Stock Advisor Stock Marketing Practices 2 — Questions and Answers
Question 1: Which practice involves artificially inflating a stock's price through false or misleading positive statements before selling at a profit?
- Pump and dump (Correct answer)
- Dollar-cost averaging
- Dividend reinvestment
- Index rebalancing
Correct answer: Pump and dump
Pump and dump schemes hype a stock to inflate its price, then sell holdings before the price collapses.
Question 2: What does the term 'churning' refer to in brokerage practices?
- Excessive trading to generate commissions (Correct answer)
- Holding stocks long-term
- Reinvesting dividends automatically
- Buying only blue-chip stocks
Correct answer: Excessive trading to generate commissions
Churning is excessive buying and selling by a broker mainly to generate commissions, not to benefit the client.
Question 3: A 'wash sale' occurs when an investor sells a security at a loss and repurchases a substantially identical one within how many days?
- 30 days (Correct answer)
- 7 days
- 90 days
- 180 days
Correct answer: 30 days
The IRS wash-sale rule disallows the loss if a substantially identical security is bought within 30 days before or after the sale.
Question 4: What is 'front-running' in securities trading?
- Trading ahead of a known large client order (Correct answer)
- Buying at market open only
- Selling losers before year-end
- Placing limit orders below market
Correct answer: Trading ahead of a known large client order
Front-running is trading a security based on advance knowledge of a pending large order that will move the price.
Question 5: Which regulatory body primarily oversees the U.S. securities markets?
- SEC (Correct answer)
- FDIC
- FDA
- FTC
Correct answer: SEC
The Securities and Exchange Commission (SEC) regulates securities markets and enforces federal securities laws.
Question 6: What is the main purpose of a stock's prospectus?
- Disclose material information to investors (Correct answer)
- Guarantee a return
- Set the dividend rate
- Predict future price
Correct answer: Disclose material information to investors
A prospectus provides investors with material details about a security offering so they can make informed decisions.
Question 7: Insider trading based on material non-public information is best described as:
- Illegal and prohibited (Correct answer)
- A standard market practice
- Encouraged by the SEC
- Only relevant to bonds
Correct answer: Illegal and prohibited
Trading on material non-public information violates securities laws and can result in criminal and civil penalties.
Stock Advisor Stock Marketing Practices 2
Which practice involves artificially inflating a stock's price through false or misleading positive statements before selling at a profit?