LOS f: Describe the process of selling a stock short and discuss an investor's likely motivation for selling short.

Q1. A short seller:

A)   often also places a stop loss sell order.

B)   loses if the price of the stock sold short decreases.

C)   does not receive the dividends.

Q2. Which of the following statements about selling a stock short is least likely accurate?

A)   The seller must return the securities at the request of the lender.

B)   The short seller may withdraw the proceeds of the short sale.

C)   The seller must inform their broker that the order is a short sale before completing the transaction.

Q3. An investor can profit from a stock price decline by:

A)   placing a stop buy order.

B)   purchasing a call option.

C)   selling short.

Q4. Which of the following statements about the functioning of securities markets is least accurate?

A)   Maintenance margin is the required percentage of an investor's equity compared to the total value of the stock after the investor trades on margin.

B)   Block houses, where institutional traders buy and sell large blocks of shares, are also called upstairs traders.

C)   A short seller receives the dividend on the stock but may not withdraw it from his account until the position is closed.

Q5. An order placed to protect a short position is called a:

A)   stop loss sell.

B)   stop loss buy.

C)   protective call.

Q6. Regarding the technical points affecting the short sales of a stock, which of the following statements is most accurate?

A)   The lender must deposit margin to guarantee the eventual return of the stock.

B)   Stocks can only be shorted in a down market.

C)   The short seller must pay all dividends due to the lender of the shorted stock.

LOS f: Describe the process of selling a stock short and discuss an investor's likely motivation for selling short.fficeffice" />

Q1. A short seller:

A)   often also places a stop loss sell order.

B)   loses if the price of the stock sold short decreases.

C)   does not receive the dividends.

Correct answer is C)

The short seller pays all dividends to the lender, loses if stock prices rise, and is required to post a margin account. A short seller often places a stop buy order to protect the short sale position from a rising market.

Q2. Which of the following statements about selling a stock short is least likely accurate?

A)   The seller must return the securities at the request of the lender.

B)   The short seller may withdraw the proceeds of the short sale.

C)   The seller must inform their broker that the order is a short sale before completing the transaction.

Correct answer is B)

Proceeds from the short sale must remain in the brokerage account along with the required margin deposit.

Q3. An investor can profit from a stock price decline by:

A)   placing a stop buy order.

B)   purchasing a call option.

C)   selling short.

Correct answer is C)

Short selling provides a way for an investor to profit from a stock price decline. In order to sell short, the broker borrows the security and then sells it for the short seller. Later, if the investor can replace the borrowed securities by repurchasing them at a lower price, then the investor will profit from the transaction.

Q4. Which of the following statements about the functioning of securities markets is least accurate?

A)   Maintenance margin is the required percentage of an investor's equity compared to the total value of the stock after the investor trades on margin.

B)   Block houses, where institutional traders buy and sell large blocks of shares, are also called upstairs traders.

C)   A short seller receives the dividend on the stock but may not withdraw it from his account until the position is closed.

Correct answer is C)

A short seller must pay any dividends due to the lender of the stock.

Q5. An order placed to protect a short position is called a:

A)   stop loss sell.

B)   stop loss buy.

C)   protective call.

Correct answer is B)

A short position profits from declines in stock price and experiences losses as the price rises. A stop loss buy is a limit order that is placed above the market price. When the stock price reaches the stop price, the limit order is executed curtailing further loses.

Q6. Regarding the technical points affecting the short sales of a stock, which of the following statements is most accurate?

A)   The lender must deposit margin to guarantee the eventual return of the stock.

B)   Stocks can only be shorted in a down market.

C)   The short seller must pay all dividends due to the lender of the shorted stock.

Correct answer is C)

The short seller must pay any dividends on the stock to the owner of the borrowed shares. The short seller must also deposit margin money to guarantee the eventual repurchase of the security.

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