Stock Advisor Stock Marketing Practices 3 — Questions and Answers
Question 1: What is 'spoofing' in the context of stock trading?
- Placing fake orders to manipulate prices (Correct answer)
- Buying on margin
- Diversifying a portfolio
- Reinvesting dividends
Correct answer: Placing fake orders to manipulate prices
Spoofing involves placing orders with the intent to cancel them before execution to create false demand or supply.
Question 2: A 'limit order' instructs a broker to:
- Buy or sell at a specified price or better (Correct answer)
- Buy immediately at any price
- Hold the position indefinitely
- Sell only at market close
Correct answer: Buy or sell at a specified price or better
A limit order executes only at the specified price or a more favorable one, giving price control to the investor.
Question 3: What does 'suitability' require of a financial advisor recommending investments?
- Recommendations must fit the client's needs and profile (Correct answer)
- Always recommend the highest-fee product
- Only recommend the advisor's firm's stocks
- Guarantee no losses
Correct answer: Recommendations must fit the client's needs and profile
The suitability standard requires advisors to recommend investments appropriate for a client's financial situation and goals.
Question 4: Which term describes spreading false rumors to drive a stock's price down for profit?
- Bear raid (Correct answer)
- Bull market
- Stock split
- Buyback
Correct answer: Bear raid
A bear raid is an illegal attempt to push a stock's price lower through coordinated selling and false negative information.
Question 5: What is the fiduciary duty owed by a registered investment advisor to clients?
- Act in the client's best interest (Correct answer)
- Maximize the firm's commissions
- Avoid all disclosures
- Trade as often as possible
Correct answer: Act in the client's best interest
A fiduciary must act in the client's best interest, placing the client's needs above their own.
Question 6: A 'market maker' primarily provides which function?
- Liquidity by quoting buy and sell prices (Correct answer)
- Government regulation
- Tax collection
- Credit ratings
Correct answer: Liquidity by quoting buy and sell prices
Market makers provide liquidity by continuously quoting bid and ask prices for securities.
Question 7: What is 'painting the tape'?
- Coordinated trades to create false activity (Correct answer)
- Updating a stock chart
- Issuing new shares
- Paying a dividend
Correct answer: Coordinated trades to create false activity
Painting the tape is illegal trading among colluding parties to create the appearance of active trading and mislead investors.
Stock Advisor Stock Marketing Practices 3
What is 'spoofing' in the context of stock trading?