Bids are the prices at which buyers are willing to purchase a security.
What is the bid-ask spread?
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A) The bid-ask spread is the difference between the highest bid and the lowest ask prices. B) Open interest refers to the total number of outstanding derivative contracts that have not been settled. C) Margin is the money borrowed from a broker to purchase securities. D) Short selling is selling a security that the seller does not own to repurchase it later at a lower price.
Which type of order allows an investor to buy or sell a security at a specified price or better?
A) A market order is to buy or sell a security immediately at the best available price. B) A limit order allows an investor to buy or sell a security at a specified price or better. C) A stop order is to buy or sell a security once it reaches a specific price. D) A stop-limit order combines a stop order and a limit order.
In the 1980s, a group of traders manipulated the bid-ask spread of particular stocks to make a profit. They would place large buy orders at artificially high prices, causing the bid-ask spread to widen. They would then sell their shares at inflated prices, making a profit at the expense of other investors. This practice, known as "pump and dump," was eventually exposed and led to stricter regulations on market manipulation.
What is the role of a market maker in trading securities?
A) Manipulating the bid-ask spread for profit is an illegal practice known as "pump and dump." B) A market maker must stand ready to buy or sell a security at publicly quoted prices. C) Borrowing money from a broker to purchase securities is known as trading on margin. D) Selling a security that one does not own, with the intention of buying it back later at a lower price, is known as short selling.
An investor wants to purchase 100 shares of a stock with a current bid price of $50 and an asking price of $50.50. They place a limit order to buy the shares at $50.25. If a seller is willing to accept this price, the trade will be executed, and the investor will have purchased the shares at a better price than the current ask.
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Example Series 65 Example Practice Question
When trading securities, don't be misled, always keep an eye on the bid and the spread.
- Limit order: An order to buy or sell a security at a specific price or better. It guarantees the price but not the execution. - Stop order: An order to buy or sell a security once it reaches a certain price, known as the stop price. It does not guarantee a specific price but helps protect against significant losses. - Stop-limit order: A combination of a stop order and a limit order. Once the stop price is reached, the order becomes a limit order, ensuring a specific price or better but not guaranteeing execution.
- Limit order: An investor wants to buy a stock at $50 or less. They place a limit order at $50, and the order will only execute if the stock is available at that price or lower. - Stop order: An investor wants to sell a stock if it falls to $40 or lower. They place a stop order at $40, and the order will execute once the stock reaches that price, potentially at a lower price. - Stop-limit order: An investor wants to sell a stock if it falls to $40 or lower but doesn't want to sell for less than $39. They place a stop-limit order with a stop price of $40 and a limit price of $39. Once the stock reaches $40, the order becomes a limit order, only executing if the stock is available at $39 or higher.