Stock Trading Stock Trading 4 — Questions and Answers
Question 1: What is 'margin trading'?
- Trading only stocks with high profit margins
- Borrowing money from a broker to purchase securities (Correct answer)
- Setting a minimum profit margin before entering a trade
- Trading on margin hours before the market officially opens
Correct answer: Borrowing money from a broker to purchase securities
Margin trading involves borrowing funds from your broker to buy more securities than you could with your cash alone, amplifying both gains and losses.
Question 2: Which regulatory body oversees securities markets in the United States?
- Federal Reserve (Fed)
- Securities and Exchange Commission (SEC) (Correct answer)
- Financial Industry Regulatory Authority (FINRA) only
- Department of the Treasury
Correct answer: Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) is the primary federal agency responsible for enforcing federal securities laws and regulating the securities industry.
Question 3: What is a 'bull market'?
- A market in which stock prices are falling by 20% or more
- A market characterized by rising stock prices and investor optimism (Correct answer)
- A market dominated by large-cap stocks
- A period when trading volume is above average
Correct answer: A market characterized by rising stock prices and investor optimism
A bull market is a sustained period of rising stock prices, generally defined as a 20% or more increase from recent lows, accompanied by investor confidence.
Question 4: What is 'earnings per share' (EPS)?
- Total dividends paid divided by shares outstanding
- Net income divided by the number of outstanding shares (Correct answer)
- Revenue divided by the stock price
- Operating income per employee of the company
Correct answer: Net income divided by the number of outstanding shares
EPS is calculated by dividing a company's net income by its number of outstanding shares, indicating how much profit is allocated to each share.
Question 5: What is a 'circuit breaker' in US stock markets?
- A system that automatically routes orders to the best available exchange
- A rule that halts trading when major indexes fall by set percentage thresholds (Correct answer)
- A tool brokers use to prevent margin calls from triggering
- Software that detects and blocks fraudulent trades
Correct answer: A rule that halts trading when major indexes fall by set percentage thresholds
Circuit breakers are market-wide trading halts triggered when major indexes like the S&P 500 drop by 7%, 13%, or 20% in a single day.
Question 6: What does 'volume' refer to in stock trading?
- The total dollar value of trades executed in a day
- The number of shares traded during a given time period (Correct answer)
- The price range between the daily high and low
- The number of open orders waiting to be filled
Correct answer: The number of shares traded during a given time period
Volume refers to the total number of shares bought and sold for a security during a specific time period, often used to confirm price trends.
Question 7: What is a 'limit order'?
- An order that executes immediately at the current market price
- An order to buy or sell a stock at a specified price or better (Correct answer)
- An order that limits the number of shares you can trade per day
- An order automatically canceled at end of day if not filled
Correct answer: An order to buy or sell a stock at a specified price or better
A limit order sets the maximum price you'll pay when buying (or minimum you'll accept when selling), giving you price control but no guarantee of execution.
Stock Trading Stock Trading 4
What is 'margin trading'?