Principal and agency trades are essential for understanding the roles and responsibilities of different parties involved in securities transactions.
Which of the following best describes a principal trade?
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Select an option above to see an explanation here.
A) A principal trade occurs when a broker-dealer buys or sells securities from its account, acting as a principal in the transaction. B) This describes an agency trade. C) This is a fee associated with an agency trade. D) This is also a principal trade, but option A is a better description.
What is the difference between the bid and ask prices of a security called?
A) The spread is the difference between a security's bid and ask prices. B) Markup is the amount a broker-dealer adds to the cost of a security when selling it to a client in a principal trade. C) Commission is the fee a broker-dealer charge for executing an agency trade on behalf of a client. D) Margin refers to the money borrowed from a broker to purchase securities.
In the late 1990s, a major brokerage firm was fined millions of dollars for not properly disclosing its role as a principal in specific trades. The firm had been buying securities from its inventory and selling them to clients at a markup without clearly informing the clients that the firm was acting as a principal in the transactions.
Which of the following fees is associated with an agency trade?
A) Markup is the amount a broker-dealer adds to the cost of a security when selling it to a client in a principal trade. B) Commission is the fee a broker-dealer charges for executing an agency trade on behalf of a client. C) Spread is the difference between a security's bid and ask prices. D) Margin refers to the money borrowed from a broker to purchase securities.
An investor wants to buy 100 shares of a stock. The investor's broker can either execute the trade as an agency trade, finding another party willing to sell the shares and charging a commission for the service, or as a principal trade, selling the shares from the broker's inventory and charging a markup on the price.
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Example Series 65 Example Practice Question
"Markup high, the dealer's buy, Commission's due, when selling for you." "Markup high, the dealer's buy" refers to the practice of a dealer buying a security and adding a markup (increasing the price) when selling it to a customer (a principal trade). "Commission's due when selling for you" refers to a broker acting on behalf of a client (as an agent) and earning a commission on the sale (an agency trade).