daily trading volume
  3. The issuer must appoint a central counterparty as its auditor
  4. The issuer must publish approved admission documentation and meet ongoing disclosure obligations Correct answer.

Explanation

Admission to a regulated market requires approved admission particulars and ongoing obligations such as periodic financial reporting and disclosure of inside information. Credit ratings, guaranteed liquidity and CCP involvement are not general conditions of admission.

Question 33Regulatory framework and market structure

Which of the following is the main purpose of the EU Market Abuse Regulation's disclosure obligation for issuers?

  1. To require issuers to publish inside information that directly concerns them as soon as possible Correct answer.
  2. To require issuers to disclose the identity of all their shareholders
  3. To require issuers to report their employees' personal trades to the public
  4. To require issuers to publish their trading strategies

Explanation

Issuers must inform the public as soon as possible of inside information that directly concerns them, so that all market participants trade on an equal information footing. Shareholder identity, trading strategies and employees' personal dealings are handled under different regimes.

Question 34Regulatory framework and market structure

A bank in the EU wants to use an internal model to calculate capital requirements for credit risk. What must happen first?

  1. It must register the model with a trade repository
  2. It must obtain supervisory permission based on the model meeting regulatory standards Correct answer.
  3. It must publish the model in its annual report before use
  4. It must receive approval from its external auditor alone

Explanation

Use of internal models for regulatory capital requires explicit supervisory approval, granted only if the model meets prescribed standards for data, methodology and validation. Publication, auditor sign-off or repository registration do not substitute for that permission.

Question 35Regulatory framework and market structure

Which statement best describes the role of a central counterparty (CCP) in clearing?

  1. It matches buyers and sellers for the first time
  2. It interposes itself between counterparties and guarantees performance of the trade Correct answer.
  3. It sets the interest rates used in derivatives pricing
  4. It holds securities on behalf of issuers

Explanation

A CCP becomes the buyer to every seller and the seller to every buyer through novation, managing counterparty risk with margin and a default fund. It does not match orders, hold securities for issuers or set market interest rates.

Question 36Regulatory framework and market structure

A retail client complains that an investment firm executed her order at a price materially worse than the best available on several venues. Under best execution rules, what is the firm's core obligation?

  1. To guarantee the client a profit on the transaction
  2. To obtain the best possible result for the client taking into account price, cost, speed and likelihood of execution Correct answer.
  3. To execute all orders on a single venue regardless of price
  4. To disclose the identity of every counterparty to the client

Explanation

Best execution requires firms to take all sufficient steps to obtain the best possible result for clients, weighing price, costs, speed and likelihood of execution and settlement. It is not a guarantee of the single best price, of profit, or of counterparty disclosure.

Question 37Regulatory framework and market structure

Which of the following best explains why regulators require firms to segregate client assets from their own?

  1. To allow the firm to lend client securities freely
  2. To increase the firm's regulatory capital
  3. To protect clients' assets from loss if the firm becomes insolvent Correct answer.
  4. To reduce the firm's tax liability

Explanation

Client asset rules require segregation so that, on insolvency, client money and securities can be identified and returned rather than being treated as the firm's general assets. Segregation does not raise capital, reduce tax or authorise unrestricted lending of client assets.

Question 38Regulatory framework and market structure

An investment firm based in one EU member state wishes to serve clients in another member state on a cross-border basis. Which step is generally required?

  1. Notifying its home regulator, which informs the host regulator Correct answer.
  2. Joining the host state's stock exchange
  3. Establishing a physical branch in the host state
  4. Obtaining a separate full authorisation in the host state

Explanation

Cross-border services under the passport rely on a notification procedure: the home regulator passes details to the host regulator, after which the firm may provide services. A separate authorisation, branch or exchange membership is not generally required for cross-border services.

Question 39Regulatory framework and market structure

A regulator is considering whether a novel token that gives holders governance rights and a share of profits should be treated as a transferable security. Which factor is most decisive?

  1. Whether the token is recorded on a distributed ledger
  2. Whether the issuer is a listed company
  3. Whether the token's economic and governance features resemble those of shares or other securities Correct answer.
  4. Whether the token's price is quoted in a foreign currency

Explanation

Substance over form governs classification: instruments whose rights and economics mirror shares or other transferable securities fall within the regime regardless of the technology used to record them. Ledger technology, quotation currency and the issuer's listing status are not determinative.

Question 40Regulatory framework and market structure

A member state wants to impose a stricter national rule on a matter where an EU regulation already provides full harmonisation. Which statement best reflects the legal position?

  1. Member states may always add stricter national rules alongside a regulation
  2. Only the European Commission may enforce a regulation, not national authorities
  3. Member states must first convert the regulation into national law before it applies
  4. A regulation is directly applicable and generally leaves no room for divergent national transposition Correct answer.

Explanation

A regulation is directly applicable in all member states and, where it achieves full harmonisation, member states cannot add divergent stricter rules on the same subject. National authorities do enforce regulations, and transposition into national law is not required.

Question 41Equity products and trading mechanics

A company declares a cash dividend with a record date of Friday. Under standard T+2 settlement, what is the last trading day on which a buyer of the shares will be entitled to receive the dividend?

  1. Thursday
  2. Wednesday Correct answer.
  3. Monday of the following week
  4. Friday

Explanation

Entitlement depends on settlement, not on trade date. With T+2 settlement, a trade must settle on or before the record date to be registered as a holder, so the last cum-dividend trading day is two business days before the record date, which is Wednesday. Buying on Thursday would settle on Monday, after the record date.

Question 42Equity products and trading mechanics

An investor buys 500 shares at $40 and later sells them at $46. Ignoring commissions, what is the capital gain?

  1. $23,000
  2. $6,000
  3. $2,000
  4. $3,000 Correct answer.

Explanation

Capital gain equals the per-share price difference multiplied by the number of shares. The difference is $6 per share, and 500 shares times $6 gives $3,000. Proceeds of $23,000 and cost of $20,000 are gross amounts, not the gain itself.

Question 43Equity products and trading mechanics

Which order type instructs the broker to execute immediately at the best available price but does not guarantee a specific price?

  1. Limit order
  2. Stop order
  3. Market order Correct answer.
  4. Stop-limit order

Explanation

A market order prioritizes speed of execution over price certainty, so it fills at whatever the best prevailing quote is. A limit order instead sets a maximum purchase price or minimum sale price and may go unfilled. Stop orders remain dormant until a trigger price is reached.

Question 44Equity products and trading mechanics

What does a bid-ask spread of $0.10 on a stock quoted $25.00 bid and $25.10 ask represent?

  1. The minimum price increment permitted by regulation
  2. The commission charged by the exchange
  3. The difference between the highest price a buyer will pay and the lowest price a seller will accept Correct answer.
  4. The annual dividend yield of the stock

Explanation

The spread is the gap between the best bid, the highest price buyers are currently willing to pay, and the best ask, the lowest price sellers will accept. It compensates market makers for providing liquidity and bearing inventory risk. It is not a fee, a yield, or a regulatory tick size.

Question 45Equity products and trading mechanics

Which of the following best describes a stock's ex-dividend date?

  1. The date on which the dividend is actually paid to shareholders
  2. The deadline for shareholders to elect a dividend reinvestment plan
  3. The first date on which shares trade without the right to the declared dividend Correct answer.
  4. The date on which the board formally approves the dividend

Explanation

The ex-dividend date is the first trading day on which a new buyer no longer acquires the right to the declared dividend. It typically falls one business day before the record date under T+2 settlement. The payment date and declaration date are distinct events.

Question 46Equity products and trading mechanics

A stock trades at $80 and the company declares a 2-for-1 stock split. What should the post-split share price and share count be for a holder of 100 shares?

  1. $40 per share and 100 shares
  2. $160 per share and 50 shares
  3. $40 per share and 200 shares Correct answer.
  4. $80 per share and 200 shares

Explanation

A 2-for-1 split doubles the number of shares and halves the price, leaving total market value unchanged. A holder of 100 shares receives 200 shares, and the $80 price becomes $40. The investor's overall position value stays at $8,000.

Question 47Equity products and trading mechanics

In a typical US equity trade, what does the T+2 convention mean?

  1. The trade must be paid for within two hours
  2. The broker charges a fee equal to two percent
  3. The investor has two days to cancel the order
  4. Settlement of cash and securities occurs two business days after the trade date Correct answer.

Explanation

T+2 means the exchange of cash and securities occurs on the second business day following the trade date. It standardizes the timing of ownership transfer and payment across market participants. It has nothing to do with cancellation windows or fees.

Question 48Equity products and trading mechanics

Which of the following securities typically grants the holder a priority claim on assets ahead of common shareholders in a liquidation?

  1. A growth-focused mutual fund
  2. Preferred stock Correct answer.
  3. A stock index futures contract
  4. Common stock

Explanation

Preferred stock ranks ahead of common stock in the capital structure, so preferred holders are paid before common shareholders in a liquidation. Common shareholders are last in line among equity holders. Funds and futures are wrappers or derivatives, not senior claims on the issuer.

Question 49Equity products and trading mechanics

A trader places a sell limit order at $52 while the stock is quoted $50.00 bid and $50.05 ask. What is the immediate effect?

  1. The order converts into a market order
  2. The order executes immediately at $50.00
  3. The order rests in the book and will not execute until the market reaches $52 Correct answer.
  4. The order is rejected because it is above the current price

Explanation

A sell limit order sets a minimum acceptable price, so it cannot execute at the prevailing bid of $50.00. It rests in the order book until the market rises to $52 or better. Sell limits above the current market are valid and commonly used.

Question 50Equity products and trading mechanics

An investor buys 300 shares on margin at $50 with an initial margin requirement of 50%. What is the minimum equity the investor must contribute?

  1. $15,000
  2. $7,500 Correct answer.
  3. $22,500
  4. $3,750

Explanation

The total purchase is 300 shares times $50, or $15,000. With a 50% initial margin, the investor must supply half of that, which is $7,500, and may borrow the remaining $7,500. The other figures misapply the percentage.