Series6 Preparation Kits}

Submitted by: Richard Mills

Question: 1

Which of the following statements about the over-the-counter market is true?

A. Only penny stocks are traded in the over-the-counter market.

B. Trades in the over-the-counter market are conducted via the auction process.

C. Only bonds and other debt instruments are traded in the over-the-counter market.

D. Stocks that are listed on exchange floors are also traded in the over-the-counter market.

Answer: D

Explanation:

Stocks that are listed on exchange floors are also traded in the over-the-counter market. The term third market refers to over-the-counter trading of listed stocks. All types of securities-stocks, bonds, options, warrants, rights-trade over the counter. The over-the-counter market is a negotiated market, not an auction market.

Question: 2

Which of the following is not an auction market?

A. NASDAQ

B. NYSE

C. CHX

D. All of the above are auction markets

Answer: A

Explanation:

NASDAQ is not an auction market. NASDAQ is a computerized system of geographically dispersed securities dealers. As such, it is a negotiated market. The NYSE (New York Stock Exchange) and the CHX (Chicago Stock Exchange) are both auction markets.

Question: 3

The entity that serves as the auctioneer for trades conducted on an organized exchange floor is known as a:

A. registered trader.

B. specialist.

C. floor broker.

D. commission broker.

Answer: B

Explanation:

The entity that serves as the auctioneer for trades conducted on an organized exchange floor is known as a specialist. The specialist is assigned stocks by the exchange and is a market maker in those stocks. A registered trader is a private individual who buys and sells on his own account only. Floor brokers and commission brokers execute trades for other investors.

Question: 4

Which of the following statements about specialists is false?

A. Specialists are market makers in assigned stocks and, as such, can profit from these investments.

B. Specialists are required to maintain a fair and orderly market in their assigned stocks, meaning that they must buy if there is an excess of sell orders and sell out of their own portfolios if there is an excess of buy orders.

C. Specialists are employees of the exchange on which they oversee trades.

D. In addition to acting as market makers, specialists also act as agents and execute limit orders placed by commission brokers for their clients if the specified price is reached.

Answer: C

Explanation:

The statement that specialists are employees of the exchange on which they oversee trades is false. Specialists are separate firms that are members of the exchange. Specialists are market makers in the stocks that are assigned them by the exchange and can earn profits (or losses) on these investments, just like any other market maker. They are required to maintain a fair and orderly market in their assigned stocks, however, which means they sometimes must trade against the market. They also maintain a central limit order book in their assigned stocks.

Question: 5

NASDAQ market makers provide investors with assurance that:

A. there is a market for the listed security.

B. the investor will be able to buy or sell the security at a price he desires.

C. the investor will be investing in a high quality investment with relatively low risk.

D. NASDAQ market makers provide investors with no assurance whatsoever. It is buyer beware.

Answer: A

Explanation:

NASDAQ market makers provide investors with assurance that there is a market for the listed security by posting bid and ask prices for it. There is no guarantee, however, that the investor will be able to buy or sell the security at the price he desires or that the investment is high quality and low risk.

Question: 6

SuperDOT is:

A. an electronic communication network (ECN).

B. an electronic system whereby trades are executed on NASDAQ.

C. an electronic system used to place orders on the NYSE.

D. both A and C.

Answer: C

Explanation:

SuperDOT is an electronic system used to place market and limit orders on the NYSE whereby the orders are routed directly to the specialist in the assigned stocks. It is not an ECN, which is an electronic network that is designed to allow buyers and sellers to interact directly with each other, thereby bypassing the middlemen.

Question: 7

GoForBroke Investments has registered with the SEC to be a market maker in certain NASDAQ-listed securities. In order to be able to enter bid and ask quotes for the securities in which it is going to make a market, GoForBroke must subscribe to which level of NASDAQ?

A. Level I

B. Level II

C. Level III

D. Level IV

Answer: C

Explanation:

In order to enter bid and ask quotes, GoForBroke must subscribe to NASDAQs Level II I. Level I simply allows the user to view the highest bid and lowest ask price for a security, and Level II allows the user to view all the bid and ask quotes from all the market makers in a security, but only Level III allows the subscriber to enter quotes. There is no Level IV.

Question: 8

Which of the following is not a characteristic of all auction stock exchanges in the U.S.?

A. There is a central marketplace.

B. Stocks that are traded on the exchange must meet certain listing requirements, determined by the exchange.

C. In order to conduct a trade on the exchange, a broker must be a member of the exchange or hold a license to trade on the exchange.

D. If a stock is listed on one of these exchanges, it is not permitted to be listed on any other exchange.

Answer: D

Explanation:

The statement that does not describe a characteristic of all U.S. auction stock exchanges is D. Dual listing is permitted. Stocks listed on one exchange may also be listed on another. In fact, most of the trading on U.S. regional exchanges is in dual-listed stocks. All of the auction exchanges do have a central marketplace, listed stocks must meet listing requirements, and brokers wishing to conduct trades on the exchange must be members of the exchange or hold a license to trade on the exchange.

Question: 9

Which of the following is an example of a primary market transaction?

A. Exco Resources (XCO) sells a new issue of 7.5%, 8-year notes.

B. Ms. Talker calls her broker and places a market order to sell shares of AT&T (T) on the NYSE.

C. Mr. Safe purchases a Treasury bill with two weeks remaining to maturity.

D. Mr. Green places an order to buy shares of Sunvalley Solar, Inc. (SSOL), a stock selling on the OTC Bulletin Board.

Answer: A

Explanation:

Exco Resources new bond issue is a primary market transaction. The primary market refers to the market for new issues. The other three scenarios describe transactions in securities that are already being traded and are secondary market transactions.

Question: 10

NASDAQ is:

A. an acronym for Norways major stock exchange.

B. the government organization that insures accounts at U.S. brokerage firms.

C. a computerized system that links together the U.S. regional exchanges.

D. a computerized quotation system used in the over-the-counter market.

Answer: D

Explanation:

NASDAQ is a computerized quotation system that is used in the over-the-counter market. It allows NASDAQ market makers to enter bid and ask quotes and allows subscribers at lower levels to view the bid and ask quotes available.

Question: 11

All government bonds and the majority of corporate bonds are traded:

A. on the floor of the NYSE.

B. via electronic communication networks (ECNs).

C. on regional exchanges.

D. in the over-the-counter market.

Answer: D

Explanation:

All government bonds and the majority of corporate bonds are traded in the over-the-counter market.

Question: 12

Which of the following types of securities would not be traded in the over-the-counter market?

I. stock options

II. government bonds

III. corporate bonds

IV. corporate stocks

A. I only

B. I and IV only

C. III and IV only

D. All of the choices are traded in the over-the-counter market.

Answer: D

Explanation:

All of the choices listed-and more-are traded in the over-the-counter market: stock options, government bonds, corporate bonds, and corporate stocks. Additionally, securities such as warrants, rights, forward contracts, and foreign currencies also trade in the over-the-counter market.

Question: 13

Which of the following are duties of the specialist on an exchange floor?

I. executing limit orders if/when the limit price specified is reached

II. minimizing any imbalance in supply and demand for the stock(s) that the specialist is assigned

III. determining an opening price for each assigned stock every day

IV. serving as an auctioneer for the shares of the assigned stocks

A. I and II only

B. I, II, and IV only

C. I and IV only

D. I, II, III, and IV

Answer: D

Explanation:

All of the choices listed are duties of the specialist on an exchange floor. The specialist maintains a limit order book and executes those orders if/when the limit price is reached. The specialist is also charged with maintaining a fair and orderly market in the assigned securities, which means trading on his own account to ensure that the supply and demand of the stocks shares match. Additionally, the specialist is responsible for setting the opening price for the assigned stock each day and for serving as the auctioneer for the shares of the stock.

Question: 14

The price at which an investor can sell a security to a market maker in the over-the-counter market is called the:

A. sale price.

B. put price.

C. bid price.

D. ask price.

Answer: C

Explanation:

An investor can sell a security to a market maker in the over -the-counter market at the bid price, which is the price at which the market maker is willing to buy the security.

About the Author: Test Information:Total Questions: 325Test Number: SERIES6Vendor Name: FINRACert Name: FINRA CertificationTest Name: Investment Company and Variable Contracts Products Representative Examination (IR)Official Site:

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